Sherwin-Williams Q3 2022 Earnings Call Transcript

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Provided by Quartr
October 25, 2022

There are 15 speakers on the call.

Operator

Morning. Thank you for joining the Sherwin Williams Company's review of Q3 2022 results and our outlook for Q4 and full year of 2022. With us on today's call are John Morikis, the company's Chairman and CEO, Al Mistyshin, CFO Jane Cronin, Senior Vice President, Corporate Controller the being webcast simultaneously in listen only mode by Issuer Direct via the Internet at www.sherwin.com. The call. An archived replay of this webcast will be available at www.sherwin.com beginning approximately 2 hours after this conference call concludes.

Operator

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 the company undertakes no obligation to update or revise any forward looking statement whether as a result of new information, future events or otherwise. The full declaration regarding forward looking statements is provided in the company's earnings release transmitted earlier this morning.

Operator

Them. After the company's prepared remarks, we will open up this session to questions. I will now turn the call over to Jim Jay.

Speaker 1

The call. Thank you, and good morning to everyone. Sherwin Williams had an excellent performance in the 3rd quarter, including high teens sales growth resulting in the first the $6,000,000,000 sales quarter in company history, significant sequential and year over year gross margin improvement, the record adjusted diluted earnings per share and strong cash flow. Demand remains strong in pro architectural and North American industrial end markets, the quarter in contrast to continuing softness in Europe and China. While year over year cost inflation remained very significant in the quarter, the We were encouraged by a modest sequential decrease in raw material costs.

Speaker 1

The industry supply chain also continued to stabilize, the quarter. Though conditions remain tight, with some previously noted specialty resins in particular remaining in limited supply. Throughout the quarter, our team continued to focus on growth initiatives, product innovation, customer solutions, pricing actions, cost control, supply chain improvements and business optimization activities, the quarter, while also taking actions and planning for a wide range of scenarios that could unfold next year. Quarter. I'd like to go through just a few of the numbers at a high level and then turn it over to John, who will provide some additional color on the Q3 and our outlook.

Speaker 1

Comparisons in my comments are to the prior year period unless stated otherwise. The quarter. Starting with the top line, Q3 2022 consolidated sales increased 17.5% to a record $6,000,000,000 the pricing was in the low double digit range. Consolidated gross margin increased to 42.8%. The quarter.

Speaker 1

This was an improvement of 120 basis points year over year and 110 basis points sequentially, reflective of our pricing actions. The Gross margin improved sequentially month to month in the quarter with September increasing 6.50 basis points year over year. SG and A expense decreased to 25.3 percent of sales. Consolidated profit before tax increased $265,700,000 or 43.5 percent. The Diluted net income per share in the quarter was $2.62 per share versus $1.88 per share a year ago.

Speaker 1

The Excluding Valspar acquisition related amortization expense, 3rd quarter adjusted diluted net income per share increased the quarter was $35.4 to $2.83 per share versus $2.09 a year ago. EBITDA in the quarter was $1,120,000,000 or 18.6 percent of sales. The Moving on to our operating segments. Sales in the Americas Group increased the quarter. 21.4 percent driven by double digit volume growth across all architectural end markets and high single digit price increases.

Speaker 1

The segment profit increased by $132,600,000 and segment margin was 21.2%, the quarter, which was about flat with last year and up 30 basis points sequentially. Sales in the Consumer Brands Group increased 8.5%, the quarter, driven by a low double digit price increase, which offset lower sales volumes, primarily outside of North America. The continued tightness in alkyd resins impacted North America stain and aerosol sales. Adjusted segment margin was 16.2%, the quarter. Up 150 basis points year over year and 500 basis points sequentially.

Speaker 1

The quarter. Sales in the Performance Coatings Group increased 13.7% and were driven by mid teen price increases, the quarter. Partially offset by a less than 1% decrease in volume. Mid single digit sales from acquisitions were offset by a mid single digit the unfavorable FX impact. Adjusted segment margin increased 5.90 basis points to 16.4 percent of sales, the Q3 due primarily to higher selling price increases.

Speaker 1

Let me now turn it over to John to provide some additional commentary before we move on to your questions.

Speaker 2

The call. Thank you, Jim, and good morning, everyone. As we've indicated since the start of the year, we expected 2022 would be a year of the 2 contrasting halves and that's exactly what we're seeing play out. We delivered strong results in the Q3 and I want to thank our the entire leadership team and all 61,000 employees for their focus, their determination and drive in what quarter remains a challenging operating environment. We continue to have great confidence in our strategy.

Speaker 2

The Before moving on to our outlook, let me provide some additional color on our Q3. In the Americas Group segment, We delivered record sales and PBT. Mid teens volume growth and high single digit pricing drove sales, the quarter, which were up by a strong double digit percentage in every end market we serve. The sales growth quarter was led by DIY, which was compared to an extremely soft quarter a year ago, where we prioritized our pro customers given limited product availability. Sales growth was next strongest in our property management followed by new residential, the residential repaint and commercial respectively.

Speaker 2

Sales were also up by a double digit percentage in protective and marine, the but were dampened by the ongoing limited availability of alkyd resins. We are seeing strong effectiveness from the 10% price increase we announced September 6. Tag segment profit increased due primarily to double digit paint volume growth and selling price increases, the quarter, partially offset by increased raw material costs and higher SG and A costs related to continued investments the Q3 in our long term growth initiatives and our strategy. From a product perspective, exterior and interior paint sales were both the quarter was strong with exterior sales growing slightly faster and interior being the larger part of the mix. The We continue to invest in our management trainee program, expecting to hire more than 1400 college graduates the company that will enter this program this year and who will be the future leaders of the company.

Speaker 2

We also added sales reps in territories in the quarter the Q3, along with ongoing growth investments in innovative new products, e commerce and productivity enhancing services. The consumer brands group had a much improved quarter led by sales that exceeded our guidance. Sales in North America increased by a double digit percentage the driven largely by price. DIY paint demand remained sluggish as inflation continued to pressure consumers, the continued tightness in alkyne resins impacted our ability to produce stains and aerosols. On a positive note, the Pros Who Paint segment again grew by a strong double digit percentage.

Speaker 2

Sales in China quarter were down by a double digit percentage due mainly to the COVID related lockdowns. Europe was also down double digits the Q3 due to the slowing macroeconomic environment. Segment margin improved significantly, primarily due to selling price increases and good cost control, the partially offset by lower sales volume, increased raw material costs and higher supply chain costs. The The Performance Coatings Group followed a very good second quarter with another strong performance in the third. The quarter.

Speaker 2

Sales were up mid teens, including mid teens pricing and a mid single digit benefit from acquisitions, the quarter, partially offset by very slight decrease in volume and a mid single digit impact from unfavorable FX. For the Q2. For the 2nd straight quarter, this team delivered year over year segment margin improvement, driven by execution of our strategy, the Q3, including effective pricing actions. The 16.4% adjusted margin in the quarter was the highest for the segment since the acquisition of the quarter. And excluding the impact of acquisitions closed over the last 12 months, adjusted segment margin was 17% in the quarter.

Speaker 2

Although we're pleased to have reached the low end of our expressed margin target of high teens, low 20s, We know there's a significant amount of opportunity ahead. I'm proud of our team's efforts to reach this goal the the quarter. Sales varied significantly by region. In North America, sales increased double digits against a challenging comp the and included low single digit volume growth. Latin America sales also increased by double digits against a strong comp.

Speaker 2

The Sales were up high single digits in Asia driven by price as COVID lockdowns continue to impact demand. The quarter. Sales in Europe were backward mid single digits against a double digit comparison and continued economic slowing. Every division in the group grew led by coil and followed by packaging, auto refinish, the general industrial and industrial wood. We're also pleased by what we're seeing so far from the recent acquisitions we've announced in this segment.

Speaker 2

Earlier this month, we announced an agreement to acquire ECA, a high quality European business focused on innovative wood coatings. The Before moving to our outlook, let me speak to capital allocation in the quarter. We returned approximately $203,000,000 to our shareholders in the quarter the financial results

Speaker 3

in the form of dividends and share buybacks.

Speaker 2

We invested $48,000,000 to purchase 200,000 shares at an average price the quarter of $237.81 per share. We distributed $155,800,000 in dividends. The We also invested $175,000,000 in our business through capital expenditures, including $125,000,000 in core CapEx the $50,000,000 for our Building Our Future project. We closed 3 acquisitions in the 3rd quarter for approximately $440,000,000 the We ended the quarter with a net debt to EBITDA ratio of 3.1 times as we increased short term borrowings to fund our recent acquisitions. We'll use cash in the Q4 of 2022 to manage debt and share buybacks will be done to offset option dilution.

Speaker 2

Turning to our outlook. We expect to deliver a very solid Q4 resulting in our second half quarter. Sales increasing by a low double digits to mid teens percentage and second half diluted earnings per share the quarter, increasing by 35% at the midpoint of our guidance. Within the Americas Group, Demand is strong across all of our pro architectural markets, including new residential despite higher interest rates, the with customers reporting strong backlogs that will take them through the end of the year and likely longer. We also see a unique opportunity to continue winning new business as our competitors transition their pro contractor business models the the Within the Consumer Brands Group, we expect the North American DIY consumer to continue to face inflationary pressures the quarter.

Speaker 2

And Europe and China remain challenging. Within the Performance Coatings Group, demand remains strongest in North America, our largest region. The European demand slowed in the Q3 and we expect continued softness in the Q4. In Asia, the pace of recovery from prior COVID lockdowns the in China and prospects for additional lockdowns make it difficult to assess demand trajectory. The From an industry supply chain perspective, we're largely getting the raw materials we need, though the availability of Alkad the and some specialty resins remain choppy and is impacting certain product lines within consumer brands and performance coatings.

Speaker 2

The quarter. While we continue to push hard, we don't expect meaningful improvement in the availability of these resins until the Q1 of next year. Some near term inefficiencies remain in our own supply chain as we continue to take steps to overcome industry issues and serve our customers. On the cost side of the equation, our full year raw material inflation guidance remains in the high teens. The quarter.

Speaker 2

We expect to see further sequential decline of raw material costs in the Q4, though they will remain elevated year over year. We expect the trajectory of raw material costs to continue trending favorably as we exit the year. The, although the pace and level of potential relief next year is difficult to project. Additionally, the Along with the highest inflation rate we've seen in 40 years, we're also experiencing significant higher costs and other elements of our cost basket, including labor, transportation and fuel and other costs. We will continue to monitor these costs, fight hard to offset them the and respond with additional pricing if necessary.

Speaker 2

So specifically for the Q4 of 2022, the quarter. We expect our consolidated net sales will increase by a high single to low double digit percentage, inclusive of a low double digit price increase. We expect the Americas Group to be up high teens to low 20%. We expect consumer brands to be down the mid to high single digit percentage. And we expect Performance Coatings to be flat to up a low single digit percentage.

Speaker 2

We expect North America, which is the largest region within PCG to be up a low teens percentage. For the full year 2022, we expect consolidated sales to increase by a low double digit percentage, the quarter, inclusive of a low double digit percentage price increase. We expect the Americas Group to be up by low double digits to mid teens percentage. We expect Consumer Brands Group to be down a low single digit percentage and Performance Coatings Group the quarter to be up by a low double to mid teens digit percentage. Given the many variables we've noted, We left our diluted net income per share guidance for 2022 unchanged and in the range of $7.65 the quarter to $7.95 per share.

Speaker 2

Full year 2022 earnings per share guidance includes Valspar acquisition related amortization expense of approximately $0.85 per share. The quarter. On an adjusted basis, we expect full year 2022 earnings per share of $8.50 to $8.80 which represents the mid single digit percentage growth from 2021 at the midpoint in what continues to be a challenging macro environment. This guidance implies a second half adjusted diluted net income per share of $4.63 per share at the midpoint, the quarter. An increase of 35% over the same time period last year.

Speaker 2

In addition, we provided updated guidance the quarter. We expect to continue to expect to see a sequential improvement in our slide deck, including our expectations for FX, CapEx, the interest expense, depreciation and amortization. We expect our full year tax rate will remain in the low 20% range. The While we're not prepared to provide any specific guidance on 2023 at this time, I would like to comment on demand trends the actions we're taking that will impact our 2023 outlook that we will provide in January. The We expect slowing new residential demand with elevated interest rates and other costs that are impacting new single family home permits and starts.

Speaker 2

The quarter. However, multifamily production has maintained strong momentum. It's also clear that macro headwinds are likely to continue the and potentially worsen in Europe and China. Our base case in this environment remains to prepare for the worst and hope for the best. The I'm highly confident in our leadership team, which is deep in experience and has been through many previous business cycles.

Speaker 2

The We've transformed our business in many ways since the last significant downturn and we are now a stronger, more resilient company. The We know what to do. To this end, we've been evaluating multiple options available to us based on a wide range of scenarios the and we are prepared to take appropriate actions beginning this quarter. These include the following. The growth and long term shareholder value.

Speaker 2

As a result of this work, we are announcing action plans to the quarter. We will now begin to review our operating model and portfolio of brands in Consumer Brands Group and to reduce costs in all regions in Performance Coatings Group, the Consumer Brands and Administrative segments. These actions once finalized could include one time costs the quarter. We expect to continue to execute on our cash flow and cash flow and cash flow for the quarter. We expect to continue to be in the range of $160,000,000

Speaker 4

to $180,000,000 over the next 4

Speaker 2

quarters and could result in annual run rate savings of approximately $50,000,000 to $70,000,000 once fully implemented. Additional details on these planned actions are outlined in the slide deck issued the Q3 with our press release this morning. We will call out significant one time charges and update our progress on run rate synergies the future quarterly earnings calls. We remain committed to our strategy of providing innovative solutions that help our customers the Q3 2020. In challenging environments, we have the opportunity to become an even more valuable partner to our customers.

Speaker 2

We will continue to focus on new account growth and share of wallet initiatives. We will leverage our strength in the recession resilient end markets including residential repaint, property management, packaging the quarter and auto refinish, all of which are larger than they were in previous cycles. We will continue to invest the growth initiatives, including adding stores, sales reps and innovative products and services. We will continue to invest in our people, including our management trainee program I previously mentioned, the Q3, along with ongoing training that positions our people as one of the most significant amongst our many points of differentiation. We will continue implementing appropriate pricing actions across the company to offset persistently higher input costs with a focus on regaining our gross margins back to our long term target range of 45% to 48%.

Speaker 2

The We will continue investing in acquisitions that can accelerate our long term strategy and top line growth and expand our operating margins including our most recent announcement of European Wood Coatings leader, Eco Group. We will maintain our disciplined capital allocation philosophy. The We will not hold cash while investing appropriately in CapEx, paying a dividend, targeting acquisitions the Q3 results and our outlook for the Q3 results that accelerate our strategy in absent M and A buying back our stock. In sum, we expect to deliver a solid 4th quarter to complete a very strong second half of twenty twenty two. And we're also taking actions to get ahead of what could be a challenging 2023.

Speaker 2

The We don't expect to be immune from any number of potentially difficult scenarios, but what we do expect is to outperform our competitors and the market. We will do this by leveraging the best team in the industry. We remain committed to creating shareholder value over the long term.

Operator

The the

Speaker 3

the

Operator

call. The questions. The call. Your first question for today is coming from Vincent Andrews.

Speaker 5

Thank you. Just a question on TAG the And the margin, both sequentially and year over year, you saw a lot more improvement in margins in the other two segments than you did in tags. So I was wondering why that was. The I did notice you called out some long term investment spending in Tagged that might have affected that. So perhaps you could talk about that a little bit as well in terms of what that is and whether the carries over not just into 4Q but into next year as well.

Speaker 4

Yes, Vincent, this is Al, my Sishen. The Yes. I mean, we saw a little over 20% increase year over year in our segment the quarter. The flow through is a little in the low 20% range. And as typically is the case, we had higher the quarter.

Speaker 4

Sales volumes, which generally drives improved operating margin. I've historically talked about a low to mid single digit volume gain, getting the In a normal state environment, mid to high 20%, we had one really month of selling price increases, but these are still quarter, partially offset by the higher raw material costs that we had talked about being sequentially better, but still up maybe a mid single digit in our 4th quarter. The And really the higher SG and A costs that we called out are the continued investments in long term growth initiatives. So we've added 67 stores. We've the put in over 80 reps.

Speaker 4

We've added headcount into our stores to support the growth outlook. And as John mentioned, we're going to add and the Really accelerate our growth in the Q4 by adding 40 to 50 new stores. So what I would expect in the Q4 is you're going the Your normal seasonal slowdown in architectural demand, which is typical, and you also see a sequential the decline in operating margin, but we expect stronger flow through in our 4th quarter, really upwards of over 30%. The quarter. And you get a full quarter of the 10% price increase for that was implemented September 6.

Speaker 4

I would tell you that price increase the quarter is going even a little better than what we had seen in the past. The 4th quarter sequential moderation of raw material costs and an easier comp. The So you're going to see bigger year over year improvement in our operating margin in the 4th quarter. The And you're going to see that SG and A growth into the first half of next year and we'll give you more color on that in January.

Speaker 5

The Q3. And just as a follow-up, we've talked a lot about raw material shortages for a year now and part of what you were doing this year was trying to get your tag inventory back to the level to service your customers. Are you there now? And given that maybe a lot of that was done the Q3, when raws were peaking, should we be thinking about you carrying sort of peak COGS inventory into next year's spring season? Or how should we think about the cadence of sort of lower raw material costs flowing through in tags specifically?

Speaker 2

Vincent, I'll take the inventory piece first and I'll throw it to Al who talks to the accounting. The Yes, we're in a very good place right now for the majority of our products. I mentioned earlier the the issue that we continue to face with the alkyd resins and some of the specialty resins. We'll fight through that. It's getting better.

Speaker 2

As I mentioned earlier, we expect to have the majority, if not All of that behind us at the end of the Q1, but for the most part, the remaining portion of our product line is available for our customers. The You should and I know you do know Sherwin Williams, our model is not to unlock the door and hope that people are finding their way back into our stores to find them. The Our sales reps and store managers are very aggressive in the hunt of pursuing customers both existing the And new to share with them the fact that we have these products available for them.

Speaker 4

Yes. And Vincent, we actually the built a little bit of inventory from our Q2 to our Q3, which is typically not the case. The To meet the strong demand that we're seeing, specifically within tag with the mid teen volume growth in our 3rd quarter and the low double digit we expect in our Q4. I think what you're going to see us do is try to manage our architectural inventory the By year end, maybe up another 4,000,000 gallons. The reality of that is we're going to monitor that very closely the quarter progresses and look at demand trends specifically going into our first half next year and we may adjust that number the A little bit.

Speaker 4

And that's specifically to the DSCs. Our store level inventories are in great shape. The We are meeting our demand our strong demand with high service levels and we expect to continue the But as you can imagine, we're as our inventories get in better shape, we'll get back to managing our working capital. The Our working capital at the end of the 3rd quarter is over 12%. We're going to target to try to drive that down between 11% and 11.5% by year end, the It's still a very strong inventory position going into next year.

Speaker 2

And Vincent, this ties also back to your first question on the SG and A the Sal's earlier point, we are continuing to invest in people to provide the service in the stores. The So as the product becomes more available, you may recall in the last couple of quarters, we talked about the the new account activity at record levels and active accounts. So now we've got a lot more people coming into our stores, new accounts coming in. The We've got product available. We want to make sure that we have the service to deliver on our promise.

Speaker 2

And so they're all interrelated and they're all working very well.

Speaker 3

The quarter.

Speaker 5

Great to hear. Thanks guys.

Operator

The call. Your next question is coming from Truman Patterson.

Speaker 6

Hey, good morning, everyone. Thanks for taking my questions. The First, clearly, there are a lot of moving parts on raw material inflation between suppliers, the petro cans, oil. The But John, you mentioned the trajectory of raw material costs that's trending favorably as you exit the year. Can you just help us the Understand at this point in time what the gross margin basket or the raw material basket might look like the Exiting the year sequentially versus kind of Q3 levels.

Speaker 1

Yes, Truman, this is Jim. I'll take that one. So the If you look at our Q3, the raw material basket was up by mid teens percentage year over year. I think as we get into the the Q4, we're looking at that being more like a mid single digit year over year number. I think as John said in his prepared remarks, the The trajectory is good and heading in the right direction.

Speaker 1

I think it's hard to project exactly what it's going to do next year. We're trying to the So formulate that and we'll come back to you in January with our full year guide to give you some more color on that.

Speaker 4

Yes, Truman, I'd just add to that. The As we typically do, in our planning for the upcoming year, we work with our suppliers the outlook closely on looking at demand trends, looking at volume trends by region. And it gives us a better line of sight the Quite honestly, because as we've talked about, labor rates have been up high single digits and in some cases across our supply chain, the low to mid teens, in an effort to reduce turnover, which is very expensive, but the The expertise that goes with that turnover and then freight and other transportation costs. So we'd like to talk about the full basket as we get into January and we'll have a better line of sight

Speaker 6

the Okay. Okay, perfect. And then you all mentioned some of the cost control initiatives in PCG and CBG in the The expiration of a slowdown, right, savings of $50,000,000 to $70,000,000 annually. I'm hoping you can walk through those in a bit more detail. The And then also assuming volumes turn negative or remain negative through 2023, the How does that impact your thoughts on kind of decremental operating margins for both of those segments?

Speaker 4

The Yes. Truman, I want to be careful about getting into too much detail on this call. I mean, we're making these decisions the In our Q4 and going forward, and it's as we talked about on our Q2 earnings call in July, it's part of our normal the Q3 2020 results and our outlook for the Q3 2020 results, that we continue and as John talked about, we continue to assess these portfolio of business brands and customer programs the And their ability to drive above average market share growth and the operating margin and cash flow targets we set for them. And if we don't see that happening, the We take action. This is similar to what we did with the exiting the ACE private label business, the sale of our Australia New the CLM Business Architectural.

Speaker 4

I would say on the run rate savings, the More of that is due to the portfolio review than what I would call more purely cost reductions and that's the relative to the macroeconomic headwinds we're seeing. And it's probably a sixty-forty split. And why I think that's important is because the We're not overreacting to the macro environment. It means that we are driving the operating margin improvement across consumer brands, across the PCG. And I would even venture to say that within PCG, yes, as John talked about, we hit the The low end of the high teens of 17%.

Speaker 4

We have more work to do. These actions we're taking in the coming quarters is not related the Q3 of 2019. This is really in response to the slowdown we're the in Europe and Asia. So we have opportunities to grow with platform consolidations as we integrate these acquisitions the Q3 2020. Going into next year, they'll start to be accretive as we get to the second half.

Speaker 4

So if we see additional the slowdowns in demand. We have more levers to pull to offset any decremental operating margin. So

Speaker 2

Yes. Truman, I'd ask I'd answer this point as well. When you heard Al talk about not overreacting, I I think your question is a good one, but I'd also point out that there are many areas of our business that we're actually continuing to invest and in some accelerating investments. The So the leadership that we have, the ability to view and see where those opportunities are, I think comes with great deal of experience in the And what we're doing. And so we're just talked about adding stores as an example.

Speaker 2

We'll add 35 new stores in the 4th quarter I'm sorry, 40 to 50 the Q4 compared to 35 last year. If you look at the staffing that we just talked about investing in the digital programs that we're investing in. So we are making, we believe the appropriate steps in reducing where we need to, but we're also investing in those areas that are appropriate.

Speaker 4

The only other comment I'd make, Truman, related to that on the one time costs, the We'll call those out as we have typically done in the past, specifically even with the Valspar integration. So we didn't put them in the guidance in the Q4. Their estimates, the The timing is uncertain. We're pushing the teams pretty hard to take action and get these done, but the We'll call them out over the next quarterly calls and we expect to get approximately 170 over the next 4 quarters.

Speaker 6

The Perfect. Thank you all and good luck in the upcoming quarter.

Speaker 1

Thanks, Truman.

Operator

The year. Your next question for today is coming from Josh Spector.

Speaker 7

Yes. Hey, guys. Thanks for taking my question. A question on the Performance Coatings guidance. I guess when I look at things sequentially, normally the It's relatively stable.

Speaker 7

You guys maybe have a 10% decline. Understanding things are kind of getting worse in some of the regions. But I think when I look at some of the competitor guidance, Things were already pretty bad in 3Q and generally things stay bad in the 4Q. Your guidance implies things are getting worse. So I'm wondering If you can maybe dig into some of the details there about what's getting worse or maybe your 3Q was helped by some items which go away.

Speaker 4

Yes, Josh. I think where we're seeing maybe a little bit more of a slowdown would be in the Europe and Asia. And I think our largest region, North America, we've talked about being up the in the lowtomidteens and price will start to annualize, so you don't get as much of a tailwind on price. The Our comps are still pretty strong in our Q4 relative to last the next year. And so I don't know there's a significant step change that we're seeing other than I think we've got to be prepared the And try to look at based on our history and what we've seen over the last few years is maybe a little bit wider range on sales As we go into the Q4 with the holidays and things of that nature.

Speaker 4

So I don't want to read too much into that other than Maybe a little less price as we get into the Q4 and then a little bit worsening outside of North America.

Speaker 2

I do think to Al's point, if you look at the comps, the Take for example, our packaging business, we had a high single digit growth this past quarter versus strong double digit comp. The You go into next quarter, Q4 comps last year were up over 30%. The We've got a lot of momentum here in this business. We expect it to continue to win with our customers and grow with them. If you look at coil, the We had a similar situation.

Speaker 2

Q4 last year comps were up 20%, coming off of a strong double digit growth here as well. So there are some really strong performances here up against some really strong comps and the We think that these teams are continuing to grow in a pretty challenging environment.

Speaker 7

Okay, got it. Thank you.

Speaker 3

The Thanks, Josh.

Operator

Your next question for today is coming from Jeff Zekauskas.

Speaker 1

The Thanks very much. In the Q4, should your average prices in tag

Speaker 4

the No, Jeff, I think what's going to happen is we're going to get the full quarter of 10%. The We're going to annualize the August 21, 7%. We're going to annualize the September 4% of last year's surcharge. So the When you net them all together, it's about flattish quarter to quarter, high single digit.

Speaker 1

I'm sorry, the Q4 of 2022 relative to the Q3 of 2022 shouldn't since your the Prices are lifting, you increased prices 10% in early September, shouldn't you capture that all sequentially?

Speaker 4

The We are, but we're also annualizing some of the price we took last year. So from quarter to quarter, our dollars will be higher. I agree with that, but it's still in the high single digit range for TAG.

Speaker 1

The Okay. And then in terms of raw materials, the Can you frame the Alkyd Resin sales and EBITDA penalty for 2022? The And is TiO2 are TiO2 prices going down sequentially in any area other than Asia? Yes. I'll take the TiO2 piece, Jeff.

Speaker 1

What We did see in the quarter was some inflation that's happening. I think as we go forward, it will depend on some of the softening demand that we're seeing. And I think it's part of our overall view that TiO2 should start to be part of that basket the That starts to moderate. The Alkyd piece, I'll let Alan answer.

Speaker 4

Yes, Jeff, I think the Alkyd impact, I mean, it could be around 1% the On top line, it's we're having to make choices. So as an example, why it's difficult to pinpoint it, the There's a broad basket of Alkyds and some we're getting fully what we need, others we're not. And it's just trying to the look at ordering and reorders and things like that. So I think it's about 1% on the top line. The bottom line, I don't think we've quantified or the Really going to quantify at this time.

Speaker 1

Okay, great. Thank you so much. Thanks, Jeff.

Operator

The next question for today is coming from Ghansham Panjabi.

Speaker 3

The call. Thank you.

Speaker 8

Good morning, everybody. I guess, first off, starting off with TAG and the various sub verticals within there, residential repin has been a very strong the quarter. I think part of that has just been due to higher home prices and consumers accordingly investing in what typically is their biggest asset. The So just based on that, how do you think that category evolves as higher market rates start to impact housing prices perhaps on the downside going forward?

Speaker 2

The Well, Gautam, I'd say it remains positive. If you talk with our contractors, they look at the backlog ahead and the double digit growth for the remainder of 2022 going into 2023. I would agree that there's some projections that remodeling may slow down mid-twenty 23, but I'll also remind you that the painting represents a terrific project to have high impact at a relatively low cost. And the While rates are moving, house price appreciation has also moved as has the aging of housing. The stock, aging stock, home price values, I'm sorry, let me redo this.

Speaker 2

The aging the home continues to require more remodeling, more updates, people the aging in place and we see that. You see it in the NAHB, which has slowed just a bit, but still well above 50. The quarter. And while existing home sales have slowed against strong comps, it's largely because of lack of inventory. The And when people have a tendency to stay in home, they'll continue to invest in those homes.

Speaker 2

Res repaint, we the We've often talked about is the largest segment in the professional sub segment space. It's a great opportunity for us. These customers respond very well the to our personal approach of selling with our store managers and our sales reps. The Our focus here is pretty simple and why we have confidence is that we focus on the services and the solutions that the allow these customers to be more successful. And I mentioned just a moment ago about the new accounts and share of wallet.

Speaker 2

The These are accounts that are responding well to us. And I mentioned earlier the innovation, I thought I'd just share one really quick one with you the quarter. As an example, because here in Cleveland, we've just experienced a pretty dramatic swing from cold weather to warm weather and the We've introduced a product called Latitude with Climate Flex Technology and it's a terrific product that fits and I think it's a great example of why we continue to grow. We're responsive to these customers' needs and this is a product that can the We applied anywhere from 35 degrees all the way up to 120 degrees with the same application, same flow, same hiding, same appearance. The So what you end up is with customers that understand we're really focused on making them successful, launching products that help them the on projects longer, allowing them to work later into the season.

Speaker 2

And this product with very minimal the Warning, if it starts to rain usually within a few hours, not even about 30 minutes actually, the product is resistant to moisture. So these are just small examples, but it really allows us Q3 to demonstrate how we're moving the needle and why we have confidence in continuing to move the needle in this space.

Speaker 8

Thanks for that, John. And just for my second question, just on your comments the Q3 2019 guidance, which sounds like it's better than your initial expectations. What do you attribute that success towards in context of just the visible the Sort of plateauing of some of the inflationary numbers out there with oil prices stabilizing, etcetera.

Speaker 2

The Well, it's really simple. It's not a 30 minute discussion. We don't win or lose our price increase on how well we talk the to them about the price increase in a pricing meeting. It's everything that I just talked about. Every day we earn the value that our customers are willing to pay us for our products and services.

Speaker 2

And so the fact that we're out there helping them to be more successful, more profitable when our costs go up, the company. They understand that we're doing everything we can. Every customer that does business with Sherwin Williams should know. We're doing everything we can to drive our costs down in both raw material the and every other item in that basket. But when we're with them in a meeting to talk about pricing, it's because we need it.

Speaker 2

The We've done everything to offset it, but what's most important is we're helping them to be successful and we're partnering with them in their business. And so, yes, we're more effective now because we're helping our customers to win.

Speaker 8

Thanks, John.

Operator

The next question is coming from Kevin McCarthy.

Speaker 9

Yes. Good afternoon. John, last year, I think you spoke about adding 50,000,000 gallons of architectural coatings capacity. Can you provide an update on that? Has any of it come online?

Speaker 9

And if so, what percent is loaded these days?

Speaker 2

It is online. It's allowed us, as Al mentioned earlier, to build inventory at a time where we Typically would have been running flat with demand outside of Orlando, terrific team. I got to hand it to our the entire supply chain team for the great work they did in getting that capacity up and running as quickly as they did. The It's pretty well utilized. We don't talk to the specifics, but we run a the 10 year model out on capacity and this capacity was needed, came in perfectly the We've got more capacity coming in Statesville, which will allow us to the quarter.

Speaker 2

Further meet the growing demands that we're projecting. And again, I hope that you see the Exactly what we see, which is confidence in our ability to deliver and the investments to support the demand that we're going to create.

Speaker 9

The Okay. That's great. And then secondly, if I may, I wanted to talk a little bit about the acquisition activity that you've done. I I think you mentioned 3 bolt ons closed during the quarter. What is the aggregate sales contribution that you would expect from those the in 3Q and 4Q.

Speaker 9

And based on your margin comments and performance, it sounds like maybe the acquisitions feature significantly lower margins. Is that correct? And if it is, maybe you can talk about the game plan to raise those to the company average or beyond over time?

Speaker 2

The Yes. Let me start with the latter part of your question. I'll throw it to Al to talk about the first piece. You're right. When we split out the acquisitions.

Speaker 2

It was to highlight to our investors our ability to reach the commitments that we've been talking about. The In fact, when we first announced the Valspar acquisition, we painted a picture that the quarter. We were proud of the performance of our tag business and that we expected to drive this industrial business the quarter. In that direction, citing our desire to get into the high teens, low 20 operating margins. The The fact that we've reached adjusted backing out to your point the last 12 months of acquisitions up into the 2017, there's no one popping corks here.

Speaker 2

We're not done. We know that the And it's 1 quarter. We understand that as well. But it clearly demonstrates what it is that we're out to do and how we're doing it. The fact that we've reached 17%, the We think is an indicator of where we are.

Speaker 2

And I will tell you where we're going is higher. The fact that we backed out these acquisitions the Should in fact indicate that we believe in these acquisitions. Some of them are as little as 30 or 60 days old and the We've not had the opportunity to drive the synergies that we know we can drive into these acquisitions. We're making these acquisitions with a long view in mind. We're not trying to the Add on the 1st 30 days of their joining our family, do we expect them to be contributing what it is the that we expect them to do.

Speaker 2

We buy them with a goal of bringing our synergies and plugging them into our platform, driving more volume the out and cost reductions and synergies in. So we're excited about these wonderful companies, the people that have joined our company as well as the technologies they bring and we will drive those in the right direction and they will contribute to our profit.

Speaker 4

The Yes, Kevin, the acquisitions that we've had to date have added a little over 1.5% in the 3rd quarter, the Q4. When I look at PCG that they would add about a mid single digit percentage and Just to highlight John's point, I mean, we've spent over $630,000,000 for the year on acquisitions, most of that or 2 thirds in the Q3.

Speaker 2

The The offset as we talked earlier to those acquisitions is in FX. So about even if you're looking just at the scoreboard.

Speaker 9

The quarter. That's helpful. Thank you.

Speaker 1

Thanks, Kevin.

Speaker 3

The Q3.

Operator

Your next question is coming from John McNulty.

Speaker 4

Yes, thanks for taking my question. So there's been the year. Tremendous number of price hikes and announcements throughout the year at different times. So I guess can you help us to think about if no further price hikes the Q3 results were announced. How should we be thinking about what the pricing in 2023 is year over year?

Speaker 4

Just to kind of help us to level set a little bit just given how much you've been putting through. Yes. John, with all the annualizations, you'd expect mid single digit price effectiveness the As you roll off the February 2020 increase and you annualize this last increase along with each of the price increases the We went out with through the other regions and segments. Right now, that's our estimate. Got it.

Speaker 4

Okay. No, that's helpful. And the Earlier, I guess, in the prepared remarks, you spoke to some of the e commerce investment that you're making. I guess, can you give us an update as to some of the investments that you're making there and how that market seems to be evolving at this point. We know it's still relatively early in that process, but I guess an update there would be helpful.

Speaker 2

The Yes, John. I think what's important to understand is that our e commerce initiative is not just a transaction. It's the more than selling paint. The ability to transact over a platform like that is table stakes and ours goes the Well above that. It's a much broader approach towards trying to tie in the entire ecosystem that we bring.

Speaker 2

So that last mile delivery through our local store is something that we want to be able to deliver in, but we're reaching in the contractor base that we have relationships with and beginning to conduct more and more business along with the rep the store manager in a very unique and differentiated way. We want these customers living on our platform, running their business on our platform the and seamlessly doing business with us as a result of that. And it's working quite well. We've got a number of painting contractors as well as a lot of national accounts that are really dialing into our platform. The There'll never be a finish line to this.

Speaker 2

We're investing pretty heavily right now, but that as we're ramping up the quarter. As part of our plan, that will stabilize and diminish over time. But right now, we the quarter. I think we're in such a unique position with our store platform and the ability to conduct business in a way that no one else can. And We're excited about it.

Speaker 2

We're leveraging it and more and more people are using it.

Speaker 3

Great. Thanks very much for the color.

Speaker 1

The Thanks, John.

Operator

Your next question is coming from Christopher Parkinson.

Speaker 10

The Good morning. Can you just hit on your broader expectations, whether it's 4Q or 2023, the On what you're hearing in your general industrial businesses, perhaps just parsing out various content from geographies and then also more consumer versus core industrial businesses, it would be particularly helpful. Thank you.

Speaker 2

Chris, our the industrial business, I would say, I talked just briefly about our packaging, but our packaging non BPA coating is continuing to gain great traction. The I mentioned that we're investing in this business. We've got great relationships with our customers here and we are investing alongside with them with great agreements the That allow us to really collaborate well and to grow with them. There's strong growth, for example, in beverage the in both North America and Europe as the preference more and more moves away the From other containers into aluminum cans, the Euro Food Safety Association opinion in Europe is also driving an increased demand for non VPA coatings. We think that continues through 20222023.

Speaker 2

The So this is a really, really unique technology, great customers. We've got a wonderful team here that's really executing very well. We're excited about this business. The coil business has been up double digits in 7 of the last 8 quarters.

Speaker 3

The quarter.

Speaker 2

I mentioned earlier that we're facing some tough comps here with a 20% comp in the 4th quarter, but we're not running for the quarter. We're running this for the year. We're really excited to hear again about this leadership team as well as the technology. Our solutions here the in the face of adversity for our customers and that's where we're headed, allowing them to be more responsive to their customers. So it's working very well.

Speaker 2

The quarter. Our industrial wood business is another area that we believe we're growing share. Kitchen cabinets is a big part of this business. It's still positive now, but we do We expect to see a little bit of slowdown in this business as new residential slows down. Furniture, same way, we're growing share, but the As new residential slows down, that will have an influence on industrial wood.

Speaker 2

There are the Other opportunities though, we see a terrific opportunity in industrial wood, flooring to continue to grow, building products the Our share position there offers tremendous opportunity. We do have a good position here in Europe. And so as Europe impacts industrial wood, we'll feel that in our industrial wood business. The Auto Refinish, I would say there's very high demand and we're really pleased with this team and the job we're doing here. We know we're growing share here, particularly in North America, where our shop count is growing dramatically.

Speaker 2

The There's a shortage here of body techs and parts that's having a material impact on backlogs, the But our results in this business are terrific. And this is another one where we have a very similar model in automotive as we do our tag business with our control distribution. So our ability to serve and be responsive to our customers the Q3, along with the shift that we're seeing very positive mix shift towards our premium products gives us great confidence in this business. The The combination of the Valspar and Sherwin technology that came together is really helping us win in auto refinish. The GI, general industrial, strong demand here in heavy equipment expected through 2022 and 2023, the Especially large in ag and construction and certainly as you would expect that's been positive impacted by the positively impacted by the the infrastructure opportunities that exist.

Speaker 2

And then finally, in protective and marine, the We're really pleased with what's happening here. Demand is strong in all end markets, oil and gas, water, wastewater. The Again, same issue here as far as an opportunity in multiple high value infrastructure opportunities. The solutions here go a long way as well. Our customers are willing to pay for products that help get them off the job quicker, the quarter either with less coats, quicker recoat times, whatever it might be.

Speaker 2

We've been investing in this business in the flooring business. We're putting together a nice portfolio of technologies, services and capabilities that we believe will again further help us to differentiate. The Our model here again is also differentiated, particularly in North America where we have our store platform to use as distribution quarter. Many of our competitors are trying to drop ship in large orders. Our customers can work with our teams and leverage the local Sherwin Williams store the to source product and have it there when they need them and our teams are working really well and together on that.

Speaker 2

The So a lot of momentum here. We clearly see some pressures in the market as you look at Asia and Europe the And what's happening in those, we're not going to be immune to those, but we absolutely do believe or we expect and hold our teams accountable the To outperform the market and we have a lot of confidence that we'll be able to do that and we're making investments to help support them doing that. So we're feeling pretty good about this.

Speaker 10

The That's very helpful color. Just as a very brief follow-up, there's been a lot of debate regarding penta demand in both the resi and commercial repaying. Can you just quickly assess what you're currently hearing from your customers in terms of the backlog longevity, scope. I mean there's been kind of some rumors about the scope of certain projects, especially in the resi side, the Actually expanding for people that are waiting a lot of time. Can you just give us your latest assessment on what you're hearing from your customers and what how that drives your confidence at least into year end.

Speaker 10

Thank you so much.

Speaker 2

Chris, hold on one second before I just get you. Are you talking about new residential?

Speaker 10

The No, resi repaint and commercial repaint. I apologize.

Speaker 2

Okay, got it. Well, commercial the In Resi Paint, I'd say the underlying demand on commercial is strong. Projects are resuming and starts are positive. The If you look at the Dodge Momentum Index, a strong positive for every month in 2022 and the ABI, the Architectural Billing Index, and the I'm sure you all know that's the index that really is a metric for how architects are billing the It's been positive for 20 straight months. So that typically means projects in the next 9 to 12 months the are going to be coming out of the ground and the fact that they remain positive, we believe is a good sign.

Speaker 2

The customers here are positive. They're still reporting the delays resulting from some labor and material shortages that we are the We've seen a terrific opportunity for our products. Infrastructure spending here as well is strong and the Schools, airports, vending, hospitals and also areas such as data centers. The Our position here is strong. Again, we really leverage our platform.

Speaker 2

We leverage our specification teams, the Q3. And continuously drive new products for customers that allow them to be more productive on the job. The combination of those local stores, reps and really great stable of products. I got to hand it to our innovation team the continues to do that. I know they've been gathered just in the last couple of days, talking about how they can continue to add more the Q3 results and they're doing a wonderful job doing that.

Speaker 2

So I want to call out to them as well. As it relates to the residential repaint side, the As I mentioned earlier, it's still positive. We see contractors in our stores every day. They're talking about the strength through the balance of the year and turning the corner into next year, still a pretty good backlog. I'd say that if We talked to them about bidding and what's in the pipeline and really dial into our CRM to understand that.

Speaker 2

I'd say the What we've been witnessing is more and more the project scope has increased. So the size of the projects continue to grow. The I think some of that might just simply be, I finally found a contractor that will come give me a quote and I'm not going to let him out just doing my Living room, I'm going to have them do the entire house or expanded areas that they may not have planned on in the past. The The quality of the leads seem to be going on. So there's our contractors would refer to it as less tire kicking.

Speaker 2

There's the people that are interested in projects, interested in getting quotes and starting these projects right away. So the We're very aggressive in pursuit of these customers. We feel as though our right to win and our value proposition is strong and getting stronger. The quarter. And we're looking forward to continuing to leverage this.

Speaker 2

One last point I would make is that, our head is not in the sand here. The call out that we're making for adjusting our expenses and everything that we're doing, I think highlights exactly the fact that we're grounded in reality. The I will say this though that when we exited the last slowdown in the last recession, we did a postmortem and really tried to understand the What is it that coming out of the next slowdown we want to be prepared with? And how would we be better the quarter. And so throughout the period, the 2,008, 2010 period all the way to now, we've been working Strategically on how do we better position the company.

Speaker 2

And when you look at residential repaint, it's a much larger percentage of our business now. The And that's because when we went through the last one, new residential, while we've been successful and we've been growing in our success there, the quarter. We wanted to offset this and diversify our business a little bit more. So we've been hard at work driving more and more residential repaint and now it's a larger percentage of our business the We think it's going to allow us to weather storms much better than we have in the past.

Speaker 4

Thank you as always.

Speaker 3

The Thanks, Chris.

Operator

Your next question is coming from David Begleiter.

Speaker 11

Thank you. Good morning. Al, should gross margins be up in Q4 sequentially?

Speaker 4

The Yes. Yes. And part of that, David, is the full impact of the 10% price increase. We do have a softer comp, but really you also have the strong the low double digit volume in tag, which is our highest margin segment. So we should see a nice the A better flow through, if you will, in our Q4 relative to our Q3 in TAG, which will help drive that gross margin up.

Speaker 4

The So yes, I'm expecting sequential and a bigger year over year improvement in our Q4 and possibly even getting to that low end of that long the full year term 45% to 48% range.

Speaker 11

Very good. And John, just on the Home Depot PPG relationship, has there been have you seen any negative impacts In your business in terms of business losses or share losses?

Speaker 2

Well, I would say this, our belief We're in a really, really good position. We've been working hard developing our approach towards the control distribution model that allows us to differentiate. When we're doing our job, we would expect people to react and change their models. And when they do that, we like to take advantage of that change. The We think we're executing really, really well.

Speaker 2

We think people are reacting exactly the way we'd expect them to react. The And we'd say that we're capitalizing on that and we will continue to capitalize on

Speaker 11

it. Thank you very much.

Speaker 2

The Thanks, David.

Operator

Your next question is coming from Arun Viswanathan.

Speaker 3

The Great. Thanks for taking my question. Good morning. I guess, first off, you noted that there could be some challenges in 2023. Could you just describe that a little bit more?

Speaker 3

Is that continued slowdown in Europe and China, and potentially that's spreading over into North the in the tag business or is it mainly still kind of more likely in PCG? I will start there. Thanks. The

Speaker 4

Yes. Arun, I think we've talked about it. We do expect continued the slowdown in Europe and Asia. I think as we get into North America architectural demand, I'd prefer As we've gone through or going through our normal preparation for the coming year and the operating plan, to give you a bit more color the On that in January, we'll have a few more months under our belt. There's a lot of moving macro the trends and things that are happening and they're moving daily.

Speaker 4

So rather than try to give you an outlook for 2023 on ARC and the regions, the I prefer we'd be better prepared to do that in January. I think the Q4, like we talked about, the strong high teenslow20% in tag and low double digit the Q1. Volume likely to carry over into the Q1 and then the price of high single digits that we've got the Certainly carries over into the Q1. I think that's as far as I think we can go on color.

Speaker 3

The Okay, that's helpful. And just as a follow-up then, have you seen your customers change their order the patterns at all in maybe some different market segments. Is the backlog actually growing? Or is it that they're getting to jobs that maybe that were deferred the during 2021 because of lack of availability to RAS and labor. Maybe you can just comment on that.

Speaker 3

Thanks.

Speaker 2

The Well, there are certainly some of that. And I would say that 2 things. One is, I think we're working much closer with our customers. Adversity brings out the best, sometimes you have to find it. The fact that we've gotten through this challenging time with raw materials the With a closer relationship with our customers, we better understand what projects they're on.

Speaker 2

In the past,

Speaker 3

the quarter. They just walk into the store and they knew they could

Speaker 2

have it, whatever it was. When they needed it, it was there. The As we went through that process of working through the raw material shortages, we were more responsive or better responsive the when we understood what the needs of the customers were. So I'd say the pattern, first of all, for us is it's a closer pattern. We're working better with them.

Speaker 2

The We do see some, I would call it maybe they're more fluid. They're moving to projects when they become available. The And if it's weather changing or getting outside when they can, the fact that the They're racing with a pretty sizable backlog. They don't want to take any time off that they don't need to. So I mentioned that product that I mentioned the and extended the painting season for them.

Speaker 2

But I'd say as it relates to the pattern themselves, on the architectural side, we're the more frequency, I would say. We're seeing people in our stores more. And on the industrial side, I'd say we're probably seeing the Smaller orders more frequently as our customers are trying the Q3 to prepare for cash management while being responsive for their teams with their teams or their customers. The fiscal year. And again, that works to our advantage given our model of responsiveness.

Speaker 3

Thanks. The Thanks, Arun.

Operator

Your next question for today is coming from John Roberts.

Speaker 12

The Thank you and nice quarter. One of your longest lead time planning items is new store openings. I assume you have your sites for 2023 selected. Can you give us some insights into what new stores might look like next year?

Speaker 2

The quarter? You're right. We do have that planned out. I'd say that we're probably at this point going to tell you it's going to be in the 80 to 100 the range. And you'll see those in a combination of metro markets where we're continuing to feed in the locations as well as in some markets where we want to supplement some of the previous investments with added locations for our customers.

Speaker 2

But you're right, John, as we go into the year, the A good portion of those are already identified and the deals are just getting finalized and we're working through those. So we're prepared and again the Confidence. Confident in our model, confident in the differentiation of Sherwin Williams adding stores while others are closing stores and taking advantage of the market opportunities that exist as a result.

Speaker 12

Okay. And on a 1 year comp, the DIY in your stores the Was obviously very different than the DIY in your consumer segment because a year ago you were prioritizing the propane or over DIY in your stores. The If you looked at a 2 year comp, is the DIY in your stores roughly up the same amount as the DIY in the consumer segment on a 2 year stack?

Speaker 4

The I think it'd be up higher than that, John. I think we've had really nice strength in the 2020 customer with Finntag and the fact that we've been able to do turn on super sales again to bring them in the has really helped drive that growth.

Speaker 1

Great. Thank you.

Speaker 2

The Thanks, John.

Operator

Your next question is coming from Mike Sison.

Speaker 3

The Hey guys, nice quarter. Just one question for me. You sort of mentioned thinking of or sort of managing the business on a worst case scenario. What would that look like for the stores? The quarter.

Speaker 3

Would demand be flat, down, down a lot? And in the event sort of that unfolds, what can you do to help mitigate some of that potential volume decline?

Speaker 2

Yes, Mike. Trying to guess how bad that could be is the Not something that we're going to do on this call. The reality is that we prepare for a number of scenarios. The Our view is that particularly in that store's business that when things get tough, we go hunting. The And the reality of really difficult time in stores might include scaling back on some of the staffing if we didn't have the transaction count for other expenses that we might feel are appropriate.

Speaker 2

But I would say this that the In the 37, soon to be 38 years I've been with the company, our approach has been to take advantage of these situations. I mentioned earlier the work we've been doing to grow res repaint as a percent of our business. Coming through COVID, I think it's a great demonstration of what we do in really difficult times. We go find customers. Those customers need to paint to put food on their plate, feed their families.

Speaker 2

The We grow share, we grow active accounts and we outperform the market. And I'd say that's what you should expect us to do in difficult times.

Speaker 4

Mike, I would just add to that. If you kind of how I frame it, so to speak, is if you go back and look at the New residential in 2008 and 2009 where there's a lot of housing speculation and things of that nature, our the new res was down in the low 22% range. And as John talked, as we've come out of that and back then res repaint and new res the ratio was 1:1. Fast forward that to today and our residential repaint versus new res is 2:1. The quarter.

Speaker 4

And when I look at also property maintenance over that same time period, you look at the combination of res repaint and property maintenance that are the Less resistant or recession more recession resistant, but we're probably over 50% of our sales relative to Just over 40 back then. So when he talks about how we've mapped the company to help us the mitigate a recession. Those are the types of things and the metrics I look at to say, okay, I don't believe it can be bad as the 2020 2020 2020 200820209. But if it is, we're much larger in other segments to help offset it.

Speaker 2

The And again, not to keep everyone here all day, but the res repaint is important part of it. The Probu Paints is another piece when we think about the residential That is a new focus for us as well as in that industrial side where packaging, auto refinish, the These are growing parts of our business that weren't as strong in the past. So we don't wait for bad things to happen. We're trying to make good things out of it. The Great.

Speaker 2

Thank you.

Operator

Your next the question is coming from Mike Harrison.

Speaker 3

Hi, good morning. The You guys noted that you're working through some inefficiencies in your supply chain still. Presumably that means the You're starting to get back to playing a little bit more offense when it comes to procurement. So I'm curious, when you're talking about raw materials coming lower the sequentially, is that really just a decline in market prices and that's mostly what you're talking about? Or does it also include This greater supply chain and procurement efficiency that you should see over time.

Speaker 2

The Yes, Mike, I think what we're speaking to there has been our willingness to serve our customers even at a cost. The quarter. And so I think it was Ghansham might have been asked about the supply or the capacity that came on the 50,000,000 gallons. The As our raw materials have become available, we don't want to turn those down. We may need finished product in one part of the country, the But the raws because of the supplier base might be available in another part near another plant.

Speaker 2

We've manufactured that product the quarter and shifted to our customers to serve them. We have worked with our suppliers at times where they've been unable to ship raw materials to us. The We've used our own tank wagons or our own vehicles or 18 wheelers to secure product And get it to our plants when needed. So there's an advantage of doing business with Sherwin the Q3. It starts with the customer in the store or the rep in a plant, but it works all the way through to the raw material the manufacturing piece.

Speaker 2

And we'll do what we have to, to keep our customers in business and producing because we know in the long run, the The better job we do at keeping them in business, the better supplier we are to them. That's in our best interest long term.

Speaker 3

The And then looking at the restructuring actions, it looks like a good portion of those are targeted at the Asia Pacific region. Is that a region where you're still investing for growth and still seeing a lot of opportunities? Or is that is there kind of a retrenchment going on there? Maybe talk just a little bit about your strategy in the APAC region?

Speaker 2

The Yes, Mike, I'd say on the industrial side, we are investing and continue to grow. Nearly every one of our the PCG business has a good and growing business there and we expect that to continue. As you would expect, we are taking the The appropriate actions based on slowdowns and as I would say is our custom, we continue to the evaluate our businesses. And as Al mentioned, not only our businesses, our programs, our customers' relationships, everything we can to ensure that the They reached the hurdle for us to continue to invest in those. I think it is safe to say that we're doing a deep dive review of our architectural business in China.

Speaker 2

The And based on how that review comes out, we'll decide what we'll do in the future. The industrial side, We know we can demonstrate the value for our customers that can allow us to win there.

Speaker 3

The All right. Thank you very much.

Speaker 13

Thanks, Mike.

Operator

Your next question is coming from Greg Melich.

Speaker 4

The Hi, thanks. Thanks for the insight on the gross margin going forward, guys. I'd like basically ask the same thing on SG and A. I think it was up almost 12% year on year in the Q3. Is that a Should we assume a double digit growth in SG and A as well in the Q4?

Speaker 4

Yes. No, the Greg, I think what you're going to see in our Q4 with the TAG stores that we've invested in and then opening another 40 to 50 the Q4, along with the reps to support that, we'll continue to grow our control, the quarter. Our SG and A pretty tightly. I do expect to get leverage still in our Q4 on SG and A. But as you the typically see with the seasonal slowdown in our architectural demand, SG and A as a percent of sales will be up.

Speaker 4

The I don't expect our SG and A to be up as much in our Q4 just because some of the actions we've taking on holding new positions, reducing travel, things of that nature will help offset some of those additional investments. The Q3. Got it. And then I guess my follow-up is given that the we've tend to focus on getting on top of raws and clearly it seems like you're there now. The But given all the other costs that are going up, is it possible next year that there could be another round of price increases even if Raws are flattening out.

Speaker 4

Greg, I think we've got to Get through our normal planning process here. We'll evaluate the merit increases and different other inputs like labor and transportation. And if we the You know us, if we need to go out again, we will, but we're not in a position today to talk to that the Specifically.

Speaker 2

And if we need to go out, we will have wrestled everything we can to the mat to try to avoid having to go out. But I I think we've demonstrated an ability and a willingness if we have to, but we don't take that lightly. Our goal is not to have to, but the There are some inflationary areas of wages or whatever it is. We also want to make sure that we retain the best talent and we so we know we need to be competitive as well.

Speaker 4

The That's great. And then my last is really a follow-up on gross margin. Could you help us if gross margins end up being, I guess, they're up 100 the 2020 this quarter and let's say they're up 300 or more in the 4th quarter. Is that going to be more from price versus raws or more just from volume the increases. I think last year you called out that was 100 of bps to help.

Speaker 4

Can you just help us on that? The Yes. I think it's going to be the strong volume through tag of double digits pricing and then the raw moderation in that order.

Speaker 3

The quarter.

Speaker 4

Got it. Thank you guys and good luck.

Speaker 3

Thank you. The call.

Operator

Your next question is coming from Adam Baumgarten.

Speaker 14

Hey, good afternoon, everyone. So maybe sticking on DIY, I know you mentioned that volumes in tag were really strong there. Were North American DIY volumes positive in consumer brands in the quarter?

Speaker 2

The North American volume was up strong single digits.

Speaker 4

Yes. I'd say on the volume side, the We are up low to mid teens in the 3rd quarter volume was up low single digit.

Speaker 14

The Okay, got it. And then just as we're thinking about the raw materials, if we were to keep current basket at the levels where they are today and the flow that through the next year, what would that look like from a raw material inflation perspective if everything just stays stable where it is?

Speaker 4

Yes. Adam, I think your if everything stayed exactly the same, which we know it won't, You're still talking probably low mid single digit by the time you annualize everything. That's a hard answer today. Like we talked about, let us get through our planning cycle, let us get through our demand outlook with our suppliers and let us the give you a better view of our full basket of input costs, raw materials, labor, freight transportation on our January call. I think it's too early to be speculating too much on 2023 costs at this point.

Speaker 4

The Okay, got it. Thanks.

Speaker 2

Thank you.

Operator

Your next question is coming from Garik the SMART.

Speaker 13

Hi, thanks. I'm curious if you could speak to any mix impact in TAG or are you seeing any signs or anticipating any signs Of our trade down.

Speaker 2

No, actually we see the opposite. As the customers are facing labor shortages and trying to get through projects as quickly as possible. They have a tendency to move up in quality. We're actually even seeing that in our new residential as well the As we've introduced new products, new one, Painter's Edge Plus, it's the ultra flat product that hides imperfections as an example. So you get in some of these projects where the drywall contractors are the struggling to hire and find experienced drywallers.

Speaker 2

The passing drywall on that may not be as perfect as the painter might have liked. And so we're helping them with products that the some of those imperfections. Our customers are willing to pay for those 90% 85% to 90% of their cost is labor. So shifting up in quality the

Speaker 3

project.

Speaker 13

Got it. Thank you. Follow-up question is just the One more on DIY. It sounded a bit more sluggish coming out of 2Q. Just curious, are you seeing the sequential strengthening there?

Speaker 2

The I'd say some of what you're seeing in our DIY, first in our stores and Al was right, we've seen more DIY in our own stores, but it's a relatively small percentage of our business. We're mainly focused on the painting contractor through our own stores, the But the comparisons there where we were shifting product away from DIY products into contractors is a portion the benefit that we see. And then also on the consumer brand side, as we've reached a more the level state, if you will, of raw materials. We've been able to benefit from some of the pipeline filling into other customers that we've not been able to in the past just because of availability. So we're seeing some benefit there as well.

Speaker 3

The quarter.

Operator

Your next question for today is coming from Steve Byrne.

Speaker 13

Yes. Thank you. The Are the equipment sales that you're paying contractors sometimes buy from you, the spraying machines and so forth, Are they still a good leading indicator of paint demand for you or does that depend on which of the businesses. I was just curious if it's still useful, how would you characterize those sales the In recent months, and on the same theme, John, you talked about having visibility for the The paint contract for the probe backlog through the end of the year, here we are almost 2019 outlook for the 2019 outlook? November, would

Speaker 3

you normally

Speaker 13

have a view of a backlog beyond year end at this time?

Speaker 2

So let me answer the first question. You're right that the spray equipment sales, any the Given time of the year could vary as how much of a leading indicator it would be. So the residential repaint as an example, I don't think many of us would appreciate a repaint contractor coming into our homes where we're living with an airless sprayer trying to the inside of the home. And as exterior slows down, they're less likely to purchase spray equipment. The So I'd say that for the most part right now, spray equipment is riding along, as you would expect with the sales volume the paint that we're experiencing.

Speaker 2

And then, the second part of your question, Steve, was

Speaker 3

Just whether you would see

Speaker 13

more backlog beyond a couple of months at this time of year?

Speaker 2

No, I'd the I'd say right now, as we've been talking historically to our customers, the outlook that we have is pretty much in line with what we would normally hear from them. Commercial contractors generally have a longer view. These are larger projects that go out to bid as far out as a year earlier. Residential repaint would be on the other end of the spectrum and those contractors could get contracts or agreements that could start in weeks, the Others in months. So I'd say it's pretty much in line with what we would normally see if you put them all together the And look at the backlog, it's pretty consistent with what we see.

Speaker 13

And then with respect the The consumer business in China, is that basically the Wah Run brand? And I was just curious whether the That brand that you acquired with Valspar just hasn't worked out as well as you had hoped.

Speaker 2

The It is the Warun brand. And if I'm talking on a call about a deep dive, it's probably safe to say it's not worked out as well as I had hoped.

Operator

The year. Your next question for today is coming from Erik Boshard.

Speaker 5

Good afternoon. Two things for you. First of all, Al, in terms of production and inventory from here, can you just clarify the Q3? What the plan is as you head into what you characterize as a bit uncertain in volume in some areas. What is the plan through 4Q and into 2023?

Speaker 4

Yes. Eric, I talked about building some inventory in our Q4 on architectural specifically. I think of those as maybe some of the if you rank products A, being your fastest mover, rebuilding some inventories the Q3 2020 and our outlook for the Q3 2020 and our outlook for the Q3 2020 and our outlook for the Q3 2020 and our outlook for

Speaker 3

the Q3

Speaker 4

2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and Q4 2020 and the quarter. That being said, as John talked about, we're going to stay very close with our customers and what their backlogs and outlooks are, the And we'll adjust production accordingly. I don't want to get too far out in front of demand, the knowing that, we were able to keep up with demand through the summer season with the additional capacity we brought online the that we talked about earlier. So I think it gives us more flexibility to manage inventory the Lower if need be going into the summer, but I think those are things that we're very going to be very cautious about. Like I said, I want to get the quarter.

Speaker 4

Our working capital back down towards that 10% to 10.5% of sales where we I would like to run the company. We think we can get down there around 11 to 11.5 by the end of this year, knowing we're going to carry a little bit more inventory into next year, the Or I should say it that way, I should say we'll be back to a more historical level of inventory than we were a year ago obviously. But the I think that's something we'll manage pretty tight.

Speaker 1

Okay. And then secondly,

Speaker 5

the John, I understand your comments of how the portfolio is different with more resi repaint versus new. In the last cycle, the The industrial business is also, I'd say notably bigger than it was before as well. I'm curious how that influences the gross margin path. The Al, you talked about getting to the low end of the 45% to 48% in 4Q, but how does the gross margin recovery path behave the In this cycle, should it behave like in prior cycles or is the inclusion of industrial change the arc of that path?

Speaker 4

The You know what, Eric, I think what you see is, that mix shift of the On the industrial side is a little bit better for us from a gross margin standpoint. And then you got to kind of look at it even within architectural, the mix shift is a little bit better for us. So I get your question. We didn't have packaging through the last cycle. It's a larger portion a much larger portion of industrial the even now than it was 2 years ago.

Speaker 4

So I think when you look at margin profiles, we might have a little bit more positive shift when you get the And to these slowdowns, we're seeing some of that, I would argue with a slowdown in Asia and Europe across some the Has better demand, our margins will be a little bit better across

Speaker 3

the business. Yes, we do have

Speaker 2

to weigh in segments like our auto refinish and coil. I mean, the It's a very good question, Eric. I think if you look at the overall, we think we're not only better positioned the From a demand standpoint, we talk about res repaint, but you also would have to include property management in there. The auto refinish, the packaging, all of these are really better positioned. But we're going to be, I think in a better position to grow volume as well, more absorption to the plant than we may have through the last cycle as well.

Speaker 2

The There's a lot that we bring in our approach even with existing segments. The strategy work that we've done the solutions that we bring is where we're focused and we think that's going to benefit us.

Speaker 3

Thank you. The Thanks, Eric.

Operator

There are no further questions in queue. The quarter. I would like to turn the floor back over to Jim Jay for any closing remarks.

Speaker 1

Thank you, Holly, and thank you everybody for joining us today. The As you heard, we're looking forward to delivering a very solid 4th quarter that will result in 35% the Q3 of 2019. We're also very focused on preparing for any number of scenarios that might unfold next the next year. Our team is very deep and experienced, as John said. So, very confident heading into next year, and we're looking to execute continuing to execute at a high level.

Speaker 1

I will be available along with Eric Swanson for your questions afterwards. And again, thank you for joining us today. The call. Have a great day.

Operator

Thank you, ladies and gentlemen. This does conclude today's event. The call.

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Key Takeaways

  • In Q3 Sherwin-Williams posted a record $6 billion in sales (up 17.5%), expanded gross margin to 42.8% and achieved a record adjusted EPS of $2.83, driven by pro architectural and North American industrial strength.
  • The company reiterated its Q4 and full-year 2022 outlook, targeting high single to low double-digit sales growth in Q4 and full-year adjusted EPS of $8.50–8.80 (GAAP $7.65–7.95), implying 35% H2 EPS growth at midpoint.
  • While raw material inflation remains in the high-teens, the company saw a modest sequential cost decline in Q3, expects further raw material relief in Q4 and notes specialty resins will remain tight until Q1.
  • Preparing for potential 2023 headwinds—softness in Europe/China and a US housing slowdown—the company is reviewing its Consumer Brands portfolio and targeting $50–70 million in annual run-rate savings, with $160–180 million in cash costs over the next four quarters.
  • Sherwin-Williams is adding 40–50 new stores in Q4, expanding its management trainee program to 1,400 hires, pursuing product innovation and acquisitions (e.g., Eco Group), and returned $203 million to shareholders in dividends and buybacks.
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Earnings Conference Call
Sherwin-Williams Q3 2022
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