Q2 2021 Sherwin-Williams Co Earnings Call

Plunging into 2022.

We expect industrial demand will remain strong over the rest of the year.

As we described last quarter, we've been highly proactive in managing the supply chain disruptions to provide product to our customers.

We expect to be in a make and ship mode until the seasonally slower fourth.

Peter.

We expect to begin building inventory.

We see the current challenges and opportunity to drive even greater engagement with our customers.

We're leveraging all of our assets, including our store platform, our fleet, our distribution centers and more to let us come up with unique.

Creative customer solutions that others simply can't.

On the cost side of the equation raw material inflation has not moderated driven by continued supply chain issues and surging demand.

As a result, we are raising our raw material inflation expectations to be in the mid teens for the year.

An increase from our previous range.

We anticipate year over year inflation in the third quarter to be higher than it was in the second quarter with only slight improvement in the fourth quarter as demand remains high.

We continue to have great confidence, we will offset these higher costs with the incremental price increases we announced in all businesses.

And during the second quarter.

We are prepared to implement additional increases should they be necessary.

We recognize the timing of price realization will continue to put pressure on margins in the near term.

Over the longer term, we expect margin expansion.

Against this backdrop, we anticipate third quarter 2000.

Mrs..1 consolidated net sales will be up by mid to high single digit percentage compared to the third quarter of 2020.

We expect the Americas group sales to be up by a mid to high single digit percentage with pro sales at or above the high end of this range and DIY sales returning.

'twenty, 1 more historic level.

We expect consumer brand sales to be down by a mid to high teens percentage, including a negative impact of approximately 5 percentage points related to the water divestiture.

And we expect performance coating sales to be up by a high teens to low.

Turning to a percentage.

We expect raw material availability to continue to improve throughout the quarter.

Embedded in our guidance is a slightly smaller impact from raw material availability than we experienced in the second quarter.

For the full year 2021, we expect consolidated net sales to be up.

2 by a high single to low double digit percentage.

We expect the Americas group to be up by a low double digit to mid teens percentage consumer brands group to be down by a mid to high single digit percentage, including the negative impact of approximately 4 percentage points related to the water divestiture.

And performance coatings group to be up by a low twenties percentage.

We expect diluted net income per share for 2021 to be in the range of $8 of <unk>.

$2.8.31 per share compared to $7.36.

Per share earned in 2020.

Full year 2021 earnings per share guidance includes acquisition related amortization expense of <unk> 80 per share and a loss on the water divestiture of <unk> 34 per share.

On an adjusted basis, we expect full year 2021 earnings per share of $9.15 to $9.45.

An increase of 13, 6% at the midpoint over the $8.19, we delivered in 2020.

Let me close with some additional data points that may be helpful for modeling purposes.

We expect to see slightly more gross margin contraction in our second half compared to our first half due to higher raw material.

Material costs product and customer mix, returning to more normal levels and a more difficult comparison year over year, partially offset by additional selling price increases implemented across all of our businesses in the second half of the year.

We expect to see some contraction in full year gross margin given the lag between.

Pricing realization in the rapid and greater than expected increase in raw material costs.

As we capture price and inflation abates, we expect to see gross margin recover and then expand over time just as it has in previous cycles.

We expect to see some contraction in our second half operating margin due to the contraction in.

Gross margin, partially offset by leverage on SG&A due to the strong sales growth.

We expect our full year adjusted operating margin to be approximately flat with 2020 with a nice improvement compared to 2019.

The level of operating margin performance compared to last year will depend on where.

And the range of our consolidated sales perform and where raw materials trend through the second half of the year.

We will continue making investments across the enterprise that will enhance our ability to provide differentiated solutions to our customers.

We expect to return to our normal cadence with around 80 new stores.

Opening in the U S and Canada in 2021.

We will also be focused on sales reps capacity and productivity improvements systems and product innovation.

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 foreign currency exchange to be of tailwind of approximately 2% for the full year.

We expect our 2021 effective tax rate to be in the low 20% range.

We expect full year depreciation to be approximately $280 million and amortization to be approximately.

$110 million.

The Capex and interest expense guidance, we provided last quarter remains unchanged.

We have $24 million of long term debt due in 2021.

We expect to increase the annual dividend per share by 23, 5% per share.

Sally thrill year.

We expect to continue making opportunistic share repurchases.

We will also continue to evaluate acquisitions that fit our strategy.

We delivered an excellent first half and despite considerable supply chain and inflationary headwinds we are maintaining our previous full year guidance.

For the prospect to deliver another very strong year.

We remained highly focused on providing solutions to our customers.

That concludes our prepared remarks with that I'd like to thank you for joining us This morning, and we'll be happy to take your questions.

Thank you at this time I will now.

And I think a question and answer session.

If you'd like to ask a question. Please press star 1 on your telephone keypad and of confirmation tone will indicate your line is in the question queue.

You may price start to if he would like to remove your question from the queue.

For patients that are using speaker equipment may be necessary to pick up your handset before pressing the star keys.

Thank you and our first question comes from the line of Concho Punjabi with Baird. Please proceed with your questions.

Good morning, everybody.

Good morning Ghansham.

Good morning, Robert.

Hi of for 2021 sales.

Pacific to tag versus your most recent guidance can you just take us through which end markets are driving that incremental upside.

We conduct and I know you also said that Robert coal prices are not moderating, but have you started to stabilize or is that not the case at this point.

So let me take of a swipe at the first part of your question then I'll ask al to talk about the second and it's going to be at an easy swipe across the first piece because.

Across the tag business, if I understand your question, which.

The segments are going to be driving that business. It's every 1 of our professional segments.

Got great confidence in the demand that.

That we see in that business.

You spoke last quarter last couple of quarters about.

Our expectations as it relates to DIY that they would likely revert back to the mean or the norm.

And that from a market perspective that we would be in a terrific position to be able to capitalize on the business as it started to shift into these pro segments. We didn't expect that it would be perfectly smooth.

Waving in from 1 to another but in fact these pro businesses are showing terrific demand and we're excited to be in the position to be able to capitalize on.

So we think the control of distribution model that we have we think the the.

Of the reps that we have and even in some of these challenges challenging times with some of the supply chain issues that we're working closer with our customers and developing a level of loyalty that we have not seen before.

Before throwing it out of I'll add just a.

A couple of comments as to why I made those those.

Sure.

Statements regarding the relationship with our customers.

We stay very close to our customers in right now.

Just gotten some terrific feedback on the research as it relates to our loyalty with our customers.

As it speaks.

2 of the probe business, we've set records during these challenging times with our contractors highlighting our ability to respond and work with them during these challenging issues.

At the fact that our reps and managers are there with them close to the customer has allowed us to be responsive to them keep.

Them and paint predominantly.

Predominantly.

Better than anyone else and that combined with the demand we feel is going to position us to really come through this and exit this stronger than we are today.

And Ghansham this is al.

On the raw material basket side.

We.

We are now saying that our third quarter is going to be at the highest year over year.

<unk>.

And that coming into the second quarter, we thought the second quarter will be higher year over year.

So a slight moderation there, but we also think the fourth quarter, we should see some moderation of raw material.

The costs.

Our higher than industrial but significant across all of our businesses and that is why we were out with price increases across all businesses, We announced a august 1st pricing, 7% price increase in tag, but were out across all our businesses and all our regions to recoup.

At this.

Significant raw material inflation and as you recall, we're going to see some short term contraction in gross margin, but as pricing catches up with those raw material increases will start to see of recovery and then as raw materials moderate we'll start getting.

Gross margin expansion going forward.

Okay perfect. Thanks, so much.

Thanks Ghansham.

Our next question comes from the line of Jeff Zekauskas with Jpmorgan. Please proceed with your question.

Thanks very much.

Yes, hi, good morning, I presume that there were raw material shortages that you endured in the quarter do you have an estimate of perhaps.

Here at lost sales because you didn't have sufficient raw materials.

And when you think about your loss of sales how would you allocate it amongst the groups.

Yes, Jeff.

On a consolidated basis, we think.

The raw material shortages were.

A headwind of about 3.

4% on the consolidated net was split pretty evenly between our tag and our consumer brand segments.

There was an immaterial impact on our performance coating segment.

Thank you for that and in consumer brands.

Is that.

Area, where it's where your raw material price raw material capture is likely to be slowest.

Jeff I think what.

Each of the across consumer each of the we had a lot of different categories and businesses.

I would say that the team has implemented pricing.

Across all of those categories or price.

Second and this is similar to where we're at end tag and there are more pricing to come to offset the additional raw material basket increases that we're seeing.

Hey, Jeff.

From our perspective, our actions are right in line and in fact, our customers responses pretty much in line with what we've expected. We we've always said that we don't try to run for the perfect quarter, we're working with our customers on both of tag consumer while end even in the PCB side on on how these price increases.

Jeff at all in.

We will get the price increase and our goal is to to do that in a way that allows us to retain the customers and to do that we work with them, but we have absolute confidence in our ability to do do both of those to put the price and then keep the customers.

At the only other comment I would make on that Jeff is.

<unk> run the lag I think if you look at the operating margin comparison versus last year, it's very difficult because of the just the very high.

Volume strength, we saw in the second quarter, but if you look at the first half of.

Our first half end consumer our operating margin was.

Still.

Almost of 180 basis points versus the second first half of 2019, so I think because of the way the.

At year rolled out I think a better comparison with each of the first half of 19 and we've maintained net margin.

And.

On a 3.5.

Our sales increase in the first half versus first half of 19.

Okay. Thank you so much.

Thank you Jeff.

Our next question is coming from the line of John Mcnulty with BMO capital markets. Please proceed with your question, yes. Thanks for taking my question.

When we think about the various buckets for.

Percentage of those whether it's resin or tier 2 or packaging or what have you I guess as you look forward are there ones, where you expect to see relief and can you speak to ones that you think they're.

They're going to be sticky here for a while can you can you help us to think about that.

Yes sure John.

When we look at the basket of what we saw in the second quarter was really the.

Our raw material <unk> was being driven by higher cost per monomer resins solvents and packaging materials.

As John mentioned, the inflation was highest in the performance coatings group given their greater exposure to that side.

We did guide here that we think the third quarter is going to be the highest year over year raw material inflation.

The only modest.

Relief, maybe in the fourth quarter. So I think a lot of those that I. Just mentioned are going to remain sticky I'd say on the <unk> side, that's been largely stable for the most part a little bit of inflation, but not that's not where we're seeing the pressure. So it's going to continue to be.

A challenging environment on the raws, but as John mentioned and Al mentioned in their remarks, we're very committed on this.

<unk> initiatives that we have we've been very aggressive we're out across the businesses.

Feel very good about our ability to offset those dollars during the year and I think if you look at historically, where we've we've.

We've seen going back in time.

The industry took a little bit of a delay in 2016 and in the experience that we gain there we've got a lot of leadership in this company thats been through.

Of that experience as well as others and the determination that we have to stay ahead of that I think is visible right now with the performance in our.

Operating margins in performance coatings, reflecting the already aggressive actions that have taken place to offset that.

We're very committed to this where we're going to stay very focused and we believe we'll stay ahead of the price a year.

Got it fair enough and then maybe just as a follow up on the on the supply chain issues.

Is where either you lost some business or couldnt meet the needs or some of your competitors have I guess, how should we think about.

About the potential for share change is it is this something where you see it as temporary loss of business or gain business or is this something where it could be a little bit stickier I guess, how should we.

About that as we look forward I.

Thank you should look at it is we're going to win share gain during this time that there might've been some transactions some projects with some element of a project that we might have lost that.

As I mentioned just briefly.

A moment ago, our researches, indicating the way in which we're handling.

Handling this and maybe I'll talk just briefly about that the transparency in which we're working with our customers.

The responsiveness that we're working with our customers there have been.

Al mentioned.

A little bit of.

Challenge in dealing with some of these customers, but we have great confidence in how we're responding and how we're dealing with our customers.

That lead us to believe in the <unk>.

Customer sat scores that were getting from our customers.

Really indicate the fact that the waiver of handling this.

Allowing us to.

To come out of this with greater stickiness of the new account growth that we're experiencing right now so of record.

Year to date performance and new account activity.

And we're stepping into this with customers, while we are opening new accounts with them.

We're getting them at this point to try new products and.

In that trial in itself down the road will lead to more projects with those customers. So I've got great.

Confidence that as we come out of this you're going to see at that same coiled spring that we've exited other challenging times uncoil and we're going to accelerate that you can see that not only in what I've talked about in the research that.

As our competitors continue to close stores and closed territories.

And we continue to invest in.

A number of areas, we're going to take advantage of this market and we actually as difficult. As these times are these are the best times for our company, we expect to come out of this stronger.

Great. Thanks, very much for the color.

Okay.

Our next question comes from.

Bob Court with Goldman Sachs. Please proceed with your questions. Thank.

Thank you good morning, John I was hoping you could help us figure out the math.

To get that mid teens inflation cover can you tell us what your raw materials are as a percentage of your total Cogs.

Yes, Bob.

Robert.

From the line of all of our about 80% to 85% of our tank cars.

I would tell you we need to get about a 50% price increase 50% of the raw material increase to cover the $1 at.

And my expectation is that we will cover the raw material increases dollar per dollar in the full year of little.

To your high end in the first half.

Catch it up in the second half, but full year will offset raw material increased dollar per dollar.

And then maybe Dovetailing on Johns question I would guess, it's the largest paint companies certainly in North America, you did where.

Were you able to leverage preferential supply relationships.

So you had better availability do you think of and your competitors.

Well, we work closely with our suppliers and.

I think the approach that we're taking here is that.

Many of them are in unique situations as well.

We clearly of what.

With our supplier.

And shifts to put ourselves in a position to leverage our supply chain working with them in a way that can accelerate our ability to serve our customers. So on the 1 front from incoming raw materials. We're working closely with them. We are unique in the fact that we have our own fleet of.

Of vehicles, we have.

<unk> hundred 60 tractor.

<unk> in 2100 trailers that we use.

To expedite once received these raw materials into our plants and in many cases right now from our plants to customer projects. So.

It's the entire the entire supply chain by working on to expedite.

I cut out as many days as possible and to serve our customers and that that transparency as we communicate to our customers is exactly why I mentioned earlier, we know that we're going to come out of this with with share gains at Bob The only other thing I would add to that is really utilizing our global scale our footprint our global.

All of our relationships to look for additional.

Supply opportunities because we're investing.

Capital to have an additional 50 million gallons of capacity coming online over the next few quarters and where the demand environment is it's well above where our initial forecast.

Our raw material supply would be coming into the season. So as we can get additional raw materials will convert those raw materials faster and as we come out of the third quarter into the fourth quarter. You can expect to we'll be building inventory and going into the first quarter also building additional inventory to get ready for the next selling season.

In 2022.

Great. Thanks for the help.

Thanks, Bob.

The next question will be coming from the line of Truman Patterson with Wolfe Research. Please proceed with your questions.

Hey, good morning, everyone. Thanks for taking my questions.

First on perfect day.

On.

And what's coatings you know you all suggested that raw material inflation will be heaviest in the segment could you just help us gauge the magnitude of.

<unk> of inflation in P. C D versus your mid teens, a company inflation guidance at.

And specifically in performance coatings, I know you're taking.

Actions.

Pricing actions, but when do you expect to get kind of price cost neutral on a dollar basis in that segment.

Trim at all.

At.

We talked about mid teens.

Our industrial businesses, depending on the business of being the high <unk>.

Teens maybe.

Low Twenty's and then you know.

Seen some moderation in the fourth quarter.

To talk about the price cost dynamic I think it's important to look at the.

First half operating margin, because it's a little bit of a goofy year last year.

Yeah, I think the team has done a tremendous job maintaining.

Attaining their first half operating margin.

At a significantly higher raw material cost environment and in the first half and it's the highest in the company as we've talked about and they're working well with their customers to keep up with the strong demand, while having to implement the selling price increases to offset that raw material inflation and when you look.

At our first half.

At operating margin, it's down just 10 basis points to the first half last year and down just a 40 basis points of the first half of 2019 and you put this in perspective. If you look go back to 2016 through 2018 and of raw material inflationary.

Environment that wasn't as significant as we're experiencing today and our industrial operating margins declined significantly from.

From 16 through 18 on a pro forma basis, including a full year of Valspar and Sherwin Williams and then as we saw selling prices increase and they co.

Caught up raw material inflation of raw materials moderate at we finally started seeing operating margin expansion on our end.

2019, I think what's important and you asked this question at our financial community presentation, and just an answered at.

At the right way, we have been more aggressive in getting.

Price until the market faster and at a higher pace than as we've seen these raw material of this raw material inflation and we are getting leverage on a stronger volume so along with our continuous improvement mindset and other other actions that we're gonna be taking it gives us great confidence in getting.

Any sort of high teens to low twenties as we come out of this raw material inflation environment. So you know how long.

This inflation last fall will dictate somewhat how long, it's going to take us to get back our operating margins, but we are in a much better position today than we were in a few.

Few years ago.

Okay. Okay. Thanks for that and then at.

On the consumer brands group are at especially at Pryor.

Well in North America, you know I'm, just hoping you can help us work through some of the moving parts. There you know the supply chain constraints.

Which are impacting sales you all had the divestiture it seems like the pro side of the business is healthy in North America consumer trying to understand how core DIY demand trended through the quarter and how it plays into your full year guide.

It seems like the at least the deceleration in DIY.

Should start to improve as we move through the quarter, just trying to understand some of the moving parts there.

Truman let me.

Just comment.

We expect at DIY.

I will return to more normal levels as the year progressed.

And we're very confident in the other segments, particularly in tag.

Within commercial and property maintenance would more than offset that slowdown. So yes, we took our consumer brands full year sales guidance.

Down.

Just to mid to high teens, and while taking the Americas group up from low double digits to mid teens and you're absolutely right. When you look at the comparison.

Year over year or.

Our second and third quarters are going to be the toughest our fourth quarter is going to get.

Slightly better, but I think it's important to look at it from an architectural market perspective, I think if you look at the combined architectural business. We expect at the first half to be up low double digits, and we were right there with their consumer and tech businesses. We set at we expected our second half to be up mid to high single digits versus last.

Last year, and with our tag and CPG sales guidance for the full year second half is in that range.

So from an architectural perspective, we believe we've positioned the company strategically to take advantage of the different shifts in the market to position us to capitalize on those shifts so and end plus you look at the return of growth industrial.

Real.

We're just really excited about our full year sales guidance to be up high single digits of low double digit in AR and AR really turbulent market.

Okay.

You guys for the time and good luck in the upcoming quarter.

Thank you Truman.

Our next question is coming from the line of our Roone Vishwanathan with RBC capital markets. Please proceed with your questions.

Great. Thanks for taking my question.

And yes impressive results I guess in the face of the raw material inflation. So.

I guess, just I wanted to ask about overall market growth.

You continue.

He is doing really well and resi repaint and at setting you up for as you just noted kind of.

How high single to low double digits and tag. So I guess next year, you will be facing a tougher comp there you'll be facing potentially at a slightly more achievable comp end.

And and DIY in consumer and end performance as well. So how are you thinking about kind of ongoing sales growth in your business. I mean are we still kind of thinking that sherwin isn't of positioned to grow 1 of half of 2 times of market and tag.

And then maybe performance is more in line with the.

Industrial production, and then consumer kind of settles back into kind of 3.3% to 4% DIY kind of range or how are you thinking about the different segments as far as growth kind of on a more midterm basis.

Yeah, Let me take a quick swipe at it at all.

Throw it to Jim to give you some macro numbers I would.

Kind of day that we absolutely agree with projected growth rates to continue to exceed.

The market.

I'll remind you you use rosary pain is the tip of the spirit of your conversation.

We've had now 5 consecutive years of double digit growth in residential repaint, we don't see that slowing down.

And in fact, our expectations of highly in our tag organization is to continue to accelerate that growth, we're making we believe some terrific investments in that business stores reps products, our digital platform.

Number of areas of that we continue to invest in the face of adversity.

Adversity in some cases, but as I mentioned earlier, that's what we believe helps us to accelerate during these challenging times, particularly given some of the moves of our competitors. So we're excited about the growth opportunities.

There to accelerate and maybe I'll throw it to Jim to just talk about some of the macro numbers.

Across the business, but.

I look at the professional segments inside of our tag business.

We're excited about each 1 of those in before Jim kicks off you also mentioned the BCG.

Syed.

We have very high expectations for adjusted <unk> and his team we've got some really good momentum there our focus here we believe is unique.

When bringing differentiated products and solutions to our customers.

And we believe that the combination of the Valspar.

Sherwin.

Acknowledging portfolio is is really starting to allow us to harvest some of the great work both companies had done individually.

Way, that's very unique in this clearly.

We try to bowl throughout the different segments, particularly if you look at automotive as an example, where we know that we're beating the market with our combined technology.

At that too.

2 companies are brought together so.

The idea of consumer reverting back into the low single digits is probably.

A good model number.

Those of us.

But we absolutely believe that our tag and <unk> businesses will be outpacing the market.

Yes.

And to John's point about residential repaint, you think about that I'll remind you again.

While it's our largest segment and tag. It's also the space, where we have the most opportunity to gain share.

Number 2 we feel really good about residential repaint I think if you look at some of the market data that's out there. It's very supportive for example, existing home sales continue to be very strong we look at the leading indicator of remodeling activity that's accelerating into 2022.

Remodeling.

Sure. So the market index is all time highs right now so readily repaint.

No reason for us to think that thats not going to continue to be strong.

On the new residential side.

Youre hearing news about labor and materials being a little bit of of governor but.

Think that could have the effect of extending that cycle and if you just.

Modeling the raw numbers on starts Theres still up very significantly year over year, both non single family and multifamily you've got historically flattish mortgage rates and consumer confidence is still strong and household formations that we always talk about so on the new RASM side very good.

Look Herschel just touching on that for a second net was our second fastest growing market in the quarter and as we've come out of Covid vaccines are in place people returning to work.

Commercial has helped.

A lot of momentum right now and Youre seeing other indicators like the architectural billing index for example that are very supportive.

We feel very very good there even property management as people returning to travel returning to offices was up very nicely in the quarter.

And then maybe to close out with the industrial business. We look at a lot of different indicators as you know theres a lot of different divisions in that segment, but.

The manufacturing.

<unk> is up in every region, we feel very good about that and we've often said you know.

In regions outside of the use of our opportunities are huge for market share gains. So we feel very good about continuing to outgrow the market and in tag end in our <unk>.

<unk> business.

And as we've said consumer is probably going to start to return to a more normal.

But I would add even on the consumer side. We are committed we believe that we can help our customers outperform the market so while it might revert back more of them too.

Our normalized run rate, we want and we'll be working on and investing with our customers to help them outpace.

That market and.

We believe that we've aligned ourselves very well with our customers they share of that desire to continue to grow market share and we're investing in that business and believe that we can help them outpaced the market as well.

Okay. Thanks for that and then just as a quick follow up maybe I could ask on the on the cash.

Capital deployment side it.

It sounds like.

You've completed some buyback activity, but that's that's still going to be your main use of cash is that accurate outside of Europe.

Internal investments.

I E is the M&A environment still showing very high valuations that are not attractive or.

Maybe just comment on your uses of cash from here.

Yes.

I think you know we've been very consistent of our capital allocation policy.

John talked about the strong cash generation of first half and a return of 1.

1 billion 9.2 are $1.9.

$9 billion of our shareholders in dividends and share buybacks.

And I think I want to make a point that.

We don't need to make acquisitions I think you know.

I talked about this on our financial community presentation, and you look at our our growth from 2000.

19 of.

At <unk>.

We've averaged at.

At $2.3 compound average growth rate of $800 million and we grew adjusted.

<unk>.

TVT.

$640 million, 77% flow through our operating margins up strong and so.

I would say, we don't have a gun to our head will continue to look for opportunities.

For M&A and that fits our strategy, but I think it's important to note that we will continue to invest in our long term organic.

Growth opportunities end and you know I think that's a.

A great way to deploy cash we talked about the architectural capacity improvements we of packaging capacity increases coming at and others, but I.

I think we get more leverage on the organic growth.

Then this is just purely M&A, but at.

Absent M&A, we will buy our stock back in the second half.

Great response.

I also do want to put a little color on the M&A strategy that al referred to.

While we don't feel as though we haven't gone to our head. We do think that there are opportunities out there and we think that there are several.

That we're working on that could be completed this year, but theyre going to be disciplined.

Deals that we can bring.

Bring value to our shareholders, we're not trying to be everything to everyone everywhere.

We're looking proactively for targets that as al mentioned fit our strategy and those would be areas that would fill necessarily geographic gaps. We're not just throwing a dart at of map here I'm trying to figure out where we're not.

Could bring technology.

Allergy that can be leveraged across the platform.

Or could fill a void of other types of to help us serve our customers. So we absolutely believe that there are M&A targets out there that are of good fit that we can get at that.

Proper value in fairness to the sellers and to our shareholders.

And Meanwhile, we don't feel as though we're out there just trying to buy a book of business business. So that we could demonstrate growth we have growth opportunities and we're actively pursuing those organically.

Thanks, a lot.

Think of the room.

Our next question comes from the line of Duffy Fischer with Barclays. Please.

Please proceed with your questions.

Good morning Fellows.

Hey, Duffy.

First question is just around raw materials, and just spikes of little bit different than just a straight supply demand tightening with the freeze in Covid is this doing anything to change your strategy on how you want of sourced raw materials either integrating upstream.

More yourself to do more of the resins diversifying producers diversifying geographies should we expect to see any meaningful change structurally on that side.

No Duffy, we have a terrific and experienced team in both procurement and in technical as well as our supply chain.

We would expect with veterans at a 25 plus years of experience, we're looking at a lot of things differently.

I don't know that that's anything that we want to talk about right now I don't think structurally you have to be concerned from a capital standpoint that we're changing the model of the business, but you should expect and our customers should expect us.

Just to be thinking about how to protect them going forward and we'll be taking those necessary steps.

But I don't think that on a public call like this we want to define what those steps are.

Fair enough.

Then.

Can you talk about both of your ability and your customer's ability to attract new talent.

Talent to hire people as we're growing into this and in what Youre seeing on labor inflation.

Yes, I would say.

We have seen.

A slight uptick in in some wage.

There is some pressure where we feel that pressure, we're taking the steps to secure what we believe to be our most.

And resource our people.

I'll remind you that we have terrific turnover rate between 7% and 8% on average so we recruit and hire.

Right talent, we train them, we give them the resources to win and then they become the reason for our success.

We're very proud of our team.

As a result of that and the fact that they have success in a career path.

People tend to stay in fact over a third of our employees have 10 or more years with the company.

And we think that's very important so while we're making some adjustments where necessary.

Important to them.

We believe that they are the right investments to make and we do believe that as a result of this retention.

We're able to respond with experienced employees that can serve their customers.

As far as the materiality of the of the.

Of the moves that we're making to respond.

Sure I don't think its material in the sense of from a modeling perspective, but we are taking the steps necessary in and in some cases.

Making a financial moves to recruit and retain of talent that we need.

Great. Thanks, guys.

Thank you Duffy.

Next question comes from the line of Mike Sison with Wells Fargo. Please proceed with your questions.

Hey, guys.

It sounds like.

The price of the same Karen is going to be a lot higher this year end, maybe the highest its ever been.

Just curious given how.

High inflationary environment.

<unk> has been.

Okay.

If raw materials do fall like why do you feel like it sounds like you feel pretty good that that you'll keep that pricing level.

At margins could expand really exponentially versus what we've seen historically and then.

Any worries that that's at the price of the paint Ken as you know could cause some demand.

<unk> instructions given I know, it's not the biggest part of our paint project, but just any thoughts there.

No Mike I think what's important to remember is the Cogs of the cost of the paint and of total project is a relatively small percentage of 80% to 85% of the.

Painters cost is in their labor.

And so we're.

Moving and developing innovative products to help them offset that labor costs and while many of them are able to hire and secure of the talent that they need many are bringing on new unskilled.

Uh huh.

People and training them.

And so the cost of a good gallon of paint that can help them produce a nice finished product that their customers will enjoy overall of the relatively small percentage of their cost of goods.

So they are they are responding I think favorably to higher quality products in just a moment ago I talked about.

Per labor and our willingness to hire recruit and retain that talent in and in some cases paying a little bit more of an and.

And we have to consider that as well as our labor.

As well as our customers.

We look at that cost of the retention of that I just described in that.

Factored into all of the pricing decisions that we make.

Our painting contractors are doing the same and so we're trying to offset some of their costs.

The painters with higher efficient projects through quality of products and while we're trying to do the same to our customers as we are experiencing some labor cost increases.

That gets trying to offset that with efficiencies in our plant in our stores to minimize the impact of labor on that.

Price increases that were out there seeking.

We do believe we're in a similar environment that we were facing in 2010.

2012, where we had to implement.

<unk> were at fixed price increases and of 22 month period of to offset the significant raw material increases, but we continue to invest.

And our long term growth opportunities, adding 160, plus new stores, adding over 260 reps in our North America paint stores over that 3 year period as well.

Well as other customer solutions.

And we did see the benefit in topline and Bottomline as raw materials moderated from 2010 through 16, North America paint stores group volume high single digits, which was a multiple of the market tax segment operating margin grew over almost 700.

Basis points and on a consolidated basis.

We grew by high single digit percentage at an EBITDA margin increased almost 500 basis points, we expect to see similar types of results as we come out of this but I think the key there is we continue to invest so we're willing to accept a little less.

Leverage on SG&A.

Including in our second half this year, but I think it's important that we show our customers that end and good and difficult times, we are investing in their business to make them successful.

Great. Thank you.

Mike.

Absolutely absolutely shocked that your.

Our first question wasn't about the Guardian name them, let me down there.

Thanks for your call.

Thanks, Mike.

Our next question is coming from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

Thank you John.

John at last question just go back to that 2000.

<unk> 2012 time period.

Did you retain the entirety of those price increases when raw sort of coming off.

Okay.

I'd say, we retain the majority of them David.

As our customer base, especially if you look at our largest segment I'll use of an example of residential repaint.

Yeah.

Cost of a gallon of paint and is.

10% of their costs and once they get those.

Of course into their bids they can pass that on and especially.

As John talked about moving customers up to higher quality products and we do see a trend when we're in an inflationary.

Environment that customers moved to a higher quality product to get the benefits of the efficiencies, which way far outweighs the cost of that gallon of paint even when you compare it to what they were using previously to the current products. So we do expect to retain a majority of the of the price not just on arc.

An area of Montreal, but also in industrial.

The industrial side of it but I think an important metric that we track closely as our ability to help our customers make more money.

So in that process, our entire focus when you when you look at the investments that we're making the services that we're providing.

Every game that we have every research that we do it always ends up with are we helping you make more money.

And that's so it's an important metric in our decision making.

Understood and just on the price impact of a back half of the year I think you gave us the expectation for tag, but what you're expecting or how should we look at.

Because her brands of performance coatings price mix expectations at the back half of the year.

As we've talked about David it's a little harder to.

Kind of look at the different businesses, because they're even though within the different categories within consumer, but you would expect to see a similar same.

Fraser, that's what you'd expect to see of.

At.

Range within consumer and higher range and P. C. G just because of the raw material basket being.

Higher on our industrial businesses.

At the timing on industrial as you know of tag is more uniformed.

Similar in timing wise, when they go out of a price where whereas in our industrial.

<unk> businesses by business by region are staggered across.

Different timelines, but.

You could expect to see of higher cadence for our industrial businesses in the second half.

Got it thank.

<unk>.

Thank you David.

The next question is coming from the line of Steve Byrne Bank of America. Please proceed with your question.

Yes. Thank you unlike some of your peers.

When this inflationary environment really started to escalate you made the decision.

You very much.

<unk> basically send the message to your co contractors that you werent going to raise price for a few months.

What's that.

Jim.

Drive loyalty.

Being that many of them had.

Already won contracts and.

Price assumption in those contracts and so forth.

Was that part of that decision and if so do you see.

Instead it was successful do you think that you gained market share among the pro contractor.

Customer base because of that decision.

Yes.

Have a great certainty and I would do that 100% of the time.

Again tomorrow.

If we have to in the future we'd likely take the same approach.

Loyalty and our ability to even execute the effect of price increase with our customers increases dramatically as a result of that so.

Without question.

And John you also made a comment earlier about.

Backlog from your contractors was robust.

Can you quantify that and do you have data that would would compare of that backlog today versus say where it was.

A couple of years ago is it does it does it meaningfully different.

We do we have a CRM system that we use.

Dieter we built and.

We do keep an eye on that it is a very strong period in backlog.

And.

We're not.

I'm going to share any more detail on the specifics but.

I speak with great confidence in the backlog.

Thank you.

Beth.

The next question is coming from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your questions.

Thank you John.

In your prepared remarks, you made a comment that new account activity is up nearly 30% in the first half of the year can you elaborate on that how does that compare to long term historical averages for example, and is there any way to translate that.

At level record level of new account activity into what it might mean for future volumes or future share gains for example.

I'll give you a little color, we're not going to get into any specifics on the metrics conversion, but I would tell you that it is.

Very high very high number of and compares.

Parison I would say that our teams are.

Our our TEG leadership.

All the way through to those that are closest to our customers are doing a fantastic job.

1 of the questions has to be how are you doing this given some of the shortages in raw materials.

And the fact is is that we've been very opened with.

With our approach compared to our competitors and we were out early with transparency I think many of our competitors were in denial at first some of our competitors were asking or you know what no..1 else is telling me that in fact, some of them said it might be a week or 2.

And we were at with very true for with our customers as to what we expected and I give our procurement.

<unk> team and our supply chain team great credit for the current took to come in to this boardroom that we're in today and explain how this was going to fall out and how quickly our commercial teams took that to the market.

Face to face with our customers with full transparency to help them run their business.

The reason of it.

At that and why I think that's important.

Is that while many of our competitors were in this denial.

You may have felt that they were going to be at a competitive advantage for whatever reason.

Ultimately from a customer's perspective, they lost credibility.

And our teams now are out talking.

I assess tumors.

Who may in the past have had loyalty that kept them from from using other suppliers.

Suddenly we're getting.

The phones getting answered and we're helping.

Our people to be in front of those customers that that offer that terrific opportunity.

<unk> co.

As I mentioned right now we might be just simply in the trial mode. Because the supply chain issues are real and we're taking care of our existing customers with great focus in and we're able to talk to these new customers about.

Of the alternate supply and the importance of that end.

City, now and getting them to try products in some cases is simply in the back of our own stores in some cases, it's 1 room on a on a project that we know with.

With great certainty that this is the most important step in the process and this trial is an exciting step and we look forward to.

Peter conversion going forward. So earlier I was asked do we feel as though we're going to come out of this with market share gains and I hope everyone heard of confidence in which I answered that because of.

Terrific.

Respect for our leadership team.

And all the way down to the part timers that Aaron our store that are in front of these customers.

Introducing.

The new products and new solutions that are going to help these customers make more money and we're determined to do just that.

Thank you for that my second question relates to performance coatings, if we look across the major categories their packaging wood coil refinished general industrial et.

<unk>.

Can you give us a sense for which of those businesses have grown the most versus pre pandemic levels and which might remain the most depressed such that you have more potential for rebound going forward.

That's a really interesting question I would say that.

Cetera.

Well I might answer that is that we see terrific growth in all of them.

I may I can just spin through those quickly.

In the packaging business.

We do believe that the unique technology that we've brought to market will help us.

To continue to grow al mentioned the Capex.

We're putting into this business, we are investing along with our customers and additional capacity and we think that our.

<unk> is a very unique product.

Our product with plug and play performance.

Easily adopted onto existing can making equipment and helps our.

<unk> with.

Speed so the efficiency of the application is terrific.

It gives great flavor protection of products, both food and beverage end.

Really the next generation of of non BPA.

Technology So I'm.

Im taking packaging first and getting into a little bit more depth, because while it's easy to talk to.

Ex of model. It's the same model that we're using in every segment.

To help differentiate our teams from our competitors. So when you look at at GI is an example of our industrial wood, we're looking at not only the technology, but the supply chain, how do we take the.

And that it takes to get product and whittle that down to what might've been weeks in the days and instead of.

Thousands of gallons of of.

Of required.

Orders too.

50 gallons of 100 gallons to put them in business faster with less working capital.

<unk> businesses are doing a fantastic job of introducing technology and speed of.

Our automotive I talked earlier about the combined technologies between the Sherwin and Valspar technology, that's helping throughput with each of their customers.

So we were able to be more productive in our protective and marine business.

Our coil get assets more debt I'm, sorry to get assets back in play at faster so when.

When you asked that question quite honestly, it's hard to answer which offers the greatest opportunity at <unk>.

<unk> was in the room with me right now I'd look at them in the eye and I tell them I of expectations for every 1 of those businesses to grow.

And grow excessively.

Business and at the expense of our competitors.

That's what I would tell him.

Thank you very much.

Thanks, Kevin.

Our next question is from the line of P. J <unk> with Citigroup. Please proceed with your question.

Yes, hi, good morning, or good afternoon, I should say.

Yes.

And I am looking at the industrial business of so far of 2 of your competitors.

And their margins are much lower.

Your margins kind of headed up.

And I am sure you, presumably impacted by the same shortages of raw materials like at park season ISO sign at.

Is your impacts.

Are likely to be delayed into <unk> or are there other factors that offset your raw material impact.

Well I think I'll start at maybe turn if at all if I if I Miss anything I think part of it is mix of business and we've been very selective in our strategy on what we pursue.

And we pursue business.

Is that are interested in coatings and solutions that will help them make more money not necessarily just commodity so youre not going to see us end.

Areas, where it's at.

It's just that commodity so we've actually walked away from some of those businesses and we.

Business focused on on areas that are.

More high value. So we often talk about bridge and highway youre going to see us on the high value Bridge area. As an example, as opposed to other areas that are just low margin commodities.

And I think that plays an important part in the alignment.

Our approach is just that we want to be partners with our our customers help them to be more successful in return they understand that our ability to serve them and make them.

Successful comes at a cost to us and our shareholders and we share in that reward of anything else about that of the only thing I would say P. J S.

We would expect to see sequential improvement.

In our performance coating segment operating margin through the second half.

Even though we're going to go up against a tougher comp.

Second half versus the first half at still we're seeing strong volume.

R R.

At <unk> return to more of what I would say, a more consistent or at normal levels quarter to quarter. So.

Our full year.

Sales guidance of up low twenties percentage implies that.

Our back half and not in the <unk>.

High teens, we talk about the third quarter being up high teens to low twenties.

So at.

And it's about a strong volume getting leverage on SG&A, but it's also the commitment that this team has made to getting price into the market.

Timely and aggressively to offset those raw material at raw material inflation and like I said earlier. This is this is not.

<unk>, we learned a lot in 2016.17 18 net that this team is now delivering on an.

Executing from that learning so I don't know if I read it right.

To revisit that.

Great Great and then my second question is can you talk about your did.

Therefore at that May have accelerated some of the pandemic.

How much of your contract customers that are ordering online and getting the paint delivered to the job site. Thank you.

Yes, I'd say that we're seeing strong utilization and I would say an increase in all of the metrics and the categories that we track.

Our platform I would say is.

Providing a service option that makes our pros more efficient and utilizing all of our resources. So.

Unlike others, who might be trying of digital platform as the model ours is unique in that it brings everything to bear so we want our customers utilizing.

Our stores are reps and the platform and we believe the model that we have is very unique in how it encapsulates and kind of recapture.

Capsulate all of that.

Into 1 offering.

This platform.

So we're not going to talk specifically about sales on.

Rising of 4 on the digital platform versus in the store by phone or through the rep.

Quite frankly, we don't discriminate against any of those orders will take them. All we want them utilizing any resource every platform that they feel as comfortable what we're trying to do is make it easier for them. So this digital platform will allow them.

On plateaus to their pricing their projects their orders and they can conduct business with us 24, 7%.

Through the platform.

They prefer to come into the store and have a cup of coffee with the best friend behind the counter we encourage that as well.

Thank you.

Thanks P J.

At.

Our next question is from the line of John Roberts with UBS. Please proceed with your questions.

Thank you John on the Guardian's I don't think Clover Gail right of use of the Guardian brand at all in Ohio, So maybe there's an opportunity there yeah.

Yeah, there might be I don't know.

All of that.

Regardless of <unk> John.

It came from John Robert now John Murray Cordero.

Yes.

Is it unusual in the June quarter for interior to be larger than exterior and was that of mixed headwind in the quarter. Since exterior is typically more expensive than interior.

John I would say.

At kind of that mix returned to a more normal level I think.

Typically we start off.

Interior of next year, maybe 4 to 1 in the out quarters, where the exterior and the Midwest end and.

Or less.

Prevalent and then as you get to the 2 middle quarters.

At trends to closer to 3 to 1.2 and a half to 1 I think we ended the quarter closer to 2 and a half to 1 of.

On volume.

Okay, and then trucking constraints were cited as a big headwind by some of your competitors were you able to use the trucking fleet and many different ways here to help.

Is it mitigate the shortage of I know you pick up some of your raw materials that you distribute but I don't know if youre able to pick up at the raw materials and somehow mitigate.

It is an issue.

Yes, we were and we plan to continue to use them as creatively as possible just as we do every asset and John.

This has given us.

Dirty and we have a terrific leader and Joel slate at that runs our global supply chain, whose.

Team has been really creative so it's not just the tractors and trailers, which is of great question that you're asking but.

We're using our distribution centers are at manufacturing our stores.

And operating at a very unique fashion.

Some of this has been on the fly and <unk>.

Continue to improve.

Improving our ability to do that and again, we will come out of this better as a result of at we're learning a lot about our supply chain and our ability to be able to leverage it and we'll be better coming out of this as a result.

Thank you nice quarter.

Every day next John.

Our next question is coming from the line of Mike Harrison with Seaport Research Partners. Please proceed with your questions.

Hi, good afternoon.

I was wondering if we could talk about the consumer strength that you were seeing in Europe and Asia.

Is that a product.

DIY remaining stronger for longer in those regions are where the comps easier I also know that you've made some changes in your strategic approach to those international markets, but maybe comment on what youre seeing in terms of demand trends internationally in the consumer business.

John.

I'm, sorry, Mike I would say that it's a little bit of everything, but certainly the region, particularly in China. If you look at the double digit decline in 2000 largely related to.

To Covid it had an impact on us I will point out that we did improve profits.

Even in that kind of environment.

In China, we continue to focus on the volume growth with the recovery.

Further defining our operating model in that region.

A strong half in 2021.

We're not going to give guidance by business, but this is as I've said before.

An area that we're looking long.

So.

Wouldn't suspect that next quarter. This business is going to move the needle 1 way or the other.

But if you look next decade at my end. So that's the way we're running this business and we have expectations for Brian patent and his team to continue to really drive through the strategic.

Terrific decisions that we're making there and we're looking long term there in Europe, I'd say, we continue to build around our kingfisher relationship.

The team in Europe has delivered a double digit increase in 2020, so comparisons are a little bit more challenging year end 2021, and we did have a very strong.

Strategic in 2021.

They are terrific leaders here in Europe, 1 of whom we just brought to the U S to take a very important role for US you did such a wonderful job there.

Very strong a strong leader and again speaks of the depth of <unk>.

Peter it's going to backfill him.

John start strong as well.

So I.

I think both of these businesses are.

Relatively small in nature, but.

Good opportunities for us.

And we are managing accordingly.

Alright, Thanks, and then I also wanted to ask about inventory levels at big box retail.

<unk>.

If we were able to look at the point of sale data is that pretty similar to what youre seeing.

In terms of the consumer business saw revenue decline are you seeing retailers still working to restock or is there actually some destocking happening at the DIY demand.

Retail is normalizing.

Mike I would prefer that our customers talk to their plans as it relates to inventory I will say that we're working hard and we will be working hard through the balance of the year or 2.

Continue to improve our ability to serve them.

So very important focus of ours al mentioned the incremental.

Investments that we've made at bringing on about 50 million gallons of capacity that certainly will help this business as well.

But as it relates to their inventory decisions and what they do I don't know that thats appropriate for us to comment on that.

I would tell you that we're working hard to be able to.

Continue to improve our position with them.

And do they decide to.

To pull in more of inventory going forward.

Alright, thanks, very much you bet.

Next question is coming from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions.

Hi, Thanks, just touches.

Point.

The past you've talked about.

Equipment sales and.

Stores business of potential indicator of box.

Of backlog is that trending in line with your expectations or at any reflecting in that yes.

Yes at a double digit growth we speak we think it speaks to the confidence that our paint.

So we're excited about it yet.

Okay, and then actually just on any issues with customers.

Customers coming to you about labor availability.

The season, just given kind of hearing that across the board anything with interest.

Yes, I'd say labor continues to be of discussion and nearly.

Half of that I've been in.

As.

As Jim mentioned in 1 of his responses, we feel as though of that.

<unk> is serving as a bit of of governor.

And I'll point out at.

While labor is an issue I believe every professional segment in tag at a double.

Every marketing.

So they're finding a way to continue to grow but it is an issue and again all of these challenges all of this adversity.

We don't ask for this adversity, but it does play to our advantage. It does allow us to serve our customers.

The Jay that helps.

It helps them through these challenges if they run short on people or have to move from 1 project to other another end.

Of that turmoil on the part of our customer.

Please write to the Rep is they're working with that customer of the store manager locally that has the capability to serve that customer.

So labor is an issue it's 1 of many and we try to work with our customers in a way that that can help them make more money working through it.

I appreciate it thanks very much.

Business.

Next question is from the line of Greg <unk> with Evercore ISI. Please proceed with your questions.

Hi, Thanks, My question was on the comp sales trend.

If you look at the acceleration of I think it was from 16% to year.

To around 12% in the second quarter is that is that really all just.

The supply availability of raws.

Was that the main reason for.

For the deceleration.

Youre talking about on tag, Greg Correct me I'm talking non tax specifically, yes, the 2 year stack.

Yes.

I think part of it is we've had a.

Tougher.

<unk>.

Yeah.

Yeah.

If you look.

At our if you look at the way our 2019 unfolded.

We kind of had a better.

Second quarter and then when you look at the way we had 2020, we had headwinds.

Headwinds in the second quarter, yes, we talked about of $3.

Store percent headwind in and raw material availability and her second quarter that impacted us so at.

Yeah, it's kind of a.

I hate to use the term wonky, but you know the way that the 2 year stack came out it was kind of.

That's kind of a little bit wonky in you look at the 2 year.

<unk>.

First half 'twenty, 1 versus the first half of 19 up 14% and.

Some prices at asset.

Primarily volume got at so then maybe the same.

Okay.