Q4 2019 Earnings Call
Good morning, Thank you for joining the Sherwin Williams companies review, a fourth quarter and full year 2019 results and the outlook for the full fiscal year of 2020 with us on today's call or John Morikis, Chairman and CEO Mr. Shin CFO , Jean Cronin Senior Vice President corporate controller, and Jim Jaye Senior Vice.
President Investor relation.
This conference call is being webcast simultaneously in listen only mode. Why is your direct via the Internet at Www Dot sure when dot Com and archive replay of this webcast will be available at sure when dot com beginning approximately two hours. After this conference call concludes and will be available until Thursday February Twentyth 2020 at five PM Eastern time.
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 statements speak only as of the date on which such statements made and the company undertakes no obligation to update or revise any forward looking statement, whether as a result of new information at future events or otherwise.
Well 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.
Thank you Jesse and good morning, everyone.
All comparisons in my remarks or to the fourth quarter 2018 for full year, 2018 result, respectively, unless otherwise stated.
Beginning with the fourth quarter of 2019.
Elevated sales increased to $50.2 million or 1.2% to 4.11 billion.
For the full year 2019, consolidated sales increased $366.3 million or 2.1% to $17.9 billion.
Currency translation rate changes it reduced sales in the quarter end, the year, I'd, 0.9% and 1.4% respectively.
Consolidated gross profit dollars in the fourth quarter increased $211.3 million or 12.6% to 1.89 billion.
Gross profit for the year increased 617.5 million or 8.3% to $8 billion.
Consolidated gross margin in the fourth quarter increased to 46% from 41.4%.
Excluding impacts from acquisition related amortization expense and integration cost.
Consolidated gross margin in the quarter increased to 46.5% from 42.4%.
Consolidated gross margin in the year increased to 44.9% from 42.3%.
Excluding impacts from acquisition related amortization expense and integration costs consolidated gross margin for the year increased to 45.1% from 42.8%.
Selling general and administrative expense in the fourth quarter increased $116.2 million to 1.35 billion.
And increased as a percent of sales to 32.9% from 30.5%.
S.G.N. a expense for the year increased $241.1 million to 5.27 billion, an increase does it per cent of sales 29.5% from 28.7%.
Interest expense for the quarter decreased $5.6 million to $83.8 million.
For the year interest expense decreased $17.4 million to 349.3 million.
The decrease was primarily due to lower year over year debt levels.
As described in our press release, we recognized noncash pretax impairment charges in the quarter totaling $122.1 million related to recently acquired trademarks.
Additionally, the company recognized pre tax gains in other income and interest income of $34 million and $19 million, respectively related to a Brazil indirect tax matter.
Consolidated profit before tax in the fourth quarter increased $195.4 million to $297.4 million.
This includes 71.3 million of other adjustments and 100, a 19.3 million acquisition related costs.
Fourth quarter of 2018 includes 173.2 million of other adjustments and 137.5 million of acquisition related costs.
Consolidated profit before tax for the full year increased $622.1 million to 1.98 billion.
This includes $69 million or other adjustments and 389.3 million of acquisition related costs.
2018 includes 341.5 million of other adjustments and 484.4 million of acquisition related costs.
We have summarized fourth quarter and full year adjustments to consolidated and segment profit in a slide deck on our website under January Thirtyth, 2019 year and fourth quarter financial results.
Currency translation rate changes decreased consolidated profit before tax by $22 million in the year.
Excluding acquisition related costs and other adjustments our effective tax rate on adjusted income for the quarter was 18.1% and 19.1% for the full year.
Diluted net income per share for the fourth quarter 2019 increased to $2.66 per share from a dollar and seven cents per share.
The fourth quarter of 29 team includes pershare charges of 97 cents or acquisition related costs and.
And other adjustments totaling 64 cents per share.
The fourth quarter of 2018 includes charges of $1.10 per share.
Acquisition related costs, and other adjustments totaling a $1.37 per share.
Excluding these items fourth quarter adjusted diluted earnings per share increased 20.6% to $4.27 from $3 a 54 cents.
Diluted net income per share for the full year increased to $16.49 per share from $11.67 per share.
Full year 2019 diluted net income per share includes acquisition related costs of $3.21 per share.
And other adjustments totaling a $1.42 cents per share.
[laughter] full year 2018 diluted net income per share includes acquisition related costs $4, a 15 cents per share.
And other adjustments totaling $2.71 per share.
Excluding these items full year adjusted diluted earnings per share increased 14% $21 in 12 cents from $18.53.
We have summarized fourth quarter and full year comparisons, including the acquisition costs and other adjustments in a regulation G. a reconciliation table in our fourth quarter 2019 press release.
Let me take a few minutes to break down or performance by segment.
Sales for the Americas group in the fourth quarter increased $108.8 million or 4.8% to 2.36 billion.
For the year net sales increased $546.8 million or 5.7% to 10.17 billion.
[noise] comparable store sales in the U.S., Canada and the Caribbean that is sales by stores opened more than 12 calendar month.
Increased 4.6% in the quarter and 5.3% in the year.
Regionally in the fourth quarter, our South East Division led all divisions, followed by southwest, Canada, Midwest and Easter.
Sales were positive in every division in the quarter.
Fourth quarter segment profit increased $36.1 million or 8.7%.
To 449.4 million.
Currency translation rate changes decreased segment profit $4 million in the quarter.
Full year segment profit increased $158.1 million or 8.3%.
The 2.1 billion.
Currency translation rate changes, a decrease segment profits by $15.5 million in the year.
Fourth quarter segment margin increased 70 basis points to 19%.
Full year segment margin increased 50 basis points to 20.2%.
Turning now to the consumer brands group.
Fourth quarter sales increased $5 million, 4.9% to $539.4 million.
Full year sales decreased $62.3 million or 2.3% to 2.68 billion.
Currency translation rate changes and the guardsmen divestiture reduced sales by 1.2% at approximately 1.8% in the year respectively.
[noise] fourth quarter segment profit increased $17.7 million to $29.7 million.
Currency translation rate changes increased segment profit $3.9 million in the quarter.
Acquisition related amortization expense decreased fourth quarter segment profit by $23.2 million in 2019.
Paired to $24.5 million in 2018.
In addition trademark impairment charges decreased segment profit by $5.1 million in the fourth quarter of 2019.
[laughter] full year segment profit increased $112.1 million to $373.2 million.
Acquisition related amortization expense decreased full year segment profit by $91.2 million in 2019.
Compared to $110.9 million in 2018.
In addition trademark impairment charges decreased segment profit by $5.1 million in 20 nicely.
Fourth quarter segment margin increased to 5.5% from 2.2%.
Excluding acquisition related amortization expense and the trademark impairment charge.
Fourth quarter segment margin increased to 10.8% from 6.8%.
Full year consumer group segment margin increased to 13.9% from 9.5%.
Excluding acquisition related amortization expense and the trademark impairment charge.
Full year segment margin increased to 17.5% from 13.6%.
For our performance coatings group fourth quarter sales decreased $63.5 million.
Or 5% to 1.21 billion.
Full year sales decreased 117.2 million or 2.3% to $5 billion.
Currency translation rate changes reduced fourth quarter, and full year sales by 1.1% and 2.3% respectively.
Fourth quarter segment profit was negative $7.4 million, including a charge of $117 million related to trademark impairment compared to segment profit of $112.3 million in the fourth quarter of 2018.
Currency translation rate changes increased segment profit by 3.4 million in the fourth quarter of 2019.
Acquisition related amortization expense decreased fourth quarter segment profit by $53.1 million in 2019 compared to $55.2 million in 2018.
Full year segment profit was $379.1 million, including a charge of $117 billion related to trademark impairment compared to full year segment profit of 452.1 million in 2018.
Currency translation rate changes decreased segment profit by $7.1 million in the year.
Acquisition related amortization expense decreased full year segment profit by $215.5 million in 2019.
Fair to $215.8 million in 2018.
Fourth quarter performance coatings group segment margin was negative, 0.6% or 9%, excluding the 117 million dollar trademark impairment charge.
Compared to 8.7% last year.
Excluding acquisition related amortization expense and the trademark impairment charge.
Fourth quarter segment margin increased to 13.4% from 13.1%.
Full year segment margin was 7.5% or 9.8%, excluding the trademark impairment charge compared to 8.8% last year.
Excluding acquisition related amortization expense and the trademark impairment charge full year segment margin increased to 14.1% from 12.9%.
That concludes our review of our operating results for the fourth quarter and the full year.
So let me turn the call over to John Morikis, we'll make some general comments and provide our outlook for fiscal year 2020, John .
Thank you Jim Good morning, everyone. Thanks for joining us.
But to make just a few additional comments on our fourth quarter and full year 2019 before moving onto our outlook for 2020.
We ended the year on a strong note growing adjusted diluted earnings per share by 21% compared to last year's fourth quarter.
In terms of the full year, we've delivered another year of excellent results for our shareholders.
Sales grew by 2.1% to a record 17.9 billion.
Adjusted gross margin improved to 45.1%, reflecting our pricing efforts and moderation of raw material inflation.
Adjusted diluted earnings per share increased 14% to record $21 in 12 cents per share.
Adjusted EBITDA increased 235 million to record 3.1 billion or 17.1% of sales.
Net operating cash increased to 378 million to a record 2.32 billion or 13% of sales.
Return on net assets employed increased to 15.1% encore profit before tax.
Total shareholder return for the year was 49.7% and we returned approximately $1.2 billion to our shareholders in the form of dividends and share buybacks, an increase of 28% over the prior year.
We reduced our debt by $660 million, we ended the year with net debt to EBITDA below three times.
Before moving on to my comments on our segments I'd like to take a moment to provide an update on the integration of Valspar well, there's still much to be accomplished particularly outside the us.
I wanted to thank our teams for their tremendous hard work to date and bringing our two businesses together and for increasing the value, we are and will be able to deliver to our customers and to our shareholders.
Since the beginning of 2017, certain Williams has generated $6.1 billion and net operating cash or 12.2% of sales.
We've used that cash to invest approximately 800 million back into the business.
Reduced debt by nearly 3 billion and return approximately 2.5 billion to shareholders, including 1.1 billion and dividends and 1.4 billion and share buybacks.
We will no longer be calling out synergies related to the Valspar acquisition has it becomes more difficult to distinguish between acquisition synergies and our ongoing continuous improvements initiatives.
We exit 2019, having a benefit of about 315 million from synergies in the piano, including about 75 million that was realized in 2019.
We've identified approximately another 100 million an opportunity largely related to our supply chain optimization efforts in Europe and Asia.
As previously communicated we expect to realize a small portion of this benefit in 2020 with the majority being realized in 2021 and 2022 as projects are completed.
Let me now turn to just a few comments on our operating segments all of which contributed to our record performance in 2019.
Within the Americas group for full year sales increased 5.7% against the prior year comparison of 5.6%.
Residential repaint remains our strongest customer segment up by double digit percentage year over year.
This is the sixth year in a row, we've grown residential repaint at a double digit level.
All other segments grew in the mid single digit range for the year.
Full year segment profit dollars and margin also improved year over year.
We continue to invest in innovation and service introducing 27, new products, our ninth consecutive year of double digit product introductions.
We opened 94, new paint stores in the Americas group this year and closed 32.
To be clear.
We opened 84 net new stores and added 150, new sales territories in the U.S. in Canada.
The 32 stores, we closed 26 were in Latin America and were related to changing market dynamics.
In the consumer segment, we generated growth with our largest retail partners in North America No full year segment sales decreased due to lower than expected sales in Asia, and Australia, and the impact of the guardsmen to divestiture.
Adjusted segment margin improved to 17.5% driven by synergies operating efficiencies pricing moderating raw material cost and lower acquisition related amortization expense.
Performance coatings group sales for the year were variable by geography, and end market and were impacted by unfavorable currency translation rate changes.
Both in North America, and Latin America was more than offset by softness in Europe and Asia.
Mid single digit growth in our packaging in coil lines was offset by softness another product lines, most notably industrial wood.
Adjusted segment margin increased to 14.1% from 12.9% in the prior year.
Pricing synergies and good cost control drove the improvement.
Turning to our 2020 outlook. We currently see a similar environment to last year with North America architectural demand remains solid and industrial demand remaining variable by geography and end market.
We have many opportunities to grow share and all of our businesses and I remain highly confident in our ability to provide customers with solutions based on innovation.
Value added service and differentiated distribution.
We entered 2020, well positioned and focused on what we can control.
For the first quarter of 2020, we anticipate our consolidated net sales will increase by 2% to 5% compared to the first quarter 2019.
We expect the Americas group to be at or above the high end of that range.
We expect consumer brands to be flat or slightly up excluding the impact of the ace business, we exited in 2019.
And we expect performance coatings to be up by low single digits.
For the full year 2020, we expect net sales increased by 2% to 4% with segment performance similar to what I described for the first quarter.
On an earnings per share basis, we believe the most meaningful way to provide guidance as to exclude valspar acquisition costs and onetime items.
On this basis and given our sales outlook, we expect adjusted 2020 full year diluted net income per common share to be in the range of $22.70 to $23.50 per share an increase of approximately 9.4% at the midpoint compared to the 20 112 reported in 2019.
On a comparable basis.
This adjusted 2020 guidance excludes approximately $2.79 per share for acquisition related expense.
The regulation G reconciliation table in our press release illustrates these moving parts.
We expect our 2020 effective tax rate to be in a low 20% range.
One key assumption embedded in our outlook is that the market rate of inflation for our raw material basket in 2020 will be flat compared to 2019.
Assuming stable petrochemical feedstocks and no supply disruptions.
We expect the basket to be lower year over year in the first quarter end to a lesser extent in the second quarter with year over year cost flattening out or slightly increase in the back half the year.
A few additional data points may be helpful for modeling purposes.
We will continue to make investments across the enterprise that will enhance our ability to provide differentiated solutions to our customers.
These investments include new stores, and reps capacity and productivity improvements systems and product innovation in both our architectural and industrial businesses.
We also plan additional incremental investments in our digital platform and the home Center channel. These investments are embedded in our full year guidance.
We expect capital expenditures to be approximately 320 million, which is about 1.7% of anticipated sales.
Note that this estimate does not include any expenditure related to our previously announced headquarters and R&D Center project.
We expect to provide you with an update on this project in the near future.
Depreciation should be 275 million and amortization will be about 310 million.
Historically, we have targeted dividends of about 30% of prior year GAAP earnings next month at our board of directors meetings will recommend a quarterly dividend increase of 18.6% to $1.34 cents per share up from $1.13 cents last year.
We expect to continue to making opportunistic share repurchases.
We'll also continue to evaluate acquisitions that fit our strategy.
Before moving onto your questions. Let me wrap up today by ask you to save the date of Wednesday June Threerd on your calendars.
That will be the day, we'll host our annual financial community presentation at the Marriott Marquis Hotel in New York.
The program will include presentations by several members of our leadership team.
We'll host our customary QNX session, followed by a reception and lunch again that date is Wednesday June 3rd.
We'll be sending out invitations and related information and a link to our registration site in April .
With that I'd like to thank you for joining us this morning, and we'll be happy to take your questions.
Thank you we will now be conducting the question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad. The confirmation indicate that your line is on the question Q you May Press Star too if you would like to remove your question from the Q for participants using speaker equipment and may be necessary to pick up your headset before pressing the star keys, one moment. Please poll for questions.
Thank you. Our first question comes from Christopher Parkinson with Credit Suisse. Please proceed with your question.
Thank you can you talk a little bit more about your expectations for us housing in the upstream consequent an architectural volumes outlook just given some more constructive data I just in terms of what you're hearing from the American screw heads.
Heads and their customers do you expect broader volume participation. This year or just what are the key puts and takes thank you.
Sure Chris Good morning, it's Jim.
What we always talk about when we have this question as we look at our.
Sentiment from our 4500 store managers, and our 3000 sales reps and they continue to be very.
Very optimistic about what they're seeing as we end the year and as we head into 2020.
As we've talked about this in the past a big picture perspective, certainly we believe that the.
Continuing household formations in that 1.3 million range annually will support what's going on as we go forward.
But as you point out Chris the more more recent data is encouraging we're seeing strengthening in.
Single and multifamily permit starts and completions that the year end and really the three month trailing average for all of those was up double digits.
We were at the.
Builders' show that just happened and I would tell you the optimism at that builder show among our customers was very positive and you have other things out there that are supportive as well the mortgage rate remains very reasonable and some of the recent reports by some of the National Homebuilders are also talking about strong orders, but I think we feel.
Very good about where housings headed from a macro perspective.
Hey, Chris This is al I, just like that on to that comment by saying as you look at how our North America paint stores group unfolded throughout the year, our second half.
Was stronger than our first half and even as you look at what tag performed or 4.8, you look at our same store sales up for six to put that in perspective architectural gallons were high single digit than the quarter excited as.
A reminder, we did not go out with price in our fourth quarter and historically as we've seen momentum and our second half and in our fourth quarter that translates to growth in our first half. So that's what makes us feel pretty good about the paint stores and architectural North America.
Just a quick follow up you previously discussed potentially get your margins and consumer performance it back up to geared towards let's say, 20% those targeted but can you just simply update us on your conviction and your ability to do this I just also highlighted investment community any key non raw material.
Levers you can continue to pull.
Potentially makes this happen in each segment. Thank you, yes, yes, Chris.
We are not coming off our numbers.
I am confident and our ability to hit those financial targets, we laid out.
For 2020, as I talked about on the Gen Investor day.
I confirm that will hit those targets, but on a lag and I think it throughout 2019, we made significant progress and are on the right path to attaining those goals.
And weve, even attained some of those goals are ready if you look at our core gross margin at 45, one for the year set the low end of the of the targeted range that I had laid out at 45 to 48 and you look at our strong net operating cash if I looked at net operating cash at 13% less path.
Next you get a little over 11%.
Net operating cash less capex, which is the target that we had laid out so I'm very confident and our ability on performance coatings and consumer brands to expand their margins at to that mid to high teens low 20, and they made good progress this year.
Thank you.
Thank you. Our next question comes from Stephen Byrne with Bank of America Merrill Lynch. Please proceed with your question.
Hey, how you just mentioned that.
The same store sales metric in the fourth quarter was mostly volume and tag just because you lap the year ago pricing and Jim you mentioned the.
Strongest region was the southeast were.
In October they were really underwater in that region. So.
Can you just comment on where you think backlog is in architectural.
Pink contractors and where do you think is could drive same store sales in 2020.
Well, Steve I think we're feeling really good about the market and the feedback that we're getting from our customers. As you just mentioned Theres a there is a backlog.
Out of it I think has to do with labor.
We continue to believe that.
That.
Backlog, if you will and labor supports our model and helps build loyalty to what it is that we're trying to do for our customers which is.
Driving the technology and services that help them to be more successful and.
We've got a lot of new products that we're launching going into this year lot of services that were introducing all directly pointed out trying to help those customers to attack. Those so to your question, we think geographically it's pretty solid.
Theres no pockets that I've been in yet or nor that we've heard from our teams.
Where people are feeling softness as a general consensus that.
The contractors are feeling very good could do more if they had more labor.
And.
And we want to be there does help support them accomplish their goals.
And John did you anticipate that.
Changing some of the acquired brands to the sure one brand would impact the.
The outlook for sales for those products.
Yes, I'd like now to talk to it from a financial perspective, but absolutely in fact, I would say, we're feeling really good about the fact that we've gotten here as fast as we have.
As we entered into the integration, we're always listening to our customers and always listening to our employees and the fact that our customers reach the retention of both our customers and our employees is so high and allowing us to move aggressively and this brand consolidation gives us really great sense of pride of of the speed of execution.
We're moving in.
Steve I would just add this is not indicative of the underlying businesses. If you look at healthy businesses operating margins are expanding and we saw that and consumer brands and in our performance coatings groups.
This year and as John talked about in his opening remarks, I mean, we've generated strong cash flow over the period.
And the 17 through 19, and we'll continue to do that we saw strong cash flow and 2019 so.
As a reminder, we looked at this valspar acquisition over the long term, it's hard when you're going into an acquisition to predict timing of when certain events happen, but as John said.
Improving our operating efficiencies by consolidating brands, that's only going to help us going forward.
Thank you.
Thanks, Steve.
Thank you. Our next question comes from Jeff Zekauskas with JP Morgan. Please proceed with your question.
Thanks very much.
Can you can you talk about.
Business conditions in China and in Europe .
And maybe your offshore operations generally in 2019, how much did they grow in revenue terms, our or how much did they shrink and whether business conditions in China in the first quarter of 2020 are very different than what they were it not fourth quarter of 2000, Mike.
Well I think.
Specifically, the China, I'd say that the environment that we find ourselves in some of our business.
There's been a challenge if you look at our Industrial Award for example.
With the tariffs and generally a weaker economy.
It's had an impact on our business, we've had pockets of strength.
In Southeast Asia.
Particularly in the cabinets area of wood.
So I'd say from a from a word perspective, it's been the most challenging.
That said if you look at our packaging business as an example, we had a terrific run there and Asia actually across the globe in packaging, our coil business in Asia was positive.
We had some pressure in our general industrial business. There are automotive business was pretty small, Jeff and in Asia, but it was positive.
So I'd say.
Mixed bag there.
Clearly some pressure, but our market share there is such that gives us terrific opportunity for growth and that's where we're headed.
Okay and then just.
A small question you talked about most of.
The growth in the stores business in the fourth quarter coming from volume, but but in previous quarters. It seem that price was a larger element did you simply annualized to your price increases or was there some competitive activity that led to a lower price benefit or was there a mix effect why was price a smaller.
Component the fourth quarter.
There was virtually no price in the quarter and it was because last.
Year 2018, the price increase went in the first of October Jeff in this year, we rolled in January one so the fourth quarter was exposed from a prices perspective.
Okay. Good. Thank you so much and I'd just point out as Al mentioned, so when we look at the architectural gallons in that fourth quarter up.
The high single digits as a really good quarter for our team and our.
Business.
Okay.
Thanks, Jeff.
Thank you. Our next question comes from Ghansham Punjabi with Baird. Please proceed with your question.
Hey, guys good morning.
Can you I want to help us with the margins on the Americans Group segment did that play out the way you thought it would during the fourth quarter.
During the third quarter, you had a nice year over year acceleration of margins I think it was up 120 basis points for Q with closer to 70 basis points and that was also on a very healthy increase in sales.
For the offset there.
Yes, so ghansham.
Well look at.
I start with the flow through and you look at flow through and tag in the fourth quarter and it was over 33%. So we saw nice leverage on our.
Our gallon increased.
Yes.
As John talked about in his opening remarks about.
Investments and additional opportunities and you know we have taken a long term strategic view of the market and aside from just new stores and new reps that we talked about.
John talked about expanding our digital platform that I think and we believe will give us a competitive advantage and in the marketplace and we're expanding and investing in that tool to get better aligned with our customers to offer better services to make them more efficient ultimately.
As we've talked about we want to drive.
Higher topline growth for them and profitability. So we started that really coming in third quarter in fourth quarter and will you'll see us continue investing at next year downstream I think when we're together actually we talk a little bit about some of the investments, we're making on that digital and we're really proud to be announcing that we'll be rolling this out nationally.
The end of the first quarter.
We think this is the start of a number of products in the pipeline here, but the start of a process that we've been really investing in into ALS point were cranking that up and the idea here is increasing that loyalty and that contractors.
Leaning on us to be more efficient and what it is that they're trying to do we talked earlier about labor and this launch of this.
Digital platform will help them run a more efficient business. It's not just external though we're also investing internally we didn't talk about this last year, we made it to one year now with our sales reps now having had ipads for one year, we think thats improving the productivity.
Of our sales organization to be more responsive to our customers. This year, we've just announced to our team we're rolling out ipads into our stores to make them more productive more efficient and more responsive to the.
To the needs of our customers. So we.
We are investing we're investing in this business, we have great confidence of our position right now and quite frankly, we see some competitive opportunities that we want to take advantage of so we are putting our foot on the gas here.
Okay. Thanks for clarifying and then just for my second question on the performance coatings segment.
Even with the industrial markets, having been weak if everybody what do you.
The margins were still up year over year, what was there any residual price catch up or any significant mix benefit from.
This is like packaging that drove the margin expansion apart from just synergy flow through.
Yeah got so that's a very astute point as packaging and coil.
Sales have expand a faster than that on the rest of the the businesses. We do see some lift in the margin on that yet.
As we've talked about in the past.
Our perform industrial business took the brunt of the run up and raw materials in 17 and 18, we've been chasing after the last few years. It doesnt come in uniformly like our paint stores group. So yeah, we saw some pricing.
Flow through in our and our fourth quarter and then the other thing I would say is as as as we are investing in growth opportunities. We are also laser focused on controlling and managing our costs, where our businesses.
And our regions aren't performing to where we expect them to perform or.
Seeing a path to set target so we're controlling our costs and consolidating operations as well. So you can expect that to continue as we go forward as we continue invest in other areas.
Got it thanks, so much.
Thank you again.
Thank you. Our next question is from John Mcnulty with BMO capital markets. Please proceed with your question.
Yes, thanks for taking my question.
With regard to in the release you would laid out.
Some acquisition related costs still in 2020 kind of to the tune of what looks to be 300 $350 million or so.
I guess, what is that still being spent on and I guess, how much of it is how much should we be thinking about is actually a cash it and then I guess tied to that how are you thinking about cash conversion as we look look to 2020, because it obviously took a big step up in 19, but curious how or where we go from here.
Yeah, John I, though.
I'm glad you brought that up because it's important that.
For an apples to apples comparison, we wanted to call out acquisition related costs and the amortization depreciation year over year is very similar and bedded in that number is about 30 million an additional integration costs.
And we wanted to include that in our guidance and then Reg G table, but we're not going to be.
Laying that out going forward.
No.
That breaks out.
Just for modeling purposes, a little more.
Back half versus front half loaded.
But this gets us in the next phase like John talked about synergies as part of our continuous improvement process, we're going to get back to integration activities or it's just part of our normal operating process as far as cash flow.
John you've followed us for a very long time.
13%, that's always the new high watermark and as I talked about in our Investor day and earlier net operating cash less capex, we're targeting 11% and we expect to continue to hit that target as we go forward.
Got it and then just just a quick follow up with regard to the pipeline that you're seeing from your customers. It sounds like the residential sides pretty solid can you speak to the nonresi side and what you're seeing there.
Yeah. It's it's very good if you look at the commercial side property management, I I'd say John .
Try not to get ahead of myself, but we're feeling really good we just came back from our national sales meeting that.
3500 of our closest friends together talking about just that and.
Very bullish environment very positive and if you go from the commercial property management into.
Health care I mean, as a general feeling that a that our customers are really excited about what's ahead for 2020. So we're really looking forward to this year.
Great. Thanks, very much for the color.
Thank you John .
Thank you. Our next question is from the line overruns, Wisconsin with RBC capital markets. Please proceed with your question.
Yes.
Good morning curious on the.
Paint stores side.
Was there any change in the quarter I know that you put up at eight comp in Q3 and that would imply like a six volume and you did a five three here. So it doesn't appear that way I'm just curious.
If you noticed an improvement in Q4 or deceleration and.
Do you expect kind of similar kind of mid single digit volume growth and.
In 2020 thanks.
Everyone I'd say.
The largest impact that we had was our protective and marine business that runs through our our tag business.
The architectural business as we mentioned was up high single digits.
We talked about the fact that we've had another.
Double digit increase in residential repaint and just talked about some of the other segments and the confidence that we have there. If you look at those indicators that we often cite spray equipment nonpaid items.
Turning points in the right direction.
So high single digit architectural gallons going through impacted by the PNM business in the PNM business through our stores was largely impacted.
Oil and gas, which was under pressure and we had some timing of some big projects.
Likely not going to be starting now until the beginning of the second quarter. So we saw a little bit of softness in PNM their fourth quarter are probably going to see a little bit in the first quarter, but again the pipeline that we're looking at here is really solid yeah and around I would just add to that the price increase that we went out within our North American stores on January Onest was three to four.
<unk> percent.
We expect an effective rate.
Just below 2% and as the John laid out and.
Opening remarks, we expect paints our pag organization be at the high end of our two to four so you think 4% to 6% if theres less than two in price the rest of volume.
Great. That's very helpful. Thanks for that.
And then just as a quick follow up on PCG.
Obviously theres macro pressure.
And regional.
Variability as you said.
Do you think that is kind of tilted to the downside just given the corona virus or.
Maybe just to offer your thoughts on on where we are potentially destocking wiser, especially in Europe and Asia is there any potential first it stability there as we as we look through 2020. Thanks.
Yes, I think we we look at the comparisons of 2019% to 2020, and we have higher expectations moving forward there might be helpful. Maybe I could just talk about each of the segments just briefly.
If we look at our auto and I'll, maybe I'll just do it for a number of the regions rather than just the twoq as I'm sure. There's some more questions there.
An auto we'd say North America, we feel really good probably the best I felt in the time I've been C O or COO.
Collision shop business here is very strong I think we're in a really strong position and we're going to take advantage of that going forward Europe , I'd say, we had a little bit of softness in our auto business in Europe .
Asia as I mentioned earlier, it's a small business up mid single digits and Latin America, we have a leadership position.
It was impacted primarily by currency, we had a good quarter and auto in Latin America.
Packaging it clearly the non BPA.
There is is giving us a terrific opportunity. We believe that's an ongoing transition with plenty of opportunity for US ahead, and and so we're investing in this business, we're investing in technology and in capacity and really trying to stay aligned with our customers.
We've got great partners that were trying to support and if you look at this this was a double digit quarter for them North America was strong double digits to your question about Europe and Asia.
Europe was.
But Asia was up really really strong double digits.
And there are business in packaging is growing both in beverage and food.
In coil.
New business wins really across the region.
North America throughout.
Everyone. We did have a little bit of softness come in comparison in Europe , but this is a team thats really hitting on all cylinders and we're working hard. So those are the ones are real is performing quite well.
Gee I.
Yes, Asia, we felt some impact there and our general industrial largely in the heavy equipment and AG equipment, but we have a good pipeline of projects and good good really good people there we expect to.
To really see some improvement in our in our performance in this business.
Industrial Wood I talked about earlier, China lot of pressure I'm feeling good about southeast Asia.
Europe was another area of a pressure as well so amongst all the businesses I would say the one we're feeling the most pressure and would be the industrial wood.
And then protective and marine I talked about largely got running through our North American business through our tag.
But if I.
Look at our a smaller businesses I, albeit Asia as a very small business. It was up strong double digits for us Europe .
Down slightly as we had some pressure on some comparisons to some business there Latin America was up.
Slightly as well, so I kind of captures all the regions all the businesses on hopefully.
Satisfy some other questions with with that response.
Great great. Thanks. Thanks.
It's around.
Thank you. Our next question is from Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Yes. Good morning, I'm, just wondering if you could comment a little bit further on capital deployment, you've made some nice progress again on the balance sheet.
John just wondering if you would foresee any material change in the balance of acquisition activity versus repurchases as you look ahead into 2020.
I think the M&A activity is something that we're we're really focused on we think it's an important part of our future. Although we don't feel as though we have a gun to our head we've got.
The challenge for US right now quite frankly internally is prioritization of the opportunities. So we're very active and I would say to answer your question you should see us.
Deploying more cash into M&A I don't think you're going to see the transformational type of acquisition the Valspar was but.
We're working business by business to understand region by region, where it is a there are opportunities I want to clearly point out that we are not trying to be everything to everyone everywhere. We are absolutely determined to invest where we can return.
Generate a return of share for our shareholders and each of our businesses are developed a really good strategy that there.
That theyre executing and any of those M&A opportunities include the right to win in those markets or we're not going to be there, we're not deploying cash and commodity areas and we're not deploying cash for the sake of saying that we can be somewhere word there to make money.
Understood. That's helpful. My second question relates to raw materials. It sounds like you anticipate some or at least to start the year just wonder if you could provide a little bit more color as to the individual categories like pigment and petrochemicals et cetera, and then with regard to.
Residence in particular, just wondering if you could comment on on your degree of internal integration versus external purchases of resins and how that's evolved in recent years. If it has thank you.
Sure sure Kevin glad to answer that.
As John said in his comments and you're right our outlook for this year is that the overall basket will be flat compared to 2019, and that's assuming stable petrochemical feedstocks no supply disruptions it will be lower year over year in the first quarter it'll be a lesser extent in the south.
Second quarter, and then sort of flattened out and maybe increase in the back half if you remember.
We had our highest rate of inflation in 2019 was in the first quarter, which moderated through the year. So our full year outlook. That's our best estimate at this time the visibility once you get a couple of quarters out is is little bit murkier.
You get to the specific.
Categories, Kevin, Yes, we expect the petrochemical basket to be in line with our overall raw material outlook.
Probably a tailwind in the first quarter, maybe into the second quarter before flattening and again, increasing in the back half we're seeing right now key feedstocks propylene ethylene are down year over year as we enter 2020.
And other key materials.
Like a policy for example, more out or industrial side are also down year over year.
From a T O two perspective right now what we're seeing is relatively stable moving into 2020 based on the current demand environment that we're in so that's kind of a big picture look at it from a resin internalization standpoint, I'll, let al take that yes, Kevin I.
I don't think our strategy has changed.
And picked up a nice business with EPS. This part of the Valspar acquisition.
Evanta, even invest and more assets to internalize resins, but it's a balance sheet look at.
Where we can.
Make the most from not just not a cost necessarily but from a differentiation standpoint and.
We have as we've talked about a number of projects in the pipeline across each of the segments continue to drive what I'd call continuous improvement opportunities down you saw some of that benefit and our consumer.
Brands group. This this year and helping their margin expansion and you should expect that going forward.
Yeah, Kevin if I could I just like to add just one other component that was just slightly touched on by all on the proprietary development of technology.
We're looking at this opportunity to serve our customers, particularly the painting contractor who's looking to maximize productivity and we're combining the the asset that you're asking about in a way I think thats really unique for Sherwin, we're trying to position ourselves to the to provide solutions and technology to help those customers to be more productive.
I mentioned earlier number of products that we are introducing and tier I'd just like to take the opportunity to talk about three of those because I think it highlights.
What al just talked about from a from a resin capability standpoint, and I'll be very brief in this but.
This gives us the opportunity to develop products that really help our customers in a unique way we're introducing the product this year called flex temp.
That provides a contractor the ability to get out earlier colder temperatures and stay out.
Longer and hotter temperatures that actually has a.
The a spread of ability to be applied from 35 degrees Fahrenheit up to 120 degrees Fahrenheit Fahrenheit with no change in viscosity terrific uniform application and so it extends the ability of these painting contractors to be out so when we talk about labor and the challenges of getting caught up were look.
Looking at ways to make them more productive.
We're introducing a new product called Emerald rain and refresh that again same same platform of technology proprietary will hold onto this no one else will have it but this is a product that did not only optimizes applications. So that you have.
More productivity from painters with less experience. This is a product that when it rains or it is whos down it looks like it was just painted so after every rain the home or commercial building a look as if it was just painted brand new clean. So these painters that have applied this in the in the commercialization process have just been.
Really raving about and last one just to be brief again, we're introducing an extension on our Emerald line, which is our top of the line product. This will be the finest paint that we've produced yet outstanding hiding great application. So again.
Peters with limited experience, we're making limited experienced painters better painters best application better touch up.
All with this idea that if we're developing resins and products for them the loyalty to showing increases.
Thank you so much.
Thanks, Kevin.
Thank you. Our next question comes from Bob chord with Goldman Sachs. Please proceed with your question.
Hi, guys. This is Anthony Walker on for Bob.
Maybe two quick ones.
Can you talk about the performance of the international business was well within the consumer segment I'm sure cars or the Valspar transaction in the past you've talked about potential strategic strategic or rationalization opportunities. There assuming the businesses continued to underperform, how should we think about the timing and the opportunity there.
Yes, I think.
Let me just walk through the three areas that are just briefly first Asia I'd say the business is certainly going through a transition we've talked about the fact that this while room brand.
Was predominantly focused on interior wood, so we're shifting.
That strategy as much of that business internally and in region is now shifting to a.
Shop or.
Factory applied application.
So the teams are developing a strategy and executing pieces of it too.
Pursue and reposition the brand there.
Again, a small piece of the business, but we think this is an important one future opportunity.
Here is terrific, we're gaining we're making some progress in the quarter, we started to see a positive trend and.
In Asia, So I'd say that one is a is trending the right way.
Europe , we made significant progress this past year.
Sales were positive in mid single digits operating profit improved to a low double digit percentage. So feeling that we are pointing in the right direction there.
Australia is a is it is a bird of another color. We've got some challenges there and quite frankly, we're not performing.
As needed we have plans and teams executing on this.
This is one that you should expect us to get closer to and and see some improvement or making some tough changes.
Great. Thanks, and then just one on the price increase since you announced or the paint stores group, how should we think about that flowing through the results in the year. When we start to see that show up in the first quarter and full and then how should we also think about the magnitude of what I assume or labor freight and distribution expenses are attempting to offset thanks.
Yeah, the pricing overall out on a on a sir similar cadence capacity price increases you'll see some of that for sure in the and the first quarter and then as it takes hold over the next.
Now six months, we'll we'll get full effectiveness as it flows through all of our customers.
When you look at.
Our cost.
Basket.
Talked about.
Merit increases.
Our higher than what they've been in the past.
Health care benefits continue to rise and as we've absorbed those over the past number of years, but this price increases not on president president at to cover costs other than raw materials and if you go back in the first quarter of 2014, we went out a price increase to cover those costs because.
As you know as you can imagine it's a compounding you know you don't get it in the first year and a compounds over three or four years. It gets to be pretty steep. So that's a kind of why this a justification with this price increase that we're not getting thank you notes from our card from our from our customers, obviously, but many of them are facing similar situation. So.
The fact that we waited until January one gave the our customers an opportunity to kind of recalibrate as their bidding going forward in the new year and secondly, the fact that they're experiencing the same thing I think as has helped in the execution as well.
Hello Hello.
Thank you all move onto our next question, which comes from the line of Mike Harrison with Seaport Global Securities. Please proceed with your question.
Hi, good afternoon.
Mike.
Wondering if you could give us an update on the progress at Lowe's and maybe just more broadly speaking your expectations for DIY why in the first half of 19, it seems like with read refinancing activity, having picked up and the easy weather comps in the store resets in the training that's been going on it.
Hello.
The that business could be stronger.
You guys provided guidance it suggests that consumers more more flattish for the full year.
Yes, so piece of that just reminders, we have the ace business, that's coming out. So thats was a piece of the go forward forecast Mike but.
I would describe our our opportunity it at Lowe's quite simply as we think we're moving the ball in the right direction, but were never satisfied and.
We are investing I mentioned earlier in my remarks about.
We're stepping up our investments in the home Center channel.
Obviously, there would be a big part of that.
We see that there are opportunities in both the consumer side and the professional side, though those pros that paid we think.
It's a terrific opportunity for us to help our customer.
On the consumer side, we have a lot of opportunities to help convert shoppers into customers and.
We made a bit commitment to this relationship and.
We want to see this thing through and the opportunity here is a help execute and that's on all fronts. So I don't think you should ever expect us to say that were done.
This is a business that we're looking at just aggressively as we do our own stores business, we think theres opportunities and we're committed to helping our customer win Hey, Mike I would just to add to that that we've talked about this in the past that in with embedded in our consumer brand segment is our retail channel that has been under.
Pressure consistently and as the Loews has performed better. They certainly are are taking share from that segment and then we're trying to be realistic when we look outside the U.S.
We're trying not to build the.
Although optimistic trying not to build a hockey stick to our sales guidance and.
But rest assured.
We expect more out of those teams outside the U.S.
Alright, and then what it also ask about color snap consultation program and how that's contributing to paint store sales growth.
How much of North America.
Do you have covered with the color snap offering at this point I'm, just trying to get a sense of kind of what stage, we're in a with that roll out and how much more could contribute thanks, yeah, we're pretty early and there's an opportunity.
And again this goes back to helping our customers.
Mike.
You really hit on something here because this is worked out quite well for us not so much just for the consumer but.
Our residential repaint contractors are leaning on us to help accelerate the selling process for them and.
As we employ this as well as the digital color snap, which is an AI application. That's that's new and continuing to two we continue to enhance the previous platform.
It allows our customers to accelerate through the their process of closing business. This is the professional painting contractor to a homeowner.
So I would suspect that youre going to see that as a component one of many items that we're going to continue to leveraged added add service.
And productivity.
It helps build loyalty to the painting contractor.
But it's.
It's still got a lot of opportunity across the country a lot.
Okay.
Thank you Mike.
Thank you all move onto our next question, which comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you good morning.
John can you discuss your plans for store openings and any closings in 2020 and.
Hi, any impact on the cadence of store openings from either your digital strategy or how you try a service some of your larger customers going forward.
Well, we expect to continue in that range of 82 or 100 stores.
We I don't know that it's.
Changed in any way.
From a from a store cadence, we'd we'd like to see a smoother.
Rollout of the other stores.
Rolling in.
I've been trying to fix sense since I ran that business.
15 years ago, but.
I'd say that we feel really good about it I also want to thank our teams because I think we're getting continuing to get better at at.
The stores or.
That we're opening we're cranking up faster and the impact is better some of that has to do with the quality of people in the stores as well as the systems that we're adding to though so I'd say you should expect us to continue to add.
In those stores at a similar rates and what we've had yeah, David I'd just add when you look at the tag.
And.
We closed 32 stores in the year 26 of those stores.
We're in Latin America, we have talked about the pressure we've been under our Latin America.
As you know, we take a a rigorous and consistent view of our portfolio of businesses brands customer programs and other investments and.
As we've not been able to see a line of sight to above average growth either and sales operating margins cash.
How to take action.
When we're not exiting those markets, but pushing those sales through what I would call more of a dealer network, which is a little.
Less asset intensive and.
I think you'll see some of that continue here and I first half.
Very good and John just lastly, what's your sense on the pool of available painters and both the quantity as well as the quality and in 2020.
Let's say a there.
So it's under pressure our customers as I mentioned earlier would would like to move faster and.
And there are a number of wonderful painters and many people entering in the industry that are learning as they go and.
As I mentioned as I ran through those products briefly we're taking that into consideration is we're building products and helping our customers to improve their efficiency. So I'd say, they're both under pressure people that typically enter into the trades.
We're working with those program with those professionals to help train those employees.
But there's a pressure in finding them.
Thank you.
Thank you.
Thank you. Our next question comes from P.J. Juvekar with Citi. Please proceed with your question.
Yes, hi, good morning, good afternoon.
Hey, Jay.
Hi.
You know lustig chemo, just plastics are coming under pressure since bags and bought those I was wondering if as bottoms come under pressure, what some of the food and beverage stuff more to cans and would that become an opportunity for you on interior exterior coatings or the cans.
Yes. The answer is yes, we would we would welcome that transition and we want to work to support our customers to do that as I as I mentioned earlier the.
The progress that we're making in our packaging business.
In both food and beverage has been fantastic and more of that transitioning into a.
To our packaging customers business is terrific and that's why we talk a lot about this in our stores business, but you know even on the on the packaging side.
We're really determined to help our customers through technology to help speed up lines.
To help minimize redemption.
Uh huh.
[music].
Not damage but.
[laughter] drawing to bikes imperfections in the coatings, but the idea here as we help them become more efficient and driving efficiencies into their plant. The better supplier. We are so we're really focused on making them better.
Okay.
And then my second question is now that your leverage is below your target of three times.
What are your willingness to look at M&A walk side, and what 2020 be the year that you come back into the market for M&A.
You know PJ.
We have consistently are looking for acquisitions.
Of any size I mean, I think you're right as you look at our debt to EBITDA ratio under three.
And 2020, I don't expect to pay down debt and as you are EBITDA grows you'll see us.
Drive that target down towards the two to two and a half long term target that I have.
But yeah, we are actively looking for acquisitions, but John as John mentioned earlier, where we're taking a disciplined approach to that and yeah. I'd say, okay were raised the dividend, 18%, we'll keep capex below 2%, but absent those M&A absent any acquisitions, we're going to buyback our.
Stock this year, yes, but I think to your point, though our COO David Souls got his teams really leaning forward in this area looking for those opportunities not only just simply from the opportunity, but from the strategic value that can be gain from it.
Thank you.
Thank you PJ.
Thank you. Our next question comes from Vincent Andrews with Morgan Stanley . Please proceed with your question.
Thank you all I've got left on my list is al can you just the tax rate stepping up this year.
Is that just sort of your starting point.
The year plays out and what things your team comes up with it or do you how should we thinking about the higher tax rate.
Having said that.
I'm always.
Looking at the tax rate, it's it's a function of.
How many options than and how our legal entity consolidations the flow through to help help that tax rate. So yeah I started at the low 20% range and then.
Expect our tax guys to develop.
Plans and pro continue with the programs that are going to continue to drive that down.
Thanks very much.
Thank you.
Thank you. Our next question comes from Duffy Fisher with Barclays. Please proceed with your question.
Yes. Good morning, just one for me Volumetrically, how fast did the North American architectural market grow last year do you guys. Thanks.
We haven't seen.
Seen official data yet.
That Duffy if I go back to probably the most recent data we have as 2018 gallon growth was a little over two I want to say, it's probably similar in 2019 in.
Probably in a similar level in 2020 sort of that low single digit level I would guess.
Great. Thanks, guys.
Yeah.
Thank you. The next question comes from Justin Spear with Zelman and Associates. Please proceed with your question.
Well I think you guys.
I just wanted to unpack that if you go.
Maybe further on pack the nature of those SGN, a investments and how you think though on fold from a from a percentage of revenue standpoint.
Yeah.
Just on where you know.
We're not going to go down.
The Pan out by line on the on the guidance you know I think what what we've consistently done is grow our store count grow our rep count and then these additional that investments.
I'm going to come through.
Pretty evenly throughout the year and.
We're not going to quantify and because it's like any other a review that we do.
We want to see how the first half on flip on faults, how volumes look and it may give us an opportunity to accelerate in the back half of the year like we did this year.
So I think it depends but.
They are in our guidance and we'll continue to manage those accordingly, I would say adjusted we are planning on sharing a number of these with you during our financial community presentation on that June 3rd date, where.
We will give you some idea from in some of these areas. The digital I think you see really impressed with and.
And to the extent that we're comfortable in sharing and obviously, we don't we don't want to point specifically.
For competitive reasons to what we're doing but as much as we can as things roll out we'll share what we've done but not what we're going to do.
Okay, I guess, maybe because I'm sure you pilot I know you piloted a number of these these different programs, but just curious how the there's like a response rate in terms of growth improvement to the model or is it isn't just a stickiness and this widening of the mode.
Bringing that the customer close or.
The relationships good but does it does it change the growth algorithm or the amount of gallons that flow through all else equal.
Yes, we're doing this for growth.
We absolutely believe it improves the sticking as the most every any.
Before we want to use but we are we are growing our business and we're gonna do it profitably and we think that the more solutions that we bring to our customers to help make them more profitable the more likely we're going to continue to be their supplier and so we're really focused on not just one lever one silver bullet, but a number of these that will enhance their ability to be successful and the result, we'd be.
From a better supplier to them.
Okay.
Last question is just on the consumer business, just how much mixed benefit from that transition at a pace. While you are you thinking are estimating for you for your 2020 targets there.
Yeah.
What we talked about as the Ace business that private label business. It was about 100 million a year.
Considerably below the average of of our consumer operating margin, we didn't lay that out and and and we're not going to.
But you should expect.
Margin improvement because of that.
Thank you gentlemen.
Thanks, Justin.
Thank you. Our next question comes from the line of Gary Smalley Capital. Please proceed with your question.
Eric Your line is why do you May proceed with your question.
We'll move onto our next question comes from the line of Truman Patterson with Wells Fargo. Please proceed with your question.
Hi, Good afternoon, guys. Thanks for taking my questions.
First just wanting to make sure I'm understanding this clearly on your tag in paint stores demand outlook.
For 2020, the full year guide I think it implies that volumes grow pretty much in line with 2019, maybe at a bit of a slower pace even.
When I'm listening to you all your very optimistic on the architectural volume side. It seems like that market is even accelerating.
Which would imply that protective and marine and that non rise market might even be decelerating versus 2019, just trying to understand how you all are thinking about that and if you can walk me through the parts.
Yes, Yeah, Truman I'd say, you're right and then sensing our confidence and the architectural side, having just finished the quarter in the mid single or I'm, sorry high single digits gives us confidence moving forward.
On the protective and marine side that runs through there.
We've got the fourth quarter and likely the first quarter right now that we're saying you know is.
Likely a little softer than we would've liked the scene, but.
Feeling pretty good about it going forward so.
I I think we're trying to be just.
In line with a with.
What our customers are telling us and we feel pretty good about the number that we put out at trim and the other comment I would make is as I mentioned earlier, if you look at the way the year unfolded for paint stores in North America, we had a strong.
Second half versus the first half even.
9%.
Eight 7% tag increase in the third quarters, which is a which has a large quarter and a very good result in a large quarter like that so.
I think when we get through our second quarter and see how the years unfolding. We can give you an update then.
Okay. Okay and then in final question for me just.
On the raw materials.
Basket can you just discuss what kind of Tailwinds you actually saw in the fourth quarter.
From an overall basket perspective, and then I'm just remind us why what you ended up seeing in 2019 as a whole.
Yeah Truman.
Costs for the broad basket that we buy I would say moderated slightly in the fourth COVID-19 from third quarter of 19, so kind of played out as we thought.
Fourth quarter 2019 was also lower year over year.
The year over year decrease in the fourth quarter was driven primarily by lower cost for resins solvents.
And we don't provide specific dollars on the savings of the raw materials, but you can see the positive trend I think reflected in our year over year gross margin improvement.
Okay. Thank you.
Sure.
Thank you. Our next question comes from Rosemarie Morbelli with GE Research. Please proceed with your question.
Thank you good afternoon, everyone.
Hi.
John I was wondering if you could give us a little more on the impairment charges I am assuming that then.
Most of it it's a wood coatings in China, but you also mentioned when impairment taken into consumer brand category. It's at Ace.
Oh.
A little color on which product lines, you out more or less eliminating as there is no gross.
And those fall, which you are going to change the brand name.
Yeah, Rosemary I would not.
Classified as rise as as no growth I would characterize that and guy and in automotive as Weve put in implemented our our our systems our legacy systems.
We've we've gotten customers to move to a new label and that has helped us optimize our streamline our operations and that's the biggest impact.
Another example would be in Australia were under pressure that we talked about earlier about driving operating margin and cash flow improvement in one way to do that is reduced the number of brands you're trying to support and so in that area. We also moved from a focus remove focus if you will on one brand and driving.
At March or the waterfall, Brandon and again, that's going to help us in the mid term here to reduce our costs on keep investing in labels and merchandising and different things like that so.
The war room brand in China has been under pressure John talked about that transition certainly from a.
To factory applied coatings, yes that is an impact and as that transition.
Continues to move and expand yeah, we're not expecting or anticipating any other impairments going forward.
Okay and then.
Nicola Shaley optimistic you all projections of 2% to 4%.
Our revenue line that is strong go higher than it was 29 to investors to any that's just 2018 and yet if I look at Sheila you P.S. projections at the mid point it is up 9% forces that.
10% to in a 90 another 14, if I have no that's right.
I'm wondering what are the offsets.
Yeah, Rosemary I I'd say that.
Where.
If you're comparing last year to the so the go forward.
I talked about the price increase that we went out with them being effective under 2% that's below what what we had answered what we really realize through the first three quarters of last year, a raw material.
Moderation isn't as strong as what we saw in 2019 and visit investments that we talked about even though we're seeing a slow error in our second half of 19 on performance coatings, we continue to invest back in this and in our businesses that we think are going to provide growth opportunities.
In the future not only the new stores and the new reps that we even accelerated in the back half, but this digital program that John laid out and then some other our home Sarit channel that so yes, there were continuing those investments in 2020 that may not have an immediate feedback.
Payback, but but no we're running this company longer term than just one quarter and we absolutely believe these are the right investments to make and so we're moving forward aggressively taking advantage as I said that not only the market, but we really think theres some competitive opportunities out here that we want to take.
Advantage of.
Okay, So nothing really essential Jess going forward than investing where you need to.
Investing where we need to skinny in back where we can but leaning forward we think that.
We've described it internally Rosemary as a coil, we feel were crankiness coil down and we expected to respond given the investments that we have in a very positive way and Rosemary.
Well, we don't expect the market to be this way, but if you go back to 2789, when we added 260, new stores. We came out of that you look at our market share growth not only on the three year, but the five year and the tenure compounded average growth rates, we think were well above market growth and that's.
The attitude, we're taking it we look at it long term and expect to as John mentioned that that coiled the CRO market share faster than what we've done in the past.
All right, you're looking forward to that coil deploying thanks [laughter].
Thank you.
Thank you. Our next question comes from Christopher Perrella with Bloomberg Intelligence. Please proceed with your question.
Hi, guys quick ones on lateral volume has flattened out for you at this point and you're looking for inflection and 2020, and then just a little color on consumer pricing or you expect to get about.
Half of what you getting the tag growth for 2020.
Yeah, Chris I would say for Latin America.
Our volumes have I would say improved as the year has gone on.
But.
Where where you're seeing it is as we continue to see the devaluation. We're continually that team has continually having to go out with price.
60% of our raw materials are dollar denominated. So every every deflation we see in Brazil. As an example, we're constantly chasing what price so the.
Biggest portion of our impact right now as price, but some of the things that we're doing then on streamlining sales organizations and focused on the right segments and customer.
Segment, Phil will help drive growth in the future Yeah, we're just not waiting for the market. We're not waiting for currency. We're we're trying to do with mentioned earlier control the things, we can control and <unk>.
In Mexico sales were up high single digits, clearly offset by Argentina, and Brazil, and some of the other regions as Al mentioned, we're trying to be very aggressive in Brazil. The the store reduction as an example of that.
But we're looking to drive more profitable sales through the most efficient channels Donna and Chris The second question on price and yes in performance coatings.
We do still have opportunities for pricing certain businesses and regions and.
As you remember 17 18, we saw the big run up and raw materials, our industrial businesses were impacted the most.
Yes.
Although raws had moderated and our expectation is in 2020 them there, they're not back to where they were at the beginning of 2017, so we're continuing to need price.
We've expanded our margins.
But we expect in I feel confident that we'll get to the high teens and low twentys and recovering those raw material costs, plus the incremental freight cost that plus the.
Merit increases and health care that I talked about on tag those are affecting our our performance coatings group and were how an offset those so yes, we're going to continue with price.
Alright, thank you.
Thanks, Chris.
Thank you. Our next question comes from the line.
Larry with Wolfe Research. Please proceed with your question.
Hey, guys. Thanks, taking my question.
First of all that kind of follow up on the tender comment earlier on the auto business looking at best and it's been in your tenure.
Little surprising to hear me are you starting to see like accident frequency inflect or total loss rates come down or is it more so just competitive dynamics, where you feel like you're taking share from the channel.
Competitive dynamics were taking share.
I think the market theres been some compression we think the you know and we've we've talked about that openly with safer cars and and safer attributes that are going into these vehicles, which are absolutely.
Critical.
So we're doing it by the technology that we're bringing in the surfaces that we're bringing the combination of valspar unsure when together we have.
A new improved system that we think is been very well received by the marketplace and we're really working hard to serve those customers in a way to to help their throughput through those facilities.
Yes, that's helpful. And then one of my question on current affairs, just want to think through like potential impacts on maybe like aboard indirect impact.
Right guys, you don't have high exposure to like Chinese tier two but already impacts to that market that manifest in the global supply chain.
Work stoppage continues or any other like feedstock or inputs that we.
Again, if we continue to see more business shutdowns and extended holiday that could maybe have an impact your business curious I think all that.
Yeah, Chris.
Let me start just by saying you know first when we look at this to the health and safety of our employees is number one obviously and so we're monitoring that.
Very carefully in the recommendations that are out there we've suspended travel to and from China in the short term.
And we're limiting some travel inside the country to business critical so we're doing that but I think we're working closely with our teams there are customers our suppliers haven't seen.
To this point any any negative impact and we'll continue to monitor that closely I think it's just too early to see.
Now we've got some very good leadership on the ground there, Jason Wu and his team our.
Our keeping us a fully abreast and.
I would say right now from a procurement standpoint, we're staying close.
So there's a couple of dynamics as the raw material piece of it and there's also the the point that that Jim just mentioned about you know are trying to make sure. We're doing everything we can to protect our employees and work with our customers. There's a whole lot of people trying to do everything possible to do that but there's a lot of uncertainty and we'll react as it unfolds.
Got you really helpful. Thank you.
That.
Thank you ladies and gentlemen, this concludes our question and answer session. So I'd like to know floor back over to Mr. Jay for any additional concluding comments.
Thank you Jesse and thanks, everybody for joining us on the call today.
Myself and Eric Swanson will be available as we always are for your questions. The today tomorrow and into next week.
And again appreciate your interest in Sherwin and we'll talk to you very soon.
Good day Bye bye.
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.