RPM International's Q2 2026 Earnings Call: Contradictions in Organic Growth Projections, SG&A Realignment, and Material Inflation Outlooks

Date of Call: January 8, 2026

Financials Results

• Revenue: Record sales, up 3.5% YOY driven by acquisitions and engineered solutions for high-performance buildings, partially offset by DIY softness and government shutdown.
• EPS: Adjusted EPS declined driven by lower adjusted EBIT and higher interest expense.
• Operating Margin: Adjusted EBIT declined as top line growth was offset by higher SG&A expenses and temporary inefficiencies.

Guidance:

• Q3 consolidated sales expected to increase by mid-single digits; adjusted EBIT to grow mid- to high single digits.
• Q4 consolidated sales expected to grow mid-single digits; adjusted EBIT anticipated to be low to high single digits with volume growth as key variable.
• Expect some projects delayed by government shutdown to convert in Q3; weather-delayed projects from Q3 likely realized in Q4.
• Benefits from SG&A optimization actions to be more realized in Q4, offsetting healthcare inflation and M&A deal expenses.

Business Commentary:

• Record Sales and Market Volatility:
• RPM International achieved record sales during the second quarter, driven by targeted growth investments and acquisitions.

• However, momentum slowed with sales declining in late October and November due to longer construction project lead times, reduced DIY demand, and a government shutdown impacting consumer confidence.

• SG&A Optimization and Cost Management:

• RPM is implementing an optimization plan expected to yield an annual benefit of approximately $100 million.

• This action was accelerated due to soft market conditions, with $5 million of benefits realized in the third quarter and an incremental $20 million expected in the fourth quarter.

• Regional Performance and Segment Growth:

• Europe was the fastest-growing region driven by M&A and FX, while North America grew approximately 2%.

• Construction Products Group reached record sales led by solutions for high-performance buildings, but was affected by weak disaster restoration sales and extended government shutdowns.

• Acquisition Strategy and Integration:

• RPM announced an agreement to acquire Kalzip, enhancing its systems offering for high-performance buildings.

• The acquisition aligns with strategic growth opportunities, with Kalzip's expertise in metal-based roofing and facades expected to contribute to RPM's capabilities.

• Cash Flow and Financial Positioning:

• Cash flow from operations increased by $66.3 million, enabling debt paydown, shareholder returns, and continued acquisitions.
• Despite challenges, RPM maintained a strong liquidity position of $1.1 billion, supporting flexibility in capital allocation and strategic growth investments.

Sentiment Analysis:

Overall Tone: Neutral

• Management acknowledges record sales but notes momentum slowed, with sales declines in late October/November due to DIY softness and government shutdown. They are taking cost optimization actions but remain focused on growth investments, stating 'we remain well positioned to continue outpacing our markets, particularly as markets rebound.'

Q&A:

• Question from Ghansham Panjabi (Baird): Could you give more color on how the business specifically performed during the quarter, and whether the deterioration was specific to construction or also impacted consumer and performance segments?
  Response: Growth was solid in September across all segments, but a deterioration occurred across all three segments in October and November, with the government shutdown contributing.

• Question from Ghansham Panjabi (Baird): Regarding the $100 million SG&A initiative, how much is temporary versus permanent, and is it a reappropriation of prior growth investments?
  Response: The initiative is roughly $70 million in personnel reductions and $30 million in discretionary expense cuts, part of an accelerated structural realignment and not a direct curtailment of prior growth investments.

• Question from Matthew DeYoe (Bank of America): Why does the guidance imply much better incremental margins in Q3 and Q4, and what drives the expected improvement in fixed cost absorption?
  Response: Easier comps, implementation of SG&A structural actions, and an expected reversal of absorption headwinds from declining volumes in Q2 will drive margin improvement.

• Question from Matthew DeYoe (Bank of America): How should we think about EBIT accretion from recent acquisitions, and does it align with earnings accretion?
  Response: Acquisitions like Pure Air and Kalzip are not immediately accretive but are expected to become nicely accretive within 18-24 months as they integrate.

• Question from Arun Viswanathan (RBC Capital Markets): How much of the transitory costs were due to the government shutdown and increased SG&A spending, and how will they trend forward?
  Response: Approximately $4-$5 million of the margin impact was due to facility transitions and a shared distribution center inefficiency; these are temporary and should resolve.

• Question from Arun Viswanathan (RBC Capital Markets): When will the full $100 million in SG&A savings flow through the P&L, and what is the run rate?
  Response: The full benefit will start flowing through in Q1 '27; a $25 million per quarter run rate is expected, with implementation mostly complete by end of Q3.

• Question from John McNulty (BMO Capital Markets): What drives the wide range in Q4 EBIT growth (low to high single digits), and what causes the low versus high end?
  Response: The range is contingent on volume recovery; the high end assumes better volume conversion from the project pipeline and backlog, while the low end reflects continued market volatility.

• Question from John McNulty (BMO Capital Markets): What is the raw material outlook, including any relief from tariffs?
  Response: Underlying raw material inflation is declining, but tariff-driven inflation persists in categories like metal packaging and epoxy resins; geopolitical trends may provide a tailwind in H2.

• Question from Patrick Cunningham (Citi): How much of the Consumer Group weakness is due to underlying market softness versus sales delays or product rationalization?
  Response: Most weakness is underlying consumer takeaway demand, though sales delays and product rationalization also contributed; easier comps in H2 and H3 should help.

• Question from Michael Harrison (Seaport Research Partners): Is the software system implementation in Consumer complete, and are delayed sales now realizing?
  Response: The temporary sales delay issue due to new systems and a warehouse transition is resolved and fully running.

• Question from Frank Mitsch (Fermium Research): How did December perform given the negative November?
  Response: December sales were up 12.1% with unit volume up 7%, driven by a pickup in consumer and construction products, but it's unclear if this indicates a trend or a recovery from Q2 shutdown impacts.

• Question from John Roberts (Mizuho): Was weather a factor in the quarter or December?
  Response: Heavy snow in late November/December impacted activity, but year-over-year trends are improving as last year's weather was also collaborative.

• Question from Kevin McCarthy (Vertical Research Partners): Why pursue Kalzip, and why are recent acquisitions domiciled in Europe?
  Response: Kalzip is strategic for expanding high-performance metal roofing capabilities globally; European acquisitions reflect both strategic fit and available value.

• Question from Kevin McCarthy (Vertical Research Partners): Why was price contribution less than 1% in Q2, and is acceleration expected?
  Response: Price was less than 1% as heavy inflationary period is over; selective price increases in areas like metal packaging and epoxy resins, with consumer facing elasticity challenges.

• Question from Michael Sison (Wells Fargo): How much organic growth is embedded in the Q3/Q4 sales outlook?
  Response: Easier comps, focused growth investments, and potential market improvement should drive better organic growth in H2, though volatility complicates precise forecasting.

• Question from Joshua Spector (UBS): Can you detail transitory costs and SG&A investment trends?
  Response: Q2 transitory costs included ~$6-$7M higher healthcare, ~$20M margin impact from conversion costs, and continued SG&A investments; details on future costs will be provided in April.

• Question from David Begleiter (Deutsche Bank): How much of MAP 3.0 savings are included in the $100M program, and what portion is manufacturing vs. SG&A?
  Response: The $100M program includes at least $75M net benefit for fiscal '27, with MAP 3.0 details to come; ~$10-$15M impacts cost of goods sold, rest is SG&A.

• Question from Vincent Andrews (Morgan Stanley): What portion of sales is directly tied to government contractors, and how much is impacted by the shutdown?
  Response: Little direct federal government sales; more impact is from state/local funding freezes for education and infrastructure, affecting ~20% of Construction Products Group revenue.

• Question from Jeffrey Zekauskas (JPMorgan): What drove the 10% SG&A growth in first half, and what is the goal of the $100M reduction?
  Response: SG&A growth driven by higher corporate expenses (healthcare, M&A), plant consolidation conversion costs, and growth investments; the $100M action is a structural realignment to offset these pressures.

• Question from Aleksey Yefremov (KeyBanc Capital Markets): Are backlogs higher or lower than 3 months ago, and what is the future pace of facilities consolidations?
  Response: Backlogs are stable in Performance Coatings and growing in Construction Products; details on future consolidation pace are part of the long-term strategic plan to be announced this summer.

Contradiction Point 1

Organic Growth Expectations for FY26

This represents a major shift in the company's core financial forecast for the fiscal year. Growth, previously projected as consistent 2-3% with organic contributions expected every quarter, has been revised to little to none for the full year, with organic growth now contingent on a market improvement in the second half.

How much of the Q3/Q4 sales growth is organic versus from acquisitions? - Michael Sison (Wells Fargo)

20260108-2026 Q2: The outlook embeds expectations for better organic growth in H2 due to easier comps, focused growth investments, and potential market improvement. - Frank Sullivan(CEO)

What organic growth do you expect this year? What is the organic growth potential in the current challenging environment? - Michael Joseph Sison (Wells Fargo)

2025Q4: Expects consistent organic growth of 2-3% consolidated. Strong growth in Construction Products Group (CPG) and Performance Coatings Group (PCG), with improvement in Industrial Coatings Group... Organic growth expected quarter-by-quarter for the year. - Frank Sullivan(CEO)

Contradiction Point 2

SG&A Savings Programs and Implementation

This shows a significant change in the nature, scale, and timing of a major cost-saving initiative. The company pivoted from an ongoing, $70M annual savings program (MAP 2025) to a new, larger $100M "realignment" program (MAP 3.0) with benefits deferred until the next fiscal year, indicating a shift from managing growth costs to addressing structural inefficiencies.

When will the full $100 million SG&A savings be reflected in the P&L? What is the quarterly run rate? - Arun Viswanathan (RBC Capital Markets)

20260108-2026 Q2: The full benefit [of the $100M SG&A initiative] will start in Q1 2027. - Frank Sullivan(CEO)

What incremental savings from the MAP '25 program are expected in 2026, and what remaining working capital improvement remains? - John Patrick McNulty (BMO Capital Markets)

2025Q4: MAP 2025 benefits in fiscal 2026 are expected to be about $70 million. - Frank Sullivan(CEO)

Contradiction Point 3

Raw Material Inflation Drivers and Outlook

This is a substantial change in the characterization of a key cost headwind. The primary driver shifted from being predominantly tariffs (~2/3 of inflation) to a broader, easing material inflation trend with deflation expected. This alters the forecast for future pricing pressure and cost management challenges.

What are current raw material pricing and tariffs, and what is your outlook? - John McNulty (BMO Capital Markets)

20260108-2026 Q2: Underlying material inflation is easing... Deflation is expected in Q4 2026 and fiscal 2027 as tariffs annualize. - Frank Sullivan(CEO), Matthew Schlarb(CFO)

Is the inflation driven by tariffs or normal supply and demand? - Michael Joseph Harrison (Seaport Research Partners)

2025Q4: Believes about half to two-thirds is driven by tariffs, and the other half to one-third is domestic suppliers raising prices in response to tariff-driven demand... Unmitigated tariff impact is estimated at a negative 4-5% for fiscal 2026. - Frank Sullivan(CEO)

Contradiction Point 4

SG&A Growth Drivers and Future Outlook

This reveals an inconsistency in the strategic rationale behind rising SG&A expenses. The narrative shifted from framing the increase as a deliberate, ongoing investment to drive organic growth (with future growth expected) to explaining it as a mix of transitory costs and a necessary "realignment" to address a changed market demand environment.

Why did SG&A growth accelerate to ~10% in the first two quarters, and what will the $100 million reduction achieve? - Jeffrey Zekauskas (JPMorgan)

20260108-2026 Q2: Increased SG&A was due to three factors: higher corporate expenses... temporary costs from facility consolidations... and deliberate growth investments. The $100 million reduction is a structural realignment, part of a longer-term MAP 3.0 plan... - Frank Sullivan(CEO)

What is the likely increase in total company SG&A expenses this year? - Kevin McCarthy (Vertical Research Partners, LLC)

2026Q1: The increase is driven by... 3) The $10 million in deliberate growth investments... The goal is to drive organic growth, and it is working. Future SG&A will continue to grow with these investments unless market conditions change dramatically. - Frank Sullivan(CEO)

Contradiction Point 5

Acquisition Integration Timeline and Contribution

This presents a contradiction in the expected financial impact timeline of recent acquisitions. Management initially presented acquisitions as contributing to the FY26 growth strategy, but later clarified that they were dilutive in the first half and only expected to become significantly accretive in the second half or later, altering expectations for near-term performance.

How to assess the EBIT impact of recent acquisitions? - Matthew DeYoe (Bank of America)

20260108-2026 Q2: Acquisitions typically take 18-24 months to fully integrate and become accretive. For example, Pure Air and Kalzip are expected to contribute more significantly in the back half of fiscal 2026 and beyond... Acquisitions have been dilutive in H1 FY26 due to high transaction costs (legal, due diligence). Excluding these costs, they are modestly accretive... - Frank Sullivan(CEO)

Is the flooring strength tied to data center/AI expansion, and what is the EBITDA contribution outlook for announced deals? - Unidentified Analyst (Bank of America)

2025Q4: The Pink Stuff (acquired May 2025, ~£160M annualized) and Ready Seal (acquired June 2025, $40M) are modeled in. M&A deal costs were elevated in Q4/Q1 due to robust activity. - Frank Sullivan(CEO), Russell L. Gordon(CFO)