Q3 2019 Earnings Call
Good morning, Thank you for joining the Sherwin Williams companies review, the third quarter of 2019, and the outlook for the fourth quarter and full fiscal year 2019 with us on today's call or John Morikis, Chairman and CEO , Alistair Shin CFO , Jim Cronin Senior Vice President corporate controller, and Jim Jaye Senior Vice.
President Investor Relations and communication.
The conference call is being webcast simultaneously in listen only mode by its your direct via the Internet at Www Dot Sherwin Dot Com and archive replay of this webcast will be available at your when dot com begin approximately two hours. After this conference call concludes and will be available until Friday November eight 2019 at five PM Eastern time This conference call liquids.
Certain forward looking statements as defined under U.S. Federal Securities laws with respect to sales earnings and other matters any forward looking statements speak only as at the date on what's the statement 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.
If all 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'll now turn the call over to Jim Jaye.
Thanks, Jeff and good morning, everyone. Thank you for joining us on the call today.
Comparisons in my remarks or to the third quarter fiscal 2018, unless otherwise stated.
Consolidated sales in the third quarter up 29 team increased $136.2 million were 2.9% to $4.87 billion.
Currency translation rate changes decreased sales by 2.9%.
Consolidated gross profit dollars in the quarter increased $215 million or 10.7% to $2.23 billion.
Consolidated gross margin in the third quarter increased to 45.7% from 42.5 person in the same period last year.
Excluding impacts from acquisition related amortization adjusted consolidated gross margin in the quarter increased to 45.9% from 42.8%.
Selling general and administrative expense increased $72.1 million.
Were 5.7% to $1.35 billion in the third quarter and increased slightly as a percent of sales to 27.6% from 26.9% in the same quarter last year.
Interest expense for the quarter decline $7 million to $85.3 million.
Other expense for the quarter increased $29.3 million $31 million.
Primarily a result of debt retirement expense and expense associated with Argentina hyper inflation.
Consolidated profit before tax in the third quarter increased $293.9 million to 700, a $9.8 million.
Our effective tax rate in the quarter was 18.8%.
Excluding acquisition related costs and the reduction of the California litigation expense.
Our effective tax rate on adjusted income for the quarter was 19%.
Diluted net income per common share for the third quarter 2019 increased to $6. It's 16 cents per share from $3.72 per share in the prior year third quarter.
Earnings per share in the third quarter of 2019 includes a charge for acquisition related costs of 77 cents per share.
And a reduction of the California litigation expense provision of 28 cents per share.
$3.72 per share reported in the third quarter 2018 included charges for acquisition related costs, and the California litigation expense of 87 cents in a dollar nine cents per share respectively.
Excluding these items adjusted diluted earnings per share increased by 17.1%.
$6 at 65 cents in the third quarter 2019 from $5.68 last year.
We have summarized the third quarter earnings per share comparison in a regulation G. a reconciliation table in our press release.
Let me now take a few moments to break down our performance by segment.
Sales for the Americas group in the third quarter increased $232.5 million.
8.7% to $2.90 billion.
Comparable store sales in the U.S. and Canada increased 8.1% in the quarter.
Regionally in the third quarter, our Eastern Division led all divisions, followed by southwest Southeast.
Midwest and Canada.
Sales were positive in every division in the quarter.
Third quarter segment profit increased $85.9 million or 14.9% to $663.7 million.
Third quarter segment profit margin increased 120 basis points to 22.9% and 21.7% last year.
Turning now to the consumer brands group.
Third quarter sales decreased $92.1 million or 11.9% to $678.5 million.
Sales from continuing operations, excluding the lows loading and the divested guardsmen business decreased approximately 6% in the quarter.
Third quarter segment profit increased $31 million to $114.9 million.
Acquisition related amortization decrease segment profit I $22.6 million compared to $26 million in the third quarter 2018.
Third quarter segment profit margin increased to 16.9% from 10.9% last year.
Excluding the acquisition related amortization in both quarters adjusted segment profit margin increased to 20.3% from 14.3% in the third quarter 2018.
For our performance coatings group third quarter sales decreased $4.3 million or 0.3%.
To $1.29 billion.
Currency translation rate changes reduced third quarter sales by 1.6%.
Third quarter segment profit increased $32.6 million to $137.4 million.
Acquisition related amortization decreased segment profit by $54.3 million.
Paired to $55.4 million in the third quarter 2018.
Third quarter performance coatings group segment profit margin increased to 10.7% from 8.1% last year.
Excluding the acquisition related amortization in both quarters.
Segment profit margin increased to 14.9 per cent compared to 12.4% in the third quarter 2018.
I'll conclude my remarks with the comment on our balance sheet.
In the third quarter, we refinanced and extended the maturity of our debt to improve our liquidity position and to lock in favorable interest rates ahead of the expected rate increases.
Specifically, we tendered approximately $1 billion of our 2020 senior notes.
In $500 million of our 2022 senior notes.
We financed this transaction with $800 million with 10 year notes at 2.95%.
$550 million, a 30 year notes at 3.8% and $150 million of commercial paper.
That concludes our review of our operating results for the third quarter. So let me turn the call over to John Morikis, who will make some general comments on a third quarter and provide our outlook for the fourth quarter and full fiscal year 20 Nike.
John .
Thank you Jim and good morning, everyone. Thanks for joining us I'd like to make just a few additional comments on our third quarter before moving onto our outlook.
Our team continued to execute at a high level, we delivered another strong quarter as adjusted EPS increased more than 17% to $6.65.
Our results were driven by outstanding performance in our North American paint stores, where we grew same store sales by high single digit percentage.
Generated growth in every customer end market.
On a consolidated basis adjusted gross margin increased over 300 basis points year over year to 45.9%.
While we still have work to do this improvement shows that we're making progress towards offsetting the significant raw material inflation, we experienced over 2017 in 2018.
We remain committed to achieving our long term full year gross margin target of 45% to 48%.
The increase in gross margin in the quarter was driven by strong North American volume growth operating efficiencies and moderating raw material costs.
Adjusted EBITDA margin expanded 150 basis points over the prior year to 18.9% and.
And for the second consecutive quarter, all three operating segments increased segment profit and margin compared to the prior year.
I'm also pleased with our ongoing integration efforts and we remain on track to exit the year at a synergy run rate of $415 million.
Looking at our topline consolidated sales increased 2.9% in the quarter inline with our revenue guidance about low single digit increase.
Our sales varied by region with North America, and Latin America, each increasing by mid single digit percentages in the quarter, we continue to see softness in Asia, and Australia and to a lesser degree Europe .
Within the Americas group sales increased 8.7% against the prior year comparison, a 5%.
Sales were positive in all North American customer end markets in the quarter led by residential repaint, which was up low double digits.
Sales in commercial and D. I, why we're up high single digits, while protective and marine new residential and property management were all up mid single digits.
Looking at total segment profitability segment profit dollars increased by more than $85 million and segment margin expanded by 120 basis points to 22.9%.
We leverage the strong volume growth to deliver incremental margin of approximately 37%.
We ended the quarter with our customers continuing to be very optimistic reporting solid backlogs for the remainder of the year and a strong sense of confidence heading into 2020.
Year to date, we've opened 31 net new stores, finishing the quarter with 4727 stores in operation compared with 4663 last year.
Our plan calls for this team to add approximately 80 to 100 new stores for the year.
Similar to prior years, we will have a significant ramp up in the fourth quarter.
And the consumer brands segment third quarter sales were down mainly related to the comparison to last year's load and of the lowest program and the impact of the guardsmen divestiture.
Sales decreased slightly more than we expected due to weakness in international markets, most significantly in Asia and Australia.
In North America, we remain very encouraged with our relationships with our largest customers where we are also committed to helping them accelerate sales to the pros who are shopping in the home Center channel.
Segment margin, excluding acquisition related amortization increased year over year to 20.3%.
Driven by synergies and moderating raw material costs, along with improving year over year supply chain cost.
We continue to feel good about our strategy in this business and our portfolio hero brands that serve the north American retail market.
Performance coatings group sales were down 0.3% in the quarter as choppy industrial demand led the variability by region and business.
Geographically total segment sales were up in North America, and Latin America, but were offset by softness in Asia, and Europe , where sales decreased by high and low single digit percentages respectively.
From a business perspective, our packaging and coil businesses remained our strongest performers delivering growth in every region as our customers continue to value our technology and service solutions.
Our automotive refinish business delivered modest growth in the quarter led by solid performance in the Americas.
Sales in the general industrial and industrial wood businesses decrease year over year, primarily due to softness in Asia and Europe .
Despite the sales decline adjusted segment margin increased 250 basis points to 14.9% due primarily to moderating raw material costs and good cost control.
Adjusted EBITDA in the quarter was $919 million or 18.9% to sales.
Excluding integration costs, and the lower California litigation expense.
Adjusted EBITDA year to date was 2.4 billion or 17.5% of sales.
Year to date, we returned over $892 million to shareholders through cash dividends and share repurchases, an increase of 46% year over year.
At the end of the quarter, we had approximately $8.9 billion of debt on the balance sheet.
We have reduced debt by approximately 435 million year to date.
We intend to retire a total of approximately 600 million this year.
Which will result in a net debt to EBITDA ratio below three to one by the end of 2019.
During the quarter Moody's raised our rating outlook to positive from stable, noting our strong business profile and meaningful deleveraging since the acquisition of Valspar.
We paid 105 million in cash dividends and purchased 250000 shares of common stock for $127 million in third quarter.
At quarter end, our share repurchase authorization stood at 8.8 million shares.
Capital expenditures were $97 million in the quarter depreciation was 65 million an average amortization was 78 million.
Moving onto our outlook for the fourth quarter 2019, we expect consolidated net sales to increase by a low single digit percentage compared to the fourth quarter of 2018.
Given that our North American professional painting contractor customers continue to report solid backlogs in a positive demand outlook, we expect growth in the Americas group to be in the mid to high single digit range.
We expect consumer brands group sales will be flat to up slightly in the fourth quarter.
We expect for performance coatings group sales to be down low single digits as industrial demand remains highly variable by region and end market.
Against this backdrop and given our strong performance in the third quarter, we're increasing our adjusted 2019 full year diluted net income per common share guidance to be in the range of $20. A 90 cents to $21 in 30 cents per share, which excludes valspar acquisition related costs and non operating.
This is an increase of approximately 14% at the midpoint compared to the 18 53 reported last year on a comparable basis.
We've included a regulation G. reconciliation table with this mornings press release to reconcile adjusted and GAAP earnings per share.
A few additional data points for the full year, maybe helpful for modeling purposes.
As planned we expect raw material cost in the fourth quarter to further moderates in the levels. We saw in the third quarter, assuming stable petrochemical feedstocks and no supply disruptions.
We expect our 2019 adjusted effective tax rate to be approximately 19%.
We expect full year capital expenditures to be approximately $320 million depreciation to be about 257 million and amortization to be 315 million.
With that I'd like to thank you for joining us this morning, and we'll be happy to take your questions.
Thank you at this time, we will be conducting the question and answer session. If he would like to ask a question. Please press star one on your telephone keypad. The confirmation total indicate that your line is in the question Q you May Press Star too if you would like to remove your question from the Q for participants using speaker equipment. It may be necessary to pick up your handset before.
Pressing the star he is.
Our first question comes from the line of Christopher Parkinson with Credit Suisse. Please proceed with your question great. Thank you.
Now that you're done with the Valspar integration that still peers, you have a long term opportunities to expand margins across all three segments, but specifically consumer brands and performance coatings I can you discuss a quick update on any non raw material levers you have left to pull to drive margins higher. Thank you.
Yeah, Chris first let me just.
Take a bit of exception to your comment about now that were done with the Valspar acquisition integration is still quite a bit of work to be done there and we're working hard to.
Fully integrate not only the domestic piece here, but we've got quite a bit of work to do in the non domestic and a whole lot of work to do on the sales side. So a lot of opportunity there too.
Due to leverage going forward and Chris. This is they almost mission just as a reminder, we talked about the synergy progress that we're making and coming out of this year at a $415 million run rate.
Through the piano 315 million and that hundred million is going to be by and large.
Facilities and.
Factoring and other consolidations as well as formulation adjustment. So you know there there are other levers to pull along with our continued focus on market share opportunities and delivering new technologies innovative solutions and services to our customers to drive growth organically and that's where we think we're going to see the benefits.
Got it.
You did it on this a little in your prepared remarks, but can you just good kind of walk us through the rest of the PC sub segments of packaging general industrial coil wouldn't refinish.
Just kind of hit on the key highlights that you're looking into over the next 12 months or so and then also give us a quick comment on whether or not your fully content with your competitive positioning.
Each of those substrates. Thank you.
Well, we're we're certainly not [laughter], we're not satisfied with our competitive position, we want to continue to grow in our competitiveness and we believe that.
Our teams are doing a terrific job in aligning.
Our our services in our technology to help our customers meet the solution and deliver the solutions that they need to to be successful.
To your first part of your question you know as we talked about overall, North America and Latin America for the quarter were positive we expect that kind of momentum to continue I I'd say, you know as I highlighted earlier that.
The European and Asian markets, we saw some softness there and I would expect that's going to be bumpy going forward here for a little while but if I look at it from a business perspective, we're really excited about the momentum in our coil business as I mentioned.
That that is our strongest growing business right now it's been a race if you will between our packaging and our coil business. This quarter. The coil business was the strongest performer and it was double digits. In every region. We've got some really good momentum there going forward and feel really good about that business.
Packaging, we've talked a lot about our unique technology there.
We expect that business continue to grow that was up single digits and it also was up in every region. So again two terrific teams really hitting on all cylinders and we're really excited about that and expect continued momentum.
We don't talk a lot about our protective and marine business that business was up single digits and mid single digits and a lot of good momentum there. Another good leadership team and we're really gained some ground and some very key focus areas in the past we've talked about are heavier weight in the petrochem and are focused on some of those other adjacent markets. We're getting good penetration there.
So we're excited about that.
Automotive business was up in three or therefore divisions overall, they were up low single digits and we feel as though they do some share here in North America, So pleased with that.
Gee I business was up and in the Americas, North America, and South America again terrific leadership here.
We are experiencing some softness in Asia and Europe .
And when you look at our industrial Wood business. That's that's the area of softness that we've had really around the world industrial wood businesses has been soft and we expect that to be bumpy for some time.
Very helpful. Thank you yeah.
Thank you. Thank you. Our next question comes from the line of Jeff Zekauskas with JP Morgan. Please proceed with your question.
Thanks, very much you spoke about your raw material comparisons improving in the fourth quarter.
Is that a year over year phenomenon.
That is our raw materials moving sequentially lower from third to fourth quarter or is that.
That that has to do with the year over year comparison.
Jeff We we do expect draws to get sequentially better.
Not to the magnitude that we saw on our third quarter as you remember the second and third quarter last year, we really saw a ramp up.
And our raw material costs, and then it kind of moderated a little bit in the fourth quarter. So do you see a little bit of sequential improvement and we believe the fourth quarter will be lower year over year.
I would add to that as al said, the broad basket was was down slightly year over year in the third quarter, but I think you have to look at a little bit by architectural and industrial. So yes. The decrease was really driven more Jeff on the petrochemical side of the basket where.
Certain parts of the basket were down not all but certain parts were down year over year.
And what I'd remind you is certainly we don't buy or sell propylene or ethylene and each of those different feedstocks have their own market dynamics associated with them, but.
As Al said, we're still expecting the basket to be down modestly year over year in the fourth quarter.
But the highest level of inflation was in our third quarter of of 18 last year.
Right and then for my follow up.
Are there any plans to increase prices and so.
Stores business in the North American pain market.
In 2019 or is that not on your agenda.
Well, we have work to do Jeff, we're still chasing the significant raw material cost inflation, we experienced in 2017 and 18.
And with our consolidated gross margin improvement, we are making progress towards our goal of the 45% to 48% as I mentioned earlier.
As to the specifics to your question, we're still reviewing our options in our pricing strategy.
At this time and I'd say that we do that on a regular basis.
Great frequency, we're sitting down talking about where we are and where we need to be and I'd say that as has been our past practice will first communicate that to our customers and then to the financial community and Jeff I would just add since we have not announced any price increases at this 0.1 John .
Talked about tag being up mid to high single digits that implies.
The vast majority is volume.
Alright, thanks, so much yep.
Thanks.
Thank you. Our next question comes from the line of Mike Harrison with Seaport Global Securities. Please proceed with your question.
Hi, good morning.
Mike.
Hi.
The same store sales number and in Q3 can you just talk about the weather.
What we saw there was some pent up demand after dealing with some some poor weather during Q2 and I think even.
Even maybe into July can you just talk about whether that was unusually strong in your opinion that 8% number.
Well, Mike I would say they are a few issues here certainly I'd say coming out of the quarter. We did speak to the fact that we felt our customers were going to be in a sprint to catch up on some of the work that was out there and that they were really working harder to capture.
But I'd also say that our customers continue to be very bullish about the pipeline both in the fourth quarter and into 2020 warning.
We are growing share.
We feel good about the execution of this team.
On their efforts was that a lot of plans that they're implementing and growing share of wallet and new account activity that we've been talking about for some time and I want to thank this team because they're executing a very high level you'd have to go back I think it was the third quarter of 2014.
Define this level of performance.
But.
I'd say that when we look at this teams drive and execution combined with the outlook that our customers are giving us.
We're feeling pretty good and were pretty feeling really good about to share that we're gaining right now.
Alright, and then I wanted to ask about the independent dealer channel as well it sounds like your competitors are working to kind of integrate their their store network a with a with some of the dealer network is that something that sherwin does as well.
And can you maybe just talk about what you saw this quarter in your sales through independent dealers.
I'd say overall the.
Independent dealer market has not been a very strong portion of the market, we do not integrate our independent dealers with our stores, we operate those as separate businesses.
And.
Our goal as we work with our independent dealer customers.
Clearly to help then and.
Their approach to growing their business and through our stores. Obviously, we we have a direct relationships with those end users as well typically those might be customers with with.
With some different expectations now some of those customers that are going into it dealer Mike.
Have different expectations and those that are coming into our stores, but.
Our our store people are out building those relationships driving them into our stores with regularity.
Thanks very much.
Thank you my.
Thank you. The next question is from the line of John Mcnulty with BMO capital markets. Please proceed with your question.
Yes. Thanks for taking my question I'm wondering where John morning, with regard to the contractors that you have can you give us some color as to how much visibility they have into their backlog as they as they look out I know, it's going to vary a little bit from residential to nonresi, but can you give us a little bit of color on that and how much you.
See in terms of that mid single digit type growth that you're seeing in the fourth quarter, how we should be thinking about that rolling into 2020.
Well you hit on a number really good points first is that a residential repaint contractors vision versus the non residential or commercial.
It would be on opposite ends of the spectrum, so commercial contract or might be in bidding a project that's not even out of the ground, yet where a residential contractor might be bidding something that could be painted in the next couple of weeks.
We're blessed so we have a number of stores in a number of territory reps that are out there working with those customers.
And we try to capture and understand as much as we can about what's happening the market through those contacts so.
A better line of sight and quicker on the residential a little more distant on commercial side.
Great. Thanks for the color and then maybe just one one follow up on the on the SGN a as a percent of sale. The ticked up I guess marginally I guess, what what was driving that was that the just the rapid pace of what you saw in the same store sales I'm trying to keep up with it or was there something else we should be thinking about.
No John I think you hit it right on the head.
It's keeping up with the increased sales, but also we have 75 additional stores year over year commensurate number of reps. So we continue to invest in our growth opportunities specifically in North America stores.
Regardless, Oh, we saw little softness and consumer because of the year over year dynamics, there and we saw little bit of softness in industrial you can be rest assured we will continue to invest in these growth opportunities specifically in North America stores.
Great. Thanks, very much for the color.
Thanks, Thank you.
Thank you. The next question is the line of Vincent Andrews with Morgan Stanley . Please proceed with your question.
Thanks, very much and good morning, everyone.
This is the second quarter in a row, where you really had what appears to be just outside of same store sales performance.
First is that the data that's out there and any other comments that are out there and I know we talked about this a bit last quarter I won't ask question.
A little bit differently. This time around and just understand it was there anything you're doing as your prospecting new business, whether it's you know greater part of the wallet is just a water or part of a wall that you don't have is there anything you're doing with data or other technology that sort of allowing you to find more leads and weve.
In the past talked about how you know when you open new stores.
Sometimes other stores closed has there been an acceleration in that trend.
Really just trying to understand sort of what's driving this big sort of what appears to be a step change in share gain and how sustainable we think it is looking into next year.
Yes, so Vincent the answer is yes, we're trying.
To use as many tools and improve the tools or any as many new tools as valuable and improve the tools that weve currently are consistently used in the past.
And I would say that a big part of that also comes down to the execution, we're always trying to.
We are hiring.
1400 College students a year, we're bringing them in we're spending more time training them and in the.
Different aspects of the business that will help them and I think we're getting better at that and I think when you're wondering what's happening I think it's using the tools. It's really good programs, it's really good products and and this a lot of determination, we don't unlock our doors and wait for something to happen we're out there aggressively.
Trying to grow this business.
And build relationships and.
To your point, we talked about a last quarter. We hope we talk about it again next quarter because our focus is on making that happen. If you look at our residential repaint business. This is this is we've had five years of compounded growth double digit growth in this business and.
We expect that there's a lot of momentum there to continue as well as in these other segments in the commercial and property management as well, but we're not waiting for it to happen were very deliberate and what is we're trying to execute.
Thanks, and as a follow up al if I could ask you about the four quarter fourth quarter guidance I mean.
Estimate you eight about 31 cents of what I'd call nonrecurring costs, hopefully the FX head and.
Distinguishment and if you take those out you really had phenomenal leverage.
Yes, so all the way through the income statement so.
It just seemed to me that maybe the fourth quarter looks a little conservative is that fair statement or not.
No offense, we try to be.
As realistic as we can when we put our guidance together.
I look at FX is just part of our ongoing business I know, it's hard to say hey, we're going to back out if I take a hit and in one country and other we choose to be there we choose to operate our business is there because we think theres opportunity.
We also did have the benefit in the quarter on supply chain improvements on our consumer brands group that helped the operating margin growth.
Recall last year, we talked about the load in to the new customer program that caused us some challenges in that quarter, so that that that benefit won't be there and going forward, but if you look at our fourth quarter you know at the mid point, our full year guidance has to be up almost 14% like John talked about that tells you we got to be up almost 21.
1% in the fourth quarter on top of the 12% increase a year ago. So I think those are pretty strong results for fourth quarter, and we feel very good about that.
Fair enough appreciate the color. Thanks.
Thank you.
Thank you. The next question is from Steve Byrne with Bank of America Merrill Lynch. Please proceed with your question.
Yes, I'd like to just continue with Vincent's question about your aggressiveness going after new projects that seem to be driving your market share gains. Just one question for you with respect to your dedicated sales force what fraction of their compensation is variable and has.
That changed.
It's not changed and I want to say, it's about 60, 40, 60 fixed 40 variable Steve it it might vary just slightly but it's about 60 40.
And John You mentioned, this 85 million year over year.
Profit gain in the Americas group, if we take this.
Split in same store sales between volume and price and you mentioned, 37% incremental operating margin on that volume you had lower raws.
There was something that was a drag.
Was it was it lab Pam and can you quantify that.
Well, our lat am business.
Was up low single digits in sales.
Are we did have a profit improvement in the.
Quarter, and I'm trying to frame in the way that you've asked a question there Steve.
Steve I'd say.
You look at the flow through.
And as Jim was alluding to we're not seeing as much of the benefit on raw material moderation in our architectural side of the business. So.
The stores.
When you get up into the mid 30 mid thirtys on flow through we feel very good about that so.
We continue to add the stores that I talked about and we have 75 additional year over year and we continue to come commensurate number rep. So I think we feel good about.
That flow through incremental operating margin and if the stores could do that all the time, we'd be happy with that.
Very good thank you.
Thanks, Steve.
Thank you. Our next question comes from Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Yes, good morning.
With regard to your same store sales growth of 8.1% how would you characterize the relative contributions from volume versus price in the quarter.
Yeah, I would say that the.
Nice within an impact of about 2.5% and then the remainder would be volume.
Excellent.
And then to ask about your non raw material costs, what we sometimes hear from other companies is that yes, raw material costs, you're adding but.
Companies, you're experiencing inflation in other categories like labor freight warehousing et cetera.
Is that the case it sure when and if so.
How does that enter into your thinking about potential optionality for.
Seeking additional price in the future.
Kevin clearly, where we're seeing wage inflation and if you look at at the year over year. It has ticked up a little bit as unemployment has continued to decline.
And we have seen.
Freight increases.
And distribution increases and we look at as well as healthcare and when we look at our cost we look at a total cost basket and try to determine where that's headed at what the impacts are we obviously try to push back on that and get efficiencies to offset it but absent getting those offsets we have to go to market.
With price.
Thank you.
Thank you Kevin.
Thank you. Our next question comes from the line of around this Watson with RBC capital markets. Please proceed with your question.
Great. Thanks morning.
I just.
Beating a dead horse, they're just going back to that.
The same store sales number.
Presumably you did that with new construction also relatively weak. So just trying to understand that step change from say Q2, which is maybe 2% or so volume.
Going up to six now.
Would you attribute all of that to share gains or was it a certain regions that will weaken the in the prior quarter I'm doing a little bit better and then what are your thoughts and then you knew side going from here I mean, it seems like there's been some improvement in affordability.
Does that give you little bit more optimism for that market actually we're turning into a into your business in 2020. Thanks.
Yes so.
We let me just over the last pieces that you just spoke about as far as the new residential we do enjoy wonderful position with.
Our largest percentage of the larger homebuilders in the country and we work really hard every day at trying to help those important customers.
Deliver on time and homes that.
They are homeowners really enjoy and that includes the services and products that that help them to deliver and so as that business picks up you're right. We will be working hard to grow those relationships I believe it's as either 17, or 18% 17 or 18 of the top 20 National Homebuilders, we have an exclusive relationship.
And we're working really hard on regional and the smaller homebuilders to leverage those.
Existing services and products that are within our company already.
As it relates back to the.
So the growth that we've had in there.
The core stores and momentum that we have there it's.
It's a good portion of it is share gain you're right. Our teams are as I mentioned and again I don't want to sound like a broken record here, but.
This is a team is executing.
Very well on on the programs that they have.
And the services that they provide.
And you know, we don't know what's going to happen going forward with weather or labor, but we can tell you that we're working really hard to position our company Favourably with these customers we had that leadership team in.
About two weeks ago walking through segment by segment and across the country. There's a lot of optimism about not only where we are but where we're going so we're feeling really good about this but.
There's no complacency here, there's a lot of work to be done lot of customers out there that we're working on and focused on to continue to grow and that's what that's what.
So what we're going to be doing this afternoon and moving forward.
And just wanted to get your thoughts on.
The priorities for your cash flow I'm going forward, you've talked about buybacks in the past.
I guess, a if I go back 10 years bolt on M&A wasn't a huge part of your strategy, maybe it wasn't that starts business, but not so much and coatings. So maybe you can just reiterate what you're looking at as far as opportunities to deploy that cash flow and maybe rank order your preferences between buybacks that reduction in M&A. Thanks.
Yes, let me start with M&A, and then I'll toss it to out to talk about the remaining capital deployment opportunities but.
I would say this urban we're really pleased with the progress that we're making we're actively involved in a number of projects.
We do feel we're blessed that we're not desperate for growth, we don't feel as though.
We have to have acquisitions for growth.
Although we haven't a number of opportunities that we're pursuing we have a number of organic growth opportunities as well and so we look across all of the businesses.
And where we were identifying those areas if its geographic or from a technology standpoint that that will allow us to further create shareholder value and those are the discussions that we're pursuing and still quite frankly have quite a pipeline to get too. So we're working at we feel good about the price.
Yes, we're making on a couple of a really good projects.
But there is more for cash deployment and I'll, let al just touch on that sort of run.
We.
Our generating a lot of cash through nine months, so over a billion 6 billion seven almost with 12.1% of sales and you know we manage our capex below 2% as you know and we've gotten back to our historical capital allocation policy, we raised the dividend over 31% and with with this.
Evident in share buybacks, we've returned over 8800 $93 million to our shareholders, a 46% increase and we're going to be very consistent on that going forward. So.
As you know, we're not going to whole cash and absent.
A more robust M&A pipeline, we're going to buyback our stock.
Thanks.
Thank you around.
Thank you. The next question comes from Duffy Fisher with Barclays. Please proceed with your question.
Yes, good morning.
Good morning to.
A question just around kind of the new strategy in the home Center for you. This is your first full year going through the paint season going to that fewer earn more people salespeople in the stores. When you look back this year, how would you grade yourself.
With the new project and again should we expect a bigger step forward next year again.
Yes, I'd say Duffy that where we're pleased but not anywhere near satisfied next year will be better than we were this year. There's a lot of elements to this program that rolled out this year for the first time in our largest customer and where we're determined to get better there and there's a lot of opportunity on both the.
Do it yourself side and as I mentioned earlier as a professional side here that enjoys the.
Home center experienced that purchasing a number of different products.
That are available through the home center channel that we want to help our customers and in that home center space to be better in pursuing and so this first year as the program rolled out.
We were learning and improving.
But.
But we're not happy with where we are we want to continue to grow now we've spoken that overall for the entire business on a global basis, we expect this to be a low single digit.
Growth business, so there's going to be some work ahead. We also know there'll be some bumps and some choppiness. If you will and then is not as smooth as kind of some of our other businesses.
But I don't want to at all give the impression that we're satisfied or complacent here I mean, there's there's a lot of learning that we've done.
And we're going to try to learn and apply and be better at this going forward.
Okay, and then one for al Alan The California settlement, what's the size of the cash out flow and what's the timing of that relative to the book numbers, you gave us and release.
Yet Duffy the.
The Santa Clara, California case was resolved for $305 million with each codependent paying 101.7 million over six years.
We made the initial payment of about 25 million on September 20, Threerd of this this year, we'll make annual payments of approximately $12 million on or about September 20 Threerd.
Next year and all the way through 2024, and then we'll make a final payment of approximately 16.7 million in September of 2025.
Great. Thanks, guys.
Thank you Duffy.
Thank you. The next question is from Don Carson of Susquehanna Financial. Please proceed with your question.
Thank you a question on consumer you know your revenues were down 12% year over year, you said half that was the lowest loading guardsmen in a year ago number what was driving the other half was that all international softness and can you comment on how you see that unfolding as you get into fourth quarter.
You talked about being down slightly in that business in the fourth quarters that.
All going to be international or is there still is a tough comp against a low sungard's.
Dan I'd say the sales missed your right by a point or two from our forecast and the Miss is as you mentioned largely attributed to our international business.
There's some work here to be done where we are certainly.
Focused on this largest piece of our business here in North America.
We do think longer term there are some opportunities as we reposition our brand in China to could be a better competitor. There. We do have a very small business a small.
In a smaller market in Australia that that that we didnt performed very well and there's there's.
No hiding about that but.
Overall, if you look at the international business It was a dragon.
We have a goal of driving those better and and we think we can and Don I would just add to that.
Last statement Guardsmen is behind US it was divested in September of last year, and we are not going to be going up against any significant load and in the in the fourth quarter.
Okay.
Ill follow up on planned consolidation I know you had kept a couple of us plants going for longer than originally planned in order to build to servicing with Lowe's business, what's the status of those plants or they've been close yet or what is the current plan.
Yeah, we're continuing to.
And put in capacity expand capacity and other sites to make sure we're going to service first our stores sarong strong volume growth.
We see had in the third quarter and the outlook.
Plus the lows volume growth that we've seen so.
Yeah, we havent.
Made those costs, yet, but as you know our normal practice will tell our employees first and then we'll talk about it going forward.
Thank you.
Thank you Don.
Thank you. Our next question is from P.J. Juvekar with Citi. Please proceed with your question.
Hi, good morning, good morning PJ.
Doug can you talk about the DIY paint growth hostess contracted applied a pain to growth.
The reason I am asking is we're getting different signals from you on your competitor I think your competitor saw a decline in same store sales growth in that on stores.
So what is a split between the 260 40 contract or do you have why and how fast are these markets going.
Our business through our stores is about 85%.
Professional painting contractor or property management.
And that's the piece that is obviously growing the fast as we did have.
Some growth in our DIY business, the DIY business relatively small piece and it's really focused on the specialty high end.
Consumer that's looking for a specialty store experience, though.
We clearly.
Are really focused on a professional side.
What is what are the overall industry and Joseph DIY and contractor.
Just your own stores, but overall industry.
The DIY wide piece would be the largest piece overall, yeah. If you look at the overall industry DIY is about 38% of the gallons. So it's a bigger slice in the industry, obviously than it is in our stores.
But.
If you Yeah 38 overall this segment larger than any one particular professional segment right.
PJ, what I would add to that though as you still we still can see continued to see the trend from do it yourself to do it for me as the population ages.
That.
Leads into the rest repaint that that we talked about being high single digits in the quarter.
We grew high single digits.
Compounded for the previous five years, so as as the demographic trends continue.
And we are we are probably skewed more heavily to new construction as John mentioned earlier than than the overall market.
We'll continue to grow faster in the market with those trends.
Okay.
A quick question for al.
Our goal was to get the leverage below three times by end of this year.
I wanted to get that would you be willing to look at a bigger acquisition.
And you know is Europe still an attractive market for you given that the recent slowdown into European overall economies.
Yeah, I think PJ, we you're right we are going to be below three to one but in this year.
Our target is two to two and a half and you know as John talked about with the earlier about M&A, we were going to be very disciplined about our approach to M&A.
You know that we look at it for the long term not not a I understand Europe , so little bit slower Asia is probably slower than what we had expected.
Specifically on the industrial side, but we look at at the long term. So the right opportunity were to present itself at the right price we absolutely would go after it.
Thank you.
Thank you PJ.
Thank you. Our next question comes from the line of Greg Melich with Evercore ISI. Please proceed with your question.
Hi, Thanks.
I'd love to follow up on the performance coatings group. Thank Jon you mentioned, a few times still chasing some of the cost increases from a few years ago.
Could you put that in context of where we are now I guess, if you back out FX performance coatings was up 1.3%.
Was that all price and what do we think we can still get there.
And now the raw materials appear to be moderating.
Yeah, Greg.
Good good portion of that was price volume was down we've talked about softness in certain markets.
And in certain regions of the of the.
The globe I would say.
We're not done we are our year to date operating margin is 14% just over 14% we've talked about targeting a high teens to low Twentys and you look at the significant ramp up and raw materials that we saw in 17 and 18, we talked about Valspar.
Specifically on industrial not being not getting a price early in 17. So we're still chasing that so you know as you know I am happy with the progress were making the team has done a great job at cost control and the synergies that I talked about that are to calm, but we got more work to do yeah, I would add to that Greg that.
You know as it as we've been going through this process. We've made a conscious decision of trying to work with our customers.
While the raws.
Increased rapidly we try to work with our customers and allowing them to work through the pricing to their customers ultimately and we accepted some compression there as the new owners of a business that hadn't had the price increases in the in the market that really needed in had quite frankly demonstrated.
Over the last few decades.
Because of the cost of.
Cogs in that.
The overall costs, the relative cost of raw materials and overall cost of goods.
You need to get the pricing through when when it raises rises here we made a decision that we work with our customers, but to ALS point, where we're working with them in a way to pass through ASU, because we need to recover that as well.
And just to make sure and the and this quarter the 1.3% sales growth ex FX.
That was volume not price or it was price not volume.
It'd be more price than volume it'd be more price and I and there was one thing and John just wanted to you had to that announcement through the quarter.
About looking at a new R&D facility in headquarters I know it'll take a few years could you just take us through the thought process of why now and what you're really looking at when you think about that sure well as you mentioned, we're going through a pretty robust process and as to find a solution to meet our needs.
And.
Greg I know you've been here and many of its on the call had been to our building here to know that we operate in a building this nearly a 100 years old.
And as we look at our ability to recruit and retain the highest caliber people in a productive and efficient environment.
The technology and innovation that we need to drive to continue to.
Drive results that we know we can continue to drive on top of the.
Factoring in the maintenance costs and just overall.
Issues that we face in this building, we feel it's necessary to move towards a solution.
We're in the midst of that process, we hope to make an announcement on the location by year end or early 2020.
But realistically, Greg I would say that.
This is not something that we'd prefer to do quite frankly.
Since it's not something that we think as any type of you know, we deserve or reward right. This is out of necessity to be able to to hire and retain the best people in this industry and and we all it to our employees quite frankly to put them in a better environment and they're working in right now and.
When you look at the retention of these terrific people, we need we need to make this merger.
Got it and and as having.
Is bringing facilities together, given you still have and Minneapolis, and and Cleveland different areas is important to get those people together or is it actually makes sense to have sort of two towers of power.
No I I'd say that we're really looking at this to your point of where does it make sense I don't I'm not a believer I mean, you can talk about the.
People in Minneapolis, and then you could say well what about the people in Shanghai or in the UK or you know so.
So where we believe that there are opportunities and synergies.
We'll bring those together, but we're not at all we don't believe that every technical.
Team needs to be here in Cleveland.
That said, we like the idea of possible of.
Of getting our marketing people in our R&D people closer together and more consistency, where there are synergies and efficiencies amongst the R&D teams and that's what we're working towards.
That's great well good luck guys, yes. Thank you. Thank you.
Thank you. The next question is from David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you Johnny mentioned strains this quarter and coil, let me finish maybe gaining some share.
What's driving a share gain and is there more going forward in both those product lines.
I think what's nice about the with the growth it's coming it's in every region double digits in every region. So.
Theres Theres a lot of growth.
In a number of different segments and quite frankly, there's still some drag some pressure that work that we're feeling in the AG business where.
It's been more influenced by some of the dynamics impacting.
Impacted by terrorists if its a.
Sales of of the farming the the products on farms or the equipment that their storing although some of those delays are impacting coil.
So we see upside there, but overall I'd say that this is a team that really executing very well and and bringing the.
Products and technologies to customers in a very efficient way and we've we've long talked about the efficiencies to be gained by the combined sherwin and valspar teams coming together and the assets and technologies and we're just starting to see some of that so we think theres a.
A lot of a really good opportunities ahead for this business, despite where it's performing right now.
Very good and al just on a debt Wi Fi, what's the benefit to enter the interest expense going forward.
Yeah.
Obviously with the.
Low interest rates that we refinanced the two and two in a quarter to seven 520 22 with the we did the fear call in the second quarter, we did the 400 million.
You us euros us currency swap so netting that it's going to be pretty neutral going forward, maybe down a little bit depending on.
What we do next year.
Thank you.
Thank you David.
Thank you. The next question is from John Roberts.
Please proceed with your question.
Thank you good afternoon.
Good afternoon, John back on the project will that be cost neutral to your operating cost the new headquarters in the new R&D facility.
Yeah, John you know, we're still crunch in those numbers and it's hard to hard to.
Fully get a feel for that until you determine location and design and things like that but we're in multiple buildings around Cleveland, Ohio, All pretty old my into my my expectation is where you're going to see some benefits.
Ongoing operating costs.
Okay and then on the next earnings call, you're going to give 2020 guidance well that's still continue to be on an adjusted EPS basis, excluding amortization.
Yeah, Hey, we're going to.
Certainly call out amortization.
We'll see how we what we do it with integration, but we're working through the plan John and.
How best to communicate the goal here is to make sure our shareholders had a clean line of sight to our ongoing operating results.
Thank you.
Thank you John .
Thank you. The next question is from the line of <unk> with Longbow Research. Please proceed with your question.
Hi, Thanks, I'm wondering if you could comment on inventories and performance coatings as you saw some of the volume decline related to additional drawdowns.
The performance coatings I'd say there's.
Probably not too much of that I'd say, what we might.
She is a.
Maybe few more orders of lesser size, so greater frequency of smaller orders, but I don't know if we'd point to a significant reduction in inventory as having much impact on our numbers.
Okay.
A follow up is just switching to the Americas group just wonder if you can maybe breakout interior versus exterior same store sales.
Exterior was up double digits and that would include paint stains and primers.
Interior sales were up high single digits.
Great. Thanks, a lot.
Thank you. Our next question comes from Justin Spear with Zelman and Associates. Please proceed with your question.
Hi, Good morning. Thank you are good afternoon.
Just in regards to the the.
Formats coatings business, the that ambitions that you're driving towards I guess.
Just.
The primary reason for being behind trend was tied to price and cost, but now that looks to be on a little bit better footing. But then you have that counterbalanced against underlying emerging market or international markets are a little slower.
Weaker than maybe youre expecting maybe a year plus ago, but yes leap, but my question is what are the incremental steps you need to take the drive towards that optimize scale and its business and when do you think you get there.
Yeah, Jeff I you know the.
The comment about slowing and in some of the regions. We're in and macroeconomic discussions that are had we still have great market share opportunities across each of these businesses and each of these regions and.
You see that in coil and packaging as examples where the teams have done a great job tying together.
Technology and services to provide those solution to this specific customers in those regions and they're making progress there that's no.
Shortage of other opportunities across each of the other businesses.
And then specifically on the synergies the 415 million run rate versus the 315 million, we'll have to the piano acquisition today that it would be by and large on performance coatings that just and by design.
The the industrial integration was coming after the architectural integration and we're on path, we have a planet and rest assured as we implement those synergies will we'll see those to the piano that being said coming out of this year and we've talked about this we're not going to be talking about synergies any longer. This is just going to be.
Part of our normal a culture of continuous improvement.
So that makes sense like I wanted to follow up questions actually add on that subject on the synergies.
I just want to make sure I understand the mechanics, and let's see if there are 315 in a piano and you're saying are you, saying that you've already done the work to drive that incremental 100 million synergies such that that's going to be realized in 2020 or is that something that carries into beyond 2020, Nm Uno hundred million yeah. We.
If you recall at the our Investor day, we talked about that 100 million being spread out over.
The next few years.
No I would say the 100 million has projects in the pipeline to support it but we got to get to.
Execution and really dial into to what we think we're going to save so there might be a little bit variability in there, but we definitely have that the projects identified now it's about all are not execution.
My last question more near term focus just in thinking about.
The implied.
Margins for fourth quarter, given it right now it's tough for us to draw a real good beat on on typical seasonality as it pertains to particular consumer brands performance coatings, but just maybe some indications where the margin destinations going mapping towards in your fourth quarter implied guidance.
Yeah as as you would expect with our stores.
Our North America paint stores and tag in particular being up mid to high single digits at at higher.
Gross margin, that's going to help but.
You definitely see a seasonal tick down so I would expect our sequential.
Gross margin to be lower but certainly.
And this is a low bar, but certainly hi, better year over year.
Yeah, I guess in terms of that consumer brands in particular as a last year you saw sequential degradation that was almost.
800 basis points that that the typical sequential the degradation should think about consumer brands.
You are going to see a little think about because we had the loading in the third quarter and then and didn't have any in the fourth quarter it'll be less it should be less than that this year.
Thank you very much guys.
Thank you Justin.
Thank you. Our next question comes from Truman Patterson with Wells Fargo. Please proceed with your question.
Hi, good afternoon, guys nice quarter.
Yeah, hoping we can touch on the raw material outlook, a little bit more just break out between your resins and titanium dioxide you know it looks like propylene is down pretty significantly here, you're starting to see that flow through your resins. How should we think about back going forward you know over the next few.
Few quarters, and then on the titanium dioxide part it seems like there's some moving parts there you have.
Year olds, U.S. business seems fairly robust, but some of your competitors don't seem quite as healthy.
While the same time, we have you know some slowing international markets Europe in particular.
Sure German yeah.
Parse that out maybe in a couple of different pieces, maybe I'll start with the T. O. Two piece I mean, what we're seeing the industry pricing for high grade chloride T. O. Two has been pretty stable over the past year, and we're not seeing anything necessarily overly favorable or unfavorable that's going to change that in the four.
Fourth quarter I think.
As one of the earlier question said, we will talk about our view on T. O. Two for next year, when we give our outlook in in 2020, I think I'm on the petrochemical side of the basket.
Thats, where were seeing some of the benefit right now in certain parts of the basket.
You know again, we don't sell propylene or ethylene directly those are those are key parts of what we what we make and there's other market dynamics, there as well, but I think that.
If things were to stay flat, where they are right now heading into 2020.
We did say that the first quarter of 19 was the highest inflation that we had this year. So if things were to stay flat from here, it's probably reasonable to think that.
20 could we see some tailwind there, but beyond that pretty hard to tell what's going to happen.
Okay. Okay. Thanks for that.
And then just wanted to dig into your gross margin a little bit Moreno nice performance up over 300, Bips or so is there any way you all can just rank order the buckets. The major buckets of what's really driving this you know pricing raw materials volume leverage synergies, you know et cetera, and then.
Piggybacking off of.
The prior question.
Going forward is there anything near term why we wouldn't expect this to reoccur over the next quarter or two quarters.
Yeah, Truman you know I always start with volume and and especially when it's our our North America paint stores volume, that's always going to be the best leverage we have.
It is the.
Our highest margin business and as that grows faster than the company at all and such as it's our growth engine, it's such a big portion of our business that drives our margins.
[laughter] excuse me.
The.
We did have the year over year comparison with the run up and raw materials that we saw in the second and third quarters of last year. So.
<unk>, a little easier comp than what you will see going forward.
We did have synergies in the quarter and we did have the benefit of.
Of.
The the year over year supply chain improvements, so with with moderating raw material costs as we talked about the teams have done a nice job with pricing discipline, but again, there's more to go there we have been chasing that significant increase in raw materials.
The past three years now and year to date, our operating our gross margin adjusted as 44 seven so we feel good about the progress were making but but we got to ways to go to get to the long term targets of 45 to 48.
Okay. Thanks, guys.
Thanks, gentlemen.
Thank you. Our next question comes from Bob chord with Goldman Sachs. Please proceed with your question.
Thanks, guys. Appreciate your patience two quick ones, if I could about North America architectural first.
I'm wondering if you've seen.
The interest rate reductions we've seen some of the your customers in the housing new residential housing markets certainly seen their stock prices catapult higher.
Are you starting to see some visibility there from order trends that that gives you. Some some confidence there is gonna be some improvement in that market.
Yeah, what I would say you know our third quarter, we felt good about the third quarter. It was up mid single digit than our new raz.
Space. If you look at some of the reports that are out there Bob.
Homebuilder confidence is at the highest level in about two years right now in mortgage rates are certainly helping.
Drive that the solid job growth.
Theres lower new home inventory out there.
If you look kind of at the second half the 2019, it's been pretty steady gains in the single family construction.
Construction.
It's the regular lit ne that we always talk about though that's on the other side you know the higher cost for land labor.
Materials and the regulatory piece too. So those are some of the headwinds, but I'd say overall what are.
Customers are telling us we feel pretty good about the most recent data talks about the is little bit mix single family permits and starts were positive sequentially and year over year multifamily was little bit more mix. So.
Overall, though I think.
We feel pretty good about where new records is heading right now.
Thank you maybe Spain in that vein of some of these indicators I noticed a the Harvard Lyron numbers look awfully darn ominous for next year and certainly.
Contradicted by your results in the stores group do you have any sense of what might be driving that are any views on the correlation of sort of their prospective forecast versus your business.
To give us some comfort that maybe it's not as diyers, they're suggesting.
Yeah, I would say, there's a number of things we look at their Bob So the lyra, leading indicator of remodeling activity certainly they are forecasting sort of a modest decline.
In the back half of next year, but what I'd I'd remind you is they measure that in dollars and so a lot of it is driven by big ticket big remodeling projects. Some of the a smaller project like a painting of your kitchen or a painting of a bathroom those tend to hold up maybe a little bit better.
And in an environment like that I'd say existing home sales are another driver those have been pretty choppy over the last year today, there was some new data out.
That said they were down sequentially, but that follow two months, where they were up.
Year over year existing home sales are still up low single digit so that'll be a driver.
And I think when you look at all of that you look at the aging housing stock that's out there.
Home value appreciation is still continuing the employment backdrop is good and to John's earlier point about share of wallet New account activation I think we still feel.
Pretty good about the repaint opportunity for us.
Great. Thanks for the help.
You bet.
Thank you. My next question comes from the line of Dmitry Silversteyn with Buckingham Research Group. Please proceed with your question.
Good morning Dimitri.
Afternoon.
Dimitri your line is likely maybe on you.
Oh good morning. Good afternoon. Thank you for for being patient and taking my call I'm really quick I'm not yeah, why a point, where I guess my consumer side of your business.
What's the price realization in North America, similar to sort of that the 2.5% level that you saw in your company owned stores and what was the pricing like in Australia, and in China, and Europe for you in that business.
Yeah.
I mean should say it was a little bit.
Less than what you would see and in the stores.
I would say Dimitri outside the U.S. and those smaller consumer segments, it's not it's not material.
Okay. So most of it okay. So it was less than 2.5% Southern division overall.
But if you if international was flattish, let's say a better than domestic.
It was domestic was less than 22.5% with what you're telling us international.
Okay got you and then secondly, just a follow up on on the strength that you guys are seeing in coil idle business has changed a lot and especially since you guys bought it from Valspar, but were bought it when you bought valspar, but historically, it's been a business with a large north American exposure to the resin to be a commercial construction.
Our market. So is there anything that we Kevin that's sort of extrapolate from from your strength in that business.
To what it implies about being the commercial construction market in North America, or where the share gains really the main driver more so than the market performance I'd say it was a little bit of both Dimitri. The there clearly were some share gains and we also are the benefactor of some of the commercial business I'd also mention that we as I mentioned earlier.
Sure.
We did experience some pressure on the AG side that drew that back down little bit, but you're right. We benefited from some of the commercial we grew share and were continued to we're determined to continue to drive it.
Okay. Thank you that's all I have thank you very much for taking my call. Thank you. Thank you Dimitri.
Thank you. Our next question is from Rosemarie Morbelli with GE Research. Please proceed with your question.
Thank you good afternoon, everyone and that will join me thanks swells for hanging in there.
Good afternoon.
I wish I.
I was wondering if you could if you have a better idea as to the sales synergies you are anticipating I think that you did not really give us any specific numbers. When you bought a valspar and we are waiting to see you know how they so that's going to unfold do you have a better feel as to how much close we could see from that.
We do but we're not going to share it today.
We feel good about it Rosemarie.
There there are lot of efforts in a lot of projects that had been identified.
That we feel really comfortable about.
Pursuing but those are going to be things. We think we're going to talk about as we are implementing them not before.
Okay fair enough.
Looking at packaging are.
There is a I'm I'm assuming that at this point tip most of the non DTA coatings has been Uh huh.
Well, we place so to speak of rather the BP has been replaced so what kind of a gross weight out you're looking at going forward and is the fact that some beverage companies are going from plastic like you see a thing they will going from plastic containers to aluminum cans. So if that's going to help.
It is going to help but again I might take just a bit of exception to your assumption that we have moves through the non BPA. They too are the BPH non VPA theirs.
Quite a bit quite a bit a road ahead, there I'd say, we're in a very early innings of that conversion. So.
We're excited about this opportunity going forward as there.
There's a lot of runway ahead in that conversion.
Okay. That's good to hear and then lastly, if I may on the automotive.
Is that mostly we finish and can you talk about the trends there.
That's all refinish and the trend for us, particularly in North America, we're gaining some traction over the last couple of quarters. We've spoken about the fact that the combined technologies the legacy Valspar and Sherwin technologies coming together provided an overall better system with greater speed for the.
VR shops to push vehicles through.
With a greater efficiency and were out demonstrating that to customers right now with some very good traction so feel really good about the team's efforts there.
We have some some expectations for them as we go forward.
Are you seeing sees a new technology and share gain of sitting on more than offsetting the decline in the level of collisions.
Yes, that's a good point because if you do look at the overall market. It was relatively flat market due to the decline in collisions. So it's a very good observation on your part that's what leads us to believe that the the low single digit gain that we.
Achieved here in North America gives us a some some modest share gain.
Alright. Thank you very much. Thank you. Thank you.
Thank you. Our next question comes from the line of Christopher Perrella with Bloomberg Intelligence. Please proceed with your question. Okay. Good afternoon, everybody a two quick ones you touched on it for the Americas, but for performance coatings and for the consumer segment. What is your visibility into into your order book, how far out can you see.
And your customers order patterns.
Well it varies by segment.
We take great pride and that though Chris you know when when you talk about as we do solution selling and and consultative selling it really takes a very good understanding of.
Of what your customers are trying to accomplish so that you can be there when they when they need you it fits with product or service.
Again.
Varying degrees. So when you look at VR shops vision might be a little bit shorter and if you look at so protective and marine as an example, where they're they're a pricing in quoting projects that could be out a year in advance I mean, there's a wide spectrum of projects.
Thanks.
When you look at various OEM customers I mean, there's depending on the industry varying degrees of a line of sight.
I think the point the important point as though that we work closely with our customers to understand we want to be the ones that are helping them avoid excess inventory avoid obsolescence.
Avoid having you know product, but it'd be in the wrong product and you do that by getting close to their needs and understanding what they're working on so we've got we've got is a pretty good line of sight in most of the segments, we're always working to make that better.
Alright. Thank you very much appreciate the time. Thank you. Thank you Chris.
Thank you. The next question comes from Ghansham Punjabi with Baird. Please proceed with your question.
Hey, guys sorry to.
Interrupt your lunch break, but I'm, just sort of going back to the share gain question for the stores group Yeah. John for just from a high level standpoint is this what you would consider to be a normal evolution, given where we are on price cost curve for the industry you being the market leader, having led the industry with price increases initially and perhaps you know willing to.
I see some share as a consequence and now you're reporting on shows the broader than that.
I'd say our approach gotten some is pretty consistent and I know you've been following us for some time in our view and al touched on this a bit earlier as it relates to the price cost you know our first effort is always to try to offset not just in our stores business, but in all our businesses try to drive efficiency into the end.
The the equation to offset the raw material costs, we don't feel as though that that's a share question because it when we don't have to go out with a price increase our customers reward us with their loyalty.
But the simple fact that we're open and honest with them about what's happening that said as costs go up and I use costs not to just point to raw material costs, but you know if its labor or freight or others that we are unable to offset then then word in front of our customers talking it.
About that the key part of the equation. There is as we're helping them to be successful and so as we're having these discussions and helping them to be successful were then introducing whatever it is that we're facing hopefully we're able to offset raw material cost where they fit with efficiencies, but if the costs are going up we have to be open with them.
And we have those discussions.
Okay. That's helpful. Then just finally your 2020, a financial targets were pushed out by roughly you're going to increase in raw material costs, and I think FX as well I'm just given the obvious momentum you're now seeing in stores group, which is a very profitable segment for you how does that China, a timeline change at this point.
Yeah, Ghansham I am I'm still it's still look on.
A couple of years out we're in the middle of putting together our 2020.
Plans, obviously, we'll share those with it at the.
Our yearend call him and you look at some of those metrics.
And we're making progress whether it's on EBITDA with the 80 basis.
I think growth year to date with.
Net operating cash.
Over 12% of sales.
So we're making progress on different different fronts. The you know the the the the factor there with raw material costs and it's also topline growth and if you go back two years I think we were expecting a little bit better topline growth than what we're seeing.
Across the different segments.
Okay. Thanks, so much so yes.
Thank you. Our next question comes from Kevin Hocevar with Northcoast Research. Please proceed with your question.
There.
The new Kevin.
You are guiding to mid to high single digit same store sales growth in the fourth quarter and your paint stores sounds like most of that will come from volumes, how big of a factor can weather play here in where that ultimately shakes out because it sounds like the backlogs are there, but obviously weather starts to get all funky here as we head into the winner so.
If the one or turns out to be harsh do your customers have enough flexibility to do indoor jobs on bad weather days and outdoor jobs on sunny days or.
There's a harsh winter it make it difficult to hit that type of growth.
Okay and there is.
A number of points to that in the first time I'd say is it's a smaller quarter. So it can be influenced a bit easier than than the larger or third and the second third quarter.
And often times, what it might impact is that the progress on a project.
So yeah, if it's nice or whether they might be outdoor painting, there might be outdoor penny taking place.
That there might be issues, if it's really a harsh winter as we saw last year with that the trip all trades and their ability to get on a project and move a project through the cycle.
So it's all dependent upon what kind of weather and to what extent, we deal with it and.
We really don't know and each one of these can be different and unique in their own then we're going to just respond.
And the best right, we know given whatever we face.
Okay, Great and then in the performance coatings, you talked about your team being focused on controlling selling expenses given the softer end markets could you elaborate on that and what levers are you willing to dial back cost there and if things get worse.
You know deteriorated from here or there are more levers that can be pulled.
Kevin There Theres all our yeah, there's always more levers to be poll domain in in you try to.
As I say you know we're controlling our costs.
Industrial Wood as an example, where.
As John talked about its been soft and we think it'll be soft going forward, but there's other areas that we're still investing in and and in for growth opportunity. So.
I think the teams have have responded to the slower sales.
And we'll continue to manage that.
Okay, great. Thank you very much.
Thank you Kevin.
Thank you. It appears we have no further questions at this time I'd like to pass the floor back over to Mr. Jay for any additional concluding comments.
Thank you Jesse and thanks, everybody for joining us on the call today.
I appreciate your interest in everything we're doing and your support I will be around and Eric Swanson will be around for your questions over the remainder of the weak and we look forward to talking with you. Thank so much have a great afternoon, and the rest of your week.
Thank you ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.