Q2 2020 Sherwin-Williams Co Earnings Call
[music].
Good morning, Thank you for joining the Sherwin Williams companies for the last second quarter 2020 results and our outlook for the third quarter and full fiscal year of 2020, well that's on today's call, our John Morikis, Chairman and CEO Alma fishing, CFO, Jean Cronin Senior Vice President corporate control.
Alert and Jim Jaye, Senior Vice President Investor Relations.
This conference call is being webcast simultaneously in listen only mode by issuer direct via the Internet at Www Dot Sherwin dotcom, an archived replay of this webcast will be available at Sherwin Dot com beginning approximately two hours. After this conference call concludes.
This conference call will include certain forward looking statements as to find on the U.S. Federal Securities laws with respect to sales earnings and other matters.
Any forward looking statements speak only as of the de on which such statement is made and the company undertakes no obligation to update or revise any forward looking statement, whether as a result of new information future events or otherwise.
Full declaration regarding forward looking statements is provided in the company's earnings release transmitted earlier this morning.
After the company's prepared remarks, we will open the session to questions I will now turn the call over to Jim Jaye.
Thank you Jesse good morning, everyone.
I Hope you and your families are remaining safe and healthy during the pandemic.
Let me begin with some high level summary comments on the quarter.
All comparisons are to the second quarter of 29 to unless otherwise stated.
Overall, Sherwin Williams delivered a very good second quarter given the environment.
Total company consolidated sales were inline with the updated guidance. We provided on June 22nd with sequential improvement in each month over the quarter.
Despite sales being down for the quarter, we delivered year over year improvement in gross margin profit before tax EBITDA diluted net income per share and net operating cash.
Second quarter 2020, consolidated sales decreased 5.6% to $4.6 billion inclusive of negative currency impact of negative 1.5%.
The estimated negative impact from Cobot 19, a consolidated sales was approximately 8%.
Consolidated gross margin increased 330 basis points to 48% from 44.7%.
Consolidated profit before tax increased $71.7 million or 10.6%.
The $747.4 million.
Diluted net income per share increased 28.8% to $6 at 48 cents per share from $5 in three cents per share.
The second quarter of 2020 included acquisition related amortization expense of 62 cents per share.
The second quarter of 2019 included acquisition related amortization expense and other adjustments of $1.54 cents per share as described in the regulation G. Reconciliation table included in our press release.
Excluding these items second quarter adjusted diluted earnings per share increased 8.1% to $7.10 from $6.57.
Adjusted EBITDA increased $57.5 million to $979 million or 21.3% of sales.
Net operating cash increased 42% year to date to $1.07 billion or 12.3% of sales.
Segment sales were also in line with the updated guidance, we provided on June 20 seconds.
Segment margin in the Americas group improved to 23.8% of sales driven by favorable customer and product mix lower input costs and reduced spending.
Adjusted segment margin in the consumer brands group increased to 26.5% of sales, resulting from operating leverage on the nearly 22% topline growth and lower input costs as well as actions taken over the past year to improve our international operating margins.
Adjusted segment margin in the performance coatings group decreased to 13.6% of sales were lower input costs and good spending control, we're able to offset some but not all of the impact of the high teens sales decline.
Additional details on our segment performance are included in the slide deck provided with our press release and available on our website.
Let me now turn the call over to John Morikis for some additional commentary on the quarter and our outlook.
John.
Thank you Jim and good morning, everyone.
Let me begin by thanking the more than 60000 employees of Sherwin Williams for their continued determination and resilience under very challenging circumstances.
As I mentioned on our last call.
Our senior leaders at persevered through several previous crises.
Their experience has been a true differentiator during this time and enabled us to deliver significant improvement across many measures in the quarter.
Our entire team has my appreciation and respect as they continue to serve our customers at a high level.
The quarter played out better than we anticipated with the pace of year over year decline decreasing sequentially throughout the quarter.
Consolidated sales were down by a mid teens percentage in April but came out of the quarter with June flat to last year.
The pace of recovery was faster than expected in some end markets, which led us to revise our sales guidance on June 20 seconds.
As Jim mentioned gross margin in the quarter expanded to 48% driven by favorable customer and product mix and lower input costs.
The industry basket of raw materials was down by mid single digit percentage in the quarter compared to the prior year.
In terms of cost control.
Our team quickly developed and began implemented a comprehensive contingency plan in March to adjust to the pandemic.
We reduced the SGN a spending in the quarter by $40 million, but also maintains strategic investments to support long term growth.
Let me talk a bit about trends, we're seeing each of our segments before moving onto our outlook.
In the Americas Group, we're now into the summer painting season, and no. One is better positioned to serve professional painters and we are.
We have safely and responsibly opened all our store sales floors in the us in Canada.
And customers in all segments tell us, they're eager to get back to work.
Last quarter, we commented that we believe we were seeing a pause in demand rather than demand destruction.
We still believe this is the case based on the momentum we saw in multiple segments as the quarter progressed.
While we don't typically comment on the pace of business by month I would like to provide a few data points that may be helpful. Given that the current extraordinary circumstances.
In DIY, our business continued to grow at an unprecedented pace and was robust throughout the quarter.
After DIY, new residential and residential repaint, where the best performers in the quarter.
In both recovered to deliver positive growth in June.
Commercial improved in each month of the quarter and was down slightly in June.
Operating maintenance and protective and marine also improved sequentially, but have not yet returned to growth.
From a product perspective exterior paint is recovering faster than interior paint as you would expect due to social distancing requirements.
Exterior paint sales increased by mid single digit percentages in the quarter and with June being the strongest month in the quarter.
Interior paint sales decreased by low single digit percentage in the quarter, but improved throughout the quarter, finishing June flat to last year.
Additionally.
Spray equipment pump sales are often a good indicator of future demand as contractors are unlikely to invest in this type of equipment unless they anticipate significant future demand.
Spray equipment pump sales were down mid single digits in the quarter, but recovered to finished strong in the month of June.
Pricing came in as we expected and was approximately 2% in the second quarter.
We expect a similar level of effectiveness in the third quarter.
We still anticipate opening approximately 50, new stores this year, while continuing to focus on adding sales reps management trainees.
Innovative new products and productivity enhancing services.
We also continue to invest in our E Commerce platform and we're pleased with the continuing uptick in usage.
Moving onto our consumer brands group.
Yeah wide demand surged throughout the quarter driven by consumers nesting in tackling home improvement projects during the pandemic.
We generated strong double digit growth by working closely with our retail customers to capture this demand.
Most notably lows, our exclusive National home Center partner.
Our global supply chain organization continue to adapt and invest during the quarter, including pivoting from five gallon pales to single gallon cans on multiple production lines to help meet the unprecedented DIY demand.
Internationally, we saw positive growth in Europe, while China, and Australia remains soft.
We leveraged this strong sales growth to drive significant operating margin improvement compared to the prior year.
Our margin improvement also reflects the benefit of actions taken over the past year to focus our portfolio.
Including rationalizing SK use exiting the ace private label business.
Streamlining our European business, and reducing costs in Asia and Australia.
This enhanced profitability will enable us to reinvest in the business to drive long term growth for our retail partners.
Especially in the handyman remodel or pros, who paint category.
Lastly, let me comment on the trends in the performance coatings group.
Demand improved sequentially across the group in the quarter, though the pace of improvement remained variable by geography and business unit.
From a geographic perspective Asia was the strongest performer in the quarter down by low single digit percentage.
All other regions were down by double digit percentages, though North America was significantly better than Europe, and Latin America.
In packaging.
Sales were positive in every region for the quarter and were up eight high single digit percentage demand for food and beverage cans remains robust.
In coil coatings, the resumption of selected commercial construction projects drove sequential improvements during the quarter.
Including exiting the quarter positively in June.
This improvement aligns with my earlier comments on commercial construction within the tags segment, which improved sequentially in the quarter.
In industrial Wood, we saw sequential sales improvement during the quarter.
Many of the end markets served by this business, including furniture kitchen, cabinetry and flooring are influenced by trends in new residential construction, which has gained momentum in our take business as I mentioned earlier.
In general industrial most end markets, including heavy equipment, agriculture transportation and general finishing remains soft, though the business did improve sequentially.
Encouragingly General industrial was up high single digits in Asia for the quarter.
All other reasons were down double digit percentages in the quarter.
In automotive refinish miles driven and traffic congestion remain at reduced levels, we saw sequential improvement in the business during the quarter.
Though he returned to growth continues depend on the lifting of stay at home orders and the resumption of more normal traveled routines.
Certainly the pandemic is not over and numerous uncertainties in the economic environment remain.
However.
To the extent that economies are beginning to shift from the containment phase to the recovery phase of the pandemic.
Our team is energized and engaged to capture current opportunities and deliver above market growth.
We anticipate third quarter demand to improve sequentially from the second quarter.
Lets softness to continue in some end markets in the U.S. internationally for the remainder of 2020.
Against this backdrop, we anticipate third quarter 2020, consolidated net sales will be up or down by a low single digit percentage versus the third quarter of 2019.
Looking at our operating segments for the third quarter.
We anticipate the Americas group to be flat to up by a low single digit percentage consumer brands group to be up a low double digit percentage and performance coatings group to be down by a low to mid single digit percentage.
For the full year 2020.
We're revising our sales guidance upward modestly to approximately flat with last year.
This guidance reflects continued uncertainties in the timing and pace of improvement in the us and global operating environments.
On an operating segment basis for the full year, we anticipate the Americas group to be flat to up by a low single digit percentage.
Consumer brands group to be up by a high single digit percentage and performance coatings group to be down by a low to mid single digit percentage.
We are revising our diluted net income per share guidance for 2020 to be in the range of $19 in 21 cents to $20.71 per share compared to our previous guidance of $60.46 to $18 in 46 cents per share.
And compared to $16.49 per share earned in 2019.
Full year 2020 earnings per share guidance includes acquisition related amortization expense of approximately $2.54 per share.
On an adjusted basis, we expect full year 2020 earnings per share of $21 in 75 cents to $23.25 an increase of 6.5% at the midpoint over the $21.12 we delivered last year.
Embedded within our outlook is the assumption that the industry raw material basket will be lower for the full year by mid single digit percentage.
Based on our current outlook, we expect the second quarter will be the most beneficial in terms of year over year deflation.
We expect the second half benefit will be less and the first half benefit given comparisons to the deflation we saw in the back half of 2019.
Let me close with some additional data points and an update to our capital allocation priorities.
Our balance sheet and liquidity position remains strengths of the company.
At June Thirtyth, 2020, we had $188 million in cash and approximately $3 billion of unused capacity under our revolving credit facilities.
Our leverage ratio improved to 2.8 times on total debt to adjusted EBITDA compared to 3.3 times a year ago.
Given the improving sequential demand we're seeing in several end markets, we're raising our capex guidance for the year from $180 million to $280 million.
This is largely related to architectural and packaging capacity expansions restarting.
This capex guidance includes a minimal amount of spending related to our new headquarters and R&D facility project.
Earlier this month, the company's board of directors approved a cash dividend of $1.34 cents per share an increase of 18.6% over the $1.13 per share dividend paid in the second quarter of 2019.
We are committed to maintain this dividend increase throughout the rest of 2020.
In May we paid off $429 million in 2.25% notes that were due.
Our next long term debt maturities $25 million due in 2021, followed by 660 million due in 2022.
We paused open market share purchases during the second quarter, believing it inappropriate to be buying shares at a time, when we were forced to adjust our workforce and pause multiple spending programs.
Again, given a stabilizing environment.
We would expect to return to repurchases in the second half of the year with a minimum goal of offsetting dilution from options.
As I mentioned in my opening remarks.
We have a long tenured and experienced management team that has successfully manage the company through many challenging times.
They've demonstrated this ability once again over the last several months and I'm confident they will continue to deliver strong results.
We also believe the long term fundamental strengths of our end markets remain intact.
We are the people products and the services to help our customers succeed.
We remain very confident about the future and our ability to create shareholder value over the long term.
That concludes our prepared remarks and with that.
I 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. If he would like to ask a question. Please press star one on your telephone keypad. The confirmation to indicate that your line is in the question Q. You May proceed starts you. If you would like your move your question from the Q.
Thank you think speaker equipment and baby necessary to pick up your handset before parting with Barclays.
Our first question comes from the line of Chris Parkinson with Credit Suisse. Please.
Ken.
Thank you you say, you're seeing posted some pretty solid margins results, especially consumer which I'm guessing. It's a testament to a few different variables, but primarily the amount of volume just moving through the system in leveraging what you've been refining is your you as cost based on you won't think spoken about 20% annualized mark.
The consumer brands from 13% level at the time in developed for acquisition can you update us on your long term thoughts in this target and what you've learned further about this platform unico benign environment. Thank you.
Hey, Chris This is almost mission of you're doing well.
Yeah, I think we're pleased with the progress were making on the operating margin within consumer brand, but I think you're right. It's too soon to come off our long term margin target of that 20% range. You know we're as we've we've always talked about volume.
Is the single biggest driver of leverage across all our businesses and with the unprecedented.
Search, we're seeing in DIY across all channels.
That is absolutely driving the majority of of the margin improvement.
And you would expect and we expect the demand will return to more normalized levels as the year for Crescent.
That being said.
Yes.
It absolutely is.
Good cost control taking place.
In North America, you know as you recall, we exited the ace business.
Last year that helped our operate improve our gross margin or operating margin, we took action to reduce our footprint, our and costs around that.
And we've also taken action as John talked about in his opening remarks on our international businesses comment it before.
The performance of those businesses haven't been up to what we expect I think the team has done a nice job.
With.
Oh variety of things pricing actions SKU rationalization to make those operations more efficient cost reductions and and even in light.
We talked about the European flow through in our first quarter, we saw a nice similar improvement efforts around our second quarter and then even in Asia, and Australia, where we saw sales backwards, we're still positive profit.
So there's a there's a a number of factors that are allowing us to drive these margins, but volume is always for share in Chris I would just add a couple of other items. One is I do think we're operating more efficiently this year versus last year.
In serving our customers I think thats.
Tribute to our global supply chain team doing them really terrific job in better planning and execution.
We're more efficient I think this year and serving our customers were optimizing our supply chain better.
We're doing this might add while investing capex in areas, such as our filling lines and.
Building with a co vid.
Challenges that everyone is dealing with and tied to just call out our global supply chain team.
During this really challenging timing over this cobot issuer that is a team that's working 24 seven.
Throughout all of this to serve our customers and to help our customers when.
I think we're we're being a little more.
More effective in euros, utilizing and optimizing our supply chain.
You also asked about the covert 19 environment, what we're learning and I would say.
For me what that's done is it's really reinforce the importance of our strategy.
We have long spoken about this approach that we're taking.
I'm really driving value for our shareholders.
By focusing on what's right, where our customers value our solutions.
And the other approaches I'd say is where we really focused on covering all the basis.
I think what's happening right now you asked about the DIY why is a great example, we've got a terrific focus on our residential repaint.
But we've also been really focused on helping our customers grow DIY and we take that approach and in each of the markets. We serve so whichever way the table tilts, we want to be first in line right. There. So if its DIY versus repaying if its new residential grocery modeling.
If its commercial new versus commercial repaying or whatever segment Pops up we want to be number one there.
Got it.
Thats very helpful and the second question I have it just it does appear you have some potential emerging I'd characterize them as structural tailwinds in both Reggie retained a and likely new ready a base what some of your customers. There's I'm not for the second half, but probably more importantly for 2021 can you update us on your general housing use any comments on a reversal.
Position and you know your efforts to accelerate share gains as you could sneak in a comment also about how that's playing into your intermediate to long term outlook versus the nonresi in protective friends, which look a little less bullish on that would greatly be appreciated. Thank you.
Are you pretty much covered the entire company with that question, Chris So yeah, I apologize Oh, it's good it's Gotta love it.
Let me start with the rest repaint, we did see sequential improvement in the quarter. It turned positive in June largely driven by the <unk> driven by the exteriors that we talked about.
We do see customers delaying interior work and its related to the covert 19 as you would expect it's very uncommon to hear of projects that had been canceled.
So we expect the interior to return, albeit probably gradually.
To your point about our share gains there and Reds repaint. It is an area of focus we are.
A very pleased with the performance and we've been talking quite a while about this idea of new accounts and a share of wallet.
And we're really trying to drive this and were treated we're really trying to bring more solutions to our customers right now than ever before.
And this is an environment, where our solutions add value you know complexity and challenges that our customers face.
They allow us to demonstrate our solutions and we are we believe uniquely positioned to help our customers to deliver and they want high quality projects. They want product on time, they want to efficiently.
And they want to make more money and we help them do that and I believe when you dial it down and Theres a lot of detail into it but if you look at it I think it's our stores or were there needed our products are where they are needed our innovation is where it's needed.
Our people are trained they're knowledgeable we we hire the best we do everything weekend to keep them our turnover our voluntary turnover is in single digits. So we build these terrific relationships with customers and we work really hard to make them successful.
And while these customers are experiencing delays or new regulations, if its co bid or just emotions that they're dealing with customers.
Theres no room for errors no room for disruptions and our stores in our reps and those relationships help us tremendously.
As it relates to commercial I would say.
We.
Saw sequential improvement improvement in the second quarter, the pace or recovery I would say is been more muted then the residential side.
Projects have started to reopen and they have.
Some limitations to them as our contractors are learning to work with social distancing and and the limits around them of how many workers can be on a project and it's slow inefficiency.
For our contractors.
It as a reminder, I might say that new commercial starts are.
Typically paid at 12 to 18 months after the ground is broken so we've got a little runway here.
But as far as we see this is again a terrific opportunity. These are.
Contractors, who you know these are.
Typically very large projects the bid projects to their competitive and.
These customers they don't want delays or problems and they learned a lean on our teams to be able to to run their projects successfully.
Trend wise I would say that the.
And when you look at the architectural billing index, it's improved sequentially in made it was 32 its.
Now in June up to 40 still below the 50 expansion threshold of that you know that shows it's growing.
But we remain pretty optimistic about this it's.
Particularly in the area of new construction.
While our customers are challenged we think that it's it's a terrific way for us to be able to demonstrate what it is that we do and why is special in the last thing I would say as.
We're working really really hard here in the areas specifications.
Both in product in color and that's an important metric that we monitor.
So we actually gauge when we when we talk with you folks about why we have confidence and we do.
It's driven by the number of color requests, we get the number of data.
Impaired sheets and information, we get we monitor all of that.
In the pipeline looks very good to us. So we're feeling good about our position feeling good about what our customers are telling us and we're really feeling good about the ability of our people to be able to deliver for them.
Was the last when you talked about the protective and marine or the industrial side.
Let's say, we've seen we've seen sequential improvement during the quarter.
It's not returned back into year over year growth.
On protective and marine about 40% of our sales are tied to oil and gas and that's obviously fallen sharply over the last quarter.
Major oil and gas companies have delayed capex projects.
Which will continue to impact our results, but these aren't decorative products that we're talking about or projects I mean that we're talking about their most often very corrosive environments and they require.
Corrosion control to protect the asset to protect safety of the.
Employees and those around it and as well as the environment.
So we're focused on that business to continue to grow there's still penetration opportunities. We're also focused on other areas like the water wastewater the fluorine the rail and work, we're gaining very good ground, there, but given given the weight that we have in the oil and gas we expect.
While we are gaining in some of these other segments.
We would expect to see meaningful growth, but most likely beginning in 2021 in protective and marine.
So long answer long answer Chris I was a long question so.
Well I appreciate it thank you.
Thank you. Our next question comes from Jeffrey Zekauskas JP Morgan. Please proceed with your question [noise].
Thanks, Thanks very much.
With with volumes down in the quarter did you get into lower cost inventory layers and your cost of goods sold.
Yeah, Jeff where.
As you know or LIFO.
Last 10 first out kind of company so.
You might see a little bit of that but we turn our raw materials. So quickly.
Especially in this kind of environment on the architectural side with DIY why yeah.
It's it's it's not meaningful in that respect because of the returns that we get.
The just in time inventory that our suppliers or do a great job, keeping us keeping up with us and and this environment or you know with the DIY why search that we talked about.
Today impact on gallon candidates and.
Other specific raw materials related to that so.
It's a it's which churn on return on our inventories very quickly on on raw materials.
So so what really happened in terms of the gross margin in the second quarter in that year over year.
Maybe your sales or your sales are down to 175 million and then your gross profits are flat to up.
And your gross margin, it's up about 300 basis points.
And and even versus the first quarter.
Maybe your incremental gross margin that 70%.
What what was the thing it was it really volume in the consumer brands business or like what unusual thing happened in the second quarter. So you have your cost of goods sold down I don't know 10 or 11% year over year.
Right.
Now, Jeff I think there's a number of things.
That are occurring in our second quarter at that give us a tailwind you bring up you talk about the the volume through our consumer brands group that we just talked about I'm not sure on the previous question with Chris when you see that kind of volume.
And and in our first quarter, we also talked about customer and and mix change and that that's across.
Really each of the segments in some respects you got tag that we talked about with DIY and rest repaint performing better than the other segments. We talk about a from a product standpoint exterior growing faster than interior paint growing faster than non pain.
I talked about the exiting or the ace business that as you know is it was it was a drag on our on our gross margin that helps and then you know we did see you know as John talked about in the opening comments lower raw material costs, and and we expected to see that in our second quarter with the way raw materials trend that last.
Here and with our second quarter likely being our biggest year over year change and then even I would I would say even within our performance coatings group with the different segment growth and the different reaching groats Ah Theres a mix there that helps and then finally as tag performs better than.
Performance coatings that segment mix gives you some some lift so it's really a combination of a number of those things happening, but I I would say with P.C.G. For example, the consumer business outside of the U.S. This is hard work being done over the past year to get us in line for whatever has.
Happens and when volume comes back I would expect to see.
Both of those.
Areas or even improve faster.
Alright, great. Thank you very much that's a remarkable margin.
Thanks, Jeff Thank you Jeff.
Thank you. Our next question comes from Ghansham Punjabi with Baird. Please proceed with your question.
Hi, good morning, everyone.
Good morning Gotcha.
Yeah, so on the do it yourself growth.
You know you saw explosive demand towards the end of the first quarter and clearly that level with sustained throughout the second quarter, what was the 20% plus increasing consumer brand for Twoq, you purely just sort of magic demand or was there some level of inventory replenishment as well and just more broadly at the company level I, including attack how do you kind of thinking about you know any sort of do it yourself fatigue.
Given that some of the demand increases potentially or just a pull forward of activity as well.
Well, let me just start with so I think what you're getting at is the services to the.
Retailers is that correct when you talk about correct.
Okay.
Well, we've seen obviously, an unprecedented level here and the surge is been some <unk> bided. Some challenge obviously our teams have.
Adapted I would say a gun to them.
Decisively and quickly.
But the surge was significant and then it's created some challenges were.
Uniquely position I think Sherwin Williams too.
Utilize assets that others might not have and I would tell you we're pulling every lever possible.
Were determined but I would say that we're still chasing a we believe that will be in a position to begin building inventory again as we come out of the third quarter going into the fourth quarter ended the first quarter, but right now we're focused on meeting demand.
And again I'd be remiss, if I didnt call out this terrific effort by the global supply chain issues global supply chain team.
With everything they're doing in this environment, but also.
The ability to work with our customers.
No. These are unprecedented times not only for us, but also our customers. So the better line of sight that we have to be able to isolate and on what are the most important skews and and working with them to deliver is really what we're after and.
You know this it this is a new experience will come out of this better and you know will likely.
Sit with our customers at the end of the year in and talk about inventory levels. As we begin next season, and if we need to step up and put more in inventory to serve our customers, we're going to take care of our customers.
As it relates to.
[noise] DIY why I think a fatigue as you mentioned that.
We don't support that attitude by any customer by the way.
Uh huh.
Reality is that we find that a more customers our home more and different customers are coming in and.
In our stores it's.
It's a often referred to as it's a cobot project where people has.
Been in their home for some time and they might have a bedroom that they've never really considered a repaying.
And they realize that it's a very affordable and highly impactful project and they tackling.
The beauty of it is is that what we're finding is very little overlap from customers coming in.
And while I'm sure there are some but it seems to be very little where customers are talking about this was a project that I was.
Going to have a contractor do and I'm going to attack what myself. These are.
What we're getting from our customers in our stores are.
Our customers that are.
Looking at a wall, that's probably not been painted likely wouldn't have been painted and and they're paying them and so through our stores. It's relatively small percentage, there's a nice gain its only 10% sales and through our stores, but through our retail partners. We're doing everything we can to make that an easy experience so that.
It's not just one project we wanted to be easy you know your questions do they have fatigue, we want to make it.
A wonderful experience. So it's an easy impactful experience that they went through seamlessly and they want to do more and we're working with our retail customers to capture those customers and make them repeat customers going forward.
Got you might just add you know, it's not only a an investment and inventory that were down I think our global supply chain has a come come up with a number of creative solutions to expand capacity of the key product lines, where where we're chasing demand and yeah. That's everything from.
And investing in a capital to retrofit five gallon lines, which are predominantly pro to gallon lines as John talked about on the opening remarks, it's it's finding where we may have capacity and industrial sites that have the ability to make an exteriors stain product line in ramping that quality process up and.
In making sure we're providing the right quality on the right process, but doing it doing it quickly to try to improve our filling rates across a across all the all the different channels. So it's not just investments in inventory, we're looking at all areas to to expand our capacity. Yeah. You look at those those assets those facilities that are producing.
Staying for example for our industrial Wood, where we've got capacity right now and these are highly technical products. So.
Finished product tool to the consumer is every good every bit as good as if it had been manufactured in existing plant because the tight specs we operate on the industrial side. So it's really that the best of asset utilization as you can go.
Okay and then just for my second question, you know given the recur into Kobe than the southern States of the was have you seen any directional shifts in demand specific to you know states like Florida, and Texas, a and do you anticipate having to make some adjustments to your Ah salesforce being open. Thanks, so much.
We don't at this time anticipate having to adjust Salesforce I would tell you that are.
Customers and our employees love those sales floors open but number one is the safety of our employees. So we'll stay close to it as of right now we've not.
And I'm not sure if you were asking about the shift of business too.
On the Southern States, if you were I would say.
We'll take it in anywhere comes if it's if it's in that market and you know that it is starts moving aggressively.
Do everything we can to serve those customers wherever they are.
Thanks, so much.
Thanks can take your Ghansham.
Thank you. Our next question comes from Bob <unk> with Goldman Sachs. Please proceed with your question.
Thank you good morning.
Turning Bob.
I wanted to ask a about China.
When you big competitors I think they got even larger business and you on the Deco side, they're talking about trends getting about back to where they were before by the ended the quarter.
So I was wondering is there anything in particular to your business. The cities you serve the routes to market.
That would make it different in sort of what are your prospects there given that.
We'd hope maybe with the lockdown ending sooner there you would see a sooner response, maybe something about the DIY versus pro or do it for me or.
Can you actually help us characterize the trends in China.
There's very little if any DIY business, there typically in in China, but.
The.
Approach that I would take first off is that it's a relatively small percentage of our business.
We saw sales in Asia that were down significantly in the second quarter.
Largely as a result of the Ur cobot.
Endemic in architectural.
We think that that's a a slower recovery or in the architectural business there, but again, it's it's really a very very small piece of our business were where they are really looking at the future. We're investing in the right people the right doing a lot of branding work.
Doing a lot of research we've got a couple of of.
Really good tests going on right now that it's gotten a little cloudy with everything that's been going on.
On a different aspects of our business so I.
I think you should expect from our perspective that to be a bigger part of the business down the road I don't think it's going to be anything that's going to be material in the next quarter or even next year.
Got you May ask you on commercial construction broadly obviously, you get coil business, there and you do see some of that activity for your stores food.
Is there some anchor that you're going to have a W kind of recovery, there, where we get some of the backlog finally gets through but then the commercial markets just aren't as strong.
Given all the work from home and other issues out there what do you sort of see as the path forward into the second half and into 2021 for commercial construction related activity.
Well.
To your point E are close to that through the commercial business through our tag business and through coil I would say in our coil business.
The resumption of select a projects.
It drove sequential improvement during the quarter.
And I would say that.
So much so that we finished June positive in June so I mean, we've we see that momentum.
Moving into right direction, not sure if there's going to be an air pocket or a gap if it.
If it does happen or when it will happen what we're doing a bob.
We're working really hard right now to minimize any impact we caught up I call. It a pothole no driving down the road here, where we're doing everything we can to fill that pothole and and the beauty of our model. The direct model is that that we can control that and so you know we're working with.
Our customers to understand.
Where are those projects are so you know we're not waiting for customers to call and placed an order or go online to place an order were attacking this we know the specifications. We're trying to get more products specified we know those projects. We know the painting contractors that are on those commercial projects, we're leveraging our strategy and we're capitalizing on the segments that.
We offer.
To to.
Offset whatever might be coming down the road. So I'd say no one's position like we are to capitalize on these opportunities but.
Rest assured we're not a retailer that just simply opens the door and waits for people to come in and we were out there right now hunting, we know that there might be a hole in the wrote we're not waiting we're aggressively going after it to filler.
Depending on what it looks like if there's a gap or not and and how much are is we'll we'll find out if we if we experienced one but I would say this if we do experienced one we think it'll be short lived.
Terrific, Thanks, what else.
Thanks.
Thank you. My next question comes from Steve Byrne with Bank of America. Please proceed with your question.
Yes. Thank you so John you're just talking there about your your folks who are out there are a hunting and I I recall part one of the ways. You you motivate that sales force within the Americas group to to be aggressive and and out there on the hunt was a re.
Reasonably large portion of their comps was was it was variable.
Can you remind me what that is and and wallet incentivizes effort. The does that also contributed to lower.
Cost of goods when there is a slowdown in sales.
It's a for our reps it's about a 60 40, we do not look at this as a cost saving mechanism Steve at all I.
I'd say like everyone aren't we expected our employees are motivated by our incentive plans, that's why we have them.
But I would say you know one of our executives. This morning I was speaking with mentioned a key word to me.
Pride.
Pride in what we do pride in who we are.
Pride and wanting to win.
And I'd say no.
This is this team were leading right now I I'd I'd call them goats. This is these are the best and and there's an element here of.
Incentive and we want them to be out there to provide for their families.
They're driven by far more than that there's a there's a sensor pride and what we do and.
We want to win and we don't want to win by a little bit more we want a really really when I'm going to stop right. There [laughter]. There's a lot of really good people doing what's right though.
And so just getting back to the.
You know the cost of goods decline in tag was was so significant can you can you break that out what portion of that was lower raw material costs. What were the key drivers. There I think you also had some store closures or was that a was that a contributor.
Just laid out all the little bit please.
Yeah, why don't why don't I take the stores and then I'll ask at all to talk about the rest there for a second.
So year over year, we have 68 more stores this year versus last year, given what we laid in last year. We have 178 more reps this year versus last year.
For the year, we've opened 16, new stores in North America, and that's offset by the closure of about 33 stores 24 of those were in Latin America nine in North America.
Hi, Steve the way I I I point to the Latin America closures, where are these were underperforming stores in persistently soft markets. That's the way I would characterize those the nine in North America. There were closed were mainly stores in Canada that were underperforming and we did have some stores in North America.
With lease expirations that we'll plan to relocate.
We do expect to open 50, new stores this year down from our originally planned 80 to 100.
Due to the co bid, but you should expect us to ramp back up into that 80 to 100 going forward and Steve you know the attack.
Starting with their Ah Ah customer and product mix that I talked about earlier, the DIY why and rest repaint performed better than the other segments exterior versus interior paint versus non pain.
Now the drives.
Margin improvement on a on the raw materials side, we've talked about raws moderating it. It's it's less of an impact on our Indus architectural businesses, but it is still.
Helping and pricing you know we went out with a three to four price increase the to offset.
Other inflationary items, whether its wages health care and alike and that price increase is performing as expected in it and it's a effectiveness of around 2%.
One last thing I would say is the.
Team did a really nice job.
Pivoting and really reducing discretionary spending cutting travel very rapidly and are.
SG Nay was he was even down a year over year. So all those are helped drive that operating margin higher.
Thank you.
Thank you Steve.
Thank you. Our next question comes from David Begleiter with Deutsche Bank. Please proceed with your question.
Hi, Thank you good morning, John I'll, just looking at tag looking at the margin in Q3, how should we thinking about a income up the margins either.
You every year or quarter over quarter, given what you're saying on raws and volumes here.
Yeah, David Let me, we're not going to give guidance on on individual segments. You know, but you look at a couple I'll give you a couple of data points to to hopefully help me out. The one is were going up against a strong third quarter and tag.
Last year same store sales for us.
In a north America eat a little over 8% they had strong.
Operating leverage on those sales and ER. So we're going to go up against a pretty.
Pretty tough quarter.
We're going to start investing back in the business as John talked about.
The advertising and merchandising that we paused is gonna come into our third quarter, but we also expect to see a better volume you know as the we've talked about same store sales were up or down in the and the second quarter, 6.9%.
Our forecast right now in the third quarter for sales to be flat to up low single digits and as we talk about the better.
Volumes, we can't put through.
Our North America stores on a chain to better leverage we get so.
Whether we see a anchor and sequential.
Margin improvement will depend on where that volume comes and if it's at the higher end of our range or you know we have a shot at getting sequential improvement.
If not that's going to be difficult to get there and then a year over year, you know the way raws kinda have.
Unfold it through last year and into this year and the product mix benefit I still expect to get in a third quarter year over year I do expect to see some modest improvement.
Oh, that's very helpful. Al I appreciate that unless he just on raws, how where are you seeing raw material raw material decline and specifically on T., how to whats your expectation for a pricing in a back half the year.
Yeah, David I'll take that one you know what we saw in our our second quarter. The industry basket of raws was down by mid single digits year over year.
And that was really driven by residents and solvents and we don't provide the specific dollars in the quarter, but you can see that positive trend reflected in our.
Year over year gross margin improvement.
We look at our outlook kind of going forward.
Our second quarter, we expect will probably be the biggest benefit year over year, we still will see and that's really because we're going to see tougher comparisons in the second half of the year.
We do expect that the second half raw material basket will be down by a mid single digit percentage overall similar to the first half and as Al mentioned, a moment ago, it's a little more heavily weighted towards the industrial part of our business then.
The benefit will be a little more there then on the architectural side.
So for the full year, we're gonna be down mid single digits or that's the expectation on raws and that's compared to our earlier. This year, we said it would be down low single so we're seeing some good.
Benefit there again, driven by resins and solvents.
If you look at the Petrochem side of the basket.
You know, we're seeing lower year over year, propylene and ethylene pricing.
More recently, though what I would say is we've seen a little bit of a sequential tick up in ethylene and propylene contracts.
And we'll see how that plays out as the year goes forward.
On the T. Io to side of the basket you know, we're still anticipating stable pricing trends in the back half.
Some of the third party forecast that we look at our reflecting a little bit more economic resiliency than some of the prior forecast you know sustained by the DIY demand.
I would say the north American T. Io to market's been the most stable.
And we have seen some indications of lower sulfate T O two pricing internationally.
But as you know the majority of our T.I.T. Io to buy is Ah chloride based T O two which we really haven't seen movement there. So.
To sum that up you know again, we're going to similar kind of in the back half down mid single digits on the raws basket led by the the resins and solvent piece.
Thank you very much.
Thank you. Our next question comes from the line of Vincent Andrews of Morgan Stanley. Please proceed with your question.
Thanks, and good good morning, everyone.
Maybe on a DIY white paper packaging, we're hearing from a variety of sources that that started you get plate.
And there's some concerns about Ah you know price increases on DIY packaging a into the back after the year and into into next year.
Is that something that Ah you know you're right you're anticipating is the thing you need to get ahead of us potentially ER with with win with pricing into into the retail channels.
Yep inside you know remains to be he's seen us if and if there's a.
You know a gap and supplier or that we are stressing.
Our our packaging suppliers for sure with this with this on President <unk> increase in demand, but we're working very closely with them.
Now, we we do not expect a increasing price in the second half on packaging.
And as far as a.
Price increase you know like we always do we'll we'll try to manage our cost first and and we'll look at it as the second half unfolds and and decide if a fun increases is needed based on the current environment, but we're not expecting an increase in our second half.
Okay very good and then just maybe you could talk a little bit about the M&A environment, but both directions. You know is your pipeline are getting more active on the on the buy side and you know as you've gone through a portfolio again in the cold environment or there is there anything that you might be looking to sell.
Well on both sides I'd say you know we're always active.
There are a number of projects that were engaged in and I'd say.
The gap if you will have.
You know pretty above a pretty wide margin in the midst of the cove it seems to be narrowing and good discussions are taking place.
I really really appreciate a the.
Leadership of our.
Her team here were David School and.
Her head of strategy, a Brian younger working with our leadership teams to to really make sure that we're staying the course of our strategy you know in times like this people can lose their their way up a bit and just.
The out looking for sales are looking for opportunities.
That's not us and we've got a very deliberate strategy that we use that we stay true to.
And we're working that and there are opportunities and.
We're hoping to continue to move.
Through those aggressively.
On the other side to your point I think we've demonstrated a if it'd be programs or products that are not fits.
The do not fit in our company that we take action.
And I'd say that leave continue that same discipline of reviewing.
These programs products skews stores businesses brands everything and you should expect that we continue to do that.
When businesses fall short of the threshold that we have to create shareholder value will take action.
But we'll talk to very much.
We'll talk to our teams and in the businesses before we take that problem.
Appreciate it thank you very much.
Vincent.
Thank you. The next question comes from Greg maybe much with Evercore ISI. Please proceed with your question.
Hi, Thanks, I had two follow ups one is on gross margins a and then the second is on the E commerce and some of the learnings you've gotten there first on the gross margins if I'm if I heard all this and piece it together correctly it sounds like the 330 bit.
Expansion was roughly split between raw material price.
Gap versus mix and the reason that gross margins might be up last year over year on the second half is not raw materials per se because you have the rest of the price increase but it could be that some of the mix. That's been extreme in the last few months starts to normalize some I am I taking that to.
Our.
No I would I wouldn't I think you're you're directionally accurate I think in third quarter, you wouldn't expect to see the DIY trends.
That we saw in the second quarter.
The raw materials or.
Tailwind, but not as big of a tailwind in the second quarter I guess, you know what Craig the way I would kind of gauge the DIY why and not a product mixes. If you look at our second and third quarter together.
Between product and customer makes I I estimate a little bit below 1% of an impact so your directionally right there.
Got it says so all the way to think of it is a 330 was probably.
A little more than a point of Max honor Beps of maps and the second quarter, that's approximately correct.
And then and then on E. Commerce, you mentioned in the prepared remarks, John I think how the platform did well I think last quarter you gave us some metrics on your how many people used to it and I know, there's a lot of conversion the curbside and sort of all hands on Dec or any numbers you can give to us in terms of the number of customers whether they be DIY wire.
As over a pros are contractors that.
Starting to use the platform or.
How engaged they are with it well see how that could drive loyalty and growth.
Yeah, I'd I'd I'd, maybe characterize it this way Greg our platform as service, we are witnessing strong utilization and an.
Increased metrics in all categories that we track.
The idea here is pretty simple allows customers more efficiency and.
Not only ordering products, but also in communicating with their reps and their store managers and we want to build on this incredible relationship that we enjoy these.
Contractors as well is now a growing number of DIY customers are learning to rely on our people on the professional side. These contractors would tell you that those reps and those store managers are part of their team that part of the contractors team and this is an extra step in and helping our customers.
Through our people so I might describe it as the last mile just got made that much easier.
And we want the contractor feeling like.
They're part of our team and were part of their team in earlier I talked about the complexity in the and the challenges that they're facing right now in the inability to absorb delays and run profitably fishing projects.
I would tell you that this platform is helping our customers on the professional side to run much more efficiently and we absolutely see.
Loyalty, increasing we ask a lot of questions and are the most important one that I think we ask is who ups you make more money.
And that gap is getting lighter and and we enjoy that as it relates to the de iwai side.
Oh, we clearly.
Have a have experienced a a number of.
Have a new.
Customers using this platform on the DIY side, our scores there are going up dramatically and.
And it's it's working quite well, we're investing heavily because we we believe this is ER.
Another great opportunity for differentiation.
As a percentage of customers isn't and have more take up on the pro side or with the iwai.
Oh, sorry.
Well.
Thanks, Good luck yep. Thank thank you Greg.
Thank you. Our next question comes from John Roberts, Yes. Please proceed with your question.
Thank you RPM indicated that quarantining has brought out the inner DIY wire in a number of people, who maybe didn't think it themselves as the I wire before I start DIY versus pro in residential repaint was mostly demographics driven but so if we go out a year from now or 18 months from now do you think we we normalize.
That's there or do you think we structurally kind of shift up a little bit here.
I think we normalize I think if you look in the past.
And and compare to whats happened historically, John we've seen these are these shifts temporarily during unique times, but.
What we also have to take into consideration as it is an aging demographic or.
Home price appreciation.
Aging house housing starts.
As last recession to your point, the DIY grew but.
Not huge amounts in it.
Wasn't protracted so we think that there are some shifts that occurred during these times while people are home as I.
I mentioned earlier, it's affordable its impactful and.
You can make a difference.
Overall every time, we've seen this than we expected.
Going forward and quite frankly, another stab I didn't share earlier I should've, maybe in the comments about that.
The rest repaid.
The reason I say this with confidence we listening to our customers, they're telling us in June of 2020.
They have more bids going out than they had in June of 2019.
So we're feeling pretty good about the trend.
Great. Thank you.
Thank you. Our next question comes from the line of Duffy Fisher with Barclays. Please proceed with your question.
Yeah. Good morning, first congrats on a bang up quarter.
I wasn't I think this is your three for the big lows, which over and last year, you had talked a little bit you work quite where you wanted to be operationally now obviously this your big you're just macro summed up the market side, but is that system now set up what are your life, where your reps are able to go.
When and help them sell in that kind of hitting on all cylinders, there or how long do you think that takes to get you never get to the endpoint, but too you know kind of I can using altitude I guess, yeah, you're right. There's no finish line in anything that we do a duffy so I like the way you characterize that.
No Marvin and his team at Lowe's.
They'll bolson, Joe Mcfarland <unk>, Joe Mcfarland. These are wonderful leaders, there, they're driving for improvement and we want to help them and.
They're giving us access there.
Allowing our teams to work with their teams.
And we believe that there's a lot of.
A lot of opportunity ahead of us we're on the runway were worse and worse screaming down it but I think together, where there's a lot more that we can do and we're looking forward to that.
I think these are two wonderful organizations that worked together can do a lot.
And we like that for two reasons that both the de iwai side, but also there's a professional.
And that prefers a home center experience, that's typically we call them. The pro the pace you know they might be a remodel or they might be doing different professional projects and they picked up pain as part of that experience and they prefer the home center.
You know with the the width of the products.
Choices and so you know our ability to help them be more successful is an important part of our strategy and we look forward to them. So there's a lot more to be done.
Great and then you mentioned, you're increasing capex in the back half by 100 million, which is a very large sum for you guys versus your historic Capex is that <unk> plants or what is that capacity that they need to bring online what is it that we get with that extra hundred million.
Yeah Duffy.
As I talked on our first quarter call. The reduction in Capex was really pausing some of these architectural.
And packaging capacity or expansions.
As we saw the sales trends come through the second quarter.
We restart at those expansion plan side, you know just just because they take you know I could take 12 month to 16 months to get a an expansion of goods a sizable expansion in place Eaton and that takes our capex up to $280 million, which is still about one and a half for ciena sales.
So you know as long as I think we're trying to control capex below that 2% we've done that pretty.
Huh.
Pretty much over last few years, all continue to do that but we need the capacity and we're going to we're gonna start those projects back up.
Terrific. Thanks, guys.
You Duffy.
Thank you. Our next question comes from the line of Truman Patterson with Wells Fargo. Please proceed with your question.
Hi, good afternoon, guys and a great quarter.
First just wanted to follow up on a prior question you know your Reggie repaying contractor I believe you sat in June or the interior got back to flat.
Could you just give an update for July a I'm really trying to understand whether or not in the second wave areas of Kobe that are having another flare up whether or not we're seeing that interior contractor business on the repaint side really get impacted and you know, Florida and Texas.
Yeah, I don't know that we want to get it too much detail here. Let me let me just give you maybe some insight I I'd say that.
In.
In more rural areas I would describe it as there is more likely a business as usual then in more metro areas.
We we are experiencing more customers.
Penetrating the home into interior.
But you know, it's still spotty and I would tell you that the.
Bids that that I mentioned earlier have a lot of people feeling really good on the contractor side, because they're not just exterior bids that they're doing.
They are doing a both bidding for interior and exterior so.
No I think it's I think it's just a matter of time and it's it's starting to roll in and our customers are feeling good but I don't think it's just going to be a light switches gonna come back online.
What I'd add to that what I'd add to that Truman is just that you know as we said he iwai continues to be a strong performer and read the repaint and the new Reds continue to be the ones that are are sort of leading the recovery, while commercial or property maintenance are there also improving but resi and a busy repaint continued to be.
For the leaders in the clubhouse.
Okay. Okay. Thanks for that and then.
Next question on on gross margin you know you all are already yet you know 48% in the second quarter.
I'm just hoping you can give some you know updated thoughts on your long term gross margin targets, because I think we're bumping up.
Towards the high end of them.
Yeah, Truman or you know as you know our long term gross margin targets at 45% to 48% you know I I would say you know overtime will continue to look at adjusting that but I don't I don't think we're ready to do that at this point you know the demand search on the try.
Hanson and that we're seeing it and the product mix customer mix.
Yeah, we talked about these band you know shorter term, we'll get through you know expect <unk> ER positive trends through this quarter.
But get back to some more normalized levels, then and then I think we've we've got to see.
How their recovery and ER our performance coatings comes out to say you know before we're ready to say, we're or we think we should move that a little that long term target up I think we've done a lot of work.
Through our different segments through our different divisions and regions to to really drive complexity out of our supply chain and be more efficient and those will pay off when demand and volumes start to pick up again, but I just not ready to raise that a target just yet.
Okay. Thank you.
Thank you Truman.
Thank you. Our next question comes from the line up I wouldn't want it then what RBC capital markets. Please proceed with your question.
Yeah room.
Room or yeah mute.
And your line is why do you May proceed with your question.
Sorry about that and then what can you hear me now.
Yes, hi around.
Hi, good morning apologies for that Yeah. I guess my first question is just on the guidance. So the mid point being 20 to 50, now I guess, a excluding the amortization and charges.
I guess, maybe maybe you can just kind of lay out maybe some of the ER. The factors that maybe could drive you to the upper end of that range, what would it be kind of.
Maybe a swift recovery in performance or would it be maybe a longer tail on consumer and Ah, Yes, maybe just provide some some details on maybe the upper end up guidance.
Yeah around I think it starts with.
Sales volumes in our and our tag organization.
You know we are like I mentioned earlier are going up against a tougher third quarter, but a tougher fourth quarter as well, but ER as tag tries volume, we get a lot operating leverage on that volume.
And you mentioned it if if the T. iwai search continues longer than we expect I can we expect to get a nice operating leverage there and then you know our our performance coatings.
Group the trends that John talked about sequentially through the the second quarter, you know if if some of those pick up fast or whether its auto refinish.
Gee I industrial wood, which are probably on a on the farther into the scale up or where we think.
Let me rephrase that auto refinish more in the middle Gee I in industrial what at the longer into the scale of recovery. If if if those do pick up back quicker.
Yeah, I think Oh, we can see ourselves to the high end of that range.
Well it sounds like it's mostly volume driven.
And then I guess, just just Oh, I guess, maybe thinking longer term, maybe just give us your perspective on.
Business.
You benefited quite heavily from the shift to do it for me over the last several years and now we're seeing a little bit of a shift back to D. I like I guess any do you think that structural and and then he I'm just curious how you're thinking about your main source business longer term you often grown into one after two times market rate.
It seems like you're you're poised to increase that yeah, maybe two or three times at market rates. So I guess, maybe just precedence to Michigan and see if I'm thinking about that the correct way. Thanks.
On our stores I think we're just getting started I think there's a lot of opportunity.
Got a wonderful team that's executing well.
And we're excited about where we're going and there's a lot of really good things in the pipeline that we're excited to talk to you about in the future.
Regarding the do it yourself first do it for me.
I mentioned earlier, we think that we've seen this.
This movie before there's a shift to do it yourself gradually shifts back and those are.
Based on fundamentals and aging population dual income.
As a pension or market wealth is created home values that are improving.
And quite frankly, a general focused on life quality of life and.
And people enjoy the benefit and the impact of a newly painted room or home.
Not all of them enjoy doing it themselves.
But it's a relatively inexpensive but impactful.
Experience and we.
We don't quite frankly care.
How it's applied.
[laughter], we'd want to make sure it's our product going on and it could be a do it yourself or could be a do it for me could be and we talked about remodel or new home. We just we have teams focused on every.
Every square feel or every corner of the room, we just want to be there when that gallons sold and be the one that's providing a solution.
Okay. Thanks, good luck in the quarter.
Thank you around.
Thank you. Our next question comes from the line that Eric Petrie with Citi. Please proceed with your question.
Yes, Hi, this is P.J. juvekar.
On a PJ good morning, or good afternoon.
Just couple of quick ones on D. Iwai Oh.
Yeah, why do well across all the big boxes.
I was wondering if you want your partner there gain share or do you feel you gained share in wouldn't happen do we didnt prices this year.
But it's it's I think it's still early to tell if we've gained share.
I would tell you we're not satisfied.
And I think it'd be disappointed in the were.
So we're still working to to improve regardless of if we're gaining share or not there's still a lot of opportunity and we want to work with our retail partners to be able to to capture that show.
I'm sorry, your second question.
The question was what.
On the on the pricing on that he does I mean to pricing.
Yeah, you know I think.
That's a better answer coming from.
Our customers themselves and I was commenting.
Okay, and then just one more on D. out why are you trying to get some de I like customers in your stores through your digital App.
Hi, any any problem is there Oh studies there. Thank you yeah again, I I had mentioned earlier, it's about 10% of our store business. So it's a relatively small percentage and there are customers that prefer.
Hey, specialty store experience and if they're going to make that decision, we'd hope that they choose hours.
And I know that you've been in our stores and you've seen how were model than what we do I think.
There's a large percentage of that contractor business that a that is out there for us to gain and that's mainly the focus of our stores.
Okay, great. Thank you so much.
Yeah PJ.
Thank you. Our next question comes from John Mcnulty with BMO capital markets. Please proceed with your question. Yes. Thanks for taking my question I'm just a quick one on cash flows normally your second half is always a much stronger quarter or <unk> or excuse me half and you tend to see about 70% of your of your free cash at least in the last few years.
In the back half I guess, given the strength that you saw in the second quarter <unk> should we still be assuming that or or is it a little bit more of a wonky kind of year, where where maybe the front end has has a little bit more than normal how should we be thinking about that.
Yeah, John I think I think you're absolutely right, it's a little kind of a walkie year with Oh strengthened yeah why.
No certainly tourist stores or they're not not going on account you know our working capital is ER.
Lower and our first half as John talked about we're gonna start building inventory coming out of our third quarter into our fourth quarter and are you know that will be a little bit of a headwind on our second half as far as cash is concerned and then.
The the profitability.
That we saw in the first half because of that the tougher comp in the second half and some of the product and customer Maxim things I talked about earlier, you just aren't going to see as big of in improvement when you look at our looking at our full year guidance, but.
We're going to build inventory and that's going to be a little bit of a drag on our cash in the second half is still should be positive a year over year, but not quite as positive.
Got it thanks very much of the color.
Thanks, John.
Thank you. Our next question comes from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Yes. Good afternoon, everyone wants to ask about your packaging coatings business I think you mentioned it grew at a high single digit Hayes.
In recent weeks, we've been hearing about aluminum cans shortages and I'm curious as to whether you've observed that in and perhaps it would be no high class problem. If that's a problem at all but can you there enough cans out there for you to continue to grow.
Rapidly in the business.
There was plenty of opportunity for us to grow.
Well this is the strongest performer a that we have in our industrial business mentioned sales up high single digits.
Yes to your point demand for food and beverage cans remains robust we have.
Terrific and unique technology, and RV 70 coding coating that.
Continues to win.
And convert new.
Customers, new lines, and it's because of the ER.
Because of the flexibility the speed the ease of application or customers are running more efficiently through the plants to be able to do that so.
Yes, we expect this business to continue to grow it's another area with wonderful leadership great technology.
Great customers and then we're we're putting a lot of <unk> bought a lot of fuel in this tank.
Good to hear and then secondly wanted to follow up on on E Commerce.
Or your margins through the E commerce channel today, higher or lower or similar.
To the same sale through a a traditional channel and you know as you continue to grow rapidly from a smaller base.
You know how might that evolved as just trying to get a sense for if and when you know this could become a meaningful swing factor.
In margin analysis moving forward.
Kevin I think you should.
Model It is basically the same.
Same margins.
Easy enough. Thank you so much.
If you haven't.
Thank you. Our next question comes from the line of Gary Smalley with <unk> Capital. Please proceed with your question.
Gary This is Jeff Stevenson on for good how are Ya and.
Jeff.
My first question was just on the outlook for the auto Refinish business are you seeing any improvement as lockdowns or use miles driven several improved and maybe even a shift away from mass transit.
We do see a the improvement we've we saw sequentially is the.
As the quarter unfolded and we expect that to continue again, we've spoken to last couple of calls about.
The technology and our play here and the performance of this business and.
It's moving into right direction obviously.
But miles driven and and traffic congestion.
I would help this business.
This is a business that when you look at kill the drivers given what we've done with this business over the last.
18 to 24 months.
Resumption of more normal.
Travel routines will benefit us significantly.
Okay, Great and then a new residential you mentioned are sequential improvement in June but as we look at the back half are you seeing an acceleration somewhere to what builders are seeing and then to are you seeing any problem with contractor labor as housing starts I'm sorry to accelerate.
Oh, we are experiencing some contractor labor issues, not only in new residential or commercial even rose repaid and.
If you wouldn't think that given the unemployment rate that.
Spoken with a number of contractors, who have mentioned, but it's difficult for them to find people.
Well, if I'd people that they are willing to work.
Given the unemployment rates that they're receiving so it isn't an issue.
I would say to your question about the trend.
Many of our builders first we do see it largely because of our position in the market.
We've got a terrific position in a national home builders, we've talked about having 18 of the top 20 national homebuilders an exclusive relationships.
And we've been really making very good penetration in the regional builders.
And and let me just take a slight detour and say our national account business outside of just the builder, but our national account business in total across all our U.S. stores platform. The activity there is fantastic so.
We're really leveraging our platform and really trying to drive the differentiation between us and others.
That said back on the builder we are.
Clearly.
Enjoying this partnership with our builders.
They are experiencing many of them instead June was their best month ever.
And so we believe that the.
Quarter.
Bodes well for the future or the other point of differentiation I would make that we're hearing from our builders.
Is that they continue to reference our ability to offer the services that we provide both the reps and inventory.
Or close to them as an important lever many of them have asked other.
Suppliers to come visit us here in Cleveland.
To understand what we're doing in how we're doing it.
And I think that when you.
Look at our position it's become more pronounced given some of the challenges at some builders have had with disruptions in other categories.
For us it's it's terrific business, it's five gallon buckets. So it's easy to serve us it doesn't have an impact on the do it yourself business.
I was just to serve them well and we can execute for these national homebuilders across the country like no one else can.
Thanks, and congrats on the great quarter.
Thank you.
Thank you our final question what comes online and Eric Bosshard with Cleveland Research. Please proceed with your question.
Thank you.
In terms of the interior business, John I <unk> I know that you talked briefly about it but just curious in terms of the momentum on the interior side I know you indicated a contractors are more bullish and that's looking at the business in total but.
Curious about what.
The trends are on in terms of interior and then also if you could remind us of the interior exterior mix within the stores.
To Q3 Q4 Q. Thank you.
Let me, let me point I think a Eric good are you again my my comments I think on the trends I might point back to the.
The bidding activity that we're experiencing with our customers.
The fact that in June there were more bids this year versus last year in a growing percentage now including the interiors. So.
The.
Trying to give you some color without getting into specific numbers to be truthful with you, but we're feeling pretty good about it. The fact is is that our our customers are recognizing that it's not going to be you know this afternoon that they're in someone's home, but they're using virtual tools to estimate their customer.
Those are interested in having their homes paint it.
There's a sense of wanting to almost get their place in line.
And our customers enjoy that because it allows them to tackle the exterior which is turning out to be an excellent exterior season for our contractors.
And they're enjoying the opportunity that many of these interior projects or the these customers are getting in line.
With the expectation that do those homes are going to be paid it down by the same pros.
And Eric on the interior next year ratio and see a outquarters first quarter fourth quarter.
About four to one or as you get into the two middle quarters as the weather improves in the Midwest and eastern it trends to that three to one in a normal environment, it's probably a little less than that.
It's really snacks.
Second and third quarters because of the trends are saying.
Okay. That's helpful. Thank you.
Thank you Eric.
Thank you we have reached the end of our question and answer session I'd like to pass the floor back over to Mr. Gay for any additional closing comments.
Yeah. Thank you Jesse and thanks, everybody for joining us on the call today I. Just one reminder, I'd like to tell you that we'll be hosting our virtual financial community presentation on Tuesday September 29, So registration details becoming out on that soon look for that we hope you'll be able to join us for that.
And as always that Eric Swanson, and myself will be available for your follow up questions or rest of this week and into next week. So thank you. So much have a great day.
Ladies and gentlemen.
Today's teleconference. We thank you for your participation and you may disconnect your lines at this time.