RPM International Inc. (RPM) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the RPM International Fiscal 2026 Fourth Quarter and Full Year Earnings Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Matt Schlarb, Vice President of Investor Relations and Sustainability. Please go ahead, sir.

Thank you, Cal, and welcome to RPM International's conference call for the fiscal 2026 fourth quarter and full year. Today's call is being recorded. During today's call are Frank Sullivan, RPM's Chairman CEO; Rusty Gordon, Vice President and Chief Financial Officer; and Michael Roche, Vice President, Controller and Chief Accounting Officer. This call is also being webcast and can be accessed live or replayed on the RPM website at www.rpminc.com. Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's report filed with the SEC. During this call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. Also, please note that our comments will be on an as-adjusted basis and all comparisons are to the fourth quarter of fiscal 2025 unless otherwise indicated. We have provided a supplemental slide presentation to support our comments on this call. It can be accessed in the presentation and the webcast section of the RPM website at www.rpminc.com. As a reminder, certain businesses that are previously part of the Specialty Products Group have been reallocated to other segments effective June 1, 2025. As a result, all references today reflect the updated structure and prior year figures have been recast accordingly. This change has no impact on consolidated results. Now I will turn the call over to Frank.

Thank you, Matt, and thank you, you all for being on this morning's investor call. I'll start with an overview of our fourth quarter results to provide an update on the current raw material outlook and operational improvements that we've been making. Next, Michael Laroche will cover financials, and Matt Schlarb will provide an update on cash flow, the balance sheet and our system selling approach. Finally, Rusty Gordon will provide our outlook after which we'll be happy to answer your questions. Starting on Slide 3. We generated another quarter of record results with each segment growing sales and adjusted EBIT. By segment, our Construction Products Group and Performance Coatings Group continued to lead our growth. They achieved this above-market growth by focusing on maintenance and restoration solutions targeting growing end markets and winning a larger percentage of project spending through system selling and improved collaboration. While our Consumer segment continued to face challenging DIY markets, they generated record sales and earnings in part driven by acquisitions. Our associates demonstrated their ability to adapt to increased global uncertainty, procure raw materials continue implementing operational efficiency improvements and our customers with high-quality products and services. Nowhere is just more evident than in the Middle East, where despite severe supply chain disruptions they were able to find alternative raw material sources, navigate logistical challenges and deliver mid-teens sales growth on a year-over-year basis. The combined actions of associates worldwide and the SG&A-focused optimization actions we previously implemented allowed each segment to achieve record adjusted EBIT and offset increased health care and insurance expenses as well as inflation to expand consolidated adjusted margins to a fourth quarter record, even against challenging comparisons to the prior year. This fourth quarter represents the 16th quarter of the last 18 quarters that we have achieved record adjusted EBIT results. Turning to Slide 4. During the fourth quarter, our center-led procurement team did an excellent job partnering with our top suppliers and having contracts in place to ensure our business had sufficient raw materials and were insulated from spot price volatility. Our businesses led by the Construction Products Group and Performance Coating Group reacted quickly to the inflationary environment by implementing price increases where necessary which caused our price/cost mix to be slightly favorable in the quarter. While still elevated from the beginning of the calendar year, spot prices have declined from their peak. While we have limited direct exposure to spot pricing, directionally, it does impact where our index-based supply contracts are headed, and it currently suggests moderating inflation in the second half of fiscal 2027 as we continue to be challenged with inflation in the first and second quarters of the new fiscal year. It is important to remember that the situation is dynamic, and our teams will adapt to changes as necessary. In the first quarter of 2027, we anticipate raw material inflation to be up 5% to 6% with pricing up by a similar dollar level. For the second quarter, we expect inflation could be as high as 6% to 8%. As we progress through the fiscal year, we anticipate that our price increases, including in our consumer segment will recover the gross margin percentage lost in the first quarter. From a supply availability perspective, we were in good shape throughout the quarter due in large part to the actions of our procurement team. Looking forward, supply availability has improved, although a fire at a supplier's plant has caused some tightness and propylene oxide drive raw materials in North America. Additionally, MDI supplies are also tight due to supplier issues. Our procurement team has done a good job finding additional sources of supply, which has limited the impact on us, but this market tightness will add to overall inflation. An update on operational improvement is on Slide 5. We continue to make progress implementing operational improvements across our businesses, which was reflected in our record results. The SG&A focused actions we implemented last fiscal year are on track to deliver $75 million of savings in the new 2027 fiscal year. As a reminder, we consider this a down payment on our new MAP 3.0 strategic plan. Additionally, our Green Belt program continues to expand. We have now trained 620 RPM associates to identify opportunities, implement efficiency actions and track their progress. This program has developed a pipeline of more than $30 million of additional savings. We are now expanding it to administrative functions and are already starting to see benefits in this area as well. We are looking forward to providing a strategy update and additional details on our next operating improvement plan at an Investor Day, which will be held on Monday, November 9 of this year. The event will be webcast, and we will provide more information as to how to participate by streaming or live as the event approaches. Turning to Slide 6. Another benefit of our operational improvement since our MAP 2025 operating improvement program was initiated has been cash flow. Thanks to four consecutive years of record adjusted EBIT and structural improvements to working capital efficiency, we have increased our average annual operating cash flow by nearly 90%. This has allowed us to complete strategic acquisitions, invest in organic growth projects and return capital to shareholders through dividends and share repurchases, while same time reducing debt. Although the teams have made significant progress in converting profitability into cash flow, we still have additional improvement opportunities ahead of us. In summary, our record fourth quarter results reflected our emphasis over the past fiscal year and over these past several years on executing things that are within our control. These include leveraging our competitive strengths, focusing on maintenance and restoration solutions to drive sales and implementing efficiency initiatives to improve profitability and cash flow. I want to thank the RPM associates for their commitment and focus during this volatile economic period. And I look forward to RPM delivering continued growth in sales and earnings for our new 2027 fiscal year. I'll now turn the call over to Mike Laroche.

Thank you, Frank. On Slide 7, consolidated sales increased 7.2% to a record, driven by engineered solutions for high-performance buildings and infrastructure projects, M&A and pricing to offset inflation. Adjusted EBIT also increased to a record as sales growth, including higher volumes, resulted in improved fixed cost utilization. SG&A-focused optimization actions also contributed to profitability growth and were partially offset by higher health care and insurance expenses as well as inflation. Adjusted EPS was a record, driven by higher adjusted EBIT. Geographic results are on Slide 8. All international regions generated double-digit growth, led by emerging markets. Our collaborative platform approach in emerging markets continued to generate positive results as we are selling more engineered solutions for high-performance buildings and infrastructure projects. Sales in North America were up a solid 5%, driven by turnkey and system solutions for high-performance buildings. Growth in Europe was driven by M&A. Foreign currency translation also contributed to sales in most countries outside the U.S. Now turning to our segments on Slide 9. Construction Products Group sales grew to a record with broad-based strength led by the concrete admixtures business. By end market, growth was strongest for roofing and wall systems for high-performance buildings such as data centers and infrastructure projects. Pricing increases to offset inflation and foreign currency translation also contributed to the sales growth. Volume growth and operational efficiency improvements leverage fixed costs and drove adjusted EBIT to a record. Mix- and SG&A-focused optimization actions also contributed to the record results. Next on Slide 10, Performance Coatings Group achieved record sales with broad-based growth across businesses. Growth was highest in solutions for infrastructure projects, food coatings and ingredients, emerging markets and fireproofing systems for high-performance buildings. Pricing to offset inflation also contributed to the sales growth. Adjusted EBIT was a record, driven by higher sales, volume growth resulting in improved fixed cost leverage and SG&A-focused optimization actions. This was partially offset by a $3.2 million bad debt expense from a customer bankruptcy. The Consumer Group results are on Slide 11. Record sales were driven by acquisitions and pricing to offset inflation. DIY end markets remain soft. Adjusted EBIT grew as MAP operational improvements, including SG&A-focused optimization actions more than offset reduced fixed cost absorption from lower volumes and inflation. M&A integration also added to adjusted EBIT growth. Adjusted EBIT excludes a $9.7 million noncash impairment charge related to the Color Group. Now I'll turn the call over to Matt to cover the balance sheet, capital and our focus on restoration.

Thank you, Mike. The cash flow improvements Frank talked about were evident in the fiscal year 2026 as we generated $899 million of operating cash flow, the second highest amount in company history. We used a portion of the strong cash flow to reward shareholders through dividends and share repurchases, which totaled $349 million for fiscal 2026, an increase of over 7% from the prior year. Our Board recently authorized a $700 million increase to our share repurchase program, which is in addition of $115 million remaining under the previously authorized amount. We continue to view repurchases as a complement to our dividend are allowing for the financial flexibility to invest in organic growth projects, acquisitions or other capital allocation decisions that generate long-term value. CapEx for the year was approximately $224 million, slightly below the prior year and included targeted growth investments like the shared European distribution center and the new operating facility in India that will be used to produce products for several RPM businesses. During the year, we used $202 million to acquire multiple businesses with a focus on adjacent consumer categories and components that we integrate into our system offerings. An example of this is CPG Kalzip's acquisition, a middle roofing and facades company, which closed in the fourth quarter. Once all the integrated into our organization over the next couple of years, we expect this acquisition to be margin accretive. The quarter remained strong at $1.09 billion, which gives us financial flexibility and capital deployment, including in acquisitions where the pipeline remains healthy. Next, on Slide 13, we have some examples of our engineered systems for high-performance buildings, which have been a contributor to our ability to outgrow our end markets. Through a combination of strategic M&A and innovation, we have developed system offerings for all 6 sides of the building [indiscernible] than just selling singular components. This system selling approach offers a compelling value proposition to building owners. First, we can guarantee that our systems will perform to meet demanding specifications and can offer warranties to back up these guarantees. Second, we make procurement similar by streamlining the decision-making process. Third, our system speed to construction time. As an example, we can manufacture a wall system in a factory, ship the wall system to the job site and assemble it there. This improves construction time by reducing the need for skilled labor, reducing weather-related disruptions and improving safety on the job site. System selling also provides benefits to RPM and increases the amount of RPM products in a given construction or restoration project. Our unique systems offer performance that others in the industry cannot which also helps us win the jobs. We are continuously looking to expand and enhance our system capabilities often through the acquisition of a component that we can then integrate into our systems. For example, we have acquired multiple floor joint companies that allow us to provide high-performance flooring system that can handle increasingly heavy loads. We've also expanded our insulated concrete form systems through acquisitions that now allowed us to offer vertical and horizontal offerings throughout a building. The pipeline in this area remains healthy. We continue to -- we expect to continue strategic M&A in this area. Now I'd like to turn the call over to Rusty to cover the outlook.

Thank you, Matt. Our first quarter outlook can be found on Slide 14. Please note that we have transitioned our primary measure of profit and loss to adjusted EBITDA. This change will help comparisons to peer companies and will better reflect underlying earnings during periods of acquisition activity. Results for fiscal year 2026, incorporating the use of adjusted EBITDA were filed in a Form 8-K today. The positive top line momentum we generated in the fourth quarter is expected to continue with all segments expected to grow in the mid-single-digit range. Our construction-focused businesses continue to focus on the highest growth factors, including data centers, energy and infrastructure projects as well as building restoration. In Consumer, we anticipate improved results as comparisons are easier, and DIY markets have shown signs of stabilization. In total, we expect sales to increase in the mid-single-digit range. We expect first quarter raw material inflation to be in the 5% to 6% range. We have already implemented price increases to offset this inflation on a dollar basis with additional price increases to come as we recover the gross margin percentage. In the first quarter, we anticipate previously announced SG&A reductions will generate $25 million of benefits, partially offset by higher health care and benefit expenses. Taking all this into account, we expect adjusted EBITDA to increase in the mid-single-digit range which is in addition to record results in the prior year period. Our full year out 2027 outlook is on Slide 15. We anticipate that many of the sales trends from the first quarter will continue throughout the year, including a stabilization of consumer end markets However, it should be noted that we have the least visibility in this segment. Additionally, we will benefit from increased pricing in response to inflation, although economic uncertainty limits demand visibility. Overall, we expect sales for the full year to increase 3% to 7%. Adjusted EBITDA is expected to increase 5% to 10%. Assuming current raw material costs remain stable, the rate of inflation will be highest in the first half of the year as the impact of the Iran conflict will have a greater effect on the P&L. From a gross margin perspective, we expect price cost to be somewhat negative in the first half of the year and then become more neutral in the back half as additional price increases are implemented and cost inflation moderated. The temporary cost headwinds from plant consolidations in fiscal 2026 will diminish in fiscal 2027 as the plants are closed. However, a portion of this will be offset by start-up costs and several newly opened shared RPM facilities. SG&A-focused optimization actions are expected to generate around $75 million in benefits during the year, although a portion of these will be offset by higher health care and benefit expenses. We are actively implementing other efficiency actions across the organization and look forward to providing more details at the November Investor Day. That concludes our prepared remarks, and we'd now like to answer your questions.

[Operator Instructions] And that first question will come from John McNulty with BMO.

So Just maybe if we can unpack a little bit some of the strength that you're seeing in CPG and the PCG group. It sounds like some of it is coming from onshoring data centers. I guess, can you help us to think about how that plays out through your fiscal '27? And how much visibility you have on the trends that you're seeing in that space right now?

Sure. Backlogs remain strong across both CPG and PCG. But we had it, as you'll recall, in fiscal '26 a pretty motile year as did everybody. And unfortunately, given the [ honor gain-off again ] situation in the Middle East, the fact that we're going to restart the tariff wars, in fact, have already started and anticipate some more tariff activity at the end of this week. Our guess is it's going to be another [indiscernible] volatile year. We have an administration that seems to not like stability. In that environment, I think we've proven that we can perform pretty well, particularly versus the peers. And so backlog is good, anticipate a lot of volatility because of broader geopolitical and economic circumstances.

Got it. Fair enough. Yes, definitely a tricky environment. On the cost saves, as the second question, you targeted the $100 million or so of savings on the SG&A front. And I believe back at time, you'd indicated, look, a lot of that the execution was already happening and/or done. So I guess have you -- since then, have you seen any new opportunities, any other areas to enhance efficiency or further cost cutting? I guess how should we be thinking about that?

Sure. We -- and it impacted us negatively in the last 1.5 years relative to our gross profit absorption. But we will be opening and really getting up and running on joint distribution centers in Europe. We will complete the closure of our largest North American facility in Construction Products Group in Toronto and effectively transition that to plants in the United States. And there's a number of issues like that, which we will begin to benefit from, particularly in the second half of fiscal '27. As Matt commented, we continue to drive our Green Belt initiative. And so we expect our MAP program, which we track monthly and quarterly to continue to benefit efficiency as well. And then lastly, we'll be providing some more detail at our November 9 Investor Day, we talk about MAP 3.0 and some accelerating connectivity across RPM from an administrative perspective.

Got it. Is there a way to quantify some of those headwinds that die down with the joint distribution side and the Toronto plant closure, et cetera?

Yes, John. So like what we talked about last year was some of those inefficiencies from the plant salvation. They totaled about $20 million in our FY '26 results. We think that with some of the plant startups, it will be about half of that will be a P&L headwind as we go through FY '27. We'll be able to provide more details on things like that at the Investor Day.

So again, in the second half of the year, in particular, you're looking at picking up a positive benefit in the $10 million to $12 million range.

And our next question will come from Mike Harrison with Seaport Research Partners.

Congrats on a nice quarter. I was hoping that you could give a little bit more detail on the consumer business? How much lower were organic volumes in the quarter? And were there any particular product lines that were better or worse. And then I guess in terms of the outlook for Consumer, it sounds like you're expecting some stabilization in DIY. Is that just stabilization at a low level, or are there some signs of green shoots or any positive dynamics there?

So we overall had positive growth in the quarter. And as you would expect, we had kind of low to mid-single-digit unit volume growth in CPG and PCG and 2% or 3% negative volume growth in consumer. The consumer segment results were benefited by The Pink Stuff acquisition and the Ready Seal acquisition. And so that's really fiscal '26 in Q4. We're seeing some spotty consumer pickup. And so as we got into the summer months, there's a few areas of strength in terms of consumer takeaway. Again, it's volatile, but it does feel like after 2 years of a pretty steady single-digit negative decline in consumer takeaway and volume impact, that we're hitting bottom. That feels better than anticipating another year of negative results. I can't say we're seeing anything that suggests that there'll be a robust rebound. And so that's kind of where we are. As I mentioned in the earlier comment, we continue to expect volatility. The biggest impact of the tariff wars for us was indirect, principally with steel costs and packaging in our consumer business. And as the tariff wars renew, we're on the lookout for possible increase in packaging costs again.

All right. And then my second question is on the share repurchase. Historically, you guys have been pretty programmatic with your share repurchases, $12.5 million a quarter for a while, stepped up to $17.5 million a quarter for a couple of years. In Q4, you stepped that up to $25 million. Should we just assume that $25 million a quarter is the new repurchase rate? Or could the larger authorization maybe signal a willingness to be more opportunistic with repurchase activity going forward?

So two comments on that, Mike. One is broadly with a bigger and healthier balance sheet and really confidence they entirely new level of cash generation from our operations, which has been a significant win of our MAP initiatives, we have more capital to deploy. Our M&A activity seems to be pretty strong, but it's your typical RPM, small- to medium-sized transactions. So it allows us to consider as appropriate, more aggressive share repurchases. I think your assumptions about how to think about our share repurchases on a regular basis are correct. But certainly, with a stock price that has been declining with the broader market and what we feel is an industry outperformance, which we would hope will continue. There will be opportunities for us to be opportunistic in the event of weakness in our stock price.

And our next question will come from Patrick Cunningham with Citi.

Maybe just on the pricing side, I think you previously mentioned segment specific measures that were maybe 70% structural, 30% temporary. Are you currently executing to plan here? And any change in how you're using surcharges versus structural price versus some sort of index mechanism? And so what sort of level of pushback have you experienced so far?

Sure. In the quarter, price was up about 2%. We anticipate further price increases over the summer, some of which have been announced and won't hit until ended July or obvious time frames that will impact a little bit in Q1 and then more so in Q2. We have mostly driven price increases. And as you've seen over time, particularly in high inflationary periods, we've generally been successful in recovering price on a dollar-for-dollar basis. And then get on the strength of our brands and the unique nature of our businesses being able to hang on to that and then see margin recovery as raw materials begin to decline. We anticipate the same thing with a quarterly outlook for Q1 of a mid-single-digit top line growth in a better environment, that would generate some leverage to the bottom line. We anticipate about a mid-single-digit earnings growth, which the difference will be some challenges to our gross profit because of what's happening with inflation raw material in the first quarter. You'll see that continue a little bit in Q2, and then we anticipate that coming down. It's interesting to note that some of the underlying primary chemicals have not been as negatively impacted and as volatile as oil prices or gasoline prices, and that's a demand issue. So we're watching that very closely. The other frustrating thing is what I mentioned earlier, which is the impact on packaging, particularly steel packaging, which is not a direct tariff impact for us, but indirectly as a result of U.S. steel manufacturers raising prices.

Got it. No, that's very helpful. And then maybe just on the raw side, I think you and others in the industry have called out the dynamics within the Polyurethanes chain, I guess, is there any anticipated supply availability or operational impact there? And what sort of expectations for that to remain tight for the next several quarters?

Sure. So I think we've been really pleased with the exceptional work of our operating people in regions like the Middle East and Asia. We have not seen any raw material availability problems. We've been able to work around a few things. The exception is really not geopolitical related. It's here in the U.S. with a significant fire at a primary chemical producer whose downstream products directly impact Tremco Roofing. And so we will have some negative impacts, both in terms of costs. And in the first quarter, some negative impact on sales growth because of the inability to get that product should be moving in the right direction as we get through the end of the summer. That's a supplier circumstantial situation as opposed to anything geopolitical or tariff-related.

And our next question will come from John Roberts with Mizuho.

This is Saurav Deer on for John Roberts. I just have a question on the sales outlook for next year. So what's the underlying organic volume growth expectation in the low and high end of that sales guidance?

So for the full year, yes, it's up mid -- yes, so you know we've talked about sales growth being up 3% to 7%. And so as we sit here today, M&A should add about 1 point to that. We've talked about pricing being -- around, like -- frankly, around 2% in the first quarter or in the fourth quarter and up a little bit more as we progress throughout the year. And so if we're at the lower end of that range, that implies a little bit of volume declines. And if we're at the higher end of that range, that would imply higher volumes.

Yes. The -- if we can maintain the unit volume momentum in our construction products Performance Coatings Group, which will be compared to prior year records. And if the ability in the consumer business comes back, along with the elements that Matt mentioned, we should be at the higher end of that range. But as I mentioned earlier, we anticipate another volatile period of time in terms of the impact of a lot of geopolitical and tariff-related items that are now back in the table.

Got it. And on the High Performance Buildings segment, what is the pipeline of demand for 2027? And what's like the go-to-market strategy on that segment?

Sure. It's a grinded out everyday effort. We are delivering some unique capabilities versus some of our competitors by being able to warrant entire wall systems as opposed to just selling components. We're doing -- as you all know, 95% of our Tremco Roofing business is restoration and reroofing. And so that continues to have a solid backlog. Although, as I mentioned earlier, we could see some raw material costs challenges and some revenue challenges in Q1 related to this raw material supply issue, which is temporary. Those are the primary key elements there. We -- this new business, not relatively new to RPM bought 5 years ago in [ purier, ] is really starting to take off. Again, it's a renovation, restoration of major HVAC units. So we're seeing really good strength there. So it's really our people responding to the renovation or restoration needs in manufacturing and in major institutions. Underlying commercial construction continues to be weak, and we don't see that changing.

And our next question will come from Ghansham Panjabi with Baird.

Frank, just to call out in terms of concrete admixtures in terms of strength. Can you just give us a bit more color as to what's going on there? Is that RPM specific, you think? Or do you sense any sort of change just in the underlying demand environment for that segment?

Hi, Ghansham, it's Rusty here. Yes, we are definitely gaining share. There's been big M&A by peers, there's been regulatory action in the space against peers. And we are [indiscernible], we're picking up distribution. And we're finding growth where we can, whether it's the data center sector, which is growing. We have done well with infrastructure, so we are definitely continuing to pick up share in that [indiscernible] business.

Okay. And then as it relates to the emerging markets across the board, it seemed very, very strong. And I know you cited some very specific drivers with engineered solutions, high-performance buildings, et cetera. How do you expect that to evolve? Is it just taking your commercial focus here in the U.S. and overlaying that across the emerging markets is driving that inflection in demand? I'm just curious as to why the strength was so broad-based in the quarter?

Sure. So strategy matters, and I've made this comment before. When I was a new CEO 20 years ago, we developed a strategy of planting a flag in a developed country through a small acquisition. It's a relatively risk-free way of getting into some of these geographies where we did not play. And we did that in a very decentralized basis in an M&A review with our Board 5 or 6 years ago. I think we identified a lot of these small developed country acquisitions is not performing very well. And it happened for a simple reason, we didn't pay attention to them. And the one big exception to that was in South Africa, where of the challenges in that market, we had really a strong team there, really good manufacturing capabilities. So they operated as the RPM of South Africa. And so organically, that business grew from about an $8 million or $10 million business we acquired 20 years ago to what's about a $50 million business today. So we took that knowledge, and we reorganized the developing world approach to what we call the RPM platform approach. Our business is now in the Middle East Africa, India and Southeast Asia, I'll report up through [ Grant Boonzaier ] and his team. They have brought a sharper accounting control perspective a better compliance environment and a real focus on driving growth and improving margins. And it's paying off in the coming years, you're likely to see us expand the breadth and the geography of that RPM platform approach. It's a little big consumer, but mostly a collaboration between the Construction Products Group and the Performance Coatings Group. And you can see the numbers. The underlying profitability is consistent with the regional revenue growth that we're talking about, and we expect that to continue we should be $1 billion plus in the developing world. And so there's a lot of room for us to grow now that we have a better organized, more strategic way to allocate capital into that part of the world.

And our next question will come from Josh Spector with UBS.

I had a couple of follow-ups. First, I wanted to ask on raw materials, just I understand your commentary, and you're pretty explicit on 1Q and 2Q. But as you think about the second half, when you say it's down, are you saying it's sequentially flat in the second half, and year-on-year comparisons are down? Are you saying it's sequentially down in the second half. And just if you could frame, is this guidance reflective of a $90-plus oil environment, or is it reflective of where we were a couple of weeks ago? I know that's probably a harder one to answer, but just curious on your framing.

Sure. This is not the answer maybe you're looking for. I would call it a swag. And it's our best guess as to what might happen in the second half of the year. We did note when there was a couple month period of stability and it felt like the war in the Middle East was coming to a resolution that the underlying primary chemicals that drive a lot of our raw materials decline meaningfully. They're starting to inch back up. And so it's really in anticipation of a level of stability relative to geopolitical issues that should deliver improving raw materials. But who knows? And it's not a very good answer. But with FIFO accounting and with some backlog that we can see in certain of our businesses, but certainly not all of them, I think we have fairly good insight into what's coming in the next 2 to 3 months, other than a sophisticated guess about the future, not much 6 or 9 months from now. We did experience and anticipated improvement in raw materials, but as I said earlier, we seem to be in an environment where stability is not going to hang around for a while. And so I think that's the world in which we anticipate living in '27. The good news is it's a world in which we live in '26, and we focused on what we could control and deliver pretty decent results.

Yes. No, I appreciate all that. I guess I want to try again just like second half, are you assuming it's sequentially stable from peak inflation and your pricing for that? Or do your gross margin assumptions assume costs come down?

We would expect still to see year-over-year inflation in the second half of the year. It will just be at a more moderate pace than what we're seeing in Q1 and Q2.

And as I mentioned earlier, you'll see some of the headwinds that we had in our conversion costs moderate relative to actually operating company distribution centers in Europe, completing some of the plant closures that we've been working on for the last couple of years. So there will be some pickup in the second half of the year that we referenced earlier.

And our next question will come from Matthew DeYoe with Bank of America.

I want to drill on a little bit on consumer for the quarter. So EBIT up pretty modestly on a pretty large top line number. So what are the primary takes? And I guess in my -- I would have thought SG&A savings would have accrued nicely to consumer. Is that not necessarily the case yet? And as you look through like organic growth for the year, I know you had mentioned some stabilization, but not much in the way of reflection. But how does operating leverage progress for that business? And can you talk through, I guess, some of the things you're doing to try to drive growth in...