Q3 2021 Sherwin-Williams Co Earnings Call

Good morning, Thank you for joining the Sherwin Williams Company's review of third quarter, 2021 results and our outlook for the fourth quarter and full year of 2021.

With us on today's call are John <unk>, Chairman, President and CEO.

Alma station CFO.

Jane Cronin senior Vice President corporate controller, and Jim Jaye, Senior Vice President Investor Relations and communications.

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 www Sherwin com beginning approximately two hours. After this conference call concludes.

This conference call will include certain forward looking statements as defined under U S. Federal Securities laws with respect to sales earnings and other matters.

Any forward looking statements speak only as of the date on which such 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'll now turn the call over to Jim Jaye.

Thank you good morning, everyone Sherwin Williams remained focused in the third quarter on solving customer challenges combating rising costs with pricing and investing for future growth in a difficult and highly fluid environment that is impacting the entire coatings industry.

Demand remained generally robust, but raw material inflation remained persistently high and raw material availability fail to improve.

While these conditions challenged our quarterly results, we continued to strengthen our customer relationships and take actions that strongly position us for the long term, we're confident in the demand outlook and even more confident in our strategy our people and our position in the market.

Let me briefly summarize the quarterly numbers.

All comparisons in our prepared commentary. This morning are to the third quarter of 2020, unless otherwise specified.

Starting with the top line third quarter 2021, consolidated sales increased 5% to $515 billion.

Material availability negatively impacted sales by an estimated high single digit percentage with about 75% of the impact in the Americas group.

The remaining impact was largely in the consumer brands group with an immaterial impact to performance coatings group.

Yeah.

Consolidated gross margin decreased 630 basis points to 41, 6% driven by lower sales volume.

Raw material cost inflation outpacing our price increases near term and supply chain inefficiencies.

SG&A expense decreased two 7% in dollars and decreased 90 basis points to 26, 6% as a percent of sales.

Consolidated profit before tax decreased $264 1 million or 32% to $611 $5 million.

The third quarters of 2021, and 2020 included $73 million.

And $76 $4 million of acquisition related depreciation and amortization expense respectively.

Excluding these items consolidated profit before tax decreased 28, 4% to $681 $8 million.

Diluted net income per share in the quarter decreased to $1 88 per share from $2 55 per share a year ago.

The third quarters of 2021 and 2020, both included acquisition related depreciation and amortization expense of 21 per share.

Excluding these items third quarter adjusted diluted earnings per share decreased 24, 3% to $2 <unk> per share from $2 76 per share.

EBITDA was $834 $2 million in the quarter or 16, 2% of sales.

Net operating cash grew to $2 1 billion or 13, 5% of sales in the first nine months of 2021.

Moving on to our operating segments.

Despite strong demand sales in the Americas group decreased 4% as volume and mid single digit selling price increases could not fully offset the decrease related to raw material availability.

Segment margin decreased three eight percentage points to 21, 3%.

Resulting primarily from lower sales volume and higher raw material costs, partially offset by selling price increases.

Segment, SG&A remained basically flat year over year in dollars and as a percent of sales as we continued investing in strategic growth initiatives.

Sales in the consumer brands group decreased 22, 8% against a very strong comparison a year ago.

The decrease included approximately five percentage points related to the water divestiture lower volume and the negative impact from raw material availability, partially offset by selling price increases.

Adjusted segment margin decreased 11, seven percentage points to 14, 7% of sales.

Resulting primarily from lower sales volume higher raw materials.

And supply chain inefficiencies.

Partially offset by selling price increases and good sales and marketing cost control.

Sales in the performance coatings group increased 17, 4% driven by volume price increases and favorable currency exchange.

Adjusted segment margin decreased five five percentage points to 10, 5% of sales.

Operating leverage from the higher volume selling price increases and good cost control were more than offset by higher raw material costs, where inflation was the highest among the company's three operating segments.

Let me now turn the call over to John <unk> for additional commentary on the third quarter and our year to date.

Along with our guidance for the fourth quarter and full year 2021.

John.

Thank you Jim and good morning, everyone. Let me begin by reiterating the themes, we provided on our September 29th update call.

First.

The demand environment remains robust across our pro architectural and industrial end markets, many external indicators and more importantly, our customers remain highly positive.

Demand is not the issue.

Second we.

We are ready to meet this demand we continue.

Two invest in growth initiatives, we have significant production capacity available today, and we are bringing 50 million gallons of incremental architectural production capacity online over the next two quarters.

Our capabilities are not the issue.

The issues that impacted our third quarter and have persisted in October continued to be industry wide raw material availability constraints and inflation.

Let me be very clear on how we are responding.

Nobody has more assets and capabilities in Sherwin Williams.

We're employing all of these to keep customers in paint and on the job better than our competitors.

We will continue to focus on customer solutions.

We are aggressively combating raw material inflation with significant pricing actions across each of our businesses.

We implemented multiple price increases in the quarter, we will continue to do so as necessary.

We continue to work closely with our suppliers on solutions to improve availability sooner rather than later.

At the same time, we're exploring every avenue to better control our own destiny going forward, including our recent announcement to acquire specialty polymers, Inc.

There is no shortage of confidence on our team, which is deep and experienced.

My deep Thanks goes to all 61000 members of our global family.

We fully expect we will emerge from these current challenges a stronger company with stronger customer relationships and with continued strong value creation for our shareholders.

And just a moment I'll.

I'll add some color to Jim's third quarter results summary, but first I'd like to make a comment on our results year to date.

While events largely outside of our control it forced us to adjust our expectations. We are still delivered a solid performance two.

2021 year to date consolidated sales were up nine 4% or $131 billion.

Despite high teens raw material inflation, adjusted PBT increased one 5% or $33 1 million.

And adjusted diluted net income per share increased four 8% to $6 80 per share.

Adjusted EBITDA is $2 73 billion or.

Or 18% of consolidated sales.

Even in this unusual environment, we've continued to make investments that will drive our momentum over the long term.

And we are confident we will see significant margin expansion as availability and inflation headwinds eventually subside.

Now returning to segment performance in the third quarter.

In the Americas group raw material availability challenges were a significant drag on sales. The good news is that underlying demand remains sound and reported backlogs are strong we expect growth rates will improve significantly commensurate with improvement in the industry supply chain.

Sales growth in the third quarter was led by protective and marine which was up by a high single digit percentage.

We're seeing good demand in this business from customers in oil and gas flooring and steel fabrication markets.

Tag largest business residential repaint grew by a low single digit percentage against a strong double digit comparison.

As industry supply chain issues are resolved, we would expect this business to return to its prior growth levels, where we've delivered double digit growth for the last five years.

New residential sales increase by a low single digit percentage.

New housing permits and starts have been trending very well since last summer and our customers are reporting solid order rates were.

We're seeing a number of projects being pushed out as a variety of building materials beyond paint are in short supply.

Property management was up slightly in the quarter improving apartment turns along with a return to travel the workplace and school or tailwind that should support higher growth when raw material availability improves.

Our commercial business was down slightly in the quarter.

Similar to new residential projects are taking longer to reach the painting phase due to short supply of multiple building materials.

And finally as expected our DIY business was down double digits versus an extremely difficult comparison, which was exacerbated by the raw material availability issues.

From a product perspective interior paint sales performed better than exterior sales with interior being the larger part of the mix.

We realized a mid single digit increase in price in the third quarter, resulting from our February one and August one price increases and our mid September surcharge.

We would expect the combination of these pricing actions to result in a high single digit percentage price realization in the fourth quarter.

In our full year price realization per tag in the mid single digit range, we will continue to evaluate additional pricing actions as needed.

We've opened 50 net new stores year to date.

Along with these new stores, we continue to make investments in sales reps management trainees innovative new products e-commerce and productivity enhancing services.

We are not taking our foot off the gas on these growth initiatives.

Moving onto our consumer brands group.

Sales decreased by a double digit percentage driven by difficult comparisons to the prior year consumers returning to the workplace raw material availability issues and the divestiture of the water business.

Overall, DIY demand continued to moderate to more normal levels compared to 2020.

This was partially offset by growth in the North American pros, who paint category.

Which was up strong double digits in the quarter and year to date.

While sales are down in all regions sales were less impacted in North America, our largest region compared to Europe, and Asia, where COVID-19 restrictions were more impactful.

Pricing was positive in the quarter well below the level of the Americas group.

As you know our global supply chain organization has managed within this segment. This team continues to work with suppliers to navigate the industry wide raw material supply chain disruptions caused by winter storm Yuri.

Hurricane Ida.

We stand ready with ample capacity and are adding more to.

To serve customers at a higher level as raw material availability improves.

Lastly, let me comment on the third quarter trends in performance coatings group.

We continue to see momentum as this is the fifth straight quarter of growth for this business group sales increased by more than 17% in the quarter, including a currency translation tailwind of 2%.

Price was in the high single digit range in all regions and all divisions generated growth.

Regionally sales in the quarter grew fastest in Europe, and Latin America, followed by North America and Asia.

Every division and the group grew the majority by double digits driven.

Driven by robust underlying demand, new customer wins and share of wallet gains.

I'll start with packaging, which generated strong double digit growth against a high single digit comparison last year sales.

Sales were up double digits in every region.

<unk> for food and beverage cans remains robust and our non BPA coatings continue to gain traction within existing and new customers.

Next is general industrial the largest division of the group, which posted its third consecutive quarter of strong double digit growth.

Sales were up double digits in every region.

Sales were strong across most of our customer segments led by heavy equipment containers and general finishing.

Our coil coatings business remains a consistent performer.

Sales grew by a double digit percentage for the second consecutive quarter and were positive in all regions. This.

This team continues to do an excellent job at winning new accounts and all regions construction and appliances led the growth.

Automotive refinish sales increase by a mid single digit percentage.

Miles driven are nearing pre pandemic levels.

New installations of our products and systems in North America remains strong.

The industrial Wood division generated low single digit growth.

Growth in North America, our largest region was up strong double digits, but was offset by Asia Pacific where COVID-19 related shutdowns had a significant negative impact on sales.

New residential construction continues to drive robust demand for our products and kitchen, cabinetry flooring and furniture applications.

Before moving to our outlook, let me speak to capital allocation year to date.

We've returned a little over $2 5 billion to our shareholders in the form of dividends and share buybacks.

We've invested $2 1 billion.

To purchase 8.075 million shares at an average price of $265 88.

We distributed $442 9 million in dividends, an increase of 24%.

We also invested $248 million in our business through capital expenditures, including approximately $36 million.

Or are building our future project.

We ended the quarter with a net debt to adjusted EBITDA ratio of two five times.

We also announced the sika and specialty polymer acquisitions, which are expected to close in early 2022, if not sooner.

Turning to our outlook, we expect robust demand to continue in North American architectural end markets, we expect DIY demand to continue normalizing as consumers return to the workplace.

We expect industrial demand to remain strong.

Raw material availability challenges will remain a headwind in the fourth quarter.

But the situation is improving.

We believe we have weathered the worst of hurricane Ida and supply should continue to come back online, we expect to be in a making ship mode and do not anticipate building any inventory until the first quarter of 2022.

On the cost side of the equation, our raw material inflation expectations for the year move up to the low 20% range from the high teens given additional pressure we've seen since our last guidance.

We do not see any meaningful improvement until well into 2022.

All businesses remain aggressive in implementing price increases as necessary to offset these costs.

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

And as we've said many times, we expect margin expansion over the long term and maintain our gross margin target in the 45% to 48% range.

Against this backdrop, we anticipate fourth quarter 2021, consolidated net sales will be up by a mid to high single digit percentage compared to the fourth 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 returned to a more historic level.

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

And we expect performance coating sales to be up by a mid teens percentage.

Embedded in our guidance has a similar impact to our architectural businesses as a percent to sales from raw material availability as we experienced in the third quarter.

For the full year 2021, we expect consolidated net sales to be up by a high single digit percentage, we expect the Americas group to be up by a high single digit percentage consumer brands group to be down by a mid teens percentage, including the negative impact of approximately four percentage points related.

To the what'll divestiture.

And performance coatings group.

Up by a low twenties percentage.

We expect diluted net income per share for 2021 to be in the range of $7 16.

$7 36 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> 85 per share and a loss on the waddled divestiture of <unk> 34 per share.

On an adjusted basis, we expect full year 2021 earnings per share of $8 35.

To $8 55.

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

We expect to see a slightly improved sequential gross margin in our fourth quarter as additional price increases are implemented in the quarter.

We expect to see contraction in our fourth quarter operating margin due to the contraction in gross margin, partially offset by leverage on SG&A due to the strong sales growth.

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

We expect to have around 80, new store openings in the U S and Canada in 2021.

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

We also plan additional incremental investments in our digital platform and the home Center channel.

These investments are all embedded in our full year guidance.

We expect foreign currency exchange to be a tailwind of approximately 2% in the fourth quarter.

We expect our 2021 effective tax rate to be slightly below 20%.

We expect full year depreciation to be approximately $270 million and the amortization to be approximately $310 million.

We expect full year capex to be approximately $370 million, including about $70 million for our building our future project.

The interest expense guidance, we provided last quarter remains unchanged at approximately $340 million.

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

We expect to continue making opportunistic share repurchases will also continue to evaluate acquisitions that fit our strategy.

We are on track to deliver solid full year results, even with the considerable supply chain and inflationary headwinds we are experiencing.

I remain extremely proud of our team and their focus on providing solutions to our customers.

Demand remains strong our customer relationships have strengthened.

And we continue to invest in our capabilities.

We expect to finish the year with significant momentum that will carry us forward in 2022.

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, we'll be conducting a question and answer session.

Sorry to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue.

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Maam, please pull for questions.

Thank you and our first question is from the line of John Mcnulty with BMO capital markets. Please proceed with your question.

Yes. Good morning, Thanks for taking my question.

So when you when you look at the impact that you had in terms of in terms of raw materials holding back the ability to deliver in some cases.

And in particular in the tag business I guess can you speak to your confidence that that business comes back versus it moving into other channels, whether it's possibly even to your consumer brands group or.

Or somewhere else.

Yes, John this is an important area that we really do want to stress and feel very comfortable and confident about this.

Tremendous.

Confidence in our line of sight quite frankly in the view of the customer and the demand that they have we have great confidence that as we're exiting this this chapter the relationships that we have with our customers are growing deeper and I would point to.

How we're working through this experience with our customers is kind of the the backbone of why we have such confidence.

We're blessed to have a controlled distribution model that has our stores.

In the markets that our customers are living and working in and reps that are partners in their business.

Through this experience those relationships are going deeper because we're working closer with our customers, but line of sight that we have on the projects that they're working into the needs that they have has only increased.

So youre right there might be some shifting from here to there and we've always said that we always expected the DIY to normalize and that the business would begin shifting into other segments of the business as people return back to business I'm, sorry back to work.

So we always expected that while DIY shifted down other areas would go up.

And we expect that we've worked hard very hard strategically to position the company to be in position to be able to capitalize on whichever segment grows and whichever segment the market might turn to so when you look at residential repaint or DIY or new residential versus property management, we were.

Very hard with products services and quite frankly, the people in those markets to be able to capitalize on them. So I'd say our confidence is probably.

As high as it's ever been for me.

What's happening with our customers from our net promoter score.

At a record level, our new account activity at record level, our share of wallet activity record level every metric that we look at I would describe as almost the coiled spring ready to expand and so we're excited about this.

This this chapter as I referred to it as ending because we believe will be the ones that are really going to accelerate quickly to take advantage of that hey, John This is al.

Comment I would make is.

As John talked about is DIY normalized if we look at our combined architectural businesses with tag and consumer were up low double digits in our first half to exclude the raw material availability issues due to the hurricane Ida due to winter storm Yuri that we talk about being a high single.

Impacting our third in a similar impact on our fourth quarter, we'd be up high single digits on that combined business. So to John's point, we're going to capture.

Either either channel of where that customer falls.

Got it. Thanks, that's helpful color and then maybe just one follow up question just in terms of inflation I know theres been a lot of issues around labor scarcity issues and Sherwin has really never had a problem with that in the past, it's always been kind of a destination for a lot of employees, but I guess can you speak to the environment that you're seeing there how to think about.

<unk> wage inflation for your professionals and also some of the labor efficiency measures that you spoke to that that may be helping to offset some of that.

John I want to make sure I'm, capturing your question Youre talking about wage pressure that we might be experiencing that's right wage wage pressure and just even the ability to get employees in the store.

Terrific and.

I'll start with that one we have had to make some wage rate adjustments and some of our factories and distribution centers and fleet drivers to I'd say attract and retain some of our employees.

I would say I'm really excited about this fact.

Hi to all of our employees is critically important but.

I would I would say that those customer facing employees the store manager and the rest of that I just spoke about are absolutely critical in.

Both of those employees the turnover rate is in the range between 6% to 8% and I would say that most in our space or operate 4700 stores would kill to have a ratio like that so while we've experienced some pressure in other areas those customer facing employees, we've been able.

To retain and we believe it speaks to the terrific culture that we have our ability to recruit and retain employees comes down to a number of areas that we consider key to that culture. The ability to come in we hired 1500 college graduates a year, we bring people and we give them a career opportunity that they can.

<unk> accelerated.

When you look at the opportunity to come in and run a business.

Out of school within a couple of years and own a P&L, we think thats a terrific opportunity for <unk>.

For these people that have worked hard to come in and really make a difference.

Look at the impact of that the 14% to 500 College graduate comes that come in and what that means to our company over time, we have nearly 10000 graduates of that MTP program throughout our company and we think I want to spend a little bit of time on this John because I think it's such an important element we call. It our secret weapon and that is the fact that we have.

Got these employees that have come in through the organization that understand our culture our strategy they understand our expectations importantly, they understand our aggressiveness.

And when they stick with us, which is an important element of that Australia strategy those employees move through the organization.

They grow in their experience they grow in their understanding and now when you look at for example, our Rep force, 80% of our reps and tag came through this program.

And so when youre looking at the opportunity to promote from within.

And what that means to retention.

They're looking at they're looking up if you will into the organization, 70% of the tag field leadership come from.

From our tag.

Sorry, our MTP program.

That drives more and more retention when you look at.

Employee turnover, then and what it means to the.

Broader organization 7000.

Of our employees are.

Great we have greater than 20 years of experience with our company.

And so when we're in front of customers, we're talking about trying to bring solutions to them to make them better.

Our experienced people that help us differentiate from our competition and so when you look at the external recognition. We've received from Forbes. The fact that we've been recognized in the area of diversity in recruitment and internships and places to begin a career all of those are really important to us we don't fight.

For those awards, what we do is fight to make a wonderful culture that people want to be a part of and as a result, we're better positioned to take care of our customers. So I'd say, it's working and it's working really well and it's an area. We will continue to be focused on.

Great. Thanks, very much for the color I appreciate it.

Thank you John.

The next question is from the line of Ghansham Panjabi with Baird. Please proceed with your question.

Thank you good morning, everybody.

John I mean supply chain chaos has been persistent along the supply chain, including.

Obviously your customers, including one that reported this morning on the homebuilding side as you kind of think about the various sub verticals within tag.

How should we kind of think about air pockets of demand just because even if you have rob drug sensibility, maybe there's other bottlenecks that your customers are cycling through and I guess, specifically I'm, referring to new resi and commercial.

I'd say those are.

A couple of really interesting examples that you use in new residential and commercial because youre right. Its not just paint that those those customers are dealing with there is a lot of.

Raw materials or materials that go into those projects that they're impacting.

The pace of those.

Those two markets, though I would say remained very strong.

Permits up in new residential we're expanding in multifamily.

As well in.

And I.

I would add this.

Not just the raw material or the materials Ghansham. It's also labor that's impacting that and so there are some challenges there what I would.

And encourage.

Our shareholders to understand is the commitment that we have not only to grow with our existing customers to begin with but I mentioned, just a moment ago about the share of wallet in.

And the new customer activity.

So we look at this in a number of different fronts.

We're excited about our penetration there, but there is terrific opportunity for growth in there and I'd say that as this market begins to.

To recover the position that we have we think not only with those existing customers with new customers will position us favorably in the market. So.

I feel as though when this.

This customer that has been pushing projects back further and further as a result of some of the supplies.

First we will out supply we believe our competition.

But we're also looking at a broader net webcasting in just our existing customers as well, Hey, Ghansham I would just add to that if you.

Look at our working capital and where we're at today.

Significantly below our planned quarter in inventory to a gallon so as raw material availability improves you can count on us to account.

Kind of keep our pedal our foot on the gas on building architectural inventory.

We're going to be and are making ship mode through the fourth quarter.

And we plan on building inventory in our first quarter of 2022, if those jobs get pushed back with the additional 50 million gallons of architectural capacity, we have coming on by by the end of the year. We will convert every pound of raw material, we can get to be in a better position to serve those.

Customers when those jobs already.

Let me just build on it so that's a great point that all makes it goes back to the point that I made earlier ghansham.

We don't discriminate to which segment drives our results. So if new residential is moving we're going to be there and if it shifts into another segment, we will take those raw materials, we will make the product in there and we will push it out. The fact that we have a leadership position in these segments is something that will leverage aggressively to be able to convert every precious ounce of raw material under sale and prop.

Stability for our shareholders.

Okay and just for my second question can you just give us a characterization of how raw material availability has sort of evolved over the past few months and thus far into the fourth quarter maybe.

Maybe it's a measure of horse matures or however, you wanted to find out supplier allocations et cetera, I'm just I'm just trying to get the.

Cadence just because at the end of September versus now, which is just one around four weeks. Later you have raised your guidance I'm, just curious as to how youre sort of thinking about the velocity of the raw material.

Yes.

I'd say, it's improving we'd like it to come on faster.

Say that we've had strategy for many years on <unk>.

Not only working with our current suppliers.

And working to make them as productive as possible when we bought <unk>.

Thus far we said all along that there were opportunities for consolidation in raw materials.

We are working aggressively to accelerate that as that will help us become.

As an efficient customer if you will for our suppliers I'd also say that the same strategy that we've had includes bringing on alternative suppliers.

And that's a goal of ours to ensure that we have the quality and consistency of our products for our customers through qualified suppliers. So I'd describe it as it's getting better we expect it to continue to get better and we're taking very proactive steps on our side to ensure that we're best in show and <unk>.

Supply and our customers and Ghansham I'd just add to that.

We did take up our raw material cost outlook up from the high teens to low 20%.

Back on September 29.

We expected certain things to happen they didn't happen as you can imagine exactly the way, we thought sort of pressured the raw material costs.

On our performance coatings business and our other businesses and if you look at our second half our second half increases in raw materials more than double our first half I talked about on the September 29th call that we were going to be chasing raw material costs through the end of this year and into the first half of next year.

And.

Again, we want to make sure you understand our commitment to doing that our teams are in third ways fourth waves tag and out just as a reminder February one of this year with three to four came back out again August 1st with seven and put a surcharge in September 20th at 4% that we fully expect to convert to.

Full price increase early in 2022, I could say that about each of our groups and regions. We are committed to offsetting these inflated raw material costs and we're disciplined about our approach as John talked about in the past, we're not losing customers over these over these discussion. So we may have to do.

Say, a little bit, but we are going to get the price increase to offset the Ross and SA moderate we'll start seeing our margin improved and as we've done in the past, we will see expansion above where we came into the cycle.

When we come out of it.

Thanks, so much.

Thank you Ghansham.

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

Thanks very much.

Hi.

DIY volumes were down.

Shortly.

Year over year.

Is the consumer is the consumer brands volume today in the third quarter of 2021 pretty similar to what it was in the third quarter of 19.

Yes, Jeff.

If you back out the impact of Lotto, we'd be up.

Low low single digits flattish to low single digits.

You would expect a similar.

A comparison and our fourth quarter.

Alright.

So if.

You can offset raw material cost inflation with price increase which I think you say that you can.

Like order of magnitude in the third quarter of 2022 should you be earning roughly.

$140 million.

Adjusted operating profit, even if you don't grow very much because that's what your returns were like in the third quarter of 19, and you know we will have.

Offset.

Raw material inflation is that right.

Yes in the sense that consumers in a lag so if we're our expectation with our.

Our tag group is to be up high single digits in price in the fourth quarter consumer's lagging that.

And it is just timing, so theyre going to come back and catch that up the other part is.

The supply chain efficiencies, we do expect to get better as we flowed through next year and raw material availability.

It gets better because as you know our global supply chain is embedded in our consumer brands group results and Thats, having a negative pressure on our margins, but Jeff I would add to the point that al made just a moment ago regarding price, it's certainly consistent across all groups and as well in consumer brands, we have gotten some price we need more its coming we.

We'll get it.

Okay, great. Thank you so much.

Thank you Jeff.

Our next question is from the line of Chris Parkinson with Mizuho. Please proceed with your question.

Great. Thank you very much for taking my questions. So it's clear your pricing efforts are rolling through that industry continues to navigate the inflationary environment.

But can you quickly comment as to the overall competitive landscape.

Perhaps by U S region.

As it stands today and your ability to continue to gain share in pro and trades into 'twenty, two and even 'twenty three just any comments on what youre hearing from your staff and customer base will be greatly appreciated. Thank you.

Yes, Chris I would say this first I want to reiterate the determination and confidence that we have in getting our price we're not a commodity we bring solutions to customers that help them make more money. We're determined to continue to do that across every business that we have so we're not asking for something to get fatter or to take advantage of a situation, where we're trying to say.

Consistent in our model, which is solutions that help our customers to be profitable and successful.

If you go back to 2016, I think from an industry perspective, when when there are some different dynamics in the marketplace and and people didn't go out with price Sherwin, we felt the brunt of that as well.

Our people I would tell you we talk regularly about the experience in kind of the scar tissue of this leadership team has a long.

<unk> leadership team has been through a lot and we learned from that and I think I suspect others did as well and what it means is that when the raw material price bucket moves like it does you have to get the pricing, it's brutal and as brutal for a long time.

We learned from that and so when you hear the conviction determination and confidence that I Hope you hear from me an hour on this topic.

Exactly that we're going to get this price.

We're not trying to be arrogant with it we know we have a responsibility to our customers to help make them more money in the process.

We will do that but our ability to do that we think is very high as far as what our competitors are doing yet we're hearing about pricing in the marketplace, but what we're really focused on is that value proposition to our customers and as long as we're doing our job we expect to continue to grow our business and to do it profitably.

That's very helpful and just as a follow up but it's a little bit off the radar screen as it relates to some of the headwinds you on todays release, but taking a step back and thinking about PC margins, 13% to 20, 20% thesis. So to speak can you just quickly break down any updated thoughts.

On the progression back to that goal across perhaps price costs General op improvements and end market mix just any color on how you think that can evolve across an initial recovery and how to conceptualize. The long term opportunity will be greatly appreciated. Thank you once again.

Yes, Chris.

We still are confident and I'll echo what Justin said.

September 29th call just in denser, our PCT group President we made good progress in 2020.

Second half operating margin was up 100 bps.

The $15 two 2% flow through was strong with sales up 4%.

Our flow through was up over 40.

So now we're seeing a stronger volume, but the rate of increase of our raw materials.

Been dramatic and I said.

It's two times in the second half versus the first half raw material increases so we're out with third and fourth waves of raw material price increases.

On top of that this team is.

Continuing to look for efficiencies.

Efficiencies on platform consolidations SKU rationalizations.

And they also have.

A lot of projects to improve our profitability outside the U S.

And what I would say is depending on the timing of the raw material moderates.

And our pricing catches up.

We'll get the operating margin moving positively again in the one piece that we talk about is we still have facility rationalizations in the pipeline.

We're not going to comment on those until our employees know and we get those public but there's opportunities there and I talked about.

Maybe $100 million incremental margin improvement from facility rationalization SKU rationalizations platform consolidations.

<unk> set us back a year no doubt.

We're fighting through it but.

And the mid term, we expect to see.

Short term improvement mid term longer term get to that high teens, low 20, but I think Chris.

Chris Adversity brings out the best.

I'll, just mentioned and the facilities and some of the opportunities there, but the other point that he mentioned about the platforms and the and the point that I made earlier about the raw material consolidation there are opportunities there that we've identified all along.

Strong proliferation of resin to our organization and the opportunity to consolidate though is be more efficient all of those will have a significant impact on this march to 20% range.

Operating margins for this industrial business, we're confident in our ability to be able to get there.

We're going to do it the right way, though we're going to get there with our customers and by bringing them value.

Thank you.

Thanks, Chris.

Our next question is from the line of Arun Viswanathan with RBC capital markets. Please proceed with your question.

Great. Thanks for taking my question I guess my first question is on demand.

And a lot of different.

Different dynamics in the market in the last couple of years with Covid and yes, why resurgent now.

Potentially lost sales.

The lack of raw material availability.

Maybe if you could help us maybe in tag and TCG is there a way to kind of quantify.

What your backlog has kind of grown too or do you have visibility on that end.

When you do not make the sale because of lack of raw material availability that go into that backlog or is it just.

Potentially lost maybe you can comment on that thank you.

Yes.

I'd say, we're again not to be a drum here too hard, but the fact that we've got this controlled distribution model gives us insight into.

A CRM system that gives us confidence and insight as to what's happening with our customers and.

And what I would tell you is that.

Across nearly every one of these professional segments that you mentioned about in tag.

There is a growing backlog.

The confidence that our customers are working with us.

And how we approach their business and the collaboration that we have gives us insight I mentioned earlier about the fact that our teams are working closer far closer than we ever have ever experienced and understanding what they have going and when it's going to be so yes, we have great confidence.

Not going to lay out any kind of numbers.

With specifics as to what that looks like but I would tell you that if you.

<unk>.

Talk to any painter right now they would probably tell you that the bidding that they're doing is further out now than they probably have ever had and they're winning jobs that people are understanding and comfortable with.

Getting in line for next spring next summer.

So there is.

Absolute understanding of what's going on I mean people are turning on the TV and listening to the news and understanding that there are some issues ours is unique from a supply chain perspective, when you think about our architectural products. Since you asked are asked about tag.

The supply chain issues that we're facing primarily go back to the points that we made earlier about the winter storm.

The Hurricane Ida.

February in September those are the two issues that impacted us the most and our confidence in getting on top of that.

The year progresses, and as we begin next year is high and our customers are learning that the fact that they do business with us or people can scramble in and get product from different stores or different distribution centers keep them in pace better than most of our competitors. So we will come out of this stronger.

And with more loyalty and yes, there is quite a bit of backlog that we're going to enjoy filling for our customers.

Great. Thanks, and then if I could just get your thoughts potentially on 'twenty. Two so it looks like you will have some demand recovery here, assuming raw material availability improves, especially by the second half of next year.

Have.

Yeah.

Full year, so specialty polymers, but you also may see some stability in DIY is there any kind of.

Initial markers you can give us for 'twenty two on how to think about each segment's growth.

Well I think I'd just point back at this point that we're very comfortable very confident that there is a growing backlog. We are not going to give you any kind of data points right now other than when we're talking with our customers that backlog is longer than that.

Longer deeper in <unk> and.

And probably growing faster than any rate than they've seen but I don't think we want to share any kind of numbers, yes, we will provide that information at a later date.

Okay. Thanks.

Thanks Sarah.

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

Yes.

Thanks again.

I guess just back to your comments about having to build some inventory in the first quarter.

And maybe just pairing that with the overall amount of deferred volume that you have.

And how do we think about the phasing of actually playing catch up on some of that deferred volume can it happened in the first half or.

What are some of the key watch out there.

Yeah, I think Stephen.

No.

We have to keep an eye on that.

Availability, not just of our existing suppliers, but.

We are looking under every rock, we can find alternate suppliers to help us meet that.

The significant demand expectations that John talked about.

So our ability to build that inventory in the first half is going to be somewhat dependent on the increase in raw materials to get to.

True forecast that demand which is.

A lot higher than where it was entering the season this year.

Like John talked about we have the capacity to make the gallons we kept.

Our factories are fully staffed.

That's an investment in our customers to make sure. We can convert every raw material as quickly as possible to get it in the field in the fourth quarter and then build inventory both on the tag side and the consumer side to make sure. We can meet the demand head on.

I think that's an important point that I'll just made the fact that we made that conscious decision.

And it did impact our gross margins keeping the the labor in our in our manufacturing and distribution centers. So that we could respond when we're talking about why is it that we have confidence in our price and that's a great example, our customers we talk openly about that the fact that that we're making investments here. So that we can supply and as al mentioned is the raw.

Charles become available we will convert those quickly.

Thank you.

Thank you Steve.

Thank you the.

Next question is from the line of Truman Patterson with Wolfe Research. Please proceed with your questions.

Hey, good morning, guys. Thanks for taking my questions and John I'm Sure you were excited that Johnson looked like Nick Nick Chubb out there last week, so great to audience.

Yeah.

So it sounds like the supply chain is improving modestly recently.

You all mentioned that some petrochemical facilities were still shut down from a winter storm in Texas on your AR.

Prior update call could you just compare and contrast hurricane Ida are there any major differences that would allow the ida facilities to recover relatively quicker.

Or on the flip side, maybe they take a little bit longer to come online in the Texas storm.

Well I think the Ida.

Situation is a little bit different why don't I have Jim talk about that briefly and then ill come in.

Any gaps there yes, good morning Truman.

As we've talked about throughout the year here. If you look at Texas that was more I would say physical damage to facilities based on the freezing of of pipes and just all the damage that we've talked about at length I think Ida what was.

More at play there was a lack of power to facilities, which has recovered.

Significantly you also had other utilities that were offline for example water supply.

<unk> things like that that are really important in production and even we saw.

A lack of nitrogen and some of these facilities, which nitrogen is a key element to preventing explosions people that produce that nitrogen had diverted to producing oxygen to help out with the COVID-19 pandemic, so a little bit different dynamics in the two.

I'd say, we're still not fully recovered in either of those.

Texas, or Louisiana, but making progress as we go forward.

Youre exactly right Jim the key point here is that there were a couple of key facilities.

The paint and coatings space, particularly resin manufacturing and other.

Thickness and Realogy.

Products that ended up impacting the ability to make paint again not for just the Sherwin Williams company, but for the industry.

Okay and then in tag you all had sales growth I believe in Canada, and the southeast divisions, but.

You all had sales declines in the southwest East and Midwest divisions, I'm, just trying to unpack this a little bit was it due to regional supply chain differences.

Directing prop.

Product.

More profitable areas I'm, just trying to understand the dynamics there.

No I would say trimming.

It's just.

The availability issues are across the chain I think what.

You see going on in Canada as determined team with the right focus on the right segments.

And really doing a great job of increasing new account activity gain.

<unk> share of wallet.

And having a focus on growth and you can say well it didn't have a focus on growth in the past, yes, we did but I think this team is executing at a higher level than we have in the past.

I would argue the same thing in southeast I mean different mix of customers impact availability as well.

Our southeast Division has performed well through all cycles.

I'll take a shot at our southwest Division that will outpace the southwest Division then.

We will see at the southwest Division can pick it up and get back at southeast.

Outgain them.

Fair enough thanks, guys.

Thanks Truman.

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

Hey, guys good morning.

Okay.

If I did the math right for sort of sort of a sale sales shortage from raw materials coming in and maybe somewhere a little over $900 million and if you actually were able to get all the raw materials you need heading into 'twenty, two would you be able to or would your customers be able to.

Yes.

Do all of that work.

And given how strong demand is in other areas.

So Mike just to be clear youre quoting a full year impact on the 900 for the full year, yes, I agree with that.

As it relates to your question is really a labor question and I would say this that.

There are some challenges there for sure.

Again, I keep coming back to this controlled distribution model and our strategy, but Mike I think these challenges work to our advantage when our customers are challenged with.

Where it would be what to do and we are the ones having the stores in the marketplace. So that we can be responsive and serve them. The fact that we are developing products to help their productivity.

What we're experiencing right now is a positive mix shift where customers who may have used a middle of the great product middle grade product.

Our stepping up into higher grade available products.

And what they're finding out that they are more productive and they're learning more so.

And they're earning more I'm sorry.

So I would say that there'll be some challenge, but I also think that we're uniquely positioned to be able to capitalize on that.

And again, we mentioned new accounts and share of wallet. So we're not just.

Let me be very clear, we're not just a retailer that opens doors and hopes people come in.

Aggressively pursuing people every day, we're trying to help those customers that are doing business with us to be more productive and make more money and we're out.

Tacking other People's Hills, we're not just trying to protect ours and so.

The programs that we have everything from the customer programs and incentive programs everything we have is about growing and that's what we're committed to and we have great confidence is as these raw materials become more available and they will and they're converted through capacity that we have which is available we will grow our business and will grow faster than our.

Competitors.

Got it and.

Just a quick follow up just curious how excited you are for a big lead on Sunday, that's not for al. Thank you.

Yeah, Thanks, Mike Yeah.

Steeler fan amongst us I don't know, how we let anyone from Pittsburgh in there.

Okay.

Thank you Mike next question.

Okay. Next next question is from the line of P. J <unk> with Citi. Please proceed with your question.

Yes, hi.

And all your protective and marine business was up high single digits and oil prices that are approaching what 18 $5 today.

What do you expect from the energy business, how strongly do you think that comes back in terms of coatings demand.

We think it will be an important part of our.

Our future P. J, we enjoy a very strong position there.

Demand is picking up there.

I do believe though that it's not just oil and gas we've been working very hard and we have been.

Very transparent about the need for that business to further diversify <unk>.

<unk> oil and gas so we've been focusing on some of these other key segments and when you look at the infrastructure opportunities that might be coming down the pipe as well as our penetration into other areas such as flooring such as.

Water wastewater, we theres a lot of key areas that we have been really working hard on so our position in oil and gas we expect to continue to penetrate but you can rest assured in these adjacent markets other markets in protective and marine business, we're focused very hard and we're having very good success there as well.

Great Great and then different paint companies are expecting to catch up full limit raw materials at different times.

Based on their data.

Product mix for raw materials.

If oil and raw materials remain here and not go up from here.

Do you think it will fully catch up what it'd be like early 2022 or would it be by mid 2022.

P J I talked about on our September 29th call that with the increases we've seen in plus the additional increase we just updated our guidance with on raw materials that we'd be chasing it.

Through the end of the year earlier in the year I thought we would offset it dollar for dollar.

Zinc.

What we.

Like they're planning to do is go out early in 2022.

With the idea that.

So nothing if we saw no other increases.

We'd get on top of it in 2022 early that means you can.

Offset the dollars, it's going to take some moderation in raw materials Street before you start seeing.

Material change in our improvement in our gross margin but.

We're our expectation is early 2022.

Great. Thank you.

Thanks P J.

Thank you the.

The next question is from the line of Bob <unk> with Goldman Sachs. Please proceed with your question.

Hi, guys. Thanks for the question on here.

I'm curious about.

You guys had to short some customers who didn't have product available.

Similarly, your suppliers on the raw materials side I'm wondering in both cases do you make that up at the pricing that was there at the time of the order or do you get to sell it in the future to where you might actually have a richer mix on those deferred sales or deferred purchases.

Yeah.

Probably some of both Bob I think we tried to do the best we can to honor quotes that we have in the pipeline as such a wonky here, though that it.

It's hard to completely do that in this environment. So we're trying to be as transparent as we can with our customers understanding that some jobs get move but not just because of the paint side of it because of the other supply chain issues that some of our.

Our customers are having so.

<unk>.

I would say, we're transparent and we work closely with our customers to figure out what that pricing looks like.

You noted the backlog is quite healthy youre going to build into that.

Is there any anxiety that the labor pool of your customer base won't be there to be able to handle that.

Serge do you.

Do you fear, maybe youre going to have some missed sales because of that.

Well, we're going to work with our customers and that's why I think Bob it's important to understand that it's not just our existing customers. When we talk about working with our customers. So it absolutely is incumbent upon us to help them be as efficient as possible that's not just.

The way in which we run our business is helping them to run a more efficient business and the products that we sell them to make them more efficient.

And at the same time, we are out there growing the number of accounts that we do business with and growing the share of wallet with new customers. So I think we are uniquely positioned in the market and.

I caught the stickiness if you will these customers that <unk>.

We realize that we're working really hard for them right now Thats why there is this net promoter score not just on the DIY side, but we do a wholesale look.

Look at that as well to understand the view from the customer is actually growing in this market and I think many people might be.

Surprised by that but the loyalty that we have during these challenging times is actually increasing with these customers. So.

We have a lot of customers that we're doing business with some that we are growing and those that we're touching in fact for the first time or maybe we've had a little bit of their business and we're the ones working with them to get through this we expect that that's going to play favorably to our to our future.

To take every step possible to make sure that happens.

Terrific and I am not sure what sport people are talking about I'm looking over at a baseball stadium, where the world series of starting Tonight. So that's why I refer those Astros.

Fair enough.

Thank you Bob.

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

Thank you good morning.

Afternoon, sorry.

John Nippon just bought chronology in France.

Any interest for you guys.

No.

Very clear.

And just on Q4 would you expect tag earnings to be.

Down again, or maybe or flatter up in Q4.

Yes, when you look at Q4.

It's really dependent on the availability issues.

We are experiencing more of those issues.

The quarter starts off we certainly are going up against a.

Tougher comp.

And our fourth quarter last year was up 9%.

But.

Based on our current outlook fourth quarter.

Have a similar impact of availability, we'll have more price in the fourth quarter.

So I think what it is.

It's going to be hard to get on top of last year's number from a margin standpoint, the dollars will probably be close to flat if not up slightly but from a margin percent.

It's going to be hard to get on top of last year.

Understood. Thank you very much.

Thanks, David.

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

Yes. Thank you wanted to drill in a little bit on how you drive share gains within tag.

It would seem that several of those.

And markets like commercial developers, who residential developers.

Property managers.

These are not customers that are walking into your stores.

New commercial relationships are much higher than that.

And.

And John you talked about driving stickiness with your pro contractors. It seems you do a lot of things too.

Make the lives easier for those pro contractors. So they don't have to go in your stores to get product.

So my question for you is one on the on the value proposition of your stores.

Is it primarily for your homeowners to be able to have a store nearby to maybe select product.

And then secondly, what.

Is the key driver for driving.

Market share gains into these end markets that.

You really have higher level commercial relationships with.

Yes, Steve I think maybe a healthy way to look at this as an ecosystem I might take exception to the idea that the stores are simply there for do it yourself.

They play a very important role in commercial new residential every aspect of our business, we leveraged at that location.

We do believe it is a competitive advantage in the marketplace and so let me just give you a little bit of highlights. There then I'll talk about the drivers of the market share gains beyond that I'll give you some of that but I will tell you that there are a lot more than willing to talk about here. So lets talk first of all about the stores. When you look at any given market.

You have a store locally there.

Remember that.

Cost of labor represents roughly 85% of the cost of goods for a painting contractor.

We have a rapid and a store in a market that is responsive to that customer in that market.

Particularly right now as you look at something like Covid, where you might have you used commercial as an example, you might have a commercial painting contractor on a project.

Whose directed by the general contractor to move from one floor to another because of the number of people in a given area or because of some delay there might not be the product that.

The substrates of paint because whatever drywall taping wasn't done on time or whatever it might be.

That painting contractors, turning to our Rep and our store manager and he realizes right now he's got men or Pedro on the project.

That he's paint considerable amount of money to and without that local store and the responsiveness that they might be lost a couple of days might be lost whatever situation that they face our store and our people are there to be able to respond.

And so when a customer calls and says I need something right now in our stores 10, 15 minutes away and we can respond.

A significant advantage that we try to leverage with our customers.

We try to help them to be more efficient and that goes across every segment and anyone that would believe that you could you could accomplish what we do with the stickiness and loyalty that we worked so hard to gain without those stores.

He doesn't understand what we do yet.

And when you speak to these customers and the role that we play it goes well beyond just a van showing up with products that are in our stores. There is relationships that are built there's questions that are asked there's training that takes place and that's I think a big part of.

Who we are I'll go back to the secret sauce that I talked about where we are.

Recruiting college graduates in many cases.

The assistant managers and managers that come in to run. These facilities. So they can talk intelligently about what it is that these contractors are facing and how to help them through that that local representation is absolutely a key part in our being a part of that customer's business not just a supplier.

And when we talk about our ability to to work with our customers in areas such as the compression in margin short term, that's a demonstration of our partnership and how we work with them and as a result of that we do believe that we're blessed to earn more and more loyalty from our customers.

As it relates to the commercial contractor new residential demand that you mentioned.

And how we grow that Youre right. This ecosystem that I talked about is very broad very broad it's everything from.

Architectural reps color reps is specifying it's having technical people that can be in the field to help in situations like this.

One product may not be available, but another one is do we have the technical people close to the customer to be able to help them with the application startups. So that the project goes smoothly. We do very few people if anyone else does in any given market and so when we're talking with a customer we're not just talking about can we deliver a gallon of paint.

As an entire ecosystem and when I say, we just don't open the door and hope people come in we're very aggressive in and getting all the way through the decision making process from owner to architects specify our designer applicator all the way through and were covering each one of those basis.

Variety of ways to make sure that those customers know and understand the value that we bring.

And John You mentioned, the example of a store being 10 to 15 minutes away I'm sure you have analyzed in excruciating detail, whether there is a value to it being five minutes away versus 30.

And thus the question is when you look at your footprint of stores.

How much how many more do you think that you could put in North America and still drive.

<unk> growth before that starts to plateau.

So we you're right we have looked at that in great depth.

I would tell you. This we have not reached saturation in any market yet.

Large markets, where we have considerable reps.

Representation, if it's Cleveland or in Atlanta, or Dallas or some of these markets, where we might have 100 stores, we're still looking at more and more facilities, there and what happens Steve is that when we grow these stores and the volume goes through these stores, we look at adjacent markets will add a store in those markets.

We'll grow that new market, but will also take some of those customers out of the existing store and we will move it over into the new store and as a result, the comp store grows faster as well as the new store. So when you look at store count.

We can see the next mile marker that I talk about frequently is 5000, but that's not to signal that we think we had 5000 stores. When we hit 5000 stores. The next mile marker for US will be 50, 506000, and we will continue to add them as long as it makes sense.

We're decades away from from a point of saturation that we're concerned about.

Thank you.

Beth.

Our next.

<unk> is from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your questions yes.

Yes. Good afternoon, just wanted to Peel the onion, maybe one more layer on raw materials I'd be interested to hear if you're seeing examples of cost relief here in October.

Your basket and on the flip side, which which inputs might be getting worse sequentially into year end and then.

Related to that I was curious.

As to whether or not youre seeing tightness in specialty chemicals. It seems in the wake of Yuriy and I know you had a lot of disruption upstream among commodity chemicals, but lately. We've been hearing more examples of specialty categories that have been disrupted and I was curious.

To know, whether whether youre dealing with that as well.

Yeah, Kevin I'll take a shot at that so I'll begin maybe with.

The third quarter and what we talked about in the third quarter was raws were up over 20% that was a sequential.

<unk>.

Got worse in the third quarter versus the second quarter was really monomer resins solvents packaging materials all of those moved if I fast forward some of the more recent data that we have.

In terms of prices that have settled if you look through September.

All the major categories that we look at our still highly elevated year over year. If you look at whether it's propylene ethylene and pox C. Hte all these feedstocks.

Elevated year over year, and not a lot of improvement so to speak sequentially I think propylene may have ticked down a penny or two but.

Most of these have not moose.

Move sequentially a whole lot. We're also seeing steel and <unk> have increased a bit as well.

I think al might have said earlier in October we've seen.

The availability, we have seen some improvement there but.

Still probably not enough to let us build inventory in the fourth quarter.

You look to the fourth quarter on inflation again, it's going to be a similar type of level of 20% plus in the fourth quarter.

And I don't really see a whole lot of meaningful improvement and.

So we're we're into 'twenty two.

First couple of months of 'twenty two.

Okay. Thanks, very much for the color I appreciate it.

Sure.

Yes.

Our next question is from the line of ethane Rodriguez with Jefferies. Please proceed with your question.

Thank you good afternoon guys.

I am just wondering like can you talk about the visibility you have for the fourth quarter.

You gave the guidance so how much visibility do you have are you more or less set.

Based on your auto book.

<unk> volume is still in flux and can change depending on what happens over the next two months, especially in November.

Yes, Atlanta, I think it's dependent on how.

Hello Bill.

For the quarter.

This quarter and there is no other disruptions as John.

And we've talked about we have the capacity we have the people in place our capabilities are there.

The demand is there. So we believe every gallon we make we will ship to the customer and get it in.

So it's just about availability right now.

Yes.

Okay. Thank you that's all I have.

Thanks Helane.

Sure.

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

Hi, good afternoon.

Noted some sales and marketing cost controls that you've put in place in your consumer business can you elaborate on that.

I'm, assuming that it does not make sense to spend money on advertising when you don't have.

Product to sell but maybe help us think about how much higher those sales and marketing costs could be next year.

We're assuming normalized products' availability.

Yes.

I would say.

We consistently.

Look to be more efficient on our non customer facing items.

We did get leverage in the quarter.

On I should say, we have reduced spending in the quarter, but.

Much of it is volume driven and what our outlook is and you're right. If we can't get product.

Doing more advertising marketing and things of that nature.

Don't have.

I think just giving you a one off on SG&A for 2022 would center.

<unk> message I think we got to look at the totality of the group how sales and margins progress that really gives us a better idea of how we're going to approach our SG&A spend we will invest as it grows and the position in the market and will work closely with our customers.

To do that that being said Mike is even though our dollars were down we continue to invest in the pros of paint at some of our retail partners to make sure that opportunity is.

Getting off the ground.

As quickly as we want and needed to.

Alright, and then my other question on mix. John You mentioned that you are seeing some positive mix shift from some of your pro customers are shifting to higher grade products to improve productivity, but at the same time lower DIY.

Probably hurts mix so.

As we think about the margin right now.

The effective mix within your tag business.

Pretty neutral or is there a little bit of a headwind from the DIY decline.

I'd say it's neutral.

Away for you on that one should be that <unk> got professional contractors that are learning that they can make more money with higher quality products and they are likely to continue to do that.

And quite honestly that helps we believe the relationship between insurance lines as discussed with these customers because they are more successful and more profitable and we're playing a part in it.

Thanks, Mike.

Our next question is from the line of Duffy Fischer with Barclays. Please proceed with your question.

Yes, good afternoon raw materials had a bigger impact on tag in consumer than PC is that because of the specific raw materials that go into those types of paints and if so which ones or is it because you prioritize scarce raw materials to go into PC and kind of made a structural decision to grow that business faster.

Yes Duffy.

Not because we are prioritizing tag over other customers it's related to the specific raw materials that were impacted by hurricane that impacted that tag more more than consumer and PCT I don't think getting into the specifics what raw materials and what products is.

Appropriate but.

It did impact us more on tag.

Fair enough and then on the 50 million gallons of new capacity, you've got coming up does that I guess, maybe do one or two or maybe one of three things. One are you short capacity today, so you'll get a nice volume bump as soon as thats running or B does it displace third party product, where you'll get a better margin on.

Or is that really just kind of a multiyear grow into project where.

We are growing into and want to fill that as quickly as possible.

Great. Thank you guys. Thanks.

Thanks Duffy.

Our next question is from the line of Greg Melick with Evercore ISI. Please proceed with your questions.

Hi, Thanks, I just had a.

A follow up as to the progression of the guidance on the raws availability.

So it sounds like the headwind you expect in the fourth quarter will be similar to the third quarter from a volume standpoint out in raws, So I get that right high single digits.

Correct.

And so if I back into the guidance it looks like.

It could be four or 500 bps acceleration in sales in the fourth quarter year over year. So is it is it fair to say that thats.

All more of the realized price or a mixture of price and mix combined.

Yes, Greg I would say it's been.

Mixes.

Price.

And volume combined tag will have the full a full quarter of the surcharge as well as the August one price increase.

<unk>.

Impacts.

Our flattish but.

I do think it's a combination of both.

Okay, Great and then I guess.

The if we think about the acquisitions you've made.

And I know they don't help this year, but is this a key part to really getting the capacity or some of the bottlenecks fixed early next year, how important I guess are they.

Getting back to that not having a headwind from raws availability.

No I don't think its going to be the magic key to the door here I think it's going to help us we'll bring some.

Best practice, if you will to the acquired companies.

But working with our suppliers.

And we expect that.

We will look at this as I mentioned, Greg during the call that it's a holistic view that we have on this we're looking at.

At this.

Specialty polymers as well as the current supply base and that allow us to ensure that we can be as productive as possible, while improving the productivity of some of our suppliers.

That will help us get more raw materials as well, we will add capacity to the specialty polymers.

Asset base.

That will allow us on the one side to continue to supply the external customers that they have while continuing to ramp up our supply as well.

But would it be fair to characterize it is it's less about getting the capacity per se and more about Derisking, maybe next spring that you have.

I think in the shorter term it may be a little bit de risking but in the longer term with the capacity expansion that we have it'll be relatively inexpensive.

Investment to give us more flexibility and.

Capacity going forward.

Well thanks, good luck and have a good time guys.

Thank you thanks Craig.

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

Thank you <unk>.

Tag commercial new construction is a longer cycle business. So usually can see out a lot. Further there do you think this is the beginning of at least four quarters of down results until we anniversary the drop in new starts and commercial mix at the depth of the pandemic.

Well actually if you look at the architectural billing index, John it's been positive for eight straight months.

Youre right that project started in late 2019 or early 2020 or <unk>.

Reaching the painting phase now, but what we're hearing from our customers is that.

These projects that were pushed back are starting to see daylight in.

And we have confidence that.

First we have a terrific position in the commercial front.

The relationships that we have with our customers.

There was a question earlier about our stores in the right place. So we're in the right markets, where a great deal of the commercial activity has taken place.

We think that this will be an area of growth for us and we're excited about capitalizing on that.

And then in consumer was pros, who paint was that up similar to tags residential repaint and should we think about those tracking together or will pros, who paint within consumer grow faster since its growing from a smaller base.

Go faster.

Smaller base.

We're excited about that.

Some terrific partners that we're working with on that segment that we've been able to tick up that a little bit through our stores, but there are customers that prefer that setting home center setting. If you will that has a broader offering of products.

Actually just prefer that setting and we want to make sure our customers are positioned very well to capitalize on those.

Those opportunities they have a number of customers in their stores right now maybe for the first time has come.

<unk> might be looking for product or availability, we want to make sure that that experience is a good one.

And the quality of the product business and the services they receive.

Okay. Thank you.

Yes.

Our next question is from the line of Garik <unk> with loop capital. Please proceed with your question.

Great. Thanks for having me.

Questions on pro and the growth is expected to be at or above the high end of tag guidance is the growth more of a function of the Cobra comp a year ago or are you seeing an accelerated return here.

Our comp last year in our North America paint stores was 97.

Third quarter was three and a half so.

I think it's more around just.

Better availability, even though the impacts are the same but.

Smaller from a dollar standpoint, just because the quarter is smaller and I would say that we typically see.

A seasonal slowdown in architecture on our fourth quarter coming out of our third quarter I would say based on what we're seeing is you won't see it we're not seeing as big of a seasonal slowdown if you will so that's kind of why you see a nice.

Uptick in tag.

Great. Thank you.

Thanks.

Our next question is from the line of Eric <unk> with Cleveland Research. Please proceed with your questions.

Two things first of all John you commented about loyalty increasing for your company. During this period of time I'm curious.

As you are putting through these price increases.

Period of time, where service levels are kind of below your standard how are the price increases being received and is the uptake are these taking longer to stick or is it following the historic normal path.

No I would say.

Either historic or maybe even a little bit faster right now Eric.

It does it is odd I can understand the question about the loyalty increasing while prices are going up and availability is challenged but I think it does speak to the point I made earlier there was a question about our store locations and I kind of Marvel at that question because it does get hard of what we have which is this unique.

Point of differentiation, where.

If we didn't have the stores and you are trying to put pricing through in.

And trying to build loyalty and you don't have product I get it but the fact that you are walking into a store and in many cases. These are your friends that you have now built a terrific relationship with that are that are working with you I need this product I need it as soon as possible and the person on the other side of the counter.

As in it with you.

We're trying to empower our people to make decisions, we're trying to get them product as quickly as possible and as a result.

The customers are understanding the efforts that our people are putting in and the pricing is the pricing.

And again, we're under a lot of pressure from a raw material standpoint, we're helping our customers to improve their profitability and we need to stay healthy and that's the discussion that we're having in that healthy. This includes a price increase for the products that were getting and as a result.

And the metrics and the numbers are all right. There I mentioned the net promoter promoter score when people are familiar with that there are a number of other metrics that we look at internally, they're all pointed in the right direction. So it gives me great confidence that what we're doing is working.

Great. That's helpful. And then secondly, al you commented about catching up on.

Raws in early 'twenty two.

Based on where you are now and you've obviously within that saving you've got some visibility on cost and pricing into 'twenty. Two is it is it reasonable from where the world sits now that next year is a year, where raws are up.

<unk> and prices up five is that the right initial way to think about 'twenty.

22 kind of linked to that statement that you made on 22.

Yes.

It would be all else being equal Eric and we don't see additional increases that would obviously make us go out again like we did this year.

Directionally accurate.

Okay. That's helpful. Thank you.

Thanks, Eric.

Thank you.

Final question today comes from the line of Christopher Perrella with Bloomberg Intelligence. Please proceed with your questions.

Afternoon, a quick question on China with the energy issues that are going on over there also issues on the property market have.

At the risk gone up and have you seen any issues getting raw materials supplier or even on the demand side over in China.

Well.

I would say China has been a challenge you are right I think the.

So let's talk first on the demand side on the architectural side.

They had a decent performance last year and there is a lot of pressure. This year. It's obviously, a very very small percentage of the overall consumer brands group.

Results.

Yeah.

It's.

Under pressure, but not.

Not meaningful in the sense of what it does to our results on the industrial side.

We've had some challenges there.

Not just China, but Malaysia and Vietnam.

Our customers as well as our plants have been under pressure as a result of Covid.

We have we believe we are beginning to work through that.

Locally and we're in a position, we think to be able to capitalize on that but.

If you if you look at our businesses in.

In China, specifically, we've had some really strong performances, we've said strong performance in our.

In our packaging, we mentioned we had strong double digit growth in every region. We continue to grow market share there we're proud of that.

If our.

Our president of our general industrial business was in the room, we'd want to point out the performance they've had there so good strong performance.

Coil business in fact, just about every industrial business, we have is doing well in China, but there is pressure pressure in that market and.

Again, our focus on solution is what solutions is what we believe will be the differentiating factor.

And John Real quick on the wood coatings business in Southeast Asia, Reopens and moves through the Lockdown as you would expect.

<unk> uptick in that business in the fourth quarter or is that.

With seasonality how would that work out.

No. We would expect an uptick there are plants in Malaysia were shut down to only the people that were there they had to be quarantined in a hotel and shipped into the plant in and out. So I mean, there's a lot of many of our customers were shut down completely Vietnam very similar challenges. So it is it has been.

There has been a lot of pressure there.

And we would expect that to ramp back up and we're in position to be able to do that we've been utilizing <unk>.

Inventory, having it shipped in from other plants nearby plants into Malaysia, and Vietnam to try to.

To make sure that we had the inventory as they ramp up so we've been thinking ahead.

<unk>.

How to how to best position, our customers as they reemerged, but.

It should be good for us.

Alright, Thank you John I appreciate it.

Yes.

Thank you at this time, we've reached the end of our question and answer session I will turn the floor back to Jim Jaye for closing remarks.

Yes. Thank you everybody for joining our call today, if I had to summarize the key takeaways that I hope you walk away with today is that.

We remain very confident in our demand environment.

Our pricing initiatives are very well in place and continuing to move forward.

Overall strategy and our people, we feel very confident about that as well. So we appreciate your interest in Sherwin as always we'll be available for your follow ups.

Today and throughout the week.

And I hope you have a great rest of your day. Thank you.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.