Welcome to RPM International's conference call for the fiscal 2022 Q4 and year-end. Today's call is being recorded. 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 and involve risks and uncertainties which could cause actual results to be materially different. For information on these risks and uncertainties, please review the RPM's reports filed with the SEC. During this conference 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.
Following today's presentation, there will be a question-and-answer session, at which time, if you wish to ask a question, you will need to press Star, then one on your telephone. Please note that only financial analysts will be permitted to ask questions. At this time, I would like to turn the call over to RPM's Chairman and CEO, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.
Thank you, Michelle. Good morning, and welcome to the RPM International Investor Call for our fiscal 2022 Q4 and year-end. Joining me on today's call are Rusty Gordon, RPM's Vice President and Chief Financial Officer, and Michael Laroche, Vice President, Controller, and Chief Accounting Officer. I'll share a broad commentary on our consolidated performance for the quarter and the year. Then Mike will provide details on our financial results, and Rusty will conclude our prepared remarks with our outlook for the Q1 of fiscal 2023. Please note that our comments will be on an as-adjusted basis, and all comparisons are to the Q4 of fiscal 2021 unless otherwise indicated. We provided a supplemental slide presentation to support our comments on this call. It can be accessed in the Presentations and Webcast section of the RPM website at www.rpminc.com.
After our remarks, we'll be pleased to take your questions. We generated record Q4 performance, which reflected accelerating momentum across RPM throughout fiscal 2022. As we progressed through the year, our nimble businesses responded quickly to address ever-changing supply chain constraints, inflationary challenges, and foreign exchange headwinds. I'd like to share a few examples across RPM. In response to the scarcity of some raw materials, we purchased a manufacturing facility in Texas last September. The dedicated team quickly ramped up production of alkyd resins, which were in very short supply due to a supplier explosion at one of our primary suppliers in the industry. In addition, our R&D professionals have been working around the clock to reformulate literally thousands of products to qualify different materials, all while maintaining high performance.
Another example is our disaster restoration equipment business, which was hampered by the semiconductor chip shortage. It found alternative supply and reconfigured its products to accommodate these challenges and deliver for its customers. As you can see on slide three, this chart reflects the quarter-by-quarter actions that we took to steadily generate momentum across our businesses throughout the year. Also having an impact were the investments we've been making to accelerate growth in the fastest-growing areas of our business, particularly our high-performance building, construction, and coating systems. Our associates' efforts, along with solid construction and industrial maintenance activity, as well as a rebound in energy markets, culminated in a Q4 that produced consolidated record sales and record adjusted EBITs.
On the next slide, you'll note. Driven by pricing adjustments and operational efficiencies, we achieved record results in all four segments in sales and record EBIT in three of our segments. The lone outlier was our Consumer Group, which began to narrow the year-over-year gap in adjusted EBIT results as price increases started to catch up with inflation and access to raw materials improved. Better materials availability was largely due to the production facility we acquired last fall. We also benefited from $17 million in incremental savings during the quarter from our ongoing operating improvement program efforts. On that subject, driving operating efficiency remains a top priority at RPM, and our teams have made significant progress in developing the follow-up plan to our highly successful MAP to Growth Operating Improvement Program, which concluded at the end of fiscal 2021.
We're calling the new program MAP 2025, and we will share details about it with you at an Investor Day to be scheduled in October around the time of our Q1 earnings release and annual meeting of shareholders. We are confident that MAP 2025 will contribute to the momentum we are building for a successful fiscal 2023 and beyond. I'll now turn the call over to Mike Laroche to discuss our consolidated and segment financial results in more detail.
Thanks, Frank, and good morning, everyone. For the Q4 , we generated record consolidated net sales of $1.98 billion, an increase of 13.7% compared to the $1.74 billion reported in the same quarter of fiscal 2021. Organic sales growth of 15% or $261.9 million. Acquisitions contributed 0.9% to sales or $16.3 million, while foreign currency exchange was a headwind that decreased sales by 2.2% or $38.6 million. Adjusted diluted earnings per share were a record $0.42, which was an increase of 10.9% compared to the $0.28 reported in the year-ago quarter.
Our consolidated adjusted EBIT was up 11.7% to a record $263.7 million compared to $236.2 million reported in the fiscal 2021 Q4 . Our Construction Products Group generated Q4 record net sales of $745.9 million, up 18.5% compared to the fiscal 2021 Q4 . Organic sales growth was 19.9%, and acquisitions contributed 1.6%. Foreign currency translation headwinds reduced sales by 3%. Despite comparisons to a strong prior year when sales and earnings were at record levels, CPG continued to generate high growth propelled by its differentiated service model as well as its unique building envelope and restoration solutions.
The segment's businesses producing the strongest sales growth were those providing roofing systems, insulated concrete forms, as well as admixtures and repair products for concrete. Results in international markets were mixed, with Europe being challenged by macroeconomic headwinds while Latin America experienced significant double-digit sales gains. CPG fiscal 2022 Q4 adjusted EBIT increased 10.9% to a record $122.4 million. The CPG segment was able to offset significant raw material inflationary pressure with selling price increases and operational improvements. Our Performance Coatings Group fiscal 2022 Q4 net sales were a record $329.4 million, an increase of 16.3% over the year ago period. Organic sales increased 17.4%, and acquisitions contributed 1.8%, which were partially offset by a foreign currency translation headwind of 2.9%.
PCG's businesses providing flooring systems, protective coatings, and FRP grating all generated double-digit sales growth. A rebound in international markets, as well as ongoing success in the company's vertical end markets, including energy, technology, and food and beverage, helped drive PCG's results. In addition, improved sales management systems and price increases were major factors in the segment's excellent top-line results. Adjusted EBIT increased 37.3% to a record $42.6 million in the Q4 of fiscal 2022, driven by volume growth, selling price increases, revenue growth leveraging, good product mix, and operational improvements. The Specialty Products Group reported record net sales of $225.8 million for the Q4 of fiscal 2022, an increase of 11.4% compared to the fiscal 2021 Q4 .
Organic sales increased 12.2%, and acquisitions added 0.5%, which were offset by unfavorable foreign currency translation of 1.3%. The majority of SPG's businesses experienced double-digit sales growth. Leading the way were its OEM coatings companies as well as its food coatings and additives business, which has improved performance under new management. Its disaster restoration equipment business continued to rebound as it cleared backlogs caused by semiconductor chip shortages and grew sales in the teens despite a difficult comparison to a strong prior year that had high demand for its products driven by Winter Storm Uri. SPG's adjusted EBIT was a record $44.2 million in the fiscal 2022 Q4 , an increase of 21.8% compared to adjusted EBIT of $36.3 million in last year's quarter.
The segment's increase in adjusted EBIT was bolstered by the favorable impact of higher sales, which were leveraged to the bottom line due to selling price increases that began catching up with prior cost inflation. Our Consumer Group achieved record net sales of $682.8 million for the Q4 of fiscal 2022, an increase of 8.6% compared to the Q4 of fiscal 2021. Organic sales increased 10%, which was partially offset by unfavorable foreign currency translation of 1.4%. The Consumer Group's top-line growth was driven by improved supply of key alkyd resins produced by the manufacturing plant we acquired last September, as well as price increases and high growth in product lines with professional remodelers, including caulks and sealants. While North American markets grew, European markets remained challenged due to macroeconomic headwinds in the region.
Fiscal 2022 Q4 adjusted EBIT was $80.3 million, a decrease of 14.2% compared to adjusted EBIT of $93.6 million reported for the prior year period. Adjusted EBIT was impacted by continued raw material cost inflation and higher costs from ongoing shipping challenges and industry labor shortages. In response, the Consumer Group has been instituting price increases to catch up with inflation, building resilience in its supply chain, and investing in capacity and process improvements to better respond to customer demand. To wrap up, I have a few comments on capital allocation. Our significant liquidity enables us to fund internal growth initiatives, make acquisitions, and reward our investors with cash dividend payments and repurchases of our shares. Since our last earnings release in April, we repurchased $50 million of our common stock.
This is in addition to earlier share repurchases and early redemption of our convertible notes in November 2018, with roughly $200 million of cash. Combined, this puts us at $658 million towards our $1 billion repurchase goal that was established at the onset of our MAP to Growth program in 2018. Now I'll turn the call over to Rusty to discuss our outlook.
Thanks, Mike. Looking ahead to the Q1 of fiscal 2023, we will continue to focus on navigating a number of challenges. The strengthening U.S. dollar is expected to be a headwind, impacting the translation of our international results. We expect significant cost increases to continue for certain raw materials, labor, and packaging. We also anticipate continued higher costs from unreliable bulk transportation, which creates production inefficiencies, although they should have less of an impact moving forward, as well as fuel surcharges, which are being driven by high energy prices that have been exacerbated by the conflict in Ukraine. These cost pressures are expected to disproportionately affect our consumer segment. Despite these challenges, the proactive measures we took over the course of fiscal 2022 enabled RPM to accelerate momentum in the business, and it is expected to carry over into fiscal 2023.
We expect to continue implementing price increases as needed and continue improving operational efficiencies in order to minimize cost pressures and restore margins closer to historical levels. While there is a recessionary undercurrent in the economy, we anticipate that demand for our products and services will remain strong, particularly those that improve energy efficiency and extend the useful life of our customers' assets through protection and restoration. In addition, we are making strategic investments in organic growth initiatives focused on market opportunities and industry trends, including the future funding for infrastructure and onshoring of industries responsible for pharmaceutical, food, technology, and energy security. Based on these factors, we expect to generate fiscal 2023 Q1 consolidated sales growth in the mid-teens over last year's record Q1 sales. For each of our four segments, we anticipate sales growth in the teens.
It is likely that the Consumer Group will generate the highest growth of the four segments due to, number one, selling price increases that should allow it to catch up with inflation, number two, improved alkyd resin supply, and number three, investments made in new capacity, sales inventory, and operational planning, and continuous improvement initiatives. Fiscal 2023 Q1 consolidated adjusted EBIT is anticipated to increase 20%-25% versus the same period last year. Lastly, I'd like to announce that we have hired Matthew Schlarb as our Senior Director of Investor Relations. He previously held investor relations positions with Lottery.com, Mettler-Toledo, and Fairmount Santrol. We're pleased to have him join RPM and look forward to having him raise our investor relations function to a new level.
Matt will be joining us on our equity analyst calls this week, and you'll be working more closely with him as we near the announcement of our Q1 results and the investor event that will provide details on our MAP 2025 initiative. This concludes our prepared remarks, and we will now be pleased to take your questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from John Roberts of Credit Suisse. Please go ahead.
Hi, John.
Thanks, and good night. Morning, and nice quarter. Does the alkyd resin capacity get you to the integration that you want? Or would you like to have even further integration if possible? It's always a trade-off between having capital deployed, versus, you know, having your margins higher.
Sure. I think the Corsicana plant is relatively unique. We have another kind of backward integrated business as well with our Stonhard group, and I believe we have the backward integration that we desire at this point in time. We do plan to spend probably close to $100 million over the next three years at Corsicana to backward integrate into a few other categories as well as use that site for expansion of our Nudura product line. We do not plan any additional significant investments in backward integration at this time other than internal investments on that site.
Okay. You noted the recessionary undertones to the economy. Which markets do you think are most at risk here for RPM?
For us, we're doing quite well in North America. Latin America is relatively strong compared to last year. The areas that we see the biggest challenges shouldn't be a surprise. It's principally Europe, and it's a function of some of the inflation hitting Europe later, slowing growth, and most of which I would attribute to the Russian war on Ukraine and its impact, both on current economic activity and anticipated challenges in the energy markets in Europe specifically.
Okay, thank you.
Thank you. The next question comes from Mike Harrison, Seaport Research Partners. Please go ahead.
Morning, Mike.
Hi, good morning. Was wondering if you can talk a little bit about the construction business, and I guess specifically, can you break down how much of that organic growth, 20% organic growth was pricing, and how much was volume? And I guess as you're looking forward, how much macro impact would you expect to see in that construction business if we slip into a recession? Or do you feel like trends around infrastructure spend and some of the onshoring or reshoring that you referenced might be enough to keep that underlying growth looking pretty solid?
Sure. We in general feel really good about the dynamics, particularly in North America for our Construction Products Group and our Performance Coatings Group. In both cases, unit volume growth was in the mid to high single digits, and it could have been better, particularly in our Construction Products Group, but we continue to face shortages that impact projects. Some of those shortages are related to intermediate chemicals that we purchase, and others of those shortages related to fasteners or insulation board or other types of components on a construction project that we're not directly involved in, but slow down projects. That organic growth could have been better in the quarter, and we continue to face some of those challenges.
I will tell you that the demand continues to be strong, and we feel pretty good about the literally hundreds of billions of dollars that came from the American Rescue Plan in February of 2021 and the $1.9 trillion infrastructure bill, at least $800 billion of which will go into real hardcore infrastructure, both of which bodes well for the dynamics in the markets that our Construction Products Group and Performance Coatings Group serve. Again, those are principally driven in the United States.
All right. Maybe a question for Rusty. Obviously, we're in a pretty unusual situation as it relates to working capital, leading you guys to be free cash flow negative for Q4, as well as for all of fiscal 2022. Can you give us some initial thoughts on working capital and CapEx for fiscal 2023? I think we're all just trying to get a better sense of what the free cash flow might look like for this coming year.
Sure. Yes, we had a rough year for cash flow in fiscal 2022. You know, when you combine decreasing margins and inflation, that's usually a bad sign for cash flow. As a result of unreliable supply, we had to build up inventory where we could because supply was so unreliable, as was transportation. As a result of that, you know, our inventories need to get into balance better in fiscal 2023, our finished goods as well as raw materials. We have cases where we don't have enough finished goods, even though inventory did increase to really supply and service our customers like we'd like. That's getting better as a number of the force majeure have expired over the year.
We still face a few supply challenges, but not nearly as bad as last year. Now that, you know, as we said in our guidance, we're gonna be back expanding margins again, EBIT margins, we would anticipate a much better year for cash flow. As it relates to capital expenditures, we are looking to play offense and invest more in our businesses. We have a lot of high growth areas, you know, including high performance buildings. That's been a real growth area for us.
As a result, we're gonna push up our capital spending as probably closer to the $300 million range in fiscal 2023. Acquisitions, on the other hand, have continued to be at high multiples. As you know about RPM, we're very disciplined and don't pay those crazy multiples. We would anticipate acquisition activity to continue to be lower than historically we've been at. Hopefully that answers your questions.
It does. Thank you very much.
You're welcome.
Thank you. The next question comes from John McNulty of BMO Capital Markets. Please go ahead.
Morning, John.
So thanks for... Good morning, Frank. Thanks for taking my question. I guess maybe the first one, high level, can you give us some color as to how to think about price versus volume in the quarter? Overall, if there are any segments that kind of stood out as the leaders or the laggards, and how that may change as we kind of push into the H1 of fiscal 2023 for you?
Sure. I provided the unit volume by group, mid- to high-single-digit % in Construction Products and in Performance Coatings. Unit volume was relatively flat across the different businesses in our Specialty Products segment, and we were down high-single-digit in Consumer for the quarter. I will tell you high-level from our perspective, it was a great quarter. We delivered the guidance that we provided. In the Q4 , we are ahead of cost price mix in three of our four segments. In Q1, we should be ahead of the cost price mix dynamics in all four of our segments, meaning you will see higher EBIT growth than sales growth, and you will see EBIT margins improving in three of our four segments.
Those EBIT margins will be at or near all-time records. In consumer, we've got a lot of catch-up to do, but you'll see significant EBIT margin improvement. We feel really good about the quarter that just ended, and that momentum that you can see in slide three as we built momentum principally around the cost price mix dynamic that impacted our industry will continue to build in Q1, and we think even better in Q2.
Got it. No, that's helpful color. I guess maybe to that, you know, back of the envelope, when I kinda look at 1Q, it looks like you're kind of assuming year-over-year the margins improve by whatever 50 basis point-100 basis points, you know, for the corporate level. I guess, how should we think about how that progresses through the year? I mean, is that kind of a decent run rate? Do you continue to catch up with either more pricing or the raw materials maybe even giving way a little bit? I guess, how are you thinking about the potential for margin improvement throughout the year?
Sure. The largest improvement you'll see in our Consumer Group, it's a function of finally catching up on cost price mix and also the operating and efficiency initiatives that we're undertaking there in relationship to a very challenged fiscal 2022. You'll see significant improvement there and continued improvement with reasonable leverage to the bottom line in our other three segments. You know, Rusty indicated that in Q1, we see earnings growth in the 20%-25% range. Q2 should be better than that. Boy, we are hesitant to go beyond any further comments because depending on what week it is and what headline you read, we're either heading for more inflation or a recession and what's happening in Europe relative to energy markets.
It's difficult to predict 3 months-5 months, let alone anything beyond that. The next two months will be rock solid in terms of sales growth, earnings growth, and EBIT improvement in every one of our segments.
Got it. Thanks very much for the color.
Thanks, John.
Thank you. The next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.
Thank you, and good morning, everyone.
Good morning.
I'm wondering if you can talk a little bit more about the E.U. in particular. You know, obviously, there's a lot of volatility in the energy markets and, you know, a lot of anxiety over what could happen from a supply perspective of natural gas and electricity. Could you talk about, you know, your exposure and what mitigation plans you have in place and sort of what, if there was a disruption, you know, what that would mean, not just for your European business, but would there be any sort of collateral consequences, good, bad, or indifferent, you know, in other geographies?
Sure. The European business on a consolidated basis is about $1 billion. I think it's highly likely that when we finish 2023, it could be less than that. Demand is certainly weaker than North America. With the foreign exchange translation and the strength of the dollar, that will further lessen or negatively impact translated results back into U.S. dollars. It's really a slower demand throughout Europe, I think because of the challenges that they're facing economically, and significantly higher energy costs than what we're seeing in the U.S. Again, part of it is the oil and gas dynamics globally, and part of it is what's happening with Russia and the impact on natural gas.
Natural gas is the primary feedstock to all of our big European Russian chemical suppliers in terms of energy. In some cases, in our facilities, some of our construction product facilities, it's a primary driver of energy as well. That's something we'll be paying attention to, and those are the dynamics. Back to not being able to look out very far, you can certainly paint a geopolitical economic picture where things get better nicely if things move in a positive, more peaceful direction. If things persist, and the threat of Russian turning off natural gas to Germany in particular, but Western Europe happens, then you're gonna have a very quick and negative dynamic shift, I think, in all manufacturing in Europe.
Just as a follow-up, in PCG, you know, you mentioned sort of the sales management systems, and I guess two questions about that. One would be just sort of how much runway is left in that improvement process, and is there anything that you can take from your learnings in that segment and apply to your other segments, or is this just a question of PCG catching up with where everybody else is?
A couple things. Number one, PCG is benefiting, particularly in our Carboline unit, from higher spending in the oil and gas markets and energy markets, and certainly that's cyclical, and it's on a cyclical upturn. As I indicated earlier, the huge chunks of money, particularly in the United States in the infrastructure bill and the American Rescue Plan Act, are serving our performance coatings business pretty well. The dynamics of some of the pricing benefits and commercial excellence that we've experienced in our Performance Coatings Group are certainly shareable across other parts of RPM. The fact of the matter is that we are utilizing data on a more consolidated, more detailed basis in all of our businesses.
In some cases, it might be RPM catching up to what others are doing, but it's benefiting RPM in a lot of places. Those practices are particularly shareable because of commonalities in sales forces, in approaches to the market and compensation structures between our Performance Coatings Group and our Construction Products Group.
Thanks very much.
Thank you. The next question comes from Josh Spector, UBS. Please go ahead.
Morning.
Hey, good morning. Thanks for taking my question. Just to follow up from an earlier question around construction and specifically margins in the quarter. I think, you know, typically you have relatively similar margins, Q4 , Q1 , and construction margins have been, you know, generally an outperformer the past couple of years. Curious if you can give some more comments about what drove, you know, the lower margins in construction and, you know, where you see those heading over the next year.
Sure. There's two elements that I would call out that drove the Construction Products Group challenges. One is they are the owner of our Corsicana plant, even though the primary beneficiary today is our Consumer Group relative to Alkyd Resin Productions. There is a $8 million or $10 million negative hit for the year, or through nine months that we owned it, in our Construction Products Group from that. That should get better as we further utilize that plant. The second area is silicones. Silicones have been the primary largest year-over-year up hundreds, couple 100%, in terms of costs. Our Construction Products Group, silicone polymers are up 211% versus last year in the Q4 .
Our Construction Products Group is the largest purchaser of silicone or silicone-related products for a lot of their sealants. The other area where we buy silicones is in our DAP business. Those are the primary drivers of it. Excluding those, and to a certain extent, that's a silly statement because that's the world we work in. Those two factors were what impeded the Construction Products Group from otherwise generating record EBIT. As you'll note through the Map to Growth program, their EBIT results, their consolidated EBIT figures are up almost 500 basis points. We anticipate that continuing to expand on a sustainable basis in the next couple of years.
Thanks. That's helpful. Just another follow-up just on construction, but related with Europe. Are you able to quantify what you're seeing volumes in that segment in Europe relative to the rest of the world?
Well, it's flat to slightly down, and it's true across all of our businesses. In the Construction Products Group in particular, we have a really nice manufacturing facility in Poland, and Poland's been very challenged. We have Ukrainian workforce who have left to fight. We have Polish associates who are hosting Ukrainian families in their homes. There's a lot of challenging things going on there, and that's particularly unique to our Construction Products Group that's got a significant manufacturing base in Poland. Other than that, it's pretty weak demand and concerns about energy costs across Europe, U.K., and across all of our segments.
Got it. Thank you.
Thank you.
Thank you. The next question comes from Kevin McCarthy of Vertical. Please go ahead.
Morning, Kevin.
Yes, good morning. How are you, Frank?
Good. How are you?
Bottom of slide three, you reference product reformulations, and in your prepared remarks, I think you used the word thousands of products. I imagine that was quite an undertaking. Can you help us frame it, in terms of, you know, what percentage of your sales would have been reformulated and whether that had any material cost impact, either positive or negative, as you executed through that process?
Sure. I don't have a good number. We can work on that. I can tell you across our businesses, we reformulated over fiscal 2022, literally thousands of products. You had to reformulate them, recertify them, do the quality control checks. It's literally in the face of initially some primary raw material shortages. Those are tough to reformulate around. It was a lot of the smaller, more modest intermediate chemicals that we were unable to get. One of the larger categories would be in seed oils, and that's a challenge coming out of Russia and Ukraine. Our Construction Products Group in particular has reformulated a lot of coatings into more bio-based seed oils and very favorable performance and a very favorable environmental footprint.
In a few places, we've had to reformulate back into more solvent-based resins, just as an example. You've got to go through the reformulation process, the recertification process, with your customers or with codes, and then make sure you're doing the QC checks such that this reformulation isn't impacting performance. This is not unique to RPM and our industry. The real, you know, there's lots of heroes. I think, frontline workers during the COVID period, and certainly in the last year, our folks in our labs have worked overtime to address this issue. We can get a better sense of that for you. That's in light of what across the board in terms of materials, quarter-over-quarter is up about 35%, in terms of material inflation, in the quarter last year versus this quarter. It was really an intermediate chemical raw material availability that drove most of the reformulation.
Okay. Just to follow up on that latter comment, how do you expect that 35% inflation level to trend in the Q1 ? You know, related to that, you commented on silicones and oils. Are there other sort of problem children in the family? Also, are you starting to see relief anywhere among the raw material basket at this point?
The biggest challenges for us in the Q4 year-over-year were areas like metal packaging, particularly impacting consumer up 50%. Alkyd resins quarter-over-quarter, year-over-year are up 114%. Mentioned silicone up over 200%. You know, other costs, you know, some of these intermediate chemicals that we're not big buyers of but are critical, and MDI's up 72%. You've got freight costs and fuel costs and surcharges. It's been, again, not unique to us, incredibly challenging. Our budgeting anticipates additional inflation over fiscal 2023 of about 15%, and that's what we've anticipated. Most of the pricing action that we've needed to cover that would have occurred in fiscal 2022 and/or is occurring.
There's additional price increases in a number of RPM companies occurring in the Q1 of 2023. We'll stay tuned to both availability issues and inflation issues. It's hard to really judge. We are seeing underlying primary base chemicals that we don't purchase directly but impact our purchases, flat or declining. You're certainly seeing oil prices move in the right direction. That has not made its way into the things we buy yet. The volatility is such, it's really hard to tell other than we're in a period of time where the core underlying chemicals and oil prices are certainly moving, in the right direction.
Perfect. Thanks very much.
Thank you.
Thank you. The next question comes from Frank Mitsch of Fermium Research. Please go ahead.
Morning, Frank.
Hey, good morning, Frank, and appreciate the product shout-out in one of your early answers highlighting RockSolid. Well done. Well played.
Thank you. I was trying to give you a headline.
It's under consideration. Hey, you mentioned three of the four segments should see all-time record margins or near all-time record margins. Was that a 2022 comment, or was that a 2023 comment? Or how should we think about that comment you made?
I would tell you that our Performance Coatings Group is at all-time record EBIT margins, and that should continue to move in the right direction. Our Construction Products Group just missed, and the just missed is if you adjust out for the Corsicana plant impact, we're about equal to record margins of last year's Q4 . The big bogey there I mentioned before is silicones. We're a big buyer of silicones, and they have been a real challenge for us. Our Specialty Products Group had a record EBIT percent in the Q4 as well, and we expect them to build upon that and get back to record EBIT margins for coming quarters.
In Q1, you should see year-over-year EBIT margin improvement in every one of our segments, including consumer. I think the consumer results that we should be posting in the next couple of quarters will look impressive, but you have to keep in mind that's in light of some pretty weak comparisons. We're pretty excited. We thought we had a really good Q4 , and as I said earlier, we met the guidance that we provided. To be able to be where we are relative to the challenges we're facing and I think our industry broadly, in terms of the cost price mix dynamic, we're ahead of the curve in three places, and we'll be ahead of the curve in all four in the Q1 .
Very helpful. Thank you. If I could just follow up on the inventory question earlier. Obviously, you know, you've had to increase your inventories given the supply chain issues. I'm curious, you know, when you expect that to normalize, and how do you see your customers? Because you'd assume that your customers are also seeing some of the same issues and that they may be building more inventories. How should we think about the inventories throughout the chain?
Sure. You know, I think as everybody knows that the inventories and working capital have been a challenge for business in general. Thankfully, we're not in fast fashion, but you've got a lot of fashion retailers that have a lot of what people don't want and very little of what they do. That's a dynamic that's playing out in certain industries. In our case, we kind of suspended our working capital goals, which will be in some detail talked about in our MAP 2025 program that we'll talk in some highlight about in our annual report that goes out in mid-August and then details in October. This year was challenging, so we were doing our best to accumulate raw materials.
In certain areas, we're accumulating as much raw material as we could get, but not producing as we're waiting for a valve or a particular intermediate chemical so that we could start production again. We have a higher level, on a relative basis, of days of raw material inventory than we've ever had. Then in certain other places, you know, the other thing that's strange is, and again, not unique to RPM, we would have the largest chunk of something we have relatively little of, which is WIP.
You could have products like in our Legend Brands business or in some in our Construction Products Group, or Consumer Group that are partially finished, and in the case of Legend Brands, literally waiting for a chip, or batches that are partially completed but waiting for a key element. WIP inventory is something we have little of anywhere and something that we and other people probably had a lot more of than they ever realized relative to the dynamics of raw material availability.
We expect that to improve significantly in 2023. I don't believe we'll get back to record cash flows, but we will get back to the positive. This is the first year in my history that we had negative cash flows in the Q4 and for the year. We'll get back to generating a few hundred million dollars of free cash flow and then some in fiscal 2023.
Very helpful. Thanks so much.
Thank you.
Thank you. The next question comes from Jeff Zekauskas of JPMorgan. Please go ahead.
Good morning.
Thanks. Hi, good morning. Thanks very much. You guys have FIFO inventory, and costs have been rising. Your-
Correct.
FIFO costs. Are your FIFO costs and your LIFO costs about caught up, or is there still a meaningful gap? Because of that gap, maybe, you know, raw materials will peak in the Q2 of next year. Is that fair as a base case?
Yeah. Jeff, this is Rusty here. As far as FIFO goes, you're correct in that, you know, we're gonna continue to see increases go through the P&L from the last three months. You know, on average, we hold about 90 days of inventory. So the, you know, latest quarters, you know, purchase order inflation, that we're seeing on, you know, actual POs will come through 90 days later in the Q1 . I would say our Q4 too, was penalized somewhat, again, because of FIFO by some of the Omicron disruption in the wintertime.
So you might remember December, January, a lot of people out of work, you know, out sick at our suppliers, freight carriers, and in our facilities too. So we had a lot of production inefficiencies around New Year that hit us in the Q4 . On the good news front, you know, that should be flowed through, and we should have better efficiency coming through our cost of sales, from that standpoint in Q1.
Okay. Get that. For my follow-up. In fiscal 2022, were your consolidated volumes down low single digits?
For consolidated fiscal 2022, our volume was pretty flat for the year, up a tad. It was not down. It was up, very marginally.
Okay, great. Thank you so much.
You're welcome.
Thank you. The next question comes from Steve Byrne of Bank of America. Please go ahead.
Yes, thank you. Frank, you mentioned your [inaudible] for alkyd resins have effectively doubled. Is it fair to say that one of the key drivers of that are the vegetable oil materials that go into those resins, which just surged during your fiscal Q4 , but have really pulled back? Are you looking for, you know, that Corsicana plant margins to meaningfully improve in this fiscal Q1 or maybe in the fiscal second? Is that a fair expectation?
Yeah, Steve, this is Rusty here. As far as alkyd resins go, you are correct. A lot of the plant-based oils have been rising since the Russian invasion of Ukraine. Alkyd resins have gone up more so because of the explosion a year ago that took out 30% of North American alkyd resin production capacity. They continue to go up here as we speak in the Q1 . You know, buying alkyd resins externally is gonna continue to be more expensive every day. You are correct, we are ramping up our Corsicana, Texas plant and getting more of our alkyd supply in-house. That progress is continuing, so we continue to make more different varieties of alkyd resins and should continue to get more of our alkyd resin sourcing done in-house.
Rusty, this plant was acquired by Tremco, right? Why isn't the Tremco plant a RPM plant when you indicated the consumer business is getting resins from this plant? I guess I'm not sure who drives, you know, sourcing at a plant that was acquired by Tremco. Maybe you could comment even a little more broadly, how do you incentivize, you know, that cross-fertilization between brands and businesses for production and sales?
Sure. Steve, this is Frank. So we don't have any RPM plants. RPM International Inc. doesn't own plants. Our plants are owned and operated by our four segments or their operating company businesses. That's where we have the expertise. I think we have a very strong manufacturing operations team in our Construction Products Group. Our expectations for the Corsicana plant were broader than just alkyd resins. They were not producing alkyd resins when we acquired them. While that is the primary driver of our focus and investment with them, in fiscal 2022, we expect to expand it in other areas. We're also gonna use that site as a significant expansion site for Nudura, which is also a Construction Products Group.
Lastly, I'd say that the cooperation and communication across our businesses post MAP to Growth in a center-led approach across many functions, but particularly in manufacturing operations, makes it possible and it's working. I say possible because ten years ago it really wasn't, and it's working exceptionally well to be sharing manufacturing assets. That is definitely a shared manufacturing asset. The Consumer Group is the biggest beneficiary of that in fiscal 2022, and will be, I think, for most of 2023. But it's an asset that's shared across multiple RPM businesses, and it's got to report somewhere and it's not to RPM 'cause we don't have the manufacturing expertise in our shop.
Thanks, Frank.
Thank you.
Thank you. The next question comes from Arun Viswanathan of RBC Capital Markets. Please go ahead.
Great. Thanks for taking my question. Hope you're well, Frank. So yeah, just wanted to get back to the inventory issue, I guess. I was just curious within your Consumer Group, how would you characterize inventory levels at the big box? You know, obviously we've heard you know, elevated levels in other areas of the retail channel, but is that also what you'd say for your big box partners?
Fill rates in consumer across multiple categories are still below where they need to be. You know, you're looking at an industry both in terms of customers and suppliers that operating with fill rates in the high 90s. Today, they're probably in the 70s, and that's true across multiple product categories. There are still dynamics of poor inventory fill that need to be fixed and will be fixed in our case, as we roll into fiscal 2023. The inventory situation in consumer is not where it should be. That has been true for the last two years.
Okay, thanks. If I could just ask, you know, in that group, is it possible that you actually see, maybe, some outsized performance or increased demand in the small project category if we do, you know, go into a more material recession? Have you seen that in prior cycles?
We have, you know, in prior recessions, we've actually seen an uptick in our consumer DIY business, and we could certainly see that. We will have completed what's a multi-year $70 million expansion of capacity in our consumer business by the end of this summer. As we work through the supply constraints, work through raw material availability issues and all these great issues, we will find ourselves at a very good position cost-wise, capacity-wise, and hopefully cost price mix as we work into the year relative to consumers. We're in pretty good shape there. In all past recessions, that's been a somewhat countercyclical aspect of RPM.
Great. If I could, just one more quick one. On the next MAP program, I guess, would the focus be a little bit more on capital allocation and cash flow? You know, I know SG&A was really an initial focus for the initial MAP to Growth program. Does this one switch a little bit more to capital allocation? Thanks.
Sure. We'll get into the details as Rusty indicated in October. I do think in most areas we have addressed SG&A in meaningful ways. The new MAP program will be benefiting from improved cash flow, a particular focus on working capital, and a particular focus on gross margin improvement along with some revenue growth expectations.
Thanks.
Thank you. Our next question comes from Michael Sison of Wells Fargo. Please go ahead.
Morning, Mike.
Hi. Hey, guys. Just one quick one. Your outlook for the Q1 just EBIT growth of 20%-25% sounds like 2Q could even be better. How much of that growth will simply come from pricing, maybe catching up with raw materials, and then the sort of volume growth and maybe some cost savings and such?
Sure. I don't see our underlying unit dynamics changing. You know, pretty good strength in North America, some growth in Latin America. Asia is relatively small for us, so it won't drive the larger ship very much. A concern about demand and a weakness in Europe. As I commented earlier by segment, I would expect us to see mid- to high-single-digit unit growth in Construction Products Group and Performance Coatings Group, qualified by any raw material availability challenges which might pop up again, both for our products and/or components that are on projects, construction projects that we're a part of that might hold things up. I think you're gonna see some improved unit volume growth in our Specialty Products Group, which has been relatively flat for most of fiscal 2022.
I would expect that most of our profitability improvement in consumer in the next couple of quarters will be a combination of price finally catching up with costs and some of the operating efficiency efforts that we've been pursuing for the last year with unit volume relatively flat. Although, again, we'll see quarter- by- quarter.
Right. Maybe the way to think about it is, you know, if you get that unit volume growth in mid-single digits, that probably levers up to about half the growth, and the other half could be the price rise.
Again, it's really a segment by segment story. That's why I went through that, Michael. You know, we'll provide detail on how it plays out when we report Q1 results. I think the Q1 results between unit and price will be comparable to what we delivered in Q4.
Got it. Thank you.
Thank you.
Thank you. Our last question comes from Ghansham Panjabi of Baird. Please go ahead.
Morning, Ghansham.
Hi, good morning, everyone. This is actually Matt [inaudible] sitting in for Ghansham. First off, you know, versus your pre-COVID baseline, can you talk about where we're at across each of your businesses from a volume or demand perspective, however you wanna portray that?
Sure. In our Specialty Products Group, you know, we are meaningfully improved from pre-COVID in terms of sales growth, both, you know, obviously price, but also units. We've effected a lot of efficiency. We are slightly below the high teens EBIT margin record that they had. I believe their EBIT margin record is north of 17%, and we would expect to get back there hopefully in fiscal 2023. In our Construction Products Group, except for the silicone issue and the Corsicana plant, we would be at all-time EBIT margins, and we expect to build upon that in fiscal 2023. Our Performance Coatings Group generated record EBIT margins throughout 2022, and we'll continue to build on that.
It's really our Consumer Group that is the most dynamic. As you'll recall, our fiscal 2021 was huge. We had organic growth in some quarters as high as 30%, particularly in the summer and the fall of calendar 2020, as the world was dealing with the stay-at-home orders, and it really drove a higher level of DIY activity than anybody had ever seen before. Some operating inefficiencies and supply chain challenges hit our Consumer Group worse than our other segments. We are ahead of our pre-COVID in terms of revenue, in terms of unit volume, meaningfully ahead obviously in price. We lost significant profitability and margin in fiscal 2022 versus the peak of fiscal 2021.
As I said earlier, we would expect to regain a lot of that in fiscal 2023, but certainly not all of it. We will talk in more detail about our MAP to Growth goals, including by segment, and it will take us a couple years to regain the record level of profitability that we had pre-COVID in our Consumer Group.
Got it. That makes sense. That's very helpful. Then just to round things out, I guess, we talked quite a bit about, you know, raw material challenges and supply chain constraints. I wanted to switch over to interest rates. How do you expect higher interest rates to impact demand across your various business units? Have you seen any impact from higher rates across any of your end markets already, whether it be because of housing affordability or other reasons?
I'll address that two ways. Number one, from an RPM perspective, our balance sheet's about 70% fixed rate at an average fixed rate of about 3.5%. Its average maturity is over 10 years. We're in really good shape relative to the rising interest rate environment, specifically on our balance sheet and our P&L. As it relates to the broader markets, we read all the headlines, but we're not seeing any impact in the United States yet. You know, there's funny dynamics, for instance, in new home construction. There is still a shortage relative to demand in housing. Yet you've got rents going up, you've got mortgage rates going up.
Seeing how all those dynamics play out over time will be interesting in the near term, particularly in our DAP business, which has a significantly larger chunk of its business that goes into pros and into new home construction. The pro business that we have is solid. It's, you know, high single digit in terms of unit volume and outperforming DIY meaningfully. The Construction Products Group, our Nudura business goes into light commercial and residential. It is component problems that are slowing down the completion of some of the housing and light commercial activities, not demand. As we sit here today, the dynamics in our business do not reflect some of the recessionary headlines that you're reading about.
Got it. That's very helpful. That's it for me. Thank you.
Thank you.
Thank you. There are no further questions at this time. Please continue.
This year is one of milestones across RPM. RPM is now in its 75th year in business. When my grandfather founded Republic Powdered Metals in 1947, it had one product, a heavy-duty aluminum roof coating called Alumanation. First year sales were $90,000. To be in business for 7.5 decades and generate $6.7 billion in revenue this fiscal year is quite a feat considering our humble beginnings. Our Carboline business, a leading manufacturer of industrial corrosion control and fireproofing coatings, also is celebrating its 75th anniversary this year. Topping both is our Stonhard business, a producer of high-performance flooring system, which is celebrating its 100th anniversary in calendar 2022. Achieving these milestones is especially impressive when you consider the average lifespan of an S&P 500 company is 15 years, according to a Harvard Business Review article from 2018.
The credit for this longevity belongs to our more than 16,000 associates worldwide and the hard work they put in every day to drive our growth and success, which was particularly challenging in the fiscal 2022 year just ended. Thank you for all you do to move the business forward and to build a better world. Our people, combined with positive market trends, innovative products, and a strong balance sheet, gives us confidence that we have a bright future ahead of us. I would also like to thank our shareholders for their continued investment in RPM. We remain focused on generating long-term value for you. We look forward to updating you on our fiscal 2023 Q1 results and to providing the details of our MAP 2025 program in October. Thank you, and have a great day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line.