Operator:

Good morning. Thank you for joining the Sherwin-Williams Company's Review of Q2 2024 Results and our Outlook for the Q3 and Full-Year of 2024. With us on today's call are Heidi Petz, President and CEO; Allen Mistysyn, Chief Financial Officer; Jane Cronin, Senior Vice President, Enterprise Finance; and Jim Jaye, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode by Issuer Direct via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com beginning approximately two hours after this conference call concludes. This conference call will include certain forward-looking statements as defined under U. S. federal securities laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the company's earnings release transmitted earlier this morning. After the company's prepared remarks, we will open up this session to questions. I will now turn the call over to Jim Jaye.

Heidi Petz :

Thank you, Jim. First, I want to thank all 65,000 of our employees around the world for their efforts in the quarter and for their ongoing passion for our company and for our customers. I continue to be humbled and inspired by all that you do. I believe our second quarter results demonstrate three things

Vincent Andrews :

Heidi, could you talk to us a little bit about the quarter in paint stores? It seems like 2Q, not unlike 1Q, had at least a month where there were some challenging weather conditions that probably pushed some volume out. So could you talk a little bit about whether the quarter progressed, you started to make up a little bit of 1Q and then maybe May hit and got a little challenging? And what are your customers saying in terms of where their backlogs are as a result of this? And what are you baking in, in terms of being able to make up some of this push out in the back half of the year?

Allen Mistysyn :

And so the only thing I would add is just to take a quick look at the second quarter, up 3.5% compared to a strong low-double digit comparison last year. Volume was up low-single digits. Price was up low-single digits, and I would say it was probably slightly below where our expectations were as we were coming into the second quarter, but we exited the second quarter at our targeted run rate, which leads to the second half, third quarter and second half guidance to be similar up low to mid-single digits and that'd be really just broken out between price up low-single digits and volume up low-single digits with as a reminder, we talked about Res Repaint being up at the high end of that range in our second quarter that happened and we expect the same in our second half.

Chris Parkinson:

When we take a step back and think about your longer term gross margin opportunity, there's still a lot of moving parts and perhaps some things in the housing market which are out of your control. But when we break down volume, price raws versus labor, and just kind of all the other things that could affect that outlook, how should the investment community be thinking about that, not even for the second half of '24, but ‘25, ‘26 onwards based on all the initiatives including investments you've already been doing?

Operator:

Your next question for today is from Arun Viswanathan with RBC Capital Markets.

Heidi Petz :

Let me start with your last question, in terms of new customers coming in. Yes, this is certainly positive mix for us. So new customers, existing customers in this segment tend to value more of the premium product premium experience that we provide. So I would say that that's a fair characterization across the segment. Obviously, we won't get into any ‘25 certainly not any ‘26 outlook, but what I would tell you is the confidence in the momentum that we have here relative to the run up we're already experiencing in a few segments. And again, I'll go back to this idea of success by design, the luxury of a very tenured management team that is very astute when it comes to reading market indicators and signals. So, the timing in which we're laying these investments in, at the right point in the cycle, so that we are best positioned for the run up. Res paint is a great example. I point to automotive refinish, is another really good example where you can see, I know you asked specifically about stores, but that same discipline, holds across the portfolio. So we're seeing some positive signals from a market share standpoint. I'm very proud of that team and that organization is as you well know that automotive refinish model very similar to our stores model and our ability to have direct relationships with these customers and end users puts us in a really unique position. So, while we're still putting in the investments here, we've got record high installs. And candidly, I would say that not everyone's getting the penetration and the acceleration that we're seeing. But that's another example outside of stores, but Al, let you pick up anywhere else you want to jump in here.

Operator:

Your next question is from Jeff Zekauskas with JPMorgan.

Allen Mistysyn :

I'll take the second one on CapEx. And as you know, we are very consistent in our capital allocation philosophy. After you get past the building our future projects, which as a reminder will help us attract and retain world class talent to allow us to continue to drive above market growth, ROS and RONA improvements and drive strong cash flow. And then we'll take that cash flow and we'll target CapEx below 2%. So depending on where the growth rates are, we may have years where we have to add capacity and I'll point specifically to the packaging capacity that we've come online with into our new France with the idea we have a lot of confidence in our market share opportunities there. We continue to build out our Statesville architectural plant net capacity again with our confidence in our growth opportunities both in the Southeast on the architectural paint stores and I would argue in consumer brands group that's facing some short-term headwinds, but certainly a lot of confidence in the outlook. And then we will keep the dividend at approximately 30% of prior EPS and then absent acquisitions we will buy our stock back.

Operator:

Your next question is from John McNulty with BMO Capital Markets.

Allen Mistysyn :

Yes, John, we had a couple of things driving our better gross margin performance in the quarter. Moderating raw materials, certainly is part of that. The price realization that we saw in the second quarter being better than what we saw in the first quarter, along with mix. We did have some global supply chain efficiencies outside of the higher fixed cost absorption that we have talked about in the first quarter, again, was really the entire driver of the consumer brand improvement in the second quarter. But you also have our Paint Stores Group growing faster than the other segments. We've talked about that as that happens, that a higher gross margin it will drive our mix better and continue to drive our gross margin. And really carry that momentum into the second half. And I do expect to see gross margin expansion in the second half, maybe not as much as we saw in the first half, driven by higher Paint Stores Group sales Res Repaint being at the high end of that range. We're going to see moderating raw material costs. But we also should see better price effectiveness in our second half versus our first half. So continuation of what we've seen in the first half, just not as heavy because of the raw material tailwind won't be as high. .

Operator:

Your next question for today is from Mike Sison with Wells Fargo.

Heidi Petz :

Well, I'll start with the first question. You know what, I think, first and foremost, we have to be prepared for any environment, which is why we're taking a very realistic approach within a choppy environment. But I think as you look by segment is where some of those answers lie. So in terms of Res Repaint, again, we've continued to talk about this because by design, this is an area of incredible market share gain opportunity for us. And I think we've demonstrated that in a down market, we've continued to take share. So I think that's a really good litmus test of how we will operate in the down market. Having said that, as we -- without repeating what we did cover in the prepared remarks, we're going to be very thoughtful where we see the indicators that are driving growth by segment and make sure that we're pacing our investments to what that growth looks like.

Jim Jaye :

Still in first place, though, Mike.

Adam Baumgarten :

Just curious if you can give some color on how the Pros Who Paint business performs relative to the overall segment in the quarter?

Allen Mistysyn :

I just think that the -- when you look at some of the leading indicators that we're following LIRA, we expect to bottom out here in the third quarter and improve in the fourth quarter. And even and that's made up of the higher ticket projects and the lower ticket projects. And I think what we've seen in the past is if you're not remodeling a kitchen, you still have to feed your family. So you revert to maybe some smaller ticket projects to fill in those gaps, and that's what we expect to see going through the second half. Clearly, DIY is where we're seeing the most pressure through the first half and into the second half. And this is why I think the investment -- we're confident in that Pro Who Paint strategy, the investments we made and our ability to get a return on that. And we're looking longer term. We're not looking just to run for the second half of this year. We're looking out '25 and '26 and being best positioned to gain share as that channel and piece of -- segment of the channel comes back.

Operator:

Your next question is from Mike Leithead with Barclays.

Allen Mistysyn :

Yes. When you look at that line specifically, and it's really the move in FX goes through there. You know what Mike, what I just address is all the other general other income. We did see credits in the quarter environmental FX and then gain on sales. If you look at it net year-over-year versus it's about a $0.12 tailwind. We did have a higher effective tax rate, which was a headwind of about net $0.07. So if you net those out, we're still up a low double-digit percentage. Not expecting that size of credits going through our second half, even though as expected coming into the year, a beat on non-operating costs year-over-year in our second half was expected. I still expect that because we had some higher environmental and some other charges in our second half last year that I'd expect environmental and other income lines to get back in line as it typically has been in the past.

Patrick Cunningham :

I'm curious on your outlook for the key performance coatings verticals. Where do you see underlying markets trending in the back half? And where do you see the most upside from share gain opportunities?

Operator:

Your next question is from Kevin McCarthy with Vertical Research Partners.

Heidi Petz :

Yes. It's a good observation, Kevin. And I think you've characterized that well. We often talk about this segment, it's having slightly two different segments. If you think about the DIY consumer in our stores, they're looking for that specialty paint store experience and candidly expect the service that goes along with that, little bit less sensitive in the current macro. The DIY that prefers a home center environment tends to be more value conscious and is certainly feeling the pressure as we talked about prepared remarks early relative to inflation, depleted savings and household debt. So those pressures are very real for that consumer. Having said that, I do want to kind of run right at this question because this is an area that I would tell you, we absolutely do not have our heads in the sand relative to our performance in DIY and certainly relative to our expectations, in the segment. This is a very important segment for us over the long-term. Al referenced that earlier as part of our overall architectural strategy. And when you look at the importance of making sure that we are well positioned here, we understand that there are cycles, certainly in the DIY consumer space. Fundamental belief that we're in a log jam in housing that is going to free up. And so our focus on ensuring we are best positioned with the best strategic partners including our exclusive and growing partnership with Lowe's, among others. So as the market begins to recover, we're very confident in our ability that we will continue to deliver above-market growth. But again, our heads are not in the sand right now and we're going to be laser focused on making sure that we are locked up with our partners.

Operator:

Your next question is from Greg Melich with Evercore ISI.

Allen Mistysyn :

Yes, Greg, if you look at our second quarter with our sales up 0.5% volume and price were up slightly, acquisitions at less than 1%. And we also had the headwind of the divestitures and FX. But really the driver in the quarter was our Paint Stores Group up 3.5%, both segment that segment of PCG segment was where we expected, and we talked about the miss on consumer. If I look at the second half, kind of a little bit up low-single-digits guide compared to low-single-digit comparison last year. I think price is expected to be up low-single-digit percentage. And when you look at -- that would tell you that volume is expected to be up or down low-single-digits. And then all the other impacts are, I'd say, immaterial, less than 1%. FX is unfavorable. A little bit of tailwind in acquisitions and again, a little bit of a headwind on the divestitures, but not material. I'd call out Paint Stores Group, just to be clear, and I said this before, second half, we expect volume and price to be up low-single-digits. Consumer down high single to low-double digits, really the continued softness in DIY. We do expect the price to be flat and that's primarily increases we see in Latin America. FX will be a headwind of about [1.5] and then the remainder is volume down high-single-digits and then within PCG for the second half, I expect up low-single-digits. Acquisitions will be a tailwind of the low-single-digits and then FX, about 1% headwind in price because of the small number of accounts we have on index will actually be a small headwind.

Ghansham Panjabi :

On the slide deck and also in your prepared comments, you alluded to consumer affordability impacting portions of your business such as Consumer Brands and also parts of Performance Coatings, I think you cited ought to refinish as it relates to deductibles. Switching to the Paint Stores segment, are your customers citing incremental issues as it relates to the same consumer affordability dynamic relative to the baseline of what you've already seen over the last 18 months or so?

Operator:

Your next question is from Steve Byrne with Bank of America.

Allen Mistysyn :

Yes. Steve, as I talked about on our first quarter call, this is consistent with our first quarter. We talked about the choppiness in production volumes that we experienced over the last four or five years and updating our cost our standards to match those higher costs on the conversion side. I talked about this at SCP last year that, that's really been a drag on our Consumer Brands Group. And we thought we could get efficiencies out -- to offset those costs, so we wouldn't have to do a reset to our standard costs like we did coming into this year. It's really not an impact on our overall gross margin because it is offset between Paint Stores Group and Performance Coatings Group, both of which I said on our first quarter call, we're not going to detail that out. We don't think it's material. And you can certainly see that with our Performance Coatings Group performance up to 19.4%, which is an all-time high first half is 18.3% an all-the-time high. And then certainly, we see the improvement in our Paint Stores Group. So you're going to see that phenomenon continued through the second half, I did call out that the entire improvement in Consumer Brands Group operating profit is due to those higher fixed cost absorption really partially offset by a decline in profits when you look at it related to the volume -- sales volume, North America DIY sales volume shortfall that we experienced in the second quarter. So like I said, we're going to continue down this path. My expectation is we'll get more consistent. Think of it as a base to build off into the future on consumer operating margin.

Josh Spector :

So I wanted to ask on Res Repaint. It's obviously been a source of strength for you this year. I mean in the event that you don't really get any improvement in housing turnover next year or maybe it ticks down. I'd be curious if you'd characterize if you want to think about either your backlog or your opportunity to win in that scenario, basically meaning have we been perhaps still over-earning from a slew of projects coming completion with lower turnover or is that a zero or low risk in your view relative to the market? .

Operator:

Your next question is from Mike Harrison with Seaport Research Partners.

Allen Mistysyn :

Yes, Mike, I would say on the -- I'd say on the positive side, starting with that, you do see less of a slowdown in North America. And let me take a step back. It all starts with share gains in this type environment, share gains, share of wallet and differentiation. I think North America will be less of a headwind. I think Europe, again, is we don't expect a lot coming out of Europe in the second half. We do expect Latin America and Asia to -- I'm sorry, Asia Pacific to be positive, more so in Asia against a really soft comp but Latin America holding up. So I think across the regions, North America, as you know, is our largest region across all of PCG and do expect it to moderate as we get through the second half.

Operator:

Your next question is from Duffy Fischer with Goldman Sachs.

Allen Mistysyn :

Yes, Duffy, we mentioned that the price increase effectiveness improved as the quarter went on, and we exited the quarter at our targeted effectiveness rate. So I would expect to see that kind of realization. We have built into our forecast that kind of realization, low-single-digit and then volume low-single-digit in the second half. .

David Begleiter :

Heidi, can you talk to the cadence of earnings in the back half of the year? And specifically on CBG margins, Al were you implying that they would be up in Q3 versus Q2?

Operator:

Your next question is from Aleksey Yefremov with KeyBanc Capital Markets.

Allen Mistysyn :

No. Like, we have talked in the past, our expectation for Consumer Brands, operating margin is high teens, low 20s. And certainly, we challenge our group and divisions to continue to raise that bar. Volume is the #1 driver of operating margin performance in all our segments, as you well know, and that clearly showed itself in 2020 during the pandemic when we had really strong volumes in consumer out-the-door sales, that drove the operating margins higher. And I would expect that as we continue -- as we see a turn in the market and we start seeing volume to grow, we'll get leverage on that volume.

John Roberts :

DIY is mostly interior, I think. So was it unusual for interior to outgrow exterior this quarter? Or was that the weather effect and painters switched to interior when the weather is unfavorable?

Operator:

Your next question is from Chuck Cerankosky with Northcoast Research.

Allen Mistysyn :

Yes. I think Chuck, within consumer, we've talked about a different kind of DIY customer and that's where the bulk of the volume is they are more sensitive to inflation, the amount of debt they have. You look at some of those headwinds that Heidi talked about in her opening remarks. It's less so on the DIY side in our stores. And like we talked about, there is a price impact on DIY in our stores. And I think if you look at our Pro, specifically in Res Repaint, we've mentioned this. I think the teams have done a really good job about driving new business through our stores to drive that mid-single-digit growth over the last three quarters in a down market. So it's not that the Res Repainters are immune or those end consumers are immune to higher cost, it's just we continue to take share because of the investments we've continually made and being very consistent about that.

Operator:

Your next question is from Garik Shmois with Loop Capital.

Allen Mistysyn :

So raws, the basket was down mid-single digits year-over-year in the second quarter. And for the full year, we're still picking or saying that the full year will be down low singles. So that tells you the back half is flattish year-over-year.

Eric Bosshard :

A question on revenue in two different areas, if I could. The consumer mix, just curious versus 90 days ago, what is so different that is driving the magnitude of the shortfall there? And then on the store side, I'm curious on Res Repaint, the market down and you up mid-single digit. I'm just curious to dive into both of those a little bit, if you would, in terms of the momentum of the market into the back half and then the ability to sustain the magnitude of the share gains of up five in the down market?

Operator:

Your next question is from Aron Ceccarelli with Berenberg.

Heidi Petz :

Yes. Let me start with that, just based on my earlier comment. If you kind of picture a bell curve of a new Res Repaint contractor coming in new versus kind of a more mature Res Repaint contractor, where we've earned over time, more share of wallet. My comment is relative to kind of first and foremost, making sure that we're getting them in and getting them set up on the right products. So when we talk about making sure our customers are making more money, oftentimes there, and that is a conversation of getting them in the right premium product that's helping them get their crews on and off the job site faster, less touch up required. So when you look at the total cost of a project, they're making more money. So making sure that we're helping our teams to help set our customers up for success at the very beginning. And then again, along that bell curve, where there's more maturity of this particular contractor, they could be bigger in size, they may be traveling our teams are meeting them exactly where they are and helping them if they're looking to travel and grow work from store to store or repo playing the role proactively help set them up again and then we're able to leverage our data and our database to put our reps in position to help these contractors kind of optimize what it is their how they're leaning in on us for products, services, all of our digital tools, et cetera.

Laurence Alexander :

Just very quickly, will your raw materials in your base case? Will your raw material cost be up year-over-year in Q4?

Operator:

We have reached the end of the question-and-answer session, and I will now turn the call over to Jim Jaye for closing remarks.

Operator:

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Operator:

Good morning. Thank you for joining The Sherwin-Williams Company's review of First Quarter 2024 Results and our Outlook for the Second Quarter and Full-Year of 2024. With us on today's call are Heidi Petz, President and CEO; Al Mistysyn, Chief Financial Officer; Jane Cronin, Senior Vice President, Enterprise Finance; and Jim Jaye, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode by Issuer Direct via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com, beginning approximately two hours after this conference call concludes. This conference call will include certain forward-looking statements as defined under U.S. federal securities laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the company's earnings release transmitted earlier this morning. After the company's prepared remarks, we will open up the session to questions. I will now turn the call over to Jim Jaye.

Heidi Petz:

Thank you, Jim. We are successfully implementing our strategy, which at Sherwin-Williams we do with a very forward looking and aggressive approach. While market conditions are choppy and may give others in our industry a moment of pause, let me be clear, we are not pausing. So this morning, I'm going to talk as much about our results as I am about what we're doing to ensure the momentum of our company not only continues but accelerates our ability to widen the gap between us and our competition. So let me start with the results of the first quarter. As Jim mentioned, our first quarter is a seasonally smaller one and our results do not necessarily dictate how our full year will unfold. While our sales came in within our guidance, it was at the lower end of our range. Going forward, I believe in our differentiated strategy, our deeply experienced leadership and our team's ability to execute in lockstep with our customers to deliver above market growth. Here are several of the leading indicators that give me great confidence that we continue to strengthen our position. For example, we increased the number of exclusive national contracts we have with homebuilders and property management customers in the quarter. New accounts and active purchasing accounts in our stores are up significantly from a year ago. Paint Stores Group rep call activity and unique accounts calls are also up in the quarter. Foot traffic in our stores is up and our net promoter score is at an all-time high. And we're seeing multiple share of wallet and meaningful new customer wins across our industrial businesses. These are just some of the factors we expect will translate into strong performance as the year unfolds. As far as specifics on the first quarter, I'll begin with the Paint Stores Group, where sales increased by 0.5 percentage against a mid-teens comparison. We are not satisfied with this level of performance as volume was basically flat in the quarter. Exterior paint sales were exterior paint sales were pressured by challenging outdoor painting conditions in some geographies. As we've demonstrated in the past, we expect to see the benefit of our focused investments unfold throughout the balance of the year. A few strong weeks in June can more than offset first quarter challenges. Price was up modestly related to our February 1 announced increase. We are now seeing a ramp to typical effectiveness as our second quarter moves forward. Segment margin decreased to 17.2%, reflecting flat volume and the higher year-over-year planned growth investments. As a reminder, Paint Store sales were up by a double-digit percentage in every customer segment in the first quarter a year ago. In this year's first quarter, pro sales were led by residential repaint where gallons were up mid-single-digits. We see this above market growth as evidence that our increased investments in this segment are already beginning to deliver a return. Commercial and protective and marine grew modestly in the quarter. New residential was down as expected, but there is momentum in single family starts that will increasingly turn to completions as the year progresses. Property management was also down driven by delays in CapEx projects even as apartment turns remained steady. From a product perspective, interior paint sales increased by a low-single-digit percentage while exterior sales decreased modestly. Encouragingly, spray equipment sales were up mid-single-digits in the quarter. We opened seven net new stores in the quarter and expect to open 80 to 100 for the full year. Our doors are open. We are laser focused on the momentum we have created serving both existing and new customers. We'll continue to win business and take share based on our differentiated solutions. Moving on to our consumer brands group, sales decreased by 7.1% in the quarter. Lower volume and the impact of divestitures were partially offset by selling price increases primarily in Latin America. Sales in North America decreased by a high single-digit percentage, as our strategic partners manage the timing of their seasonal inventory build. Outside of North America, sales increased by a double-digit percentage in Europe and a low-single-digit percentage in Latin America. Adjusted segment margin which excludes acquisition related amortization expense expanded to 20.9%. This was primarily driven by improved manufacturing and distribution fixed cost absorption, moderating raw material costs and improved results in Latin America and Europe, partially offset by lower North America sales volume. Sales in the Performance Coatings Group were in the range we expected with continued choppiness across each of our businesses and regions. Lower volume was partially offset by growth from acquisitions. Sales growth in Europe and Asia was offset by decreases in North America and Latin America. Adjusted segment margin, which excludes acquisition related amortization expense improved to 17.1%. This is the fifth straight quarter this team has delivered year-over-year segment margin improvement and again reflects the disciplined strategy to growing operating margin in the industrial business to mirror that of our architectural business. Industrial wood led the growth including the impact of recent acquisitions. Coil also delivered solid growth. Auto Refinish was flat against a mid-teens comparison. We are confident recent share wins driven by our differentiated service and technology will begin to show up more meaningfully as the year progresses. Packaging was down as expected with improvement expected in the back half of the year. General industrial was impacted by lower demand in all regions. Moving on to our guidance for the second quarter and full year. First, I want to talk about our global team. It always comes down to our people. Our team is highly engaged, aggressive and acting with determination and urgency. They are focused on the right priorities and this will become more and more visible in our results. I would bet on this team all day every day. Second, on our January call, we acknowledged there are uncertainties in the economy. We don't expect to get material help from the macro environment this year, but a few bright spots are emerging. Single family housing starts have improved and this will increasingly turn to completions as the year progresses. Existing home sales are unlikely to get much softer. Last week's LIRA report from Harvard indicates that the remodeling outlook continues to improve with declines easing and momentum building later in the year. On the industrial side, the manufacturing PMI has stabilized or improved in several regions. Third, we are tilting the table in our favor by controlling what we can control. Year-to-date, we have signed 56 new exclusive national account agreements in Paint Stores Group primarily in new residential and property maintenance. We also have increased sales rep call activity and unique accounts called significantly. We have a robust plan and aggressive field activity to engage customers of competitors who have recently closed their doors or are otherwise distracted. As I said earlier, our doors are open. We are not distracted. You can expect us to be very aggressive here. In addition to our stores platform and team of experienced reps and store managers, we're driving customer stickiness through our digital initiatives. In March, we had the highest number of pro plus users ever engaging with our platform, along with a near record number of new registrations. We have opened our Tournus France packaging plant which will support customers converting to non-BPA coating to meet the European Commission's 2026 mandate. We expect on multiple new infrastructure and mega projects that are gaining momentum. And we're introducing multiple new products in both the architectural and industrial businesses to drive our customers' success. Obviously, we're not going to share everything that we're doing for competitive reasons, but you can be certain that there's a long list of actions that we are taking in addition to these items. The key takeaway is this, at some point the demand logjam in multiple end markets is going to break. We will be there to capitalize. We're very confident it's a matter of when, not if. As for our specific outlook, the slide deck issued with this morning's press release includes our expectations for consolidated and segment sales for the second quarter of 2024. The deck also contains our full year sales and earnings per share outlook, which again is unchanged from what we provided in January. We expect to provide an update on our 2024 full year outlook when we report our second quarter results in July. Our slide deck also provides guidance on our expectations for raw material costs and other items helpful for modeling purposes. All of these remain unchanged from our January call as well. As you can see, we have high expectations of ourselves. Our team is aggressive, determined and focused on the right priorities. I want to be clear, we are playing to win. We know our strategy is the right one and we have demonstrated for decades that it works. We expect to outperform the market and we are confident our differentiated solutions will continue to drive our customers' success, while also rewarding our shareholders. This concludes our prepared remarks. And with that, I'd like to thank you all for joining us this morning. We'll be happy to take your questions.

Vincent Andrews:

Heidi, I know historically the company doesn't like to talk about weather and use it as an excuse, but maybe you could comment on it a little bit since it was in your deck and you brought it up. Just curious how much you think you may be lost from an exterior days perspective and how much you think you might make up in 2Q? And related to that, you did mention that you were disappointed with results in the quarter and PSG did come at the low end of your range. So I just want to clarify whether that was all weather related or whether you felt like the execution could have been better in the quarter and you're looking to course correct as you move into 2Q?

Allen Mistysyn:

Yes, Vincent, this is Al Mistysyn. We did talk about in the opening about softer than anticipated exterior sales, which were pressured by that challenging outdoor painting conditions. And we saw it, if you looked at our slide deck, Southeastern division, which is our largest sales division in the first quarter was a laggard, which is typically not the case. Commercial, we saw slower exterior sales, property maintenance and then protective and marine got off to a slower start than we were expecting. All of these three segments, we have confidence that these jobs and projects have just been moved and not all of them will get done in the second quarter, some will be pushed into the balance of the year, but certainly have a high level of confidence there. One highlight I think -- that I think is worth mentioning and Heidi mentioned in her opening remarks. We talk about res repaint market being flat for the year but with the investments we've made, we were up mid-single-digits in the fourth quarter, we're up mid-single-digits in the first quarter. And I think if you look at how the quarter unfolded on a same day basis, March was the strongest month for Paint Stores Group in the first quarter and we see that continued momentum in April.

Operator:

Your next question is coming from Greg Melich from Evercore ISI.

Allen Mistysyn:

Yes, Greg. It's primarily moderating raw material costs and modest price increases in Paint Storage Group. And also as another tailwind is that Paint Stores Group volumes were higher than the other segments, which has a higher gross margin in the company. So those are the primary drivers of the year-over-year improvement. The call out on the higher fixed cost manufacturing affected the Consumer Brands operating margin and including the gross margin, but that was offset by other segments. And if you recall, I did talk about this on our year-end call that I expected our global supply chain to improve performance throughout the year in 2024. I also if you recall, I talked about it on our financial community presentation last August that our consumer operating margin was under pressure and underperformed due to the supply chain inefficiencies. We've experienced choppy production swings that negatively impacted our cost plus higher wages, energy and other costs. And so as we typically do And so as we typically do annually, we update our product costs. As we do expect to continue to see improvements in incremental cost per gallon with our global supply chain, continuous improvement and simplification efforts. There is an impact on Paint Stores Group and PCG. I talked about not getting into the detail of that on our year-end call and it's really not a material impact in the quarter. It is on consumer because it's a small quarter for consumer. But if you look at Paint Stores as we talked about that's volume driven and the incremental investments in SG&A. On PCG, we're still in the high teens performance, nice improvement year-over-year and we'd expect that kind of performance as the year goes out.

Jeff Zekauskas:

In the first quarter in Consumer Brands, you earned roughly $170 million in EBIT adjusted. And normally the Consumer Brands business is seasonally weak in the first quarter, that is your sales, whether they grow a little bit or whether they shrink a little bit are higher in the second and third quarter. So from a logical standpoint, should it be the case that you earn at least as much in the Consumer Brands Group in the second and third quarter as you did in the first?

Operator:

Your next question is coming from David Begleiter from Deutsche Bank.

Heidi Petz:

I won't share the numbers, but I appreciate your question. What I would tell you it's material. And I would also tell you that it was also, it's evidence of our ability to put on display what it is that only Sherwin-Williams can do relative to servicing these contractors, certainly both from a new residential and a property maintenance standpoint in a way that only a specialty Paint Store can do. And so it's a function of our footprint of our team, of the expertise that we have, not just on a broad base nationally leveraging that platform, but our ability to be nimble and local and support the needs of these local contractors. So I think what you're seeing, it's a material pickup, but it's evidence of our value proposition and what we're able to do uniquely in the market.

John McNulty:

Maybe we can speak to the raw material environment. You've left the outlook for the year unchanged. It does seem like we've kind of got a mixed bag out there with the oil having run up, but a lot of the derivatives not really moving. TiO2 is kind of a little bit of a question mark. So I guess, can you give us color on how you're seeing your raw material basket at this point, if there are -- if everything is kind of stable, if you're starting to see things from an inflationary perspective go higher or are some still falling lower? I guess maybe you can just give us a little bit more color behind the raw material basket?

Operator:

Your next question is coming from Chris Parkinson from Wolfe Research.

AIlen Mistysyn :

Yes, Chris, I don't think our spending thesis has changed yet. I think you look at what we talked about on our second half and our year-end call, leaning in with additional investments or accelerated investments to influence the share gains and accelerate the share gains that we expect to see and we saw that with res repaint. I think as we get through the second quarter, as we've typically done, we'll look at the indicators, market indicators and what we see happening not only in the second half of 2024. But to your point looking at the first half of 2025 look at the trends and volumes, the trends in our growth margin and as we have done not just in 2023 but in the past, we believe that we have upside in our volumes, upside in our gross margin we will lean in and add more investments than we would normally do or typically do. Because of the confidence we have in our strategy, because of the confidence we have in long-term new single family construction and need for housing in this country and as interest we talked about this on our first quarter call. As interest rates moderate, we would expect to see existing home sales improve. We'd expect to see an acceleration in new single family starts and in property maintenance improved CapEx. And we will be better positioned as those turn to get a greater share of that market.

Operator:

Your next question is coming from Josh Spector from UBS.

AIlen Mistysyn :

Yes. Josh, we talked about this on our first year end call, we went out -- just as a reminder, we went out with 5% February 1, and we said we would realize the increase -- the full price increase over the next few quarters -- the next couple of quarters as we typically have done, I would say, prior pre-COVID, so it's more typical. As we talked about, we had a 0.5% increase in our first quarter split pretty evenly between price and volume and we'd expect that price to ramp up and get fully realized as we exit the second quarter.

Mike Harrison :

One of your competitors announced a strategic review of their architectural business. I think you guys have alluded to their challenges, helping to drive some customer wins. But I'm just curious, are there parts of this business that you will consider looking at and have you ever acquired paint stores as part of your store expansion efforts? Where are you always new builds or kind of new storage rather than acquiring?

AIlen Mistysyn :

Yes, Mike, we have purchased store chains before. The last one I want to say was PPI, which was a part of COMEX, and that was back in 2010. I think as Heidi mentioned, we're confident in our strategy in opening 80 to 100 stores is like acquiring a small store chain in the U.S. as it is. So we're happy with that strategy, and we'll continue executing against that.

Patrick Cunningham :

There still seems to be quite a bit of choppiness in general industrial and packaging. What are your expectations for volumes for the year? And how much do you expect to outperform from share gains? And then maybe just across Performance Coatings broadly, what are your expectations for pricing for the year, given there might be some indices rolling off, but maybe some targeted price increases as well.

Allen Mistysyn :

Yes, Patrick, on the volumes with our second quarter guidance to be upper down low-single-digits. That would tell you our first half volumes will be down low-single-digits. Full year guidance is flat to up low-single-digits. There was no change to that which tells you that our volume in the second half has to be up -- flat to up low-single-digits.

Aleksey Yefremov :

You mentioned momentum in homebuilding as homebuilding customers and new residential. To what extent have you sensed any the change among this set of customers was latest volatility in rates. Has the optimism basically maintained the same level or has it moderated perhaps?

Operator:

Your next question is coming from Ghansham Panjabi from Baird.

Heidi Petz :

No, I don't think anything has materially changed. Again, as you look segment by segment, I'd point to Protective & Marine was a segment certainly that we see upside. And I think I'll use them as an example because there continues to be demand strength in all markets. Some of the projects have been delayed, so there's been some timing issues here. But think when you look at the visibility that we're gaining relative to some of these mega projects, we're launching some pretty significant new technology into the market this year in fire and flooring and protective coatings, which is an indicator not just of our incremental investment, but I think some good upside. Having said that, I want to go back to where I started which is there's nothing that's materially different from where we came in last quarter. But again, as rates fluctuate as some of these jobs pick back up, then we'll be back out in July if there's any more upside than what we're at today.

Operator:

Your next question is coming from Michael Leithead from Barclays.

Allen Mistysyn :

Yes, Mike, I think about it this way. The wage inflation is for 2024 is more typical to prior years. So think about a low-single-digit impact. I think what you're seeing in our first quarter, the start of the annualization of the accelerated long-term growth investments we made in the second half of last year. As you recall, on our year-end call, I said I thought SG&A would be up a mid-single-digit percentage for the full year with the first half being above that range because we're annualizing the investments that we made in the second half and then that will level out in the second half of this year.

Adam Baumgarten :

I just say I don't know if you mentioned this, but could you give us an update on how the Pros Who Paint business did in the quarter? I know you mentioned DIY was soft, but maybe some color on Pros Who Paint.

Operator:

Your next question is coming from Duffy Fischer from Goldman Sachs.

Allen Mistysyn :

Yes, Duffy, it's primarily volume. As we have talked about in the past, volume is the single biggest driver of operating margin leverage in, I'd say, all of our segments, but for sure, in our Paint Stores Group. So that's going to be the majority of it. And then yes, we also have an impact from the investments we made but we do expect to continue to get a return for those investments as the year progresses.

Michael Sison :

I guess sort of a follow-up on that is as you get into 2Q, 3Q, 4Q for PSG, do you expect segment profit to turn positive? And for the full year, will segment profit growth?

Operator:

Your next question is coming from Kevin McCarthy from Vertical Research Partners.

Heidi Petz :

Yes. I'll start with the P&M piece, and then I'll hand it over to Al. We look at some of the gallons year-over-year. I think you said it in your question, it is timing. And I think with some of these project delays we don't believe in any regard that they have gone away, it's simply timing. And as I mentioned earlier, what gives us confidence is our increased visibility into some of this project work. So again, the team is working hard to make sure that with some of these launches, we are best positioned in the industry. So when the timing does recover, we're at the front of that line. And then I'll hand it over to Al to talk about your question relative to.

Operator:

Your next question is coming from John Roberts from Mizuho.

Allen Mistysyn :

Yes. I think from project delay relative to what we saw from weather in the first quarter, we'll see those pick up in the second quarter and into the third quarter. As far as CapEx projects, we talked about this on our first quarter call. As rates moderate, we do expect to start seeing CapEx projects improve both rates and lending gets easier at lending standards ease up a little bit. John, we don't have material growth impact in our forecast for property maintenance CapEx growing a significant amount in our second half. So turns are going to continue to improve. And then as CapEx returns will benefit with that as a slight tailwind.

Garik Shmois :

You mentioned there was some impact in Consumer Brands in the quarter due to limited inventory build. Is there any way to size if that was material to the quarter or would you expect any restocking in 2Q and maybe speak broadly to any opportunities for restocking across your network?

Allen Mistysyn :

Garik, I mean, think about our first quarter is a small quarter for consumer in North America and it ramps up as the architectural season ramps up. So we have seen this in the past and it's not overly material. You think about a couple of percent on $800 million, it's not huge.

Steve Byrne :

You made the comment about your sales forces out there hunting for new accounts. And clearly, that's been the model. My question for you is, how are you incentivizing that or driving that with your investments. Is it headcount related? Or are you doing something to drive more servicing to existing accounts? And is this really to drive share gains? Or can this also drive mix shift to higher-performing products?

Allen Mistysyn :

Steve, the only thing I would add to that is we often talk about surveys painting contractors and the number one driver of their loyalty is who helps them make the most money. So the more reps we have in the field and our ability to spend more time with those painting contractors and doing demos with higher-quality products we can show them the efficiencies that they can gain so that they can grow their top line and their bottom line with the same number of painters because the labor markets haven't improved dramatically. So that's a value add that I think we can provide.

Arun Viswanathan :

Just maybe two questions on Paint Stores Group. So first of all, historically, I think you've been underpenetrated on the West Coast. And given one of your competitors now there has shut at stores. Is that something that you could maybe pivot and increase your store openings towards? And then my second question was basically on growth and margins. So it looks like you face your easiest comps in the second half in Paint Stores Group. Last year, you were up 2% to 4% or so in those quarters. So would you expect to be up kind of mid-single-digits in Paint Stores Group in the second half of this year towards the upper end of your full year guide for sales?

Allen Mistysyn :

Yes, Arun, I think you're right. We would expect that our second half would be in that mid-single-digit range. Of course, as we see the summer selling season unfold. We'll look at those trends, look at indicators and certainly give an update to the street on our July call as appropriate.

Laurence Alexander :

Just a quick one on industrial coatings, can you just characterize the landscape for bolt-on M&A how appealing it is currently and our multiples in discussions starting to drift down?

Operator:

Your next question is coming from Eric Bosshard from Cleveland Research Company.

Heidi Petz :

So Eric, no, we don't see a situation or an environment where we pull back. We're confident again in our strategy. The comment we made earlier is these are very focused investments. And so we're not trying to be all things to all people, water all the trees. But where we know we've got points of differentiation that are meaningful in the market. You can expect that we'll continue to be very bullish there. So no, I don't see us pulling back in any regard there. And Al, I'll let you speak to the rates relative to the what’s in.

Operator:

Your next question is coming from Aaron Ceccarelli from Berenberg.

Heidi Petz :

It's a great question. I would say the opportunity continues to be first and foremost. While there's opportunity in every segment, the biggest opportunity for us, as we've said historically is res repaint where we've got more share there. And I would say that it's on top of already very healthy growth. So I don't think in any way this incremental traffic is going to help correct think this incremental traffic is going to continue help us to outperform kind of the flat environment that res repaint sits in today. So it will be accretive, and it's something that we're confident that this is an opportunity, as you mentioned -- as I mentioned earlier, an increased call activity and increased unique accounts rather and active accounts, so this is evidence that we're taking share.

James Jaye :

Yes. Thank you, everybody for joining our call today. I think you heard that the team is very aligned, very confident in our strategy and what we're doing. We've made the right investments, and we're driving those solutions for our customers. And we're pretty confident that you're going to see as the year unfolds, those share gains and those returns become more and more evident. The other thing I would do is just remind you, we will have our annual financial community presentation this year in Boston. That's on August 29. And in addition to Heidi and Al, you'll hear commentary from our group presidents as well. So additional information on that will be coming out some time soon. So look for that, please. And as always, thanks for your interest and we'll be available for your follow-up calls over the next several days. Have a great day.

Operator:

Good morning. Thank you for joining The Sherwin-Williams Company's review of Fourth Quarter 2023 Results and our outlook for the first quarter and full-year of 2024. With us on today's call are Heidi Petz, President and CEO; Al Mistysyn, Chief Financial Officer; Jane Cronin, Senior Vice President, Enterprise Finance; and Jim Jaye, Senior Vice President, Investor Relations and Communications. This call is being webcast simultaneously in listen-only mode by Issuer Direct via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com, beginning approximately two hours after this conference call concludes. This conference call will include certain forward-looking statements as defined under U.S. federal securities laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the company's earnings release transmitted earlier this morning. After the company's prepared remarks, we will open up the session to questions. I will now turn the call over to Jim Jaye.

Heidi Petz:

Thank you, Jim. I'll begin with the Paint Stores Group, where sales increased 2.3% against a mid-teens comparison. Volume drove the increase as our previous price increase annualized in September. Segment margin improved 210 basis points to 19.3%. Protective & Marine, commercial and residential repaint drove the growth. Strength in these markets was partially offset by decreases in New Residential and property management. From a product perspective, exterior and interior paint sales both increased by low-single digit percentages. Exterior sales grew faster but were a smaller part of the mix. We opened 35 new paint stores in Paint Stores Group in the fourth quarter and a total of 76 new stores in 2023. We also announced a 5% price increase to our customers in the quarter effective February 1. Moving on to our Consumer Brands Group. Sales decreased by 7.1% in the quarter, which was better than our guidance. Sales increased mid-teens percentage in Europe and Latin America. Sales decreased in North America by a low-double-digit percentage as customers managed their inventories lower due to soft paint demand, partially offset by an increase in the pro paint sales. Adjusted segment margin, which excludes acquisition-related amortization expense and impairment charge related to trademarks in Europe and the negative impact from the significant devaluation of the Argentine Peso in December was 10.8%. The decrease from last year's fourth quarter was driven by lower volume and higher nonoperating costs. Sales in the Performance Coatings Group increased slightly with continued choppiness across each of our businesses and regions. Acquisitions and favorable FX were offset by lower volume. Adjusted segment margin, which excludes acquisition-related amortization expense and the Argentine devaluation impact, improved to 17.3%. This is the fourth straight quarter this team has delivered year-over-year segment margin improvement. This performance reflects execution of our strategy, moderating raw material costs and the ongoing value we are providing customers. Industrial wood led the growth, including the impact of recent acquisitions. Coil and Automotive Refinish also delivered solid growth. Packaging was down as expected. General industrial was impacted by lower demand in all regions. PCG sales varied significantly by region with growth in Europe and Latin America and decreases in North America and Asia-Pacific. From a full-year perspective, I'll provide just a few highlights before turning to our 2024 outlook. At this time a year ago, you'll recall an environment of tremendous macro uncertainty with single-family housing starts down an average of more than 20% for seven consecutive months, existing home sales down a similar percentage, soft PMI manufacturing indices in all regions and most economists predicting a hard recession. Against that backdrop, we provided guidance that we believed was appropriate. We also said that if conditions improved, our performance would be better than our initial guidance, and that is exactly what happened. I could not be more proud or thankful for the efforts of our 64,000 employees throughout 2023. On a consolidated basis, our team delivered record full-year sales, adjusted EBITDA, adjusted diluted net income per share and net operating cash. We returned a total of $2.1 billion to our shareholders in the form of dividends and share buybacks in 2023. We delivered these results while reinvesting in the business by design and at an accelerated rate to drive continued above-market growth and enhanced profitability. In terms of CapEx, we invested $590 million, including approximately $205 million for building our future R&D lab projects. We expect to begin occupying these facilities by the end of 2024. We ended the year with a net debt to adjusted EBITDA ratio of 2.3x. Looking at our reportable segment on a full-year basis. Paint Stores grew sales by a high-single digit percentage and expanded its margin. Sales increased in all end markets except New Residential, which was down less than 1%. This New Residential performance was remarkable given the state of the market and reflects our share gains. Performance Coatings also grew its top line while further integrating recent acquisitions and achieving a high teens adjusted segment margin. The full-year adjusted margin performance is the best since the Valspar acquisition in 2017. Consumer Brands had a challenging year on the top line with lower sales resulting from soft DIY demand, but adjusted segment margin expanded. We're confident our aggressive portfolio adjustments completed during the year, including the divestiture of noncore aerosol product lines and the China architectural business, should result in improved future profitability. I am confident that we further separated ourselves from our competitors in 2023, and that's exactly what we intend to do again in 2024. Our success in 2023 stemmed from executing on our strategy, which remains unchanged. We provide differentiated solutions that enable our customers to increase their productivity and profitability and for which they are willing to pay and stay. These solutions center on industry and application expertise, innovation, value-added services and differentiated distribution. We also have momentum in the enterprise strategic priorities that are illustrated in our slide deck and I first described at our Investor Day last August. I am confident the continued execution of our strategy and our enterprise priorities will spur the next era of profitable growth for Sherwin-Williams. So turning to our outlook. We entered 2024 with confidence, energy and a commitment to seize profitable growth opportunities in our targeted end-market segments. We expect to outperform the market just as we have in the past. And while the macro environment feels better today than it did a year ago, it still contains a number of uncertainties. On the architectural side, U.S. New Residential sentiment has improved. Single-family starts have been up year-over-year for six consecutive months. Mortgage rates are expected to begin moderating but will remain well above historic levels. In residential repaint, existing home sales drove a portion of our sales and have declined year-over-year for 28 straight months. The trajectory of recovery is not clear here, and the LIRA index is forecasting negative remodeling spend in 2024. However, there are numerous other drivers for repaint, and our investments and our model give us confidence that we will continue to grow share. In new commercial, starts slowed considerably in 2023, which we expect will impact completions starting midway through 2024. Commercial lending standards have also tightened, and the Architectural Billing Index has been negative for five consecutive months. On the DIY side, we'll remain in share gain mode as we do not currently see a macroeconomic catalyst driving meaningful improvement in consumer demand, though any improvement in existing home sales could be a tailwind. On the industrial side, the PMI numbers for manufacturing in the U.S., Europe and Brazil have largely been negative for multiple months with China being slightly better recently. We expect Automotive Refinish to be our most resilient business in this environment, and we expect to see ongoing benefit from recent share gains. Industrial wood is likely to benefit from recovery in New Residential given the furniture, flooring and cabinetry end markets it serves. We expect Coil will grow driven by significant new account wins over the past year. Protective & Marine should continue to have momentum but will face challenging comps. We expect general industrial demand to remain choppy. In packaging, we expect industry volume for food and beverage cans to be flat to down in 2024. We will also see a negative short-term impact related to temporary volume shifts, which occurred as a result of our Garland production plant incident last August. We fully expect to recover this volume in stages in 2024 and 2025 while also winning new business. Longer term, we remain bullish on our packaging business and our differentiated non-BPA solutions. Our Garland plant is fully back online, and we are bringing on additional capacity in other locations during the first half of the year. We continue to have excellent new account and share-of-wallet opportunities in every business and in every region. The continued growth investments we have made over the past year give us tremendous confidence in pursuing these opportunities and gaining share. Moving to the cost environment. Our outlook assumes our raw material costs will be down by a low-single digit percentage in 2024 compared to 2023. We expect to see the largest benefit occurring in the first half of the year as comparisons become more challenging in the back half, where the entire basket decreased low-double-digits. While raw materials will likely be a benefit for us, other costs, including wages, health care, energy and transportation are expected to be up in the mid- to high-single digit range in 2024. I will remind you that these categories also inflated in 2023. Working with our customers, we delayed additional Paint Stores price increases last year given the pricing actions that we took in 2021 and 2022. We cannot however ignore these escalating costs indefinitely. As I mentioned earlier, Paint Stores Group is implementing a 5% price increase effective February 1st. The Performance Coatings and the Consumer Brands Group are also likely to have some targeted pricing activity in 2024 though at a more modest level than Paint Stores. As for our specific outlook, the slide deck issued with this morning's press release includes our expectations for consolidated and segment sales for the first quarter of 2024. The deck also includes our expectations for the full-year, where consolidated sales are expected to be up a low to mid-single-digit percentage and diluted net income per share is expected to be in the range of $10.05 to $10.55 per share. Excluding acquisition-related amortization expense of approximately $0.80 per share, adjusted diluted net income per share is expected in the range of $10.85 to $11.35, an increase of over 7% at the midpoint compared to 2023's adjusted diluted net income per share of $10.35. We've provided a GAAP reconciliation in Reg G table within our press release. Let me provide some additional data points and an update to our capital allocation priorities. Given incremental 2024 pricing, raw material deflation and Paint Stores Group, our largest and highest gross margin segment, growing sales faster than the other two segments, we would expect full-year gross margin expansion. We expect SG&A dollars to increase by a more typical level and increase by a mid-single-digit percentage in 2024, a moderation from the low-double-digit percentage increase we reported in 2023. We expect the investments we made last year and those we plan to make this year will enable us to grow at a multiple of the market. We plan to control costs tightly in noncustomer-facing functions. And we have a variety of SG&A levers we can pull, depending on a material change to our outlook up or down. We expect to open 80 to 100 new stores in the U.S. and Canada in 2024. We'll also be focused on sales reps, capacity and productivity, system improvements and product innovation. Next month, at our Board of Directors meeting, we will recommend an annual dividend increase of 18.2% to $2.86 per share, up from $2.42 last year. If approved, this will mark the 46th consecutive year that we've increased our dividend. We expect to continue making opportunistic share repurchases. We'll also continue to evaluate acquisitions that fit our strategy. We have a manageable $1.1 billion of long-term debt due in 2024 and expect to refinance the debt at higher rates. We expect to be within our current long-term target debt-to-adjusted EBITDA leverage ratio of 2x to 2.5x. In addition, I will refer you to the slide deck issued with our press release this morning, which provides guidance on our expectations for currency exchange, effective tax rate, CapEx, depreciation and amortization and interest expense. Our team is operating with great confidence as we begin 2024. We are extremely well positioned to continue delivering shareholder value. And I want to thank John Morikis for the incredibly strong foundation he leaves with us as he moves into his role as Executive Chair. I'm also grateful for the outstanding executive leadership team surrounding me. Given that there is still a considerable amount of uncertainty in the global economy, we believe our initial 2024 outlook is an appropriate one. Should the demand environment prove to be stronger than we are currently assuming, we would expect to do better than the guidance we are laying out today. Our first quarter is a seasonally smaller one. For that reason, we will not be making any updates to full-year guidance until our second quarter is completed and we have a better view of how the painting season is unfolding. Our strategy is clear, our priorities are focused, and our people are ready. We will continue to win by providing innovative solutions that help our customers to be more productive and more profitable. We expect to deliver meaningful earnings growth in 2024. This concludes our prepared remarks. With that, I'd like to thank you for joining us this morning, and we'll be happy to take your questions.

Vincent Andrews:

Thank you and good morning everyone. Heidi, I'm wondering if you could sort of break down the Paint Stores Group top line guidance for I see low single to mid-single-digits, and maybe there's 3% of net pricing there. And I guess, what I'm really trying to get at is where do you think that sales guidance would be if you hadn't made the significant growth investments in 2023. What are you anticipating you're going to get from that this year?

Allen Mistysyn:

Yes, Vincent. This is Al Mistysyn. Yes, when you look at the 2024 volume number, up low-single digits. If you go back to -- coming out of the second quarter of 2023 and looking at the indicators that we were, we were talking about our volumes really being flat. And as John and Heidi like to say, we got to influence the numbers. So with our line of sight being better than -- or better, the investments we made in Res Repaint and what you'll see is we expect Res Repaint to be at the high end or above the high end of that range. In the fourth quarter, you saw a low-single digit volume growth. And again, our Res Repaint volumes were up mid-single digits. So even in the short term, we're seeing the benefits of those investments, and we fully expect to realize those benefits in 2024 to accelerate our volume growth in Res Repaint.

John McNulty:

Yes, good morning. Thanks for taking my question. So there's a lot of focus on the SG&A jump and administrative jump. And I guess, when you think about the roughly $300 million of the 20% investment that you had there or growth that you had there, I guess, how would you break it out in terms of just general inflation versus investment for growth versus management comp? Because primarily, the team did pretty darn well this year. So I guess, how would you break that out? And can you help us to think about on the growth investment side, the types of investments that are, I guess grabbing those costs or grabbing those dollars?

Heidi Petz:

John, one thing I would add to that, too, I think when you've got significant points of differentiation and you believe in your strategy, you're going to invest in them. So while we're growing faster than the market, then we're confident, as Al pointed out, on the return we're going to get here. Our heads are not in the sand. We absolutely know that it's an expense, and we expect to get a return. There's no doubt about that. But we do see this also as an investment to make sure that we continue to outpace the market.

Operator:

Your next question for today is coming from Jeff Zekauskas with JPMorgan.

Allen Mistysyn:

Yes, Jeff. The way we have the raw material benefit rolling out in 2024, about 85% of that benefit is in our first half. And the assumption we're making is that we're not going to see another material drop as the year goes on. So essentially, we're annualizing the benefits that we saw through the second half of 2023. That being said, the market is driven by supply and demand, and the raw material costs are driven by supply and demand. And as we see how demand unfolds, certainly, there's plenty availability of supply in the market. That may change. But that's based -- our low-single digit outlook is based on the indicators we see today.

Operator:

Your next question for today is coming from Mike Sison with Wells Fargo.

Heidi Petz:

So just to clarify, the mid-single-digit reference was relative to '23. So I think, yes, we would expect it to be flat. Now having said that, I'll go back to my earlier comments that the investments that we placed in, we're not waiting for the market and we don't think the market is going to help us this year. So the team was very diligent. We were very clear on putting those investments in long enough ago last year so that we were in a position to take advantage of this. So in this environment, while I would characterize the demand as flat, you can absolutely count on our ability to take share. We've got the right positioning in the market. We've got a model that allows us to absolutely understand largely not just through our stores and our reps, through our data, our ability to follow these customers to partner with these customers and helping them not just to get by with their current projects, helping them travel, helping them grow and really helping partner with them as they're looking to grow their business. So the characterization would be flat, but I would expect us absolutely to outpace the market there.

James Jaye:

Thank you, Mike.

Ghansham Panjabi:

Hi, everyone. Good morning. I guess, first off, on the Paint Stores Group pricing, maybe you can give us a sense as to how to think about the time line, the price realization specific to the segment. And I'm just asking because historically, it took a couple of quarters to realize increases. And then during the COVID supply chain chaos, it was of course, much faster just given the extent of inflation. And then also related to that, what do you expect productivity to be in 2024 in context of the non-commodity inflation, such as wages and also with all the investments you have been making? Thank you.

James Jaye:

Thanks, Ghansham.

Aleksey Yefremov:

Thank you. Good morning everyone. I just wanted to ask you about the Property Maintenance subsegment. You're showing negative low-single digit number there, down from double-digit growth earlier in first half '23. Can you just address what's going on in this segment?

James Jaye:

Yes. Aleksey, you mentioned the fourth quarter. So property maintenance was down low-single digits in the quarter, but that was against a really strong fourth quarter a year ago, where we were north of 20%. If you look at property management for the year, I mean, it was up mid-to-high single digits. So we continue to feel good there. And the investments that Al and Heidi are talking about, many of those are aimed at growing our position there and continuing to add to what we're doing in that property maintenance segment. Thanks, Aleksey.

Michael Leithead:

Great. Thanks. Good morning team.

Michael Leithead:

Good morning. I wanted to ask on the 2024 EPS outlook. It looks like you're guiding for low-to-mid single digit top line growth. You mentioned you expect some degree of gross margin expansion, and you should also have a good amount of cash flow to deploy. So even with SG&A up a bit, I would think that leverage itself through the P&L, maybe greater than 7% EPS year-over-year. So can you maybe just walk through some of the key offsets or other items there that maybe I'm missing?

Michael Leithead:

Thanks, Mike.

David Begleiter:

Thank you. Good morning. Heidi and Al, in terms of your plans, I believe you ran your plans below your volumes in 2023. If so, what was your earnings hit from that under-absorption? And should they all reverse in '24? Thank you.

James Jaye:

Thank you, David.

Michael Harrison:

Hi, good morning. Within the Consumer Brands Group, curious if you can talk a little bit about your expectations around customer order patterns into the spring paint season. It sounds like as of Q4, they were maybe still managing their inventory levels lower. But I'm just curious if right now you're expecting kind of a more normal seasonal improvement or if there's still going to be some caution on inventory management.

Allen Mistysyn:

Mike, can I just add one thing about that that we're talking specifically DIY. On the Pros Who Paint side of that, I know it's not a huge portion of that business. But I think the team has invested in that, working closely with our partners. And we have been taking share and growing faster than the market, and we expect that to continue going into 2024.

Operator:

Your next question for today is coming from Greg Melich with Evercore ISI.

Operator:

Greg, your line is live.

Operator:

Your next question is coming from Chuck Cerankosky with Northcoast Research.

Heidi Petz:

Yes. Chuck, it's certainly an interesting environment right now. I'll start with our stores. I know you want to get to the consumer piece. As you know, in our stores, it's a small part of the business, and we are catering to a unique, I would call it a subsegment, which is a higher end customer that really values more of that high touch that we can provide. And candidly, this time of year, it's even smaller. And we'll need to see how the consumer is going to react to the macro conditions during the paint season. So I would say that it's early, and we're certainly watching that. But you talk about the Consumer Brands Group, which is obviously our focus on circling the market from every angle. So you've got more price points certainly within that environment. And Al mentioned the Pros Who Paint already. But in terms of the DIY, it certainly is -- it's a choppy market right now. We're trying to stay really close to it and being in lockstep with our retail partners to look for opportunities to continue to build strength in that end segment.

James Jaye:

Thanks, Chuck.

Greg Melich:

Hi, hopefully, this is working now.

James Jaye:

Welcome back, Greg.

Heidi Petz:

Well, first and foremost, it's volume. I'll go back to Al's comments earlier. We certainly are looking at the margin expansion and ultimately operating margin, but volume is no doubt the key focus. Al, I know -- Al and I are both sitting here wanting to jump at this answer. So I'll share this with him.

James Jaye:

Thanks, Greg.

Steve Byrne:

Yes, thank you. I'd like to ask you a couple of questions about price mix. When you look at your Paint Stores and you look at your end markets, which of them do you think you have the greatest ability to drive a mix shift? If you stroll through any of your stores, one of the characteristics that just jumps out is the huge range of price points. And I'm curious, do you see the ability for your investments to not just drive share gains in volume? But can you drive a mix shift up in price? And just conversely to that, is there any risk that you've seen in the past when you raise pricing, does it cause any of your pros to shift down to a lower price point?

Allen Mistysyn:

Yes. Steve, the other part of your question, we typically do not see contractors go down in quality in an inflationary environment. Typically, in an inflationary environment, and we've talked about this in the past. We tend to do better on converting contractors to a higher quality product with the idea they're going to pay more for the product anyway. So try this better quality product. And to Heidi's point, it's going to make you more efficient and effective, and you'll get on and off jobs faster.

Operator:

Your next question is coming from Josh Spector with UBS.

Heidi Petz:

I will tell you that we don't see a downside here and the level of -- again, if we didn't have access to, we talk about leading indicators, the data that helps us to really understand our contractors. And I'll give you a little bit of color here without going too far is what they're buying, what they're not buying, what their projects are, current and their future pipeline, where they're looking to travel as they're looking to grow and expand in the different territories. And so we're able to then, Josh, take our data, sit down with our reps and our sales managers and make sure that they are armed to truly help bring value to these contractors in a way that a competitor that doesn't have a specialty paint store just doesn't have those levers to pull. So I don't see a downside in this environment.

Operator:

Your next question is coming from John Roberts with Mizuho.

Heidi Petz:

I do. And I also think, I really find your question very interesting, because I think there is a commonality of, certainly, first and foremost, the belief that our strategy is working. I think John has contributed, we say his fingerprints are all over this company, and they absolutely are. So I have the fortune of inheriting an incredibly rock-solid foundation on which to build. And when we talk about just getting started, I couldn't agree more that we are just getting started. I think in terms of having a different background and bringing perspective into the business, I think it's important to share that my values and John's values are spot-on in terms of culture, customer focus, desire to grow, determination to win. And so bringing a perspective from outside of only a paint category, I think, only helps to continue to put our foot on the gas on what's working. And I would characterize it more maybe as a healthy challenge on where we might have opportunity to strengthen our model and just continue to grow.

Operator:

Your next question is coming from Arun Viswanathan with RBC Capital Markets.

Heidi Petz:

Yes. Hi, Arun, I'll start with your first question, and then I'll kick it over to Al for your second one. You mentioned Res Repaint, so I won't touch that. But in terms of -- I won't get into the numbers, but you asked about the magnitude of share gains. And I would point to, candidly, the rest of the segment. So New Residential here is where we're obviously playing a long game, but we're continuing to take share by expanding the number of agreements that we've secured. Even in these very challenging times, we've been able to secure incremental agreements. And we're doing that at a time when there's a lot of pressure on starts. And so as you fast forward and play this out and as the cycle plays out, and it will, our position here is going to be even more significant as these new agreements begin to really pay off with the acceleration of housing starts. Property management, we hit on that a bit -- I hit on that a bit earlier. But I would say that it's very similar in terms of our ability in this environment to demonstrate our value and secure some of these incremental agreements, again, in property management, that will be true, certainly at the national, regional, and the local level. Our teams have been able to really penetrate based on a lot of the data that we've got access to there. Certainly, a lot of benefit Commercial, Protective & Marine, two segments that I would say are largely focused on product technology, specifications, and really great distribution. These businesses are both strong, and we're working very hard every day to put distance between ourselves and our competition. And I would go maybe a step further on commercial, where we're confident is we're well positioned in every subsegment within commercial. So when Al mentioned, we've got stronger view in the first half, it might look more soft in the second half. We're prepared to meet our -- these contractors where they are as they're looking to shift and transition within subsegments. So I'm confident that even despite where the market goes, we're going to intercept them.

James Jaye:

Thanks, Arun.

Duffy Fischer:

Yes, good morning. A question on SG&A. So historically, you guys have had positive leverage on growth in SG&A growth that changed last year. It still seems like it's going to be negative in the first half of this year, maybe going to neutral in the back half. Structurally, has something changed in the market or with your model? Or will that revert back to positive leverage in '25 and '26, and what this will be is just kind of a short-term bump maybe to kind of push through the high pricing that you've put through on raw materials? But just structurally, SG&A versus sales longer term, do we get back to a positive leverage there?

James Jaye:

Thanks, Duffy.

Kevin McCarthy:

Yes, thank you and good morning. About two weeks ago, the trade press reported that one of your competitors Kelly-Moore, is essentially going out of business as I understand it. And so my question would be, does that open the door for Sherwin to gain a little bit more share than you otherwise would perhaps on the West Coast? And if so, are you allocating resources any differently? Or might anything change operationally to take advantage of that void before your competitors act to do so?

James Jaye:

Yes. I think a very aggressive approach, as Heidi says. We've been making the investments. And I would tell you, Kevin, Kelly-Moore, amongst all of our competitors, we're competing with all of them all of the time. And so they've certainly been on our radar, certainly been aggressively going after them for many years. We're going to continue to accelerate here and see that as a great opportunity. Thank you, Kevin.

Garik Shmois:

Hi, thanks. Just a clarification question for me. It sounds like you have the Paint Stores price increasing your guidance in advance of the Feb 1st implementation date. Just hoping you could confirm that. And then maybe just speak to the pacing of gross margin expansion as the year unfolds?

James Jaye:

Thanks, Garik.

Adam Baumgarten:

Hi, thanks for taking my question. Just on the new res market, can you maybe remind us what the typical lag between a start and when the paint sale gets made? And I guess, beyond that, have you at least been seeing the declines in that market for you guys to moderate as you move through the back half and into the first half of next year?

Allen Mistysyn:

Yes, Adam. I think what our expectation is as new single-family starts, it continued to improve. Our first half will be -- one, just to be clear, if you look at 2023, the new single-family up starts were down significantly. As Heidi talked in the opening, we were down only slightly, which tells you we're taking share in that market, and we expect to continue to take share in that market. Our national account team, along with the field of Paint Stores Group field organization, do a terrific job at servicing those customers and adding tremendous value to those large national, regional builders and even local custom builders. So that being said, we are going to go up against a tougher comparison in our first quarter. So we do expect to be not as strong in our first half. But then as we see these completion -- starts coming to completion where painting is at the end of that project or that house, we expect to see a stronger second half.

Operator:

Your next question is coming from Eric Bosshard with Cleveland Research Company.

Heidi Petz:

Yes. I would say the conversations, as we mentioned in the earlier prepared remarks, we do this with our customers. And so as we took this out towards the end of last year, it was making sure that they understand why we're going out with this, but also making sure that they're prepared to pass this along and make sure that they're not absorbing that. I think the conversation here quickly becomes making sure that there's a greater outcome here for a focus on the premium products. And that's what we're going to continue to focus on.

Heidi Petz:

The other piece I would mention on that is we talk about value and that we're out demonstrating our value to these contractors every day. And so when we bring a price to them, Eric, it's -- we're not having a price conversation. We're making sure they understand holistically. Again, I'll go back to my earlier comments in terms of access to the rep, the store-to-store consistency and our ability to help with them with leads, help them with bidding activity. So it's a very different discussion than I think many others in our industry are having.

Operator:

You final question for today is coming from Patrick Cunningham with Citi.

Heidi Petz:

I would say they're normalizing. I don't have a lot of color. I think as you look at some of the visibility into backlog, it's not as long as we have with other segments such as commercial. So to Al's earlier comment, we'll -- like everybody else, we'll know more in the next quarter or two. But at this point, it's pretty limited in terms of future visibility. So the base characteristic would be that it's normalized at the current state.

Operator:

We have reached the end of the question-and-answer session, and I'll now turn the call over to Jim Jaye for closing remarks.

Operator:

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Operator:

Good morning. Thank you for joining the Sherwin-Williams Company's review of third quarter 2023 Results and our Outlook for the Fourth Quarter and Full Year of 2023. This conference call is being webcast simultaneously in listen-only mode by Issuer Direct via the internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com beginning approximately 2 hours after this conference call concludes. This conference call will include certain forward-looking statements as defined under the U.S. federal securities laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date of which such statement is made and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the company's earnings release transmitted earlier this morning. After the company's prepared remarks, we will open the session to questions. I will now turn the call over to Jim Jaye, Senior Vice President, Investor Relations and Communications.

Heidi Petz:

Thank you, Jim. I'll begin with the Paint Stores Group. Third quarter Paint Stores Group sales increased 3.6% against the challenging 21.5% comp. The increase was driven by continued effective pricing and higher Pro architectural volume, excluding New Residential. Segment margin improved sequentially and year-over-year to 25.9%, driven by pricing discipline and moderating raw material costs. Protective & Marine was the fastest growing in the quarter, driven by strong volume as sales increased by a double-digit percentage against the mid-teens comparison. Industrial flooring, infrastructure and oil and gas applications remain key drivers. In our Pro architectural end markets commercial sales were strongest, increasing by a high single-digit percentage versus a high teens comparison. Residential repaint sales increased by a mid-single-digit percentage amid continued softness in existing home sales and against a 20% comparison. While this is a solid performance in the current environment, we are not satisfied, and res repaint continues to be our largest opportunity for growth. Property maintenance sales grew by a low single-digit percentage against a mid-20s comparison. New Residential sales were down mid-single digits with volume down high single digits against the mid-20s comparison. As we've previously noted, we anticipated New Residential would be challenging near term, given prior softness in single-family starts. We expect our continued share gains and new account wins to become more and more apparent as starts improve. Our DIY business was down low single digits against a very difficult low 30s comparison. From a product perspective, interior paint sales were up low single digits and exterior paint sales were flat, both against double-digit comparisons in last year's third quarter. Sales in our Consumer Brands Group decreased by 4% in the quarter, primarily due to the divestiture of the China architectural business and softer DIY demand in North America, which was partially offset by selling price increases. Sales in North America, our largest region, decreased by a mid-single-digit percentage against a double-digit comparison. The Pros Who Paint category continued to grow, while DIY demand remained muted by inflationary pressures on consumers. We continue to invest here with our strategic retail partners for growth. In other regions, sales were up high single digits in Latin America and low double digits in Europe. Sales in China were down high double digits as we completed divestiture of the business on August 1. Adjusted segment margin was 13.8%, which was lower than a year ago, primarily due to lower sales volume and lower fixed cost absorption due to lower production volumes. Sales in the Performance Coatings Group decreased 1% against a low teens comparison. Volume decreased by a high single-digit percentage, but was partially offset by positive low single-digit contribution from pricing, FX and acquisitions. Adjusted segment margin increased to 19.1% of sales, primarily due to pricing discipline and moderating raw material costs. Sales in PCG varied significantly by region. Sales were strongest in Europe and increased by a mid-teens percentage. Latin America sales increased by low single digits against a mid-teens comp. North America sales decreased mid-single digits against a 20% comp. Demand in Asia remained weak, with sales down double digits against high single-digit growth a year ago. From a division perspective, growth was strongest in our Industrial Wood business, which was up by a low double-digit percentage against a mid-single-digit comparison. This growth reflects our ICA acquisition, share gains and a potential bottoming of New Residential construction. We expect to gain further momentum in this business. As we closed October 1st on the previously announced acquisition of Germany-based specialized industrial coatings holding comprised of the Oskar Nolte and Klumpp Coatings businesses. We are gaining share and seeing steady demand in Auto Refinish, where sales increased by a mid-single-digit percentage against a high single-digit comparison. Sales in Coil and General Industrial both decreased by low single-digit percentages against challenging comparisons and vary widely by region. Packaging sales were down by a mid-teens percentage against the high single-digit comparison. We anticipated this decline given the near-term destocking by brand owners that we described earlier this year. Packaging sales in the quarter were also slightly impacted by the fire at our Garland, Texas plant. Our business continuity team is executing our contingency plans to minimize customer impacts from this event near term. Longer term, we continue to feel very good about our position and growth prospects in this end market, and we expect to bring additional capacity online at our , France plant by early 2024. With that, let me turn it to John for his comments on our outlook for the fourth quarter and the year.

Operator:

[Operator Instructions]. Your first question is coming from John McNulty from BMO.

Heidi Petz:

Yes. I think you make a great point here. I want to take a minute before I jump right into res repaint, which I absolutely will and just put this a bit in perspective. You heard from some of our prepared remarks that when we look at our performance in general, and we're posting some stronger results up against really aggressive comps last year. I think that's an important piece that we anchor in as I get into the res repaints. repaint certainly New Res being up against over 20% comps here and still in this environment, continuing to post. So we're really proud of the team to be able to overcome some of that. So I think if I just jump right into Res repaint, I'll let you know that yes, we are gaining share in this market. Demand does vary depending on a few variables. I think if you look at this and separate a bit, those contractors that are more established and well-known and are more experienced in marketing their business, they've got the scale and they're confident in their backlog. I would say that's more so true for them than those that have less experience being able to put that type of focus on in marketing their business. So I'd say there's a bit of a variance there. But we look at this importantly. The adversity that these contractors are facing in this choppiness is also an opportunity where I believe that it makes our stores and our reps even more valuable as we're helping them navigate through a lot of this uncertainty and helping to intercept what it is that they're trying to accomplish in their business, whether it's leads or making sure that we're helping them finding ways to be more efficient in their process. So I think if we've seen this movie before, we're ready for what's ahead. We're putting investments in. John referenced earlier in the SG&A that you see, and I'll take you back. We saw this coming in 2008 and 2009. And making sure that what came out of that was our desire to be well positioned and New Residential does recover, that we've got all the investments in place here to continue to drive res repaint. So this is an opportunity where, where and I would say when, our model stands out and when we're able to gain a lot of share.

Allen Mistysyn:

Yes, John, this is Al Mistysyn. And we're in that part of the year where we're going through our operating plans. We're reviewing really demand outlook with our suppliers. I know we've gotten a lot of questions about oil ticking up, and that has to be up for a period of time before we see that flow through our raw material basket. I think what you will see is the other cost input items increasing, I think merit increases will get back to a more normal level, but you've got health care, freight, some of the things going on with LTL carriers that are driving our overall costs up. So as we typically do, we push back and look for offsets as much as we can. And then when we can't -- don't feel like we have an offset and we need to go out with price, we'll tell this to our customers first and, then we'll talk to the Street. So we're going through that process, and we need a little more time to figure that out, and we'll let our customers know and then we'll come back and let the street know.

Vincent Andrews:

Wondering if I could just dig into the SG&A a bit more. Understand completely and appreciate what you're doing this year. But how do we think about that into '24, both in terms of what level of increase is realistic for next year, presumably SG&A is not going to go down, but should it grow a lot less than normal just given the big step up this year? And then how do we think about from the outside over the next couple of years measuring the return on that? Is it simply going to come through the volume line in Paint Stores Group, or do you think it's going to be about margin or both? As we -- we're here 2 years from now, and we do a look back, what do you want us to see specifically in the P&L?

Allen Mistysyn:

Yes, Vincent, I would say certainly, as we annualize costs or the investments in our long-term growth initiatives, you're going to see that in the first part of the year. But I'd highlight, if you look at our SG&A sequentially second quarter to third quarter, even though we kept investing in Paint Stores Group and reps, Performance Coatings Group sales and tech service reps and you have investments in the Pros Who Paints. We saw those offset by reductions in our G&A costs or admin SG&A so that we're trying to figure out ways to continue to drive G&A down to offset the incremental cost of those investments. And yes, we will absolutely measure the return. But as we get into 2024, we're going through our budgeting plan. We're going through key initiatives across each of our functional areas, and we'll keep driving both those costs lower to help pay for the incremental investments.

Jeffrey Zekauskas:

I know that the year-over-year price comparisons are less positive than they've been. But when you look at sequential pricing from the second to the third quarter, were your prices down sequentially in any important product area?

Heidi Petz:

Jeff, I would add to that as well. I think our effectiveness is at a record high, and I give the team a lot of credit because it's not just about holding it, it's about demonstrating that value every single day with our contractors.

Allen Mistysyn:

Jeff, I don't know I'd go that far. As I mentioned earlier, I think we have to look at the -- market is still demand, supply driven. We're working with our suppliers to develop what does industry demand look like across each of the regions. And I think that's going to be a bigger driver of raw material pricing as we get into 2024. I think as we mentioned on our second quarter call, we expected our third quarter to be our biggest year-over-year change in raw material costs, but certainly, they're going to be down in our fourth quarter as well.

Gregory Melich:

I had a couple of questions. One is, how much did the volume decline year-on-year hurt gross margins in the quarter?

Gregory Melich:

So it may have hurt, but not as much as you think, given the mix of where the volume decline was?

Gregory Melich:

Okay. And then I guess my follow-up question is more specifically on architectural. Could you give us some update on what the backlog that you're hearing about or what it sounds like from the PROs, particularly in resi repaint, you mentioned how new residentials weak, but I'd love to hear more on the new res -- I'm sorry, the resi repaint side.

Operator:

Your next question is coming from Ghansham Panjabi from Baird.

John Morikis:

Well, I think I'd describe it this way, that there's some uncertainty given the challenges and interest rate can have on our market. And I think Heidi and the team are really focused on one very clear mission. We're going to outpace the market. And we've got confidence in the approach that we're taking, the services that we bring to the products that we are introducing. And quite frankly, we're also taking advantage of other opportunities within the market. We've got competitors that are changing models as an example. And our simplified approach of dealing with 1 Sherwin-Williams stores as it relates to the painting contractor, we believe adds value. So the investments that we're making will enhance that on top of the organic growth that we expect from our stores. And so we're taking advantage of market conditions where Heidi just mentioned some res repaint customers that may not have had experience going through a cycle yet. They are now turning to our people for guidance and support on how do you begin advertising. In the past, they just park their truck in front of a car -- I'm sorry, a truck in front of a house in the neighborhood and all the neighbors would flock in. They need help right now. And so they're turning to our people, and our people are playing an important role. And so when we look at what's happening with interest rates, there's some choppiness, but we also believe it creates opportunity. And we talked openly about adversity creates opportunity at Sherwin, and we're capitalizing on that.

Ghansham Panjabi:

Got it. And then in terms of free cash flow allocation, I guess, going back to the fact that interest rates are much higher. It looks like you have about a little over $2 billion of debt due for refinancing between '24 and '25. How are you thinking about the terminal sort of balance sheet leverage for Sherwin-Williams at this point, given the changed interest rate environment?

Operator:

Your next question is coming from Arun Viswanathan from RBC.

Heidi Petz:

Yes. I think, first and foremost, I think it's indicative that our strategy is working. And when we look at this business and this portfolio, it's really important. I'll share with you what we talk about internally, which is we're not trying to be all things to all people. And so when you look across these businesses, making sure that the discipline and how we're thinking about investment, the discipline and when we're investing is certainly a key part of this. So maybe just a little bit of across some of these divisions on the -- John, rather jump in as well. You start with -- you mentioned Industrial Wood. There's been a lot of wins here against some regional competitors. And while we mentioned earlier, U.S. housing is continuing to soften. We think this is an opportunity for us just coming out of completing some key acquisitions that we mentioned in our prepared remarks, with Oskar Nolte and Klumpp. It feels like we're in a really good position here to continue to drive increased value and return of value to our shareholders. Our gallons per day appeared to have bottomed out in all regions, again, so as the New Residential swings back, we expect Industrial Wood to absolutely come along for the ride there. I'll comment briefly on Automotive Refinish. I think importantly, we've had some really good share gain here. Year-to-date installs in North America have been up strong double digits, and our core users are growing. We talked a bit about our Collision Core technology and business. That momentum and adoption is continuing. And this is a suite of digital tools and solutions that truly is helping to benefit our business here. And I would also add along with our North America footprint. Similar think of our Paint Stores Group similar to that footprint. We're really able to have a better opportunity to control a more consistent customer experience beginning to end here with our Auto Refinish, which we think is an incredible differentiator for us. We talked a bit about General Industrial, heavy equipment market is rolling up, especially in Ag, and we continue to -- we expect to see that continue. Building products, general finishing is soft, but we've expected that the team is laser focused on pivoting and adapting to the market. In the Coil side, North America is holding up better than the other regions, still soft, but the team is working really hard against some new business wins. And then nearshoring in Mexico continues to create demand for us. So we're managing that across the regions very carefully. One comment on Coil as well. I would say that most of the China coaters are running at about 50% capacity. So we expect there to be some forward opportunity there as well.

Arun Viswanathan:

Great. And if I could just ask one follow-up on the M&A side. Given what you said in those different verticals, do you see the need to add capacity inorganically in any of those areas and similarly divesting businesses or what would you share on that side?

John Morikis:

The one point I do want to add, I don't know if Heidi mentioned, Packaging or not, but that's an area that we continue to invest. It's not so much needed through acquisition or M&A, Arun. It's more through our investment of a very unique technology, so the packaging business, particularly our V70 product is a very unique technology. And as quickly as we can bring capacity onboard, it's sold out. So I think that's an area that we will continue to invest in.

David Begleiter:

On your gross margins, they were near your long-term target in the quarter. And it sounds like it will be above that target in Q4. So given that, how high can it go this cycle? Can they approach or even exceed 50%?

Heidi Petz:

David, I would just add, very simply, there is no ceiling.

John Morikis:

Well, clearly, the consumer is feeling some pressure from an inflation perspective. And there'll be some normalization, if it's in wages increases -- have wage increasing or the spending patterns of consumers that will take effect. But the fact is this, that I'll remind you that paint is a relatively inexpensive, yet highly impactful opportunity for people that are interested in their home, staying in their homes to make a difference. And if people decide they're not going to sell the home, they're going to stay in place, it's a very viable option. I'll remind you the average home age now is over 40 years old. So there's more and more investment in the structures, people aging in place is impacting as well. And additionally, I would say, not only does it help the DIY, but as the population is aging, that generally will turn into more of a res repaint opportunity, which helps our position in that space as well. We don't want 70-year-old people out there scraping their gutters and eaves of their homes. But inside, yes, DIY is going to be an important part. There's a cycle, and we're playing the long game here, whichever way the table tilts we'll be there.

Joshua Spector:

I guess two ones, more for macro around the stores group. I guess, first, when I look at U.S. completion data for New Res, it looked like that was kind of flat, you guys reported down mid-single digits. I assume you get some pricing. I don't know if that's a regional divergence or something else you'd call out? Maybe I'll stop with that one first.

Joshua Spector:

Okay. I appreciate that. And just on the other side of it, when you think about the resi repaint side, not just Sherwin, but maybe the industry. So I mean we still have turnover down about 1/3 from the peak a couple of years ago. Has the industry fully digested that. So if contractor backlogs reflect that, have orders reflected that. And just -- I mean, how are you thinking that plays out into next year? Is there another leg down in the industry to normalize to that, if we don't have a step up, or have we already reflected that in the current run rate?

Heidi Petz:

And I would add to that, too, Josh, I think there's a lot of confusion in the marketplace right now. And our opportunity, John mentioned, adversity is our friend. And I couldn't agree more with that. Our strategy is working here, and I'll take you to -- we talk about our control distribution platform. We owned the stores, we own the reps, the store manager owns that P&L. The store manager owns staffing, owns the culture of that store. And I think it's really important because when we talk about that relationship and the consistent experience we can offer these res repaint contractors, it's critical that they know exactly what they can get from the experience they can have at Sherwin-Williams. And so as they're coming in, as they are traveling, as they're trying to grow and take on more, our teams are prepared, trained and ready to get any tools that they need in front of them, to help them to become as productive and profitable as possible. So I'm really confident in how we are prepared to differentiate as we add value to this contractor.

Michael Harrison:

You have opened 36 new paint store locations so far this year. Is the target still 82/100? And are you seeing any delays in either the permitting process or the construction process?

Michael Harrison:

All right. And then within the consumer business, one of your competitors suggested that sell-in to the big-box retailers have been weaker than sell-out. It suggests that maybe there's been some inventory work down this year. Do you have any thoughts on how point of sale with some of your key customers as compared to your volumes into those customers? And I guess whether big box inventories at this point in the year are below where you would expect them to be.

John Morikis:

Yes. And I think that's really important. I'd like the way that Heidi frame that, that we gauge our success by how successful our customers are. And so we're actually working with our customers, encouraging them to manage their working capital so that they can put their cash to work and be more successful. And Al, maybe you want to talk a little bit about what the impact of that might be because we're trying to drive reasonable or acceptable working capital, not only for us but for our customers.

Heidi Petz:

And one piece I would add to that as well, I go back to Al's point here. We put by design very intentional capacity to work here so that as we're partnering closely to manage and optimize working capital and inventory with our partners that we've got the confidence that we can have the capacity to build the inventory in time for the season ahead.

Patrick Fischer:

John, you've often talked about things like sprayers being a good leading indicator what you're seeing in your stores with like a 1- to 2-quarter lag. What is that equipment sale telling you today about what the next couple of quarters holds for the store sales?

Heidi Petz:

But what we are seeing there too, despite the sprayers is the backlog of projects for our commercial contractors continues to be solid, well through the midpoint of next year. So getting back to more of that normal cycle. So good indicator of some growth there.

Heidi Petz:

That was just in Wood.

Kevin McCarthy:

Yes, I was wondering if you could comment on your administrative costs. It looks like they jumped up a bit in the third quarter. And in reading the commentary you called out 2 items, namely environmental expense and asset disposals. So a few questions would be, what are the nature and magnitude of those items? And would you expect that line item to come back down in the fourth quarter and beyond?

Kevin McCarthy:

Okay. And then as a second question, if your raw material costs were to trend flat from here, would it be reasonable to estimate that you could see relief in 2024, perhaps in the negative low single to mid-single-digit percentage range, or how would you frame that outlook for next year as it relates to raw material costs, specifically?

Operator:

Your next question is coming from Aleksey Yefremov from KeyBanc Capital Markets.

Allen Mistysyn:

No. I think that's going to be -- when you -- the bigger driver sequentially you have is the decrease in sales on the seasonality of that. I think what's hard Aleksey is, you look at our last 4 years, it has been choppy, really choppy quarter-to-quarter, including third quarter to fourth quarter. So I think you got to go back pretty far to find a more normal year. I think the -- like I said, the gross margin, I do expect to be higher year-over-year, but sequentially lower because of less of the tailwind in price. I think SG&A growth is probably higher in this year's fourth quarter sequentially than it has in past years because of the things Heidi talked about, about leaning in harder on, investments in our paint stores. And long-term growth initiatives within PCG and CBG. So that probably is driving some of it. And it is our smallest quarter. So some of these year-end adjustments have a bigger impact on our fourth quarter than they would on our third quarter.

Heidi Petz:

So I'll take that. It's a great question. I think you're spot on. And I would say that there is -- go back to my comment earlier, great amount of confusion out in the marketplace, and this is an opportunity where our consistent strategy, I think, is on full display. And I have a lot of confidence in Justin Binns and his organization and the depth of leadership that we have there. This team is well prepared to not only execute our strategy, but to adapt to market conditions around us, and I think we've got a competitive advantage in doing that. And I suppose if we didn't own 5,000 stores and 4,000 reps and have strong customer relationships and data that can help our customers be more successful. I think we too might try to stitch together a strategy that helps to get products placed on the shelf. But this is really an opportunity for us to do what we do well and to demonstrate to our customers, a very consistent experience with Sherwin-Williams. We're working with them closely to help fight through a lot of the complexity out there and make sure that they're coming out winning. So I do think where we're seeing competitors make different choices on store closings or channels, we think, again, this uncertainty is our opportunity.

Garik Shmois:

Within Pro architectural, you called out strength in commercial. I'm just wondering what drove that. It sounds a little contrary to some of the commercial data points that emerged over the course of the quarter. So just curious as to the outperformance there.

John Morikis:

Yes. I think if you look at the commercial piece, that's where we have the longest visibility and the longest lead time. So we feel pretty comfortable about what we're seeing in terms of completions into first half of '24, as Heidi said. I think you might be referencing things like the Architectural Billing Index, which are choppier now. That's why we're saying the back half of '24, we might start to see a little softness, but feel very comfortable again about our ability, if that was to occur, our ability to fill those gaps with perhaps, New Res is starting to come back. We'll put our foot on the gas with the res repaint, property maintenance, et cetera.

Allen Mistysyn:

No, Garik, it's primarily -- well, it's primarily 2 things. The sequential decline in volume. But also as we have talked about -- and I mentioned on our working capital, we're targeting a year and inventory level so that when we come out into 2024, our inventory is in great shape, which means we tweak our production volumes to make sure we stay in line with that targeted inventory levels. So with production gallons being down sequentially a low single-digit number, that does have -- is a headwind for us in this segment.

Adam Baumgarten:

Just one for me. Just thinking about Europe, it seems like it was a bit better year-over-year across multiple segments. Just curious if that's just comps or maybe you're seeing some kind of bottoming or even improvement in demand on the ground there?

Allen Mistysyn:

Yes. I think 4 of the 6 to your point, had some strong comps. But 4 of the 6 had double-digit sales gains in Europe in Q3. And I think putting a bow on what Heidi just said, we're doing it the right way. We're focused on the right segments where we can bring value and that our customers appreciate that value and are willing to pay for it. We're not in this for practice. And so we're growing and bringing value to our customers, and we're open about the fact that while we bring value to them, our shareholders need to be rewarded as well. That's why we work as hard as we do. So it's a good performance in Europe, and it's driving both the sales and bottom line as a result.

Stephen Byrne:

What fraction of your resi repaint volumes would you say the Sherwin-Williams paint was selected by the contractor versus selected by the homeowner. And clearly, you've highlighted a multipronged approach going after that contractor for loyalty. What would you say you can, perhaps do more of to drive loyalty with the homeowner selecting Sherwin that could help you also drive share gains.

Stephen Byrne:

And how would you rank the resi repaint end market in Paint Stores as an opportunity to share -- to gain share as compared to new commercial property managements and new home construction. How would you rank those in terms of potential share gains?

Operator:

Your next question is coming from Eric Bosshard from Cleveland Research.

Allen Mistysyn:

Yes, Eric, here's how I would think. Here's how we think about it. And as you know, we manage operating margin, not specific to SG&A. And as this year showed, our volumes held up better than what we had planned coming into the year. Our gross margin performance and gross margin expansion was a little bit better than what we had coming into this year. So it allowed us the opportunity to lean in and put more investments in than we normally would. We are certainly going to have growth in investments next year. I would say, back to a more normal level. And then as we see the year unfold with volumes and gross margin and what we see happening going into 2025, that will dictate how much more investments we put into each of those segments.

Eric Bosshard:

Helpful. And then, Al, if I could follow up. In terms of managing the operating margin, is it fair to say as you solve for '24, you're managing these different levers for some degree of operating margin expansion. Again, I'm not asking you to comment on '24. I'm just curious how that thinking can play out.

John Morikis:

We'll outperform the market.

Operator:

Your next question is coming from Michael Sison from Wells Fargo.

John Morikis:

Yes, Abigail, Happy to do that. So as we said, the third quarter was likely the biggest benefit for us from a year-over-year perspective. I would say, as we've commented, the petrochemical side of the basket is where we've seen some relief. TiO2 have been a little bit stickier. But I think Al said it well earlier, as you think about going forward, oil is moving around. And while it hasn't necessarily made its way into those commodities yet, I think it's to be determined of where that heads into next year. So right now, it's again, petrochemical side has been probably the greatest relief. TiO2 a little bit stickier. We feel very good about our ability to hold on to the pricing that we've put in the marketplace given the solutions we're providing our customers. And we'll have a better update on where it goes as we get into January.

Heidi Petz:

Well, it's -- I would say this as similar to what we talked about before. We won't get into very specific details here. But I think it really is important that we're in lockstep with the demand environment, making sure that -- John mentioned this earlier, that as our customers are working through some choppiness right now that we've got capacity continuing to come online through our brand site. And as soon as we have that capacity, we're confident not just in our ability to have the capacity to satisfy that demand. But what's behind that are the technology that the market is looking for. So we're very confident that we're going to have that online here shortly.

Operator:

Your next question is coming from Patrick Cunningham from Citi.

John Morikis:

Well, we're clearly seeing improvement in share gain in our PSG, our stores business. Heidi mentioned the comparisons to last year in the quarter, we're all very strong, nearly 20% comparisons, and we've continued to perform very well even against that backdrop. And the investments that we're making are easy to point to as key drivers for future share, but I drive it back to the core business that we have and the expectations we have for organic growth. Heidi mentioned quickly in one of the M&A questions about that we don't need acquisitions. And in stores, when you look at our business, you could arguably say that this core business in itself is going to be a fantastic show to watch, and it will be. But our expectations are to accelerate growth even faster. So the investments that we're making will allow us to capture that even quicker. As it relates to our consumer business, we've got wonderful partners. We're committed to their growth. Heidi mentioned things like capacity and helping them to drive down their inventory with the reassurance that we have the ability to respond to them. So from the back side, we're clearly trying to help position them financially. But more importantly, we're introducing new products. We're bringing innovation. We're adding people in our team -- on our team to help train their team members. And we do believe there is a continued opportunity to convert people that might be in our customers' stores as shoppers, we can help turn them into buyers of products in our category. So we're excited. This is a type of market that most don't hope for, I would say, arguably, we don't hope for this type of market. But we know what to do, and we're going to turn it into advantage to our shareholders.

Aron Ceccarelli:

I have one on product simplification. You have been doing quite a lot of simplification inside and outside the can, reducing formulation and also rightsizing the number of SKUs. Maybe can you help me understand a little bit better where are we in this process? And if you can quantify what has been done, and where can we go from here?

John Morikis:

And I think Heidi's strength here is, and she's a humble person, she won't say this. But I will say this, I am a front row to this show. You've got a leader that is driving the opportunity to the bottom line. She's got a very respectful approach to our traditions and to our norms. Our 157-year-old company, there's a lot of things that we do and have done, and many of them are right. And we've got an opportunity, I think, to take a look at those traditions and norms and ask if there's a better way to do that. And this simplification effort is a great example of that. I think our company is going to come out much stronger, much more efficient, better responsiveness to our customers, and an opportunity to pursue business in new ways. We didn't really get into our digital approach, and the approach that Heidi is leading there to our team to better use the data that we have available in ways that we just haven't in the past. We've scratched around the surface but there are some terrific opportunities that she's leading that I think will further differentiate Sherwin-Williams.

Heidi Petz:

Yes. The underlying demand is solid. I think we've seen some delayed CapEx and a lot of deferred maintenance that is now being addressed and we'll continue to see that coming into next year. I would say relative to apartment turns are improving, a bit influenced by the return to travel of the school driving some of that demand. But much like our momentum in New Residential, we're demonstrating our unique ability here to really serve the property management segment with a consistent experience that I believe only Sherwin-Williams can deliver. And regardless of the size or the location of these contractors, our goal is consistently the same. It's -- we want to make it as convenient as possible to leverage our stores, our reps and our segment-specific tools and solutions here. So we're taking share. We're increasing our number of sole preferred or exclusive contracts, if you will. And we're confident that we're going to continue with our foot on the gas going forward.

Heidi Petz:

Great. Thank you. So I expect to close out this year with momentum. I think you've heard that loud and clear here. We believe that we're growing share and -- we are -- our humility takes us to the point where we're saying, we recognize that there is no finish line. So we're determined to move forward here. Going forward, as we look at 2024, here's what I can tell you, I have clear line of reality. There is going to be some choppiness that we talked about ahead. But we have seen this movie before. And my confidence is in this team, our ability to execute on our strategy that we know is working, our confidence that our key investments that we know will deliver shareholder value. And those combined together is what gives me confidence that we're going to outperform the market. Any additional questions, please feel free to reach out to Jim and Eric. And we'll conclude with just looking forward to talking with all of you in January about our outlook and our plans and have a wonderful holiday.

Operator:

Good morning. Thank you for joining the Sherwin-Williams Company Review of Second Quarter 2023 results and our outlook for the Third Quarter and Full Year of 2023. This conference call is being webcast simultaneously in listen-only mode by Issuer Direct via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com, beginning approximately 2 hours after this conference call concludes. This conference call will include certain forward-looking statements as defined under the U.S. federal securities laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the company’s earnings release transmitted earlier this morning. After the company’s prepared remarks, we will open the session to questions. I will now turn the call over to Jim Jaye, Senior Vice President, Investor Relations and Communications.

Heidi Petz:

Thank you, Jim. I’ll begin with the Paint Stores Group. Second quarter Paint Stores Group sales were ahead of our expectations and increased 10%, driven by mid-single-digit volume growth and continued effective pricing. Segment margin improved 280 basis points to 24.3%. Growth was led by our protective & marine business, which was up strong double digits and was driven by industrial flooring infrastructure and oil and gas applications. In our pro-architectural end markets, the strongest performers were commercial and property maintenance, both of which increased by double-digit percentages. Residential repaint was close behind with sales up by a high single-digit percentage. Demand in this market is being somewhat tempered by the extended period of weak existing home sales. New residential sales were flat against a double-digit comparison, reflecting the softer start that we saw at the end of last year, which have continued into this year. As we’ve previously noted, we anticipated new residential would be challenging in 2023, though we are performing better than the market as we continue to focus on new accounts and share gains. Our DIY business was up strong double digits, albeit against a softer comparison where sales were impacted by supply chain challenges. From a product perspective, interior and exterior paint sales were both up high single digits, with interior sales growing faster and representing a larger part of the mix. Sales in our Consumer Brands Group also exceeded our guidance and increased by 5.1% in the quarter, primarily driven by mid-single-digit pricing. Sales in North America, our largest region, increased by a low single-digit percentage. We continue to invest here with our strategic retail partners for growth. In other regions, sales were up strong double digits in Latin America and Europe. Sales in China were down double digits, and we expect the previously announced divestiture of the China business to be completed in the third quarter. Adjusted segment margin was 15.7%, up 470 basis points year-over-year. Sales in the Performance Coatings Group increased less than 1% against a strong 15.2% comparison. Volume decreased low single digits but was offset by mid-single-digit increases in price. Adjusted segment margin increased 420 basis points to 18% of sales, which is within the range we have been targeting for this business. Sales in PCG varied significantly by region. In North America, sales increased low single digits against a nearly 30% comp. Sales in Europe were up mid-single digits. Latin America sales were down less than 1%, also against a strong comp of over 20%. Demand in Asia remained weak with sales down double digits against a soft period a year ago. From a division perspective, growth was strongest in Auto Refinish, which is up by a high single-digit percentage followed by General Industrial, which was up mid-single digits. Industrial wood sales were up less than 1% as softness in new residential continued to impact demand for furniture, capetry and flooring. Coil sales were down mid-single digits driven mainly by Europe, which was impacted by last year’s Russia exit and against the nearly 40% comparison. Packaging sales were also down low double digits against a 20%-plus comp. We anticipated this decline given the near-term destocking by brand owners that we described on our last call. We continue to feel very good about our position and growth prospects in this end market. With that, let me turn it to John for his comments on our outlook for the third quarter and the full year.

Operator:

[Operator Instructions] Your first question is coming from Greg Melich from Evercore ISI. Your line is live.

Heidi Petz:

Yes, hi, Greg, I think it’s a great question. I think if you look across our entire enterprise right now, I would just qualify this or characterize this as choppy. I think that’s true both by division, by region. When you break it down, our volume is down low to mid-single digits. If you look at Paint Stores Group alone down low single-digits, I would say that’s primarily due to the new residential slowdown but confident in the increasing starts that we’re seeing. Remember, that’s against a really tough comp of 19%. That’s a bit offset by some of the heavy impact that we’re seeing with both PCG and CBG, but I’m confident in our ability to drive above market growth here.

Al Mistysyn:

Yes, Greg, this is Al Mistysyn. And we’re really pleased with the performance of our gross margin. As a reminder, our target is midterm, 45% to 48%. As we have talked about in the past, we – in our raw material inflationary environment, we put price in to offset those dollars. And then as raw materials moderate, we start seeing the benefit of that pricing to increase our gross margin and helps us cover the continued investments we make to help our customers drive value in their business. So I’d expect the sequential gross margin to be similar to what I saw in this – what we saw in the second quarter. Price, as you know, we’ll start annualizing the price increases in our third quarter, specifically the September 10% in Paint Stores Group plus the other items, other segments that have put pricing in. So for the full year, I think our gross margin, depending on where Paint Stores Group volume is could be in that 45% to 46% range. And then as you know, we’ll evaluate that 45% to 48% range over time. And as we get consistency in that range, look to raise the bar and move that target up.

Greg Melich:

And it sounds like even with the lower raw material expectation for this year, your pricing expectations are unchanged. Is that fair?

Greg Melich:

That’s great. Good luck.

Operator:

Thank you. Your next question is coming from Vincent Andrews from Morgan Stanley. Your line is live.

John Morikis:

Yes, Vincent, let me kick it off kind of my thinking on it and then I’ll ask Al to get into some of the details. First, we are going to adjust our investments to market conditions. And these are things that we monitor closely. We reminded the trends in the market, as you just mentioned, activities and opportunities, cost, even the activities of our competitors. And we’ve seen this before. We’ll capitalize on the market opportunities, the competitive shifts and missteps that our competitors make, these are all opportunities. So to your point, as we see raw material trends and these are part of our data set, all roll into what you should expect to see from Sherwin-Williams. We’re going to be aggressive. We’re going to drive market share and invest in our businesses. And I think it comes down to when you have confidence in your strategy and confidence in your leadership team like we do, you can invest. And while others are adjusting their strategies, we’re going to take advantage of any shifts. We will be on the attack.

Vincent Andrews:

Thanks, guys. Appreciate it.

Operator:

Thank you. Your next question is coming from John McNulty from BMO. Your line is live.

John Morikis:

So let me start with New Residential, because I think that’s an important piece. And maybe what we will do here, John, is I’ll start with New Residential, maybe talk about Commercial and then I’ll ask Heidi to talk about some additional segments because to be truthful with you, we’re very pleased with the execution of our team. We talk a lot about our secret weapon. And we talked about the recruitment and retention of this team. They are truly executing. We couldn’t be any more proud. In New Residential, I think it’s clear to all of us, there’s pressure in the new residential space. Our flat sales in this quarter, I believe, are indicative of the share gains we’re executing. We talked about penetrating that top 100 builders for the last couple of quarters. And quite honestly, we’re working on that, and we’re experiencing terrific success, in fact, even deeper into some of the more custom homebuilders as well. It’s growing, and we expect to continue to grow there. We continue to execute on our strategy of bringing solutions to these builders to make them more successful. And I think that’s the key and core behind everything we do. So in the builders area, the efficiency that we’re bringing in our supply chain to help them in innovation, quality, consistency, even as they’re adapting into different substrates to help defray costs. We are working with them to ensure that we have the right coatings for them. Importantly, I just talked about our people. I think our stores and our reps in this area – they’re doing a fantastic job of staying close and in contact with not only our builders, but their applicators, which is very unique. And we’ve got a distribution platform that wherever our builders are building, whatever developments they’re pursuing, our stores are where they are building and where they might want to build. So we’re not out there promising if you will invest here, we’ll invest with you. Our people are there and our assets are there, and we’re capitalizing on that. So we’re growing share. We have not experienced the depth of decline, as you mentioned, we originally projected. Although I would say we do expect to see softness in the second half. You talked about our strategy here and our commitment to favorably position the company and we think this segment absolutely demonstrates that. In the commercial side, I’d say we’re experiencing very good performance. And again, I think it highlights the advantages of our controlled distribution. We expect the balance of 2023 to be strong. We’re really focused on the sub-segments inside commercial going forward. So again, really leveraging the value of this controlled distribution model. Our reps and our specification teams are really dialing into those areas that provide opportunity. And even within those areas that might be strong now that could dry up even in those areas. We know that there will be opportunities could be in tenant build-out or wherever in commercial, it might shift we’re going to be there. So again, our focus on applicators, the specifiers and the owners, we believe, will pay off for us. Res repaint is another area that I think is really important to talk about. Let me turn it over to Heidi.

John Morikis:

Well, property maintenance, I think, is another area that performed a little bit better than we expected. And we have a lot of confidence here. A lot of the delayed maintenance we believe now is being addressed. Apartment turnovers are strong and bodes well for us. And again, I think even the idea of return to travel, office and school all help. And as we leverage a national platform of just up stores and reps to be able to really capture that business as well. So it’s a good business for us and one that performed better as well. Protective & marine was another area that in our stores that performed stronger than I would say we expected. I’ll say that here, not to our team. We expect more from our team would be the answer I’d give them. Our core business was very strong, double-digit growth. But we’ve been investing in this business, and our expectations are high of this team. We’ve got terrific leaders in this area, and we’ve been making investments in areas. We’ve announced a number of acquisitions, for example, in flooring. That’s helped us get into some really key opportunities in food and beverage, pharma, even airport hangers, all have been very strong. Energy has been very strong for us. It’s another great example where we focus on everything from extraction to processing as well as alternative energy. Government activity here is trying to stimulate has been good for us as well. We see business in the area of mega plants for chips that have been good for us. as well as I mentioned, alternative energy, where we really have done a very nice job of bringing technology from all aspects. We’re taking into wind farms, for example, there is one that’s been promoted in the Northeast. It’s going to be a terrific opportunity to bring our marine coatings as well as our heavy-duty petrochem technology to bear in a very unique way. So we’re bringing technology. We’re bringing a strength of a distribution platform, specifications and it’s driving business that the business is very strong.

John McNulty:

Great. Thanks very much for the detailed color. Appreciate it.

Operator:

Thank you. Your next question is coming from Christopher Parkinson from Mizuho. Your line is live.

John Morikis:

Yes, Chris, thanks for your question. I’ll start and kick it to Al. You’re right. We do feel very good, very proud of Karl Jorgenrud and his entire team. That leadership team is really focused on doing this the right way. So the solutions that we’re bringing to our customers and the focus and discipline that we’re bringing is part of the strategy we keep repeating. And as we do that, we bring value to our customers and we’ve been successful. The discipline in that is that if not every gallon is necessarily a good gallon for us as a result. We’re focused on key segments, key customers. We’re trying to introduce technology and services that help them to make more money. And again, as a result, we believe that our shareholders should participate in that. But the push is to make our customers successful and have discipline doing that. And that’s exactly what the PCG team is doing.

Christopher Parkinson:

Got it. And just a very quick follow-up, and also, quite frankly, a corollary of what you just said. I don’t get to have myself with the next remark, but it seems things are generally progressing a little bit better than expected. Obviously, that’s reflected in the guidance range and so on and so forth. When we take a step back and you look at your portfolio, obviously, you’ve taken a few extra actions of the last 12 to 18 months in both divesting as well as acquiring. Can you just give kind of a very quick update on where you stand with that thought process? Are there any technologies which you still feel you’re focusing on? Are there still assets which you would consider divesting? Just given the actions over the last, quite frankly, 5 years plus? Any update there would be very helpful. Thank you.

Christopher Parkinson:

Thank you for your thoughts.

Ghansham Panjabi:

Thank you, operator. Good morning, everybody. John, as you kind of think about 2023 specific to Paint Stores Group, what do you think the common theme is as it relates to the volume outperformance across your various categories? I’m just curious, is the customer backlogs that were a bit stronger than relative to what you initially thought or market share gains or something else? And then on residential repaint, do you think that vertical could be directionally less sensitive to existing home sales on a go-forward basis relative to the historical baseline?

Heidi Petz:

Yes, Ghansham, I think the good question. In terms of the reliance on resale, I think that the inverse is true as well, which is that those that are staying in place, making sure that they are aware that this is really about the opportunity to raise the value of their home if they choose to stay. We mentioned earlier the inexpensive and highly impactful project. I mentioned the data earlier. I’d like to go back to that. I think it’s a great example of how we’re able to penetrate and not be reliant on the resale market. In terms of our ability to go back – I’ll give you an example, again, without getting into too much detail, mining for the data for those customers that haven’t bought paint in a while for customers based on a certain demographic that we know are more likely or a certain region that are more likely to reengage in the category. Mentioned earlier, our team, something that really differentiates us in this space is we’ve got 1,500 graduates every year that really own the P&L in their store, and they are hunting for this exact customer. So a lot of respect for the people out that are building these relationships and making sure that whether it’s a homeowner or a contractor making sure that we’re being very surgical in terms of how we approach these really important customers.

Ghansham Panjabi:

Got it. And then for my second question, on PCG, several categories seem to have been impacted by destocking across the various regions. Where are we in that process, do you think? You give some comments on packaging? What about the other major verticals? Thanks.

Ghansham Panjabi:

Thank you so much.

Operator:

Thank you. Your next question is coming from Jeff Zekauskas from JPMorgan Securities. Your line is live.

Al Mistysyn:

Yes, Jeff, I would say you are correct, maybe not quite high single digit on the second half, but close to it. Yes.

Al Mistysyn:

Third quarter, actually, it will be up our high – it will be the best improvement year-over-year.

Al Mistysyn:

Sitting here today, Jeff. We continue to talk about our pricing and our ability to maintain pricing as the raw materials moderate because of the solutions that we drive. I don’t think we’re ready to talk about incremental pricing for 2024. We have – we look at the total input cost basket to determine if we need a price or don’t need a price. And as you know, any price discussions we have we’d have them with our customers first then talk to the Street. So we have time to talk about 2024 over the next quarter and half quarters.

John Morikis:

Thank you, Jeff.

David Begleiter:

Thank you. Good morning. John, Al, how should we think about second half earnings in terms of the cadence between Q3 and Q4?

David Begleiter:

Very good. And John, one of your competitors announced a couple of homebuilder wins over the last few months. Why do you think they won that business and you may have lost that business? And overall, how is the competitive landscape in that portion of the business? Thank you.

David Begleiter:

Thank you very much.

Heidi Petz:

Thanks, David.

Mike Sison:

Hi, guys. Nice quarter. With the third quarter volumes potentially being down, do you think things are bottoming as I think about the fourth quarter volumes look like they could be flattish to maybe even up? And then – and how do you think about 24% volume growth next year? Do you think it’s – we could be in a position to start growing again?

Mike Sison:

Yes, I guess for quarter. I guess I’m trying to understand if you think things are bottoming here in the third and then potential for volume growth for the total entity maybe into the fourth quarter and into 2024?

Al Mistysyn:

Yes. I think on if you look at we said projected to be flat to low single digits. But when you look at the dollars, sequentially, they are pretty close. And that’s with new res declining more in our third quarter than we expected in our fourth quarter, which tells you we have some strength in our other segments that John and Heidi talked about, and it’s going up against the 21.5% comp last year. So when you think about the second half, Paint Stores Group has a tough comp, I’d say the other segments, as we talked about, are choppy, and it’s by business, by region. I think some businesses in certain regions have bottomed out. I think there is still challenges that we see in Asia Pacific. But as an example, Europe in our second half, we expect to do better than what we did in the first half. 2024, that’s a whole different discussion that we will have as we get into January on our year-end call.

Mike Sison:

Got it. Thank you.

Operator:

Thank you. Your next question is coming from Arun Viswanathan from RBC Capital Markets. Your line is live.

John Morikis:

Yes, Arun, I’d say I’ll jump in here. I think if you look at the points that Heidi is making, I think there is two points. You’re asking one very good question, but there is another element here that I want to tie to this. One is if you look across the various segments and say, okay, commercial, we see strong residential repaint, a little bit choppier with resales, but we can see out 6 to 8 months property maintenance strong. DIY has been strong, but it’s on a softer comps, so we don’t expect that to continue. I think all of those are opportunities for us to continue to grow market share, and we will. The other point, though, that I think she’s talking – that she spoke to that I think is important is coming through COVID and in the shortage we’ve worked much closer with our customers in ways that, quite honestly, I wish I would have had that opportunity when I was in a store. We’re now working collaboratively with what projects are taking place now, what’s next, even to the point where if it rains, my fallback is this position. And the fact that we’ve got our reps and our stores out there, close to the backlog and close with our customers closer than ever before is a terrific advantage that we’re trying to leverage. So by segment, I would say, yes, we see new residential likely to slow down a little bit as the slowdown works its way to the painting phase of the homes that weren’t started 8 months ago. Property maintenance, we’re really leveraging the fact that their CapEx money is freeing up. Our national agreements are opportunities for us and the others, as I described. So it’s a good market for us because there is a lot of diversity in the market, and that’s what we thrive on.

Jim Jaye:

Yes, Arun. So our raw material basket in the second quarter was down in that high single-digit range. And what was really driving that deflation for us, as you might expect, is the petrochemical side of the basket, resins, in solvents, even plastic packaging, the decline in some of the key feedstocks such as propylene, it’s now flowing through into the things that we’re buying, and we expect that to continue – this is a cycle that we’ve seen many times over the years. With regard to TiO2, your question there, those costs are still a little bit elevated for us, but we expect to see them starting to trend in a more positive direction as the year goes on. Some of the key input costs on TiO2 are elevated right now, chlorine being one of the main ones. And I’d also say some suppliers are also trying to manage their capacity a little bit more tightly. But with demand soft here, you’re going to see or we believe we’re going to see and expect to see some decreases in the TiO2 pricing.

Jim Jaye:

You bet.

Operator:

Thank you. Your next question is coming from Duffy Fischer from Goldman Sachs. Your line is live.

Al Mistysyn:

Yes. Duffy, I mean it starts with that sales outlook down mid-single digit from – for second half versus first half. Less price would be in that, so we have got a nice tailwind in the first half for price that helped drive our operating – our gross margin. And so you also see a lower volume, specifically in consumer and in our Performance Coatings Group. So I think as you would expect, you are going to get lower gross profit dollars. I do still expect gross margin expansion in our second half, not quite as good as year-over-year anyway that we saw in our first half because of our comps. And then you do get some help on the raw material reduction, but that is partially offset by lower fixed cost absorption in our second half due to lower production volumes. I think SG&A, even we talked about SG&A in the opening and being more aggressive at adding investments for our long-term growth strategy, both in stores, reps, field tech service reps. And the final piece these non-operating costs that I would call out that were – are probably going to be an incremental $60 million to $70 million headwind versus our first half because some of the gains that we had on sale of assets and marketable securities. So, I think those are the things that are driving that sequential movement.

Al Mistysyn:

Yes, Duffy, I will try to go back to a normal year, 2019. So, to your point, I am not sure what normal is. But I think as we continue to see growth in our Performance Coatings Group, that’s less seasonal. You might not see as big of an increase in our second half versus our first half as we move forward. But if we get back to the way Paint Stores Group brand, our consumer business brands and yes, you should typically see that.

Duffy Fischer:

Perfect. Thank you, guys.

Operator:

Thank you. Your next question is coming from Adam Baumgarten from Zelman & Associates. Your line is live.

Heidi Petz:

Yes, good question, Adam. I think there is a lot of growing – certainly growing interest here as it relates to how we are partnering with our strategic retail partners and certainly the investment that’s following that with a lot of confidence and growth to be gained there. And I won’t get into a lot of the details because I think those are certainly for our retailer partners to share. But I can tell you that the level of collaboration an alignment from the planning standpoint, certainly understanding how the calendar lays out, laying in key events throughout the year, making sure that the data is aligned, that the reps are aligned, that the structures are aligned. It’s – we are just getting started to hear and we have got a lot of confidence in where this can go.

Heidi Petz:

Yes, it’s a great question. I will tell you that, that’s going to be a journey onto itself. So, when you think about it, how we are kind of broadly defining this is truly looking end to end. Al mentioned this earlier, where we are looking to bring some efficiencies, certainly with our global supply chain team. Al mentioned the Performance Coatings Group, I would say true for all groups and for our supply chain as well, really understanding all the way from the raw materials you asked – the question was asked earlier, Jim mentioned how we are thinking about procurement in general. The conversations that we are having are I would say a lot more detailed relative to the sub-supplier level and making sure that when we step back and look at our supplier strategy, there is a distinction between strategic suppliers and transactional suppliers. So, we are having those very important conversations at the front end. And then if I take you all the way through, Al mentioned our rationalization efforts that are underway. But as you can imagine, as we simplify the basket, and continue the rationalization efforts from a customer-facing standpoint, it puts us in a much more optimized and efficient standpoint from an operational manufacturing logistics. And so there is a lot of milestones that the team is setting forward here. This will be a multiyear journey, as I mentioned, but I would expect that we will see some customer-facing updates as it relates to how we can compete with a more aggressive portfolio of products here in the short run. And then you will see that continue to show up to the bottom line as we move faster and faster towards automation and the like.

Adam Baumgarten:

Thanks. Best of luck.

Operator:

Thank you. Your next question is coming from Josh Spector from UBS. Your line is live.

Al Mistysyn:

Sure, Josh. As typically is the case as we get into the summer selling season, we will see a sequential decrease in our inventory gains, as you mentioned. I think you will see a sequential decrease in our third quarter, which is also typical. And then we will build inventory back in our fourth quarter to our targeted numbers that are similar to prior – similar to last year, but to more historic levels. So, I feel very good about where our inventories are at today. That being said, we will adjust production through the second half to maintain that targeted year-end inventory. I don’t want to get us too far ahead going into next year. So, we will monitor demand trends closely and adjust production schedules accordingly. We will try to push that working capital back towards our target by year-end of 11.5%. I think that’s going to be a little difficult considering accounts payables because of the lower production is what’s driving our increase over that 13%. But we will get that working capital back towards the target of 11%, 11.5% going forward.

John Morikis:

Thanks Josh.

Steve Byrne:

Yes. Thank you. This 10%, roughly increase in SG&A that you are expecting for the year. Can you talk a little bit about what exactly is driving that? Is that underlying wages? Is it variable comp to incentivize aggressive effort in sales? Is that headcount? Is it something else? Is it a digital app? What would you say is driving that? What are the primary buckets driving a 10% increase in SG&A?

Steve Byrne:

And then on your cost structure, Al, if I heard you right, I think you have indicated low-single digit deflation in raw material costs. And I believe that was not current purchases, but what flowed through COGS in the second quarter, is there something else that was a meaningful change year-over-year in cost structure like freight or logistics or something because your gross profit increased year-over-year, significantly more than revenue. There seems to be maybe something else in there other than just low single-digit raws.

John Morikis:

With a more optimized supply chain this year versus last year, Steve, last year, literally, we were taking raws wherever we could make them or get them manufacturing paint and sending it to customers wherever they needed it. And we absorbed that into our margin. But I think again, it speaks to the commitment we make to our customers and why they can count on us.

John Morikis:

Thanks Steve.

Patrick Cunningham:

Great. Thank you. You talked about the fixed cost drag from lower production volumes. How much lower are utilization rates versus historical levels? And if the recent uptrend maybe in housing starts or commercial and property hangs in there, do you expect to bump up to historic high utilization rates in 2024 and perhaps even pre-build more additional inventory in 4Q? Thank you.

Patrick Cunningham:

Great. Thank you.

Operator:

Thank you. Your next question is coming from Aleksey Yefremov from KeyBanc. Your line is live.

Heidi Petz:

I will start with that. I think if you look at DIY and our Paint Stores Group, I give you a slightly different response versus what we are seeing in the rest of our business and largely based on the premise that there is a slightly different segment and a customer that’s looking for more service that want more of that specialty paint store experience. So, as I mentioned earlier, we are seeing traffic up in our stores. I think the challenge on the softness and you will see this on the consumer brand side as well. We have gotten back into a strong position of inventory. You will see some more promotional activity that’s been happening in an effort to drive traffic. But still continue to see some of that softness coming in the current state, at least through the balance of the year.

John Morikis:

Thank you.

Kevin McCarthy:

Yes, good afternoon. In your consumer business, can you speak to the outlook for repair and remodeling activity. And given that backdrop, do you expect your market share among Pros Who Paint to rise or fall or stay about the same over the next year or so?

Kevin McCarthy:

Yes. Thank you for that John. And secondly, if I may, perhaps for Al, it appears as though your 2023 CapEx outlook declined by $100 million to $700 million. Why is that, is that a function of timing or any meaningful changes to the project roster?

Kevin McCarthy:

Perfect. Thank you so much.

Operator:

Thank you. Your next question is coming from Mike Harrison from Seaport Global. Your line is live.

Heidi Petz:

Yes. Mike, it’s a great question. I think there is a whole host of acquisitions John mentioned earlier. And I would say the team is laser focused on, first and foremost, making sure that these integrations are seamless to the customer. We are very focused on the integration at the team level. I think when you look at some of our – the acquisitions that have been around technologies, and our ability to quickly – the tech transfer has been an area of focus so that we are able to get those products outside of one necessary region and in some cases, moving across the country or moving them across globally. So, we are really focused on making sure we are getting the value capture out of some of these and the synergies that we know are there. But there is a lot of great work being done by the teams to make sure that we are keeping our customers focused on a fuller assortment in a fuller portfolio of choices based on these acquisitions.

John Morikis:

You are talking about on the consumer side in Europe?

John Morikis:

Yes. So first, to capture this, it’s a relatively small percentage of our overall business. It’s – we are proud of our relationship there. We play a kind of a niche role, if you will, in intended paint through the Valspar brand this came to us with our acquisition. We have got a terrific relationship that we are interested in growing. And I would say the momentum that we have is good, and we are excited about it.

Mike Harrison:

Thanks very much.

Operator:

Thank you. Your next question is coming from John Roberts from Credit Suisse. Your line is live.

John Morikis:

John, new residential is a mid-teens percentage of our Paint Stores Group. And we don’t bid house, John. We quote our customers on a regular basis, and those are fluid discussions that we have with our customers. So, it varies by customer, the timing of any agreements that we have, and we just work closely with our customers to ensure that they have as much lead time to any adjustments to pricing as possible.

John Morikis:

Even the largest.

John Morikis:

Thanks John.

Eric Bosshard:

Clarity on two things if you could, first of all, on raws. The 5 to 9 full year, what was the first half of raw material?

Eric Bosshard:

And then secondly, relative to the original guidance, is the increase relative to what you thought the year would look like, is that even between the first half and second half, or is that more first half loaded?

Eric Bosshard:

Okay. And then is there anything different that makes it more first half loaded, or is there – I understand the comparisons, the comparisons existed and there were comparisons in the first half as well. I mean is there something that makes – creates more benefit in the first half than the second half?

Eric Bosshard:

Okay. That makes sense. Thank you.

Operator:

Thank you. Your next question is coming from Garik Shmois from Loop Capital. Your line is live.

John Morikis:

We do believe we are gaining share there. It’s a great opportunity again to highlight this controlled distribution. The approach that we take has been grounded in the focus on the applicator on the specifier and the owner through a distribution platform that is first class. And so our reps are working hand-in-hand with our customers. I would say that many of our customers would see our reps almost as part of their team. And the more challenging the market, the more valuable that sales rep is and the facilities that we build to service those needs. So, yes, I think we are growing share. I think there is a good – really good momentum through the balance of the year, rolling into next year. From there, as I mentioned earlier, while we are not waiting for the business that – to finish up, we are very focused on those sub-segments that I mentioned earlier that are a bit more resilient that we are focused on to continue the momentum.

Heidi Petz:

I would say they are back to more normalized levels. I think you will see, depending on the size of the resi repaint contractor, some that are willing to take on more and have the labor and the support and the resources to do that and some that are smaller in size and that might be more governed by shortage in labor. We are really trying to intercept them at that point and help them focus on how they can be as productive as possible. So, everything from our product assortment to our tools to our reps and how we are engaging these contractors, making sure that when they are on the job site, they are as productive as possible, how they bid, how they quote, how they get paid. So, really trying to help them from an entire business standpoint, regardless of the maturity of their size.

John Morikis:

Thanks Garik.

Jim Jaye:

I want to thank everybody again for joining our call today. I hope you heard come through loud and clear. Our team is aligned and committed to growing our business profitably, but we are also going to invest in growth and customer-facing initiatives. That’s going to drive our success and our customer success over the long-term. I will remind you that our annual Financial Community Presentation is going to be held here in Cleveland on August 24th. In addition to John, Heidi and Al, you are going to hear directly from our group presidents at the event, and they are looking forward to sharing their plans in each of those operating groups. And you will hear how they are planning to execute and drive those businesses forward as we described on much of the call today. You can register for that event on our website, and we look forward to seeing you at that event. So, thank you again for your interest in Sherwin. Have a great rest of your day.

Operator:

Good morning. Thank you for joining the Sherwin-Williams Company's Review of First Quarter 2023 Results and our Outlook for the Second Quarter and Full Year of 2023. With us on today's call are John Morikis, Chairman and CEO; Al Mistysyn, CFO; Heidi Petz, President and COO; Jane Cronin, Senior Vice President, Enterprise Finance; and Jim Jaye, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode by Issuer Direct via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com, beginning approximately two hours after this conference call concludes. This conference call will include certain forward-looking statements as defined under U.S. federal securities laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the company's earnings release transmitted earlier this morning. After the company's prepared remarks, we will open up the session to questions. I will now turn the call over to Jim Jaye.

Heidi Petz :

Thank you, Jim. I'll begin with the Paint Stores Group, previously known as The Americas Group. We described this change on our last call and in this morning's press release. There is no impact to prior year consolidated results related to this change. Current and prior year segment results have been restated to reflect this change. First quarter Paint Stores Group sales were ahead of our expectations and increased 14.8%, driven by high single-digit volume growth and continued effective pricing. Segment profit increased by $97.9 million and segment margin improved 120 basis points to 18.4%. Our Pro architectural sales grew by a mid-teens percentage in the quarter. All Pro market segments increased by double digits, led by property management and followed by commercial, residential repaint and new residential, respectively. Sales in protective & marine and DIY also increased by double-digit percentages. From a product perspective, interior and exterior paint sales were both strong, with interior sales growing faster and representing a larger part of the mix. Moving on to results in our Consumer Brands Group, which again now reflects the addition of a Latin America architectural business in the current quarter and prior year. Sales were well ahead of our guidance and increased by 2.4% in the quarter. Performance was better than expected in North America, where sales were down less than 1%; and in Europe, where sales were down low single digits. In other regions, sales were up strong double digits in Latin America and down double digits in Asia. Effective pricing led by Latin America was partially offset by a mid-single-digit decrease in volume and low single-digit FX headwinds. The tightness in alkyd resins impacting our ability to produce stains and aerosols, improved significantly during the quarter, and we expect this issue to be behind us by the end of the second quarter. Adjusted segment margin was 13%, up 120 basis points year-over-year. As Jim mentioned, we divested a noncore aerosol business at the beginning of this month, and we also entered into an agreement to divest our China architectural business. We expect these actions will benefit segment margin over time as we drive a return to our high teens, low 20s adjusted margin target. Onetime restructuring costs in the quarter were immaterial. Sales in the Performance Coatings Group increased 3.4% against a 20.4% comparison. The increase was driven by low teens pricing and mid-single-digit sales from acquisitions, partially offset by a low teens decrease in volume, which included the impact from discontinued operations in Russia and a low single-digit unfavorable FX impact. Adjusted segment margin increased 390 basis points to 15.7% of sales. This is the fourth straight quarter this team has delivered year-over-year segment margin improvement, driven by execution of our strategy, including effective pricing. Sales in PCG varied significantly by region. In North America, sales increased high single digits against a nearly 30% comp. Latin America sales increased by double digits, also against a strong comp. Sales in Europe were up mid-single digits, while sales in Asia were down double digits. From a division perspective, growth was strongest in Auto Refinish, which was up by a mid-teens percentage, followed by Coil and General Industrial, which were both up mid-single digits. All three of these divisions grew against double-digit comparisons. Industrial Wood sales were down mid-single digits as expected due to slowing in furniture, cabinetry and flooring related to new residential softness. Packaging sales also were down mid-single digits against a 30-plus comp with volume down about 1 point in the remainder due to our exit of Russia and unfavorable FX. We continue to feel very good about our position and growth prospects in this end market. With that, let me turn it over to John for his comments on our outlook for the second quarter and the full year.

Operator:

[Operator Instructions] Your first question for today is coming from Vincent Andrews at Morgan Stanley.

Allen Mistysyn :

Yes, Vincent, this is Al Mistysyn. And let me start with consolidated SG&A was up 14%. Paint Stores Group was just over 2/3 of that increase, and excluding acquisitions, was approximately 80% of the increase year-over-year. And this is due to the increase in new stores and additional sales reps, which probably represented about 2/3 of the increase. And then in addition, employee-related costs were higher year-over-year due to multiple merit increases beginning in the second half of last year and into the first quarter of this year.

Allen Mistysyn :

Yes. The only thing I'd add to that is, Vincent, as we discussed in January, we're going to continue to manage our G&A expenses tightly and adjust other discretionary marketing and other spending as we get a better outlook on demand in the second half. I would say I would expect a smaller year-over-year increase in our second quarter as we annualize the merit increase from last year. We start realizing more cost reductions from the restructuring activities. . Typically, we see a slight uptick in SG&A in our Paint Stores Group as it ramps up staffing and service to increase seasonal architectural demand uptick. Acquisitions will be slightly less than what we saw in our first quarter, which is a low single-digit impact. And then we'd expect those to annualize and not see much in our second half. So as the year goes on, my second quarter, I'd expect a lower percent of sales because of the seasonally higher architectural sales, but then the year-over-year change gets tighter as the year goes on as we annualize some of these things.

Jeffrey Zekauskas :

The SG&A increase of 14%, I understand that it should moderate from that level. But this year, with everything you're considering, are we going to be up more than 10% as a base case year-over-year?

Jeffrey Zekauskas :

Okay. And then secondly, your new residential business seems to have held up reasonably well, given market conditions. When we get to the fourth quarter or the first quarter of next year, as a base case, what do you think those volumes are like year-over-year in new residential in the Paint Stores Group?

Operator:

Your next question for today is coming from Christopher Parkinson at Mizuho.

John Morikis :

Yes, Chris, I'd start with the fact that our Paint Stores Group is our largest business, as you know. It's a $12 billion portion of the company. 90% of our Paint Stores Group is made up of professional sales. And as Heidi mentioned, PRO sales in total grew by a mid-teens percentage with every one of our professional segments growing double digits. So these are large segments growing double digits. So we're growing real market share in absolute dollars. And I'll give Justin Binns and his team a lot of credit for the new account and share of wallet initiatives that are clearly working. To your question specifically on residential repaint, we probably best would describe the bidding activity as having returned to a more normalized bidding market, where in the past 12 to 18, maybe 24 months, it was difficult to get a painter to even come out and give you a bid because they were so busy and so backlogged. I would say that it's likely best described as a more level or more normalized bidding activity. If you look at the LIRA or the NAHB remodel index, both are positive, but clearly some deceleration in what they're projecting. Our double-digit quarter this year was on top of a mid-single-digit performance last year. So I'd say that we have confidence in what we're doing. We have confidence in our ability to continue to grow and grow at our competitors' expense. We have product back in our store. We just talked briefly about the people in our stores. We think that's a very important element in what it is that we do. So the retention of our people, we believe, has a direct correlation to the retention of our customers. And we continue to introduce new products. We can get into some of those details, perhaps later, if we like. But we're introducing new products to help keep that residential repaint customer not only successful in what they're doing, but also growing in new segments as well. Talk a little bit about new res there a moment ago after Jeff's question, but I will say that our ability to work with our builders and help to drive their business and their efficiency, we believe, has been an important element in our ability to retain the relationships that we have, and in fact, grow those relationships. We're introducing in the face of an adverse market here in the diversity of new residential, we're introducing new products that will help our customers high build products that will help hide imperfections and improved durability, and that's helping us to grow our new residential business, and we expect that to continue to grow. We expect to come out of this time here of some challenges in the market with absolute new and greater market share. On the Commercial side, you asked about this was one of the markets that clearly came in with stronger-than-expected results for the quarter. Our position in this segment is very good, strong and growing. We've been long investing in reps, products, specifications and the fact that we have local stores and local reps is an important element in growing this segment. Again, we've introduced a number of innovative products here as well. When you think about labor, we often talk about that labor represents, on average, about 85% to 90% of the cost of goods for a painting contractor. The cost for a commercial contractor is likely higher than the average, perhaps in the 90% to 95% as many of the commercial contractors are either union or applying paint in the metro markets, which are higher cost. Our model, therefore, is even a greater value to these customers. Our ability to collaborate with the architects, work with the designers, work with these contractors is absolutely paying dividend. And we're excited about this business. The commercial side, there's a lot of work that's still coming out of the ground, and we expect to continue to grow with this market and at the expense of our competitors. Property maintenance, you asked about as well, is another segment that grew stronger than expected. Occupancy and rents are returning to more normal rates, and growth here is driven by not only our continued share gains but capital improvement projects as well as an increase in turns. So the Pro side by segment is really going well, and we're going to continue to put fuel in this tank and feel really good that while we're growing share, the only expectation we have for our team is to grow it even faster.

James Jaye :

Yes, Chris, I would say that raw materials are really trending as we expected. And not sure that I'd say there's a lot of surprises there. They were down slightly in the first quarter. The moderation was led by monomers, solvents and resins. To your point, TiO2 and pigments may be a little stickier near term, but we expect to see some moderation there as the year goes on. I would remind everyone, as a reminder, our cost of goods also includes higher inflation in wages and other employee-related costs. For the second quarter, we're expecting to see some further moderation as we move towards our guide for the full year, which, as we said in our opening, is unchanged. Raws down low to mid-single digits.

Michael Harrison :

Was hoping that you could talk a little bit about the additional architectural capacity that you brought on probably a little over a year ago? As you look at these housing challenges that seem to be ahead, is that additional capacity is something that we should think about as weighing on utilization or fixed cost absorption as we're going forward? And I guess in hindsight, should you maybe have pulled back or wait a little bit longer to expand some of that capacity?

Allen Mistysyn :

Yes. Mike, I'd just add to that. As you remember on the January call, I talked about a potential headwind with just lower architectural volume because everybody in the industry had to build architectural inventory back up. So that's short term. Long term, we have a lot of confidence in the growth across each of the segments, Architectural Pro segments that John talked about, and we'll fill up that capacity very quickly. So even though it might be a short-term headwind, as we've lived through some of these cycles before, the bounce back and the strong growth, I'll go back to 2008 and '09, and we grew high single digit for the 3-, 5- and 10-year compounded average growth rate, and we're a much bigger architectural business today than we were back then, we'll fill that capacity. So -- and I would argue or add to that, we're going forward on Statesville because of the confidence we have in the future outlook and the growth in architectural.

John Morikis :

Well, Mike, we're positioned well to do just that. It's yet to be seen as the market or the the market tries to kind of resume back to some normalcy in Asia. We're positioned very well. Our technology, our assets, our people, I think a lot of that has to do with what happens in the market and our expectations as in any situation is to grow faster than the market. I think we're in a very good position from a technology, but also a relationship perspective. So yes, I'd say that there is some uncertainty with the market in general as it opens up, and our customers are back producing product, we expect to capitalize more than our share there.

John McNulty :

Can you -- it sounded like in the Consumer Brand side, business was maybe a little bit better than you expected. Can you speak to the stocking patterns that are going on there? Are we seeing kind of a normal stock? It seems like the expectation was it was going to be a little bit below normal, but again, you're kind of coming in better than you thought. So maybe a little bit of color there would be helpful.

John McNulty :

Got it. Okay. Okay. And then when you -- I know you guys don't tend to do much around the weather or blame a lot or take much credit for things on the weather front. But was a much wetter start to the season, particularly in regions where you can't paint in the first quarter out West and what have you and it looks like the Midwest also maybe started a little bit more slowly. Do you have pent-up demand? Is that why maybe some of the -- it looks like some of the data that we've at least been seeing from the contractors is maybe a little better than expected? I guess, how would you characterize that?

Operator:

Your next question is coming from Ghansham Panjabi at Baird.

John Morikis :

Ghansham, I'd say this year, we see a pretty solid year. These buildings are reaching the painting stage now. They started 12 to 18 months ago. So we'll have to see if there is, in fact, an impact on Construction and Commercial 12 to 18 months from now. But the long line of sight that we have in this space, we are growing share, and there's a lot of projects coming on, which we expect to paint.

John Morikis :

That's an interesting one because I think when you look at Packaging, we never accept from any of our businesses softness. But this is a very unique situation with our Packaging business on top of the 30% comps. This team is continuing to expand the commercialization of what we consider a very unique technology. So we continue to see the lines that our product is on. They grow. They're growing. We're growing share. What's happened right now is there's a level of destocking that's taking place within many brands impacting our customers as they work through high inventory levels. It's not often that I'm accepting to a team that's brought in softness. But in this case, given the line of sight that we have and the share that we're gaining and the incremental production lines that were going on every day, we're giving them a break. So I think the first quarter was a little tough. We'll probably have a little choppiness here in the second quarter. And as the year progresses, our expectations will resume for this team to continue to grow or to be able to demonstrate the share that they're growing. It's a short-term issue for this team. We've got a lot of confidence in the technology, the team and what we're doing. We'll be fine here.

Michael Sison :

Nice start to the year. John, I know you mentioned that you need to see how trends for 2Q on the folds to have a better idea for the second half. So just curious if unfold as you expect today, and I think it means -- I think your outlook suggests that PSG volumes are going to flatten out versus a pretty strong first quarter. What does that mean for your second half outlook? And if 2Q comes in better or worse, what does that sort of mean?

Michael Sison :

And as a quick follow-up, given your new capacity, better cost structure and such, if you do get your volumes back to where they were prior to this downturn, where do you think earnings or margins should be at this going forward?

Allen Mistysyn :

The only thing I'd add to that, Mike, is when thinking about it by segment, we have a lot of confidence in our Performance Coatings Group to drive operating margins to that high teens, low 20s. The first quarter, excluding acquisitions, we were at 16.4. Again, if you remember, we hit that mark in the third quarter. It's an all-time high since we've owned Valspar. And we're confident in driving Consumer Brands Group back up to that high teens and low 20s. So we get our cost structure right, that will be a tailwind. We hold on the price. But as we come out of this, we drive strong architectural gallon growth, market share growth in our Performance Coatings business, and that's what's going to drive those operating margins back up to the high watermarks we experience in different occasions on the different businesses.

Steve Byrne :

What fraction of your Consumer business is the Pros the Paint category versus what was it back when you first got that exclusivity with Lowe's? What would you say is driving that growth? For example, is it the product offering? Or I know Lowe's has at least in some stores offering free delivery to the job site? Can you comment on how extensive that is? Is that meaningful? And are you involved in that?

John Morikis :

No, I was just going to say I want to start and then kick it to you, Heidi. I'd say, first of all, as there's a commitment by both companies to grow this, that terrific leaders inside our organization and they're working with terrific leaders inside the Lowe's organization, an outstanding partner. And I think we're combined looking at the right elements of the business. And so we're not going to disclose the percentage on that, Steve. But Heidi, I would like for you to maybe could talk a little bit about the Pros Who Paint, but also on a broader view, the importance of this relationship and in the Consumer Brands portfolio as well as the initiatives that we have to grow.

John Morikis :

On the Pros Who Paint, specifically, Steve, to your point, there are customers that prefer a home center platform. They can purchase everything from dry wall to every other element that they might use on a project. And -- so to get to your question about who supplies delivery or sales calls or anything, there's a team effort that goes along with that. And while we don't disclose the details of those for strategic and competitive reasons, I think hit at best. The collaboration and focus has never been stronger.

Heidi Petz :

Steve, I think you answered it perfectly. Yes, there was -- there's a better model here. I think the divestiture certainly it does align with our strategy And as we've done a lot of work in that group to optimize the portfolio of the brands, certainly making sure that we're driving a focus on where we can get a return for our shareholders. And I think you said it -- sometimes they're just assets that are more valuable to others and this is an example of just that. We had -- the business was about $100 million in revenue with 300 employees -- and frankly, it was acquired as part of the Valspar acquisition, you remember, in 2017. So as we move down the next quarter here, we'd expect to close on this second half of 2023.