Prepared remarks
Good day, and welcome to the RPM International Fiscal Third Quarter Earnings Conference Call. Please note today's event is being recorded. I would now like to turn the conference over to Matt Schlarb, Vice President, Investor Relations and Sustainability. Please go ahead.
Thank you, Rocco, and welcome to RPM International's conference call for the fiscal 2026 Third Quarter. Today's call is being recorded. Joining on today's call are Frank Sullivan, RPM's Chair and CEO; Rusty Gordon, Vice President and Chief Financial Officer; and Michael Laroche, 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 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.
Also, please note that our comments will be on an as-adjusted basis and all comparisons after the third 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 Presentations and Webcasts section of the RPM website at www.rpminc.com. As a reminder, certain businesses that were 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. Now I will turn the call over to Frank.
Thank you, Matt. Thank you all for joining our investor call this morning. I'll begin with an overview of our third quarter results, provide an update on how current events in the Middle East are impacting our business followed by Michael Laroche, who will cover our financials in more detail. Matt Schlarb will then provide an update on cash flow, the balance sheet and how our focus on maintenance restoration and energy efficiencies has helped us during these volatile economic times. And then finally, Rusty Gordon will conclude our prepared remarks with our outlook, after which we'll be happy to answer your questions. Beginning on Slide 3. We generated record results in the third quarter with top line growth, including higher unit volumes translating into strong earnings growth and improved margins in all segments. The RPM associates are executing at a high level on the things that we can control.
The economic backdrop remains volatile during the third quarter with some of our geographies experiencing severe winter weather. We successfully navigated these challenges by focusing on our competitive strengths, including turnkey and system solutions for high-performance buildings, a focus on maintenance, restoration and repair and a nimble sales approach to targeted expanding end markets. Aided by the operational improvement initiatives we put in place, we were able to leverage this growth to achieve a nearly 50% increase in adjusted EBIT. With this quarter, we have delivered record adjusted EBIT results in 15 of the last 17 quarters. Turning to Slide 4. We previously talked about the power of RPM, combining RPM's ability to outgrow our markets and improve operational efficiency. This was on full display in our third quarter. We saw positive results from the targeted growth investments we've previously shared and the profitability of this growth was amplified by the operational improvements we have and continue to put in place.
These include actions like our Green Belt program, which is now trained over 600 RPM associates and has expanded to administrative functions. Green Belts have generated more than $50 million in savings with $30 million in our current pipeline. We have also started realizing benefits from the SG&A-focused optimization actions we announced last quarter. These actions generated approximately $5 million in savings during the third quarter. The optimization actions underway go beyond expense reduction. They're designed to make our organization more agile, better positioned to serve customers and to achieve accelerated growth. All segments have begun this transformation with some of the most meaningful changes occurring in our consumer segment. As announced in our press release this morning, we promoted Don Harmeier to President of the Consumer Group. Under his leadership, the consumer group is reallocating assets towards its highest growth opportunities while maintaining strong financial discipline.
Our center-led procurement team continues to do excellent work leveraging our company-wide buying power to achieve savings. They have played a critical role in navigating new supply chain challenges caused by current geopolitical activities. Turning to Slide 5. I'd like to address the conflict in the Middle East, its impact on our business and how we are responding. Recent geopolitical events have created supply chain disruptions and increased raw material costs, which, as a reminder, represent approximately 60% of RPM's cost of goods sold. While the conflict is having a global impact on costs, the effects are being felt most acutely in the Middle East, Africa and the Asia Pacific regions, which together account for approximately 4% of RPM's year-to-date revenues. In Europe and South America, which represents about 20% of sales, inflation has picked up meaningfully. North America at 70% of RPM sales has also experienced inflation but to a lesser extent, and remains the region most insulated from the direct effects of the current conflict.
Having navigated significant supply chain disruption and inflation in recent years, our teams are prepared for the current environment. We have contracts in place covering the vast majority of our raw material volume requirements. These contracts help ensure continuity of supply during periods of disruption and reduced volatility from underlying commodity price movements. In addition, our use of FIFO accounting delays the P&L impact of cost changes, providing us additional time to respond. Previous actions such as qualifying multiple suppliers for key raw materials and developing strategic long-term supplier relationships have further positioned RPM to manage through the current challenges. As a result of these efforts and the execution of our center-led procurement team, supply conditions generally remain good for us globally, with only limited disruptions, primarily in the Middle East.
We currently expect raw material inflation of approximately 1% to 2% in the fourth quarter of fiscal '26, increasing to an estimated mid- to high single-digit range in the first quarter of fiscal '27. While the situation remains dynamic, we are taking appropriate actions to mitigate cost pressures and consistent with prior inflationary cycles we have begun implementing price increases to offset inflation that we are unable to mitigate. These price increases vary by business and by region, with those experiencing the most inflation also having the largest price increases. Finally, I want to commend our procurement team for their strong execution, both in the current environment and through the vital tariff conditions we've experienced over the past year. I also want to thank our teams around the world who continue to focus on serving our customers during these challenging times and particularly our associates in the Middle East, where safety is our top priority. They have continued to operate despite the many challenges facing that region today. I'll now turn the call over to Michael Laroche to cover our financials for the quarter in more detail.
Thank you, Frank. On Slide 6, consolidated sales increased nearly 9% to a record driven by engineered solutions for high-performance buildings, M&A and FX, partially offset by continued DIY softness. Adjusted EBIT increased to a record as sales growth, including higher volumes resulted in improved fixed cost utilization. SG&A-focused optimization actions also contributed to the profitability growth and were partially offset by higher health care costs. Adjusted EPS was a record driven by higher adjusted EBIT. Adjusted EBIT and adjusted EPS exclude MAP-related costs including $22.1 million in pretax charges associated with SG&A-focused optimization actions implemented during the quarter. Geographic results are on Slide 7. All regions grew sales in most markets outside the U.S. benefited from favorable FX rates. Europe grew over 20%, driven by M&A and FX. North America grew 6.3%, driven by an increase in high-performance building solutions and was also aided by M&A. In emerging markets, growth was led by Africa and the Middle East as they continue to have success serving high-performance building and infrastructure projects.
Moving to our segments on Slide 8. Construction Products Group sales grew to a record with broad-based strength in North American businesses, including roofing solutions, wall systems and concrete admixtures, currency translation and a rebound from the government shutdown also contributed to the sales growth. Improved sales mix, SG&A-focused optimization actions and fixed cost leverage drove adjusted EBIT growth, which more than offset temporary inefficiencies from plant consolidations. Next, on Slide 9, Performance Coatings Group achieved record sales with broad-based growth across its businesses. Protective Coatings and passive fire protection performed particularly well, as did infrastructure and high-performance building solutions in emerging markets. Adjusted EBIT was a record driven by higher sales, SG&A-focused optimization actions and improved fixed cost leverage. Moving to Consumer Group, whose results are on Slide 10, and M&A and pricing to recover inflation generated record sales, partially offset by continued soft DIY demand and product rationalization.
Adjusted EBIT grew as operational improvements, including SG&A-focused optimization more than offset reduced fixed cost leverage from lower volumes and temporary inefficiencies from facility closures and transitions. M&A integration also added to adjusted EBIT growth.
Moving to Slide 11. Cash flow from operations, which has been a focus of MAP, remained solid during the third quarter. Year-to-date, we have generated $656.7 million, the second highest amount in the company's history. This has allowed us to continue returning cash to shareholders through dividend and share repurchases, which totaled $255.3 million through the first 9 months of the year, an increase of 5.2% from the prior year. Liquidity remained strong at $1.02 billion, which provides financial flexibility to take advantage of M&A opportunities where the pipeline remains good. On that topic, we closed on the previously announced agreement to purchase Kalzip on March 31. This acquisition will expand CPG system offerings to include high-performance metal roofing and facade options that meet demanding specifications. Kalzip generated calendar 2024 sales of approximately EUR 75 million. And once fully integrated, we expect this company to be accretive to margins.
Proactively, we acted early and extended the maturity of our revolving credit facility to February 2031 and maintain its size at $1.35 billion. This will help maintain our financial flexibility. Turning to Slide 12. We wanted to provide additional details on our maintenance repair and restoration focus, which generates approximately 2/3 of our sales. Whether it's a consumer preparing their grill for another season, a municipality restoring its critical infrastructure or a building owner improving the performance and aesthetics of their asset. Our value proposition is the same. Our products and services allow end users to extend the life of their assets and improve their performance, often at a fraction of the cost of replacement with far fewer disruptions. Additionally, this focus is a core component of our Building a Better World sustainability program by reducing waste, improving efficiency and extending the life of assets.
During times of economic volatility, our ability to provide maintenance and restoration solutions to address our end users' challenges has distinguished us and proven to be a key component of our ability to outgrow our underlying markets. Additionally, we offer solutions that make both new and existing structures more energy efficient and increasingly important and valuable capability in a period of rising utility costs. The images on Slide 13, highlight a school constructed using both our Nudura insulated concrete forms along with the Dryvit exterior insulation and finished system. These offerings enhance thermal and insulation and improve the building's resistance to extreme weather events. The result is an attractive high-performance facility that lowers operating costs for the owner while delivering meaningful environmental benefits. Now I'd like to turn the call over to Rusty to cover the outlook.
Our outlook for the fourth quarter can be found on Slide 14. Economic conditions are expected to remain volatile, driven by events in the Middle East. Additionally, prior year comparisons will be more challenging. Despite these headwinds, we are reaffirming our sales guidance and expect to generate mid-single-digit revenue growth aided by M&A. Organic growth is expected to be strongest at our construction businesses as they focus on maintenance and restoration solutions for high-performance buildings. In consumer, M&A growth is expected to be partially offset by soft DIY markets. As Frank mentioned, we currently anticipate fourth quarter raw material inflation will be in the 1% to 2% range, with mid- to high single-digit inflation expected in the first quarter of 2027. We expect to offset raw material inflation with pricing. In the fourth quarter, we will also see more benefit from the SG&A-focused optimization actions we announced in January.
We anticipate that these actions will have a favorable P&L impact of around $20 million in the fourth quarter, partially offset by inflation in areas we've discussed for the past several quarters like wage inflation and more recently, freight inflation. Taking all of this into account, we are reaffirming our adjusted EBIT guidance of low to high single-digit percentage growth over record prior year results. The wider-than-normal adjusted EBIT range reflects the heightened uncertainty in our markets. This concludes our prepared remarks, and we are now happy to answer your questions.
Questions and answers
Today's first question comes from John Roberts at Mizuho.
The raw material inflation numbers are not surprising. Given the current fluid situation, I wanted to ask what factors influence your position between the low end and the high end for fiscal 1Q. How do you reach the high end? What market conditions do you think are necessary to achieve that? What assumptions lead you there?
So I'll answer that question, which is obviously key for our whole industry kind of at a high-level perspective first. And then give you a little specifics. But from a high-level perspective, we seem to have a whole of government that doesn't like stability, whether it's tariffs or government shutdowns and now war. And so that volatility I think is frustrating a lot of folks were facing as is the whole industry, a meaningful raw material price increase potential. We're seeing significant increases across a lot of base chemicals as we speak. Their impact should be modest in Q4, but we'd anticipate them, as Rusty commented to be material in the first quarter. Back to the volatility, the markets are reacting well today to geopolitical events. If there is some period of stability, I think we're highly confident in the RPM ability to deliver strong results based on growth. You can see that in our third quarter, both at the operating gross profit margin line and the SG&A expense reduction program, which is continuing, are optimized to leverage our volume growth to the bottom line pretty well.
Specific to Q1, I think, as Rusty commented, it's going to be hugely variable. There's a scenario in which we would have modest mid-single-digit raw material increases. There is a scenario in which we will have high single-digit inflation. And so TBD, depending on volatility in the Middle East, the one thing that we're very confident in as we look out over the next 6 months is stability and supply. We've got really good relationships with key raw material suppliers, except for the Middle East, which we are seeing some disruptions in supply; we don't see supply challenges at this point. If the situation in the Middle East spins out of control, obviously, all bets are off, both in terms of understanding where raw material costs are going and what raw material availability might look like in the fall.
I appreciate that. Regarding SG&A, there were many factors influencing the quarter. I understand you have some deals in place and some costs decreasing. If we were to filter out the noise, what would you consider an appropriate SG&A number moving forward? How much net savings did you achieve this quarter, noting that you mentioned $20 million for next quarter?
In the third quarter, it was about $5 million. When you strip out the impact of FX and acquisitions, our SG&A was relatively flat year-over-year in dollar terms. So there's really good action going on there. We would expect the positive impact to be about $20 million, as Rusty indicated, that might net out to something less in the mid- to upper teens, depending on the impact of inflation in non-raw material categories like freight, and then $75 million is lined up for fiscal '27 spread relatively evenly across our quarters.
And our next question today comes from John McNulty of BMO Capital Markets.
Yes. with regard to your ability to put through price, I guess, around some of the raw material inflation I guess can you give us an update as to whether that process has really started at this point? And how long do you think it takes to catch up to where the raw materials are going? Do you think, given the FIFO benefit or cushion that you have, that we don't see any lag in the price versus cost? I guess how would you articulate it?
Sure, John. This is Matt. I'll take that one. It's ongoing now and varies by business and geography due to differing inflation levels in these areas. It has begun, and it may be helpful to look at how this is progressing. In the third quarter, pricing was up a little over 1%, and the price/cost relationship was favorable as we were catching up with some prior inflation. In the fourth quarter, with the implementation of some price increases, pricing will be higher again, and we still expect the price/cost to be favorable. As we look at the first quarter and begin to see inflation, we are implementing those price increases. However, it's quite dynamic, with changes occurring on a week-to-week, if not day-to-day basis in some areas. Those incremental price increases are happening now, and we should have better visibility on the outcome in the next few months. We are confident that pricing in the first quarter will be higher than in the fourth quarter.
Got it. Okay. No, that's helpful. And then when you think about the construction and the performance segments, both did really solidly from a volume and top line perspective. I guess there was a lot of noise. You had some of the government shutdown issues from the prior quarter, and you were seeing some benefit of that early on. But it also sounds like you've had a lot in the backlog, and it looks like it's starting to make its way through. I guess, what were the bigger drivers of the 3Q volume growth? And I guess, how do you expect that to kind of play out as we're going forward in both 4Q and at least at the start of 2027.
Sure. So in our Performance Coatings Group, we have solid backlogs and they seem to be being maintained. We are seeing a shift from larger projects to more small, medium-sized projects. That's good for margins, but creates some volatility in our Construction Products Group. Our backlogs continue to grow, both in roofing, in the waterproofing and building envelope areas. As we've indicated in the last couple of quarters, the work in Pure Air for the HVAC restoration business is also growing very nicely and really gaining some traction now. We're excited about the Caleb acquisition. They are a leader and a German-based leader in the U.S. and in some cases globally for aluminum and metal roofing applications. Some are your core traditional industrial and commercial roofing, some are real high-profile architectural projects. Most of their work is European based, and so we will be working in the next 6 to 9 months to bring the Calcite products into the U.S., which is a real bang for us once we get it done effectively.
So we're not only building good backlog in our core business, but particularly in our Construction Products Group, a lot of these product lines are very leverageable to drive future organic growth. The flip side is in consumer, still really weak in terms of takeaway. We've adjusted accordingly in terms of our expense base and really allocated growth investments to the areas that are both highest margin, and I think you have the best potential for growth as the DIY markets start to stabilize, which before all of the Middle East activity, we were starting to see after what's been more than 2 years of really weak consumer DIY takeaway.
Our next question today comes from Mike Harrison at Seaport Research Partners.
Congrats on the nice quarter. I was hoping that you could talk a little bit about the temporary inefficiencies that you've seen related to the plant consolidations. How much of a headwind, if you can quantify it, did you see in the third quarter? And have those inefficiencies largely run their course? Or are there still some more to come? And I guess, which segments should we expect to still see some impact in Q4 and into next year?
Yes, Mike, it's Rusty here. In terms of the third quarter, so a little more than $6 million that cost us in some of these facility consolidations, about 2/3 is in consumer. They have a lot going on in Europe between opening a new shared RPM distribution facility and also consolidating 2 plants into 1 and rationalizing some lower-margin products there. Probably the remaining 1/3 mostly at our construction products group, they are consolidating their plant network in North America. And they're also repurposing a facility in Europe to sell Nudura, which is exciting. So I would expect that both of those will be completed by this fall. And so you will not see that negative impact at the end of the second quarter and fiscal '27 or beyond.
And our next question today comes from Arun Viswanathan with RBC.
This is Brian Don on for Arun. Can you talk a little bit more about the rising health care expenses? Specifically, could you quantify what was the Q3 impact and do you expect it to continue on to Q4 and fiscal year 2027?
So in Q3, health care costs were up another $4 million. As we've commented before, the rising health care costs are not unique to us. It's been a huge cry across the United States. Relative to what's happening in health care costs and insurance costs. We did make a decision more than a year ago to add some of these weight loss drugs to our health care program. That's been part of the significant rise this year that will annualize this summer. We believe long term and will actually have a positive effect on our health care costs. But over the last year, it's certainly been part of the increase. So we would anticipate that our health care costs stabilize somewhat in fiscal '27. But I don't see anything reversing.
And our next question today comes from David Begleiter with Deutsche Bank.
Construction Products exceeded Street expectations. Anything you can point to that drove that large beat there in that segment?
Sure. We have a really good team that's executing at a really high level. And they are very focused on providing solutions, turnkey solutions. And so we have made a very deliberate shift from 10 years ago selling components for distribution, particularly in the C&S and W Trunk Sealant business, which has indicated in past calls. 10 years ago, we were about 60% distribution and 40% direct on major projects that has reversed about 60% direct. When we get a building envelope sale, we're getting perhaps in one project to Nudura walls, the Dryvit finished systems and all of the Tremco gaskets and sealants and waterproofing coatings that go with that. And so we're able to sell complete systems. We're able to warrant complete systems and we're doing a better job of understanding what segments of the market value that and focusing our time and effort there. And then we're adding new categories. So we've done a lot of small acquisitions, and from time to time, analysts scratched their head and asked us whether these small acquisitions are worth their time given our size.
I can tell you on our Construction Products Group, the answer is definitive yes. We've added some high-performing kind of unique expansion joint products from metal expansion joints to different polymer expansion joints to add to what we have. Most recently, we bought 2 relatively small expansion joint businesses in Europe. We're transferring their technology and distribution to the U.S. And then most recently is the Kalzip acquisition, again, $75 million, mostly Europe-based with some real high-profile projects like to sphere like some of the big airports but not really present in the United States. And we're already selling purchased for resale of $40 million worth of metal roofing in the U.S. And so we're excited about what that can do. So a combination of being in the right place, system selling and then having a real strategic approach to acquisitions or product lines that we can expand across our distribution is what's building a really solid momentum in our construction products group, and we see that continuing.
Very helpful. And Frank, given that large beat led by construction products, why can't you at least raise the low end of the Q4 guidance range for EBIT?
It's really about geopolitical circumstances. I can sit here and say confidently that we're not going to see any supply disruptions. Given what we know today and what we believe going forward, I in the world are hoping and praying for good outcomes. There's a possibility that, that doesn't happen. And if things get worse in the Middle East, that could clearly impact our results in the next couple of months. Secondly, we're already seeing the impacts of that. We're anticipating the impacts of that in April and May, almost like in the fall, we had a really strong Q3. We had a very solid March but there are a lot of cautionary flags as a result of what could happen in April and May. So I think we're being appropriately cautious in a wider-than-normal guidance.
And our next question today comes from Mike Sison with Wells Fargo.
Frank, I'm wondering what your outlook is for 2026. If you achieve your targets for the fourth quarter, your adjusted EBIT is expected to increase by low to mid-single digits, similar to fiscal 2025. Considering your success with cost savings and the MAP program, do you believe your EBIT growth can improve? I recognize that DIY conditions have been challenging, but do you expect RPM to demonstrate stronger EBIT growth for the rest of the decade? How do you plan to achieve that higher growth trajectory moving forward?
Sure. If we could find a period of stability where tariffs, government shutdowns and kinetic actions in Europe and the Middle East don't get in the way, and that's not unique to us. I think the things that we are doing at RPM, the decisions we're making, and the execution of our associates is such that in the coming years, you'll see improvement in the gross margin line, you'll see a shrinking of SG&A as a percent of sales. And that will have a positive impact on a steady, stable improvement in our margin profile. It's in the cards in terms of what we are doing, and you can see it in Q3, and it's going to get better. All that, notwithstanding, we will be disrupted like everyone else by major raw material inflation or availability if things get worse instead of better both in the Middle East and for that matter, and with the Russian war in Ukraine. Both have a disproportionately negative impact on Europe versus North America, Europe being our second largest region.
Got it. And then one quick follow-up on Consumer Group. Acquisitions have been a positive this year. I expect DIY is going to remain sluggish for another year. So when you think about developing growth algorithm for the consumer group, do you have to shift a little bit more to acquisitions given the DIY is probably going to stay weak? Or maybe you have any thoughts on DIY for next year?
Sure. We were starting to see some stability, as I indicated, and then concerns about interest rates and raw material costs and pricing, I think, will not help improve the DIY market. You're seeing that from not only us but our peers. We need to focus on 2 things. We need to focus on categories that are growing, and there are a number of those, including cleaners, which we're pulling together a pretty good cleaner portfolio. And we need to do a better job of driving consumers to our products, whether it's in stores or online. And so as we become more consumer-centric in our data and our marketing, with all of our retail partners, we need to be driving consumer purchase much more than focusing on customer traffic and things like that. We've got to get better at that, and we're doing things. We've reallocated our spending in ways that should drive more consumer activity versus focusing on customer takeaway.
We've got to get better at that, and we're spending money towards that. And just to finish that to your point, I think we've come to the conclusion we need to do some things differently because I don't think waiting for a big recovery in that market is a good strategy. I think we and others have communicated that this spring of '24 and then this spring of '25, and then this spring of '26 is when the consumer is going to come back strong. And everybody that's waited for this spring to get better has been incorrect. So we're not waiting anymore.
And our next question today comes from Vincent Andrews at Morgan Stanley.
If I could just ask, Frank, I think you said on the $100 million program. I think you indicated half of that would go to consumer. Is it fair to allocate the balance to the other segments equally? Or would it be a different mix?
I would think it would be fair to allocate the balance roughly along revenue lines. So it will be a little bit heavier at the Construction Products Group and Performance Coatings in part just because they're a larger organization.
Okay. And then just a follow-up on your comments a couple of questions ago in consumer, I believe, about some concerns about demand as a function of raw material costs going up. And I just wanted to better understand whether you were indicating that maybe the large retailers are sort of saying, well, I don't know what things cost right now because every day the price is going up or the price is going down. So they're being even more cautious about their inventory levels as we head into the big selling season or if that was also meant to imply that you actually think this will be an incremental headwind to consumer takeaway or maybe you meant both. So any clarity there would be helpful.
Part of it is related to the big macro there that will help everybody is a pickup in housing turnover, which we've talked about as have others, it's been at 30- or 40-year lows from last year or so. And the anticipation of improving housing turnover and improving new home construction, obviously, a fascination of the Trump administration as well in terms of some of the things they're trying to do anticipated interest rates declining. And I think with the current inflationary environment expectations to the extent that people think interest rates are not only not declining, but not going to decline that doesn't help that big macro. I think the other thing, quite candidly, is we and other consumer product companies have learned some lessons about consumer price elasticity. And so the ability to raise prices when necessary, we had one super-premium spray paint that got over $10 a can and people started trading down. And so that's just candid. So whether it's value engineering, whether it is understanding the price points that will move products off the shelf that have nothing to do with raw material costs and/or getting price increases through customers and everything we do with understanding consumer price elasticity. Those are the reasons that we're cautious about the current geopolitical activities and their impact on our consumer group.
And our next question comes from Joshua Spector with UBS.
This is Lucas Beaumont on for Josh. So I just wanted to go back to raw materials. So I mean, with oil and petrochemicals up kind of 30% to 40%, I mean, that would seem to sort of imply that we're headed towards more of like a 20% kind of annualized increase in raws over the next kind of 12 to 18 months. So I just sort of wanted to clarify your comments there around moving towards high single digits in the first quarter. I mean, that sort of would be on the pathway to those higher rates, but I just wanted to sort of clarify whether you're thinking you guys are going to see it peak kind of in the first quarter now and expecting things to come back down or if you see that more on a pathway to higher costs, which for PM in particular, is sort of all going to hit your fiscal 2017 year lining up that way. So you just kind of walk through your assumptions there that would be great.
Sure. So the simple answer is we don't know. We have some insight and I think some foresight into where raw material costs are going. And so I think we're pretty confident in a couple of percent impact in Q4. And I also think we're pretty confident in the mid- to high single-digit impact in Q1. Beyond that, we don't know. And your estimation, I think, is not incorrect. If oil prices stay at these high levels and raw material costs stay at these high levels on a sustained basis for all of our fiscal '27 and into '27. Again, as my comments earlier. I think there's a possibility that this inflation spike could be temporary, and that would be very helpful. And then you'll see a continuation of what we just generated in the third quarter in terms of positive volume growth and good leverage to the bottom line. If it is not, then I think the world could be facing another inflation spike that is sustained as it spreads across energy, freight, and materials on a higher-level basis, that's certainly not what anybody hopes for. And I think we'll be in a far better position to understand where the world is heading when we release fourth quarter results in July versus all the volatility from day to day and week to week that we're facing today.
And Lucas, I'll just add too, if you look at our raw material basket, a little over half of our raw materials are derived from oil or natural gas. So we actually have several things that aren't derived from those which aren't subject to some of the volatility in the oil prices. Our procurement team has done a really nice job, like Frank talked about with our strategic partnerships and having contracts, so we aren't subject to the volatility related to the spot market like some others are.
But I would add to that, again, I think we are pretty confident in what we see between now and the end of our first quarter. and our confidence level of where things are going after that diminishes very quickly. We don't know.
Thank you. And our next question comes from Eric Boyes at Evercore.
Another one on consumer. I think organic sales have contracted now for 4 consecutive quarters. Curious on kind of the volume versus price split for fiscal 3Q if you're able to share that? And then shouldn't we be lapping easier comps in consumer, in particular, starting in fiscal 4Q? And have you seen any kind of organic green shoots in any particular product lines?
Sure. Yes. In consumer, as we discussed, we had negative organic growth in the consumer group. We did have some pricing that came into effect from increases last fall. So that gave us some tailwind. But yes, you're right, the last 4 quarters, we have seen negative volume growth in consumer.
Yes. And as I indicated earlier, it felt like consumer takeaway in the DIY markets were stabilizing. And I will tell you, we're not annualizing easier comps. We're annualizing 18 or 24 months of easier comps and so the whole industry has been anticipating some stability. It was coming. And now I think the current events are putting into question whether or not a seemingly stabilizing or improving consumer DIY takeaway is going to continue to be challenged. So that's everybody's expectations for the balance of fiscal '26 and so it's also why we took the actions we took, particularly to the extent that we're focused on our consumer group because we've been waiting for easier comps for 18 months, and they're not coming.
Okay. I appreciate that. And then maybe for the second, can you speak to the structure of the pricing actions? Are those that are being done in response to this Iran situation? Are they being couched customers potentially as like temporary in nature? I guess I'm trying to understand if all of it will be structural, if or when the Iran situation escalates.
Sure. First of all, when any of our competitors or peers mention a general price increase, they usually refer to averages, particularly through our RPM which includes three groups. We have about 20 dependent operating businesses across different geographies and a wide range of product lines. While we can say that prices increased by about 1% this quarter, that doesn't provide insight into specific product lines. Some industrial coatings may show a decrease in competitive pricing, while certain specialty products might see increases in the high single digits or more. We're currently evaluating this situation. By the first quarter, I estimate that about 70% of our pricing adjustments will be due to price changes, with approximately 30% stemming from temporary adjustments, especially in areas like freight surcharges. While we've mostly discussed raw material costs, the ongoing situation in the Middle East is affecting freight costs across the board, whether it's ocean freight or trucking expenses. We are likely to address this with surcharges in the short term, and if inflation persists, we will need to determine how and when to make these adjustments permanent.
Our next question today comes from Jeff Zekauskas with JPMorgan. Jeff?
On Slide 7, you said that Europe grew 20%, but driven by M&A and did Europe contract exclusive of M&A and FX in the quarter?
Yes, it did.
By how much?
I don't know that we disclosed that by region, but it wasn't down meaningfully. We are improving our bottom line. This is consistent with our comments on the last call. We are consolidating production. We're consolidating some distribution. We're focused on margin improvement. So the bottom line is performing better than the top line. But the events in Ukraine have not helped economic activity in Europe. The war in the Middle East and Iran is not helping energy costs in our economic activity in Europe. And so that continues to be a challenge. As you noted, most of the growth has come from acquisitions. The acquisition stuff, a couple of other product line acquisitions that I referenced earlier in our Construction Products Group. So broadly speaking, we're flat down in consumer. We are on an organic basis without acquisitions; we're down slightly in construction products, which really touches on the strength of our Construction Products Group everywhere else, and we're up in our Performance Coatings Group modestly.
Okay. And in answer to one of the previous questions, you talked about experiencing a robust March. And you said April is different. Can you give some kind of quantification to what March was like and what April is like for your overall business?
I don't want to provide much in the way of guidance for Q4, a, because we're in the middle of it other than to say that March was a solid month. And I think a continuation of what we just published on Q3. But given all the activity in the Middle East, we are seeing some projects delayed. We're anticipating some slowdowns that may happen or may not happen. We just went through this in the fall related to the government shutdown. And so the full impact of raw material costs and the full impact of any disruptions. For instance, we had a really solid Middle East performance in March. But we burned through inventory on what's been really good a really good team there that's taking share and been growing organically in the double-digit range. That's going to come to a halt in April and May because that's the one area where supply is challenged in terms of getting raw materials back into our plants.
It's a modest portion of RPM's business, but it's just one reason why we're hesitant on how we'll finish the quarter because as we experienced in the fall, we had a good first quarter. We had a bank up in September and then the world fell apart for us in November and December. We came roaring back. And the dynamics of RPM have changed. And if the disruptions of a lot of these geopolitical events we get out of the way. And again, that's almost a silly statement because it applies to everybody. The work that our people have been doing is really improving our business, and you can see it.
And that concludes our question-and-answer session. I would like to turn the conference back over to Frank Sullivan, Chairman and CEO, for any closing remarks.
Good. Thank you to everybody for your participation in our call today. We greatly appreciate your questions and your investment in RPM. While the economic conditions and the geopolitical conditions remain volatile, we are executing very well on the things that we can control. I particularly want to thank the RPM associates globally and those in the Middle East. We wish for your safety and appreciate everybody's dedicated execution and commitment. Hopefully, we'll be seeing a return to great weather, which will help RPM's performance and we look forward to communicating the results of Q4 and our 2016 fiscal year in July. Thank you, and have a great day.
Thank you, sir. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.