Q1 2022 Sherwin-Williams Co Earnings Call

Good morning, and thank you for joining the Sherwin Williams Company's review of the first quarter of 2022 results and our outlook for the second quarter and full year of 2022.

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

An archived replay of this webcast will be available at www Dot <unk> dot com beginning approximately two hours. After this conference call concludes.

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

Any forward looking statements speaks only as of the date of which the statement is made and the company undertakes no obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.

A full declaration regarding forward looking statements is provided in the company's earnings release transmitted earlier this morning.

After the Companys prepared remarks, we will open the session to questions I will now turn the call over to Jim Jaye.

Thank you and good morning, everyone.

Sherwin Williams delivered first quarter results in line with our expectations in an environment characterized by strong demand.

Ongoing cost inflation.

And choppy raw material availability, which began improving meaningfully in the final weeks of the quarter.

Sales in the quarter grew by a high single digit percentage against a double digit comparison, a year ago and.

And we delivered sequential improvement in consolidated gross margin and segment margins in all of our businesses.

Our margins remained under pressure on a year over year basis, a significant pricing actions previously announced and all businesses have not yet fully caught up to highly elevated raw material costs near term.

This remains an area of volatility.

Our team is operating with confidence and momentum as we begin to enter the painting season or.

Our strategy is clear.

And we remain focused on delivering solutions that help our customers succeed.

Let me briefly summarize the quarterly numbers before turning to John <unk>, who will provide some additional commentary on the quarter and our outlook.

Comparisons in my comments are to the prior year period unless stated otherwise.

Starting with the top line first quarter 2022, consolidated sales increased seven 4% to $5 billion.

Pricing was in the low double digit range.

Volume was lower and the consumer brands group and the Americas group, primarily due to challenging prior year comparisons.

Along with anticipated raw material availability challenges, which are largely behind us now.

<unk> gross margin decreased to 41, 1%.

Driven by lower sales volume, primarily due to raw material availability issues and cost inflation outpacing our price increases near term.

Our gross margin improved each month during the quarter and compared to last year.

On a sequential basis gross margin improved by 160 basis points due primarily to additional pricing actions taken in the first quarter.

SG&A expense decreased to 28, 2% of sales.

Our SG&A expense was two 3% below fourth quarter 2021, and on a sequential basis was 200 basis points better.

Consolidated profit before tax decreased nine 4% to $461 $1 million.

Sequentially profit before tax improved by $152 2 million or 49, 3%.

The quarter included $70 million of acquisition related depreciation and amortization expense compared to $75 6 million a year ago.

Diluted net income per share in the quarter was $1 41 per share versus $1 51, a year ago.

Excluding acquisition related depreciation and amortization expense and the water divestiture.

First quarter adjusted diluted net income per share was $1 61 per share versus $2 <unk> per share a year ago.

On a sequential basis adjusted diluted net income per share increased 21%.

EBITDA in the quarter was $693 million or 13, 9% of sales.

Moving on to our operating segments.

Sales in the Americas group increased five 6% against a high single digit comparison.

As low double digit pricing offset lower volume related to challenging comparisons into raw material availability.

Which improved significantly over the last few weeks of the quarter and has continued to improve as we enter the second quarter.

DIY volume was impacted the most as we prioritize serving the professional contractors, which make up the largest part of our business.

Segment margin decreased to 16, 8%.

<unk>, primarily from lower sales volume and higher raw material costs.

Partially offset by selling price increases and good cost control.

Segment margin improved 170 basis points sequentially.

Sales in the consumer brands group decreased 10, 1%.

Due primarily to lower sales outside of North America and.

And an impact of six percentage points related to the water divestiture.

This was in comparison to an extremely strong quarter, a year ago, where sales were up 25%.

Adjusted segment margin decreased to 12, 1% of sales <unk>.

Resulting primarily from lower sales volume and higher raw material costs and supply chain inefficiencies.

Partially offset by selling price increases.

Segment margin improved 580 basis points sequentially.

Sales in the performance coatings group increased 24% against a double digit comparison and were driven by volume and price increases.

Adjusted segment margin decreased to 11, 8% 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.

Adjusted segment margin improved 290 basis points sequentially.

Let me now turn the call over to John for some additional commentary on the first quarter, along with our outlook for the second quarter and the full year 2022.

John .

Thank you, Jim and good morning to everyone listening.

Before getting into some color on our three segments I'd like to frame today's call with some themes, we're seeing across the business.

First <unk>.

Demand remains very strong across most of the business.

Our teams are highly engaged and focused on growing volume through new accounts and share of wallet as well as reactivating customers that may have shopped elsewhere to meet the needs of a specific project over the past year due to product availability challenges.

Second.

Raw material availability improved meaningfully late in the quarter and this has continued into the second quarter.

We do not expect lack of raw materials to have a material impact on sales going forward.

To be clear the supply chain is not completely recovered as the bottleneck is now largely moved from suppliers production to their transportation and logistics.

In the near term, we're speeding this recovery by employing our own fleet and tank wagons to supplement suppliers delivery capabilities.

Our ability in this area is unique among our competitors.

We're also focusing on SKU prioritization and formulations to make the most of the raw materials that are available to us.

Additionally.

The specialty polymers acquisition is meaningfully contributing to our resin needs.

Third inventory in our stores and distribution centers is in a markedly better place than it was at the end of December .

The 50 million gallons of incremental architectural capacity, we brought on in the fourth quarter is up and running.

As the supply of raw materials improves we are quickly converting those materials to paint.

In fact.

We made more architectural paint gallons in march than in any previous months in our company's history.

We expect to run this additional capacity and a high rate to keep up with demand through the painting season, and then begin building inventory in our fourth quarter as we typically would.

And looking to the future, we announced a $300 million investment to begin expanding production and distribution and our Statesville North Carolina architectural facilities.

Serves both TEG and CPG, which.

Which will be completed in 2024.

Finally inflation remains significant and is trending towards the high end of the guidance. We previously provided.

In addition to raw materials.

Seen increases in other elements of the cost basket, including freight energy and labor.

As we've said in the past our continuous improvement efforts are focused on offsetting these increased costs.

Additionally, we've been aggressive with pricing actions in all of our businesses to offset these costs and we will continue to do so as necessary.

As far as our first quarter I'll keep my comments brief in order to get to our outlook.

In the Americas group sales.

Sales growth in the first quarter was led by protective and marine and property management, both of which were up by a double digit percentage.

New residential residential repaint and commercial were up by a mid single digit percentage.

DIY was down double digits as we faced a strong double digit comparison and prioritize sales to professional contractors.

We've also begun to see margin recovery in the business as segment margin expanded sequentially.

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

We realized a low double digit increase in price in the first quarter with volume remaining under pressure.

12% price increase we announced February one is going in as planned.

We opened four net new stores in the first quarter.

And still plan 80 to 100 for the year.

We also continued our growth investments in sales reps management trainees.

Innovative new products.

E Commerce.

And productivity enhancing services.

Moving onto our consumer brands group.

While this business faced a very challenging comparison, we're encouraged by our sales in North America, which were nearly flat as we continue to focus on supporting key strategic retail partners and growing our pros who paint initiatives.

Sales were softer in Europe , and China, as we faced double digit comparisons and Covid related lockdowns.

Note that we have now anniversaried, the water divestiture, which was a drag on group sales of about six percentage points in the quarter.

Pricing was positive in the quarter and in the high single digit range.

Segment margin expanded significantly on a sequential basis benefiting from increased volume leverage on SG&A and incremental pricing.

Last let me comment on first quarter trends and performance coatings group.

Group sales increased by 24% in the quarter, including high single digit volume growth against a double digit comparison.

Price realization was in the low teens range.

All regions and all divisions generated growth.

As in the other groups, we saw meaningful sequential margin improvement during the quarter.

Regionally.

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

Every division and the group grew with nearly all by double digits, driven by robust underlying demand new customer wins.

<unk> wallet gains and pricing.

Packaging was strongest followed by coil.

General Industrial auto Refinish, and Industrial award respectively.

Before moving to our outlook, let me speak to capital allocation in the quarter.

We returned approximately $558 million to our shareholders in the quarter in the form of dividends and share buybacks.

We invested $407 million to purchase 145 million shares at an average price of $280 77.

We distributed $150 9 million in dividends.

We also invested $106 $3 million in our business through capital expenditures, including $77 million in core Capex and $29 million for our building our future project.

Additionally.

The acquisition of <unk> European Industrial coatings business closed on April one.

We ended the quarter with a net debt to EBITDA ratio of three three times as we increased short term borrowings.

To fund our share repurchases and the <unk> acquisition.

We expect to be closer to the high end of our two to two five times range by the end of the year.

Turning to our outlook as I referenced earlier, we continue to see very strong demand in North America architectural end markets.

Though we are facing a comparison to a strong double digit growth quarter that was driven by very robust post pandemic recovery.

Comparisons will ease in the back half of the year.

Rising mortgage rates have not made an appreciable debts and the demand for our new residential customers to this point.

Should new residential demand slow we remain extremely well positioned in multiple architectural segments, including residential repaint property management, which have proven to be more defensive in nature.

We expect industrial demand will remain strong as the year progresses based on the outlook our customers have shared with us.

Comparisons will be challenging over the remainder of the year.

Demand remains strongest in North America, our largest region.

European demand also remains strong although we continue to closely monitor for potential impacts from the war in Ukraine.

For the record our sales in Russia, and Belarus are well below 1% of the total company sales and we are suspending operations in these regions.

In Asia and in China particular demand has been dampened near term by the latest COVID-19 wave.

On the architectural and industrial sides will continue to leverage our strengths in innovation value added services and differentiated distribution as we expect to grow at a rate that outpaces the market.

From a supply chain perspective, we believe we are through the most challenging aspects.

As I described in my earlier comments, we expect this to continue improving.

And to have a minimal impact on sales going forward.

On the cost side of the equation, we are maintaining our low double digit to mid teens raw material inflation guidance.

Though we are trending towards the high end of the range driven primarily by performance coatings group.

There is considerable short term volatility in the market and our visibility beyond a quarter or two is limited.

We do expect the level of year over year inflation to remain elevated but to moderate in the back half of the year.

Our pricing actions remain on track and we're prepared for additional increases if necessary.

For the second quarter of 2022, we anticipate our consolidated net sales will increase by a low double digit to mid teens percentage compared to the second quarter of 2021 inclusive of a low double digit price increase.

We expect the Americas group to be up by a high single digit too.

To low double digit percentage.

We expect consumer brands to be up by a high teens to low 20 percentage.

And we expect performance coatings to be.

<unk> up by a low double digit to mid teens percentage.

Our full year guidance is heavily second half weighted due to stronger volume the impact of pricing actions and weaker second half of 2021 comparisons.

I'll remind you we began 2021 with great momentum, including first half sales growth of 14, 7% and adjusted EPS growth of 26, 6% before the natural disasters supply chain and Covid issues derail the second half of the year.

For the full year 2022, our guidance remains unchanged, we expect consolidated net sales to increase.

By a high single digit to low double digit percentage.

We expect the Americas group to be up mid to high single digit percentage with North American paint stores at or above the high end of the range.

We expect consumer brands group to be up a low to mid single digit percentage and performance coatings group to be up by a high single to low double digit percentage.

We expect diluted net income per share for 2022 to be in the range of $8 40 to $8 80 per share.

Compared to $6 98 per share earned in 2021.

Full year 2022 earnings per share guidance includes acquisition related amortization expense of approximately 85 per share.

On an adjusted basis, we expect full year 2022 earnings per share of $9 25 to $9 65.

An increase of 16% at the midpoint over the $8 15, we delivered in 2021.

The additional data points, we provided last quarter on full year currency exchange tax rate Capex interest expense depreciation and amortization are unchanged.

As we enter the heart of the painting season, we remain confident in our strategy our capabilities and the differentiated product and service solutions, we bring to customers.

The 61000 employees of Sherwin Williams are focused on the tasks at hand, and there is no better team in the industry.

Our business remains extremely well positioned.

And we are emerging as an even stronger showing wins following the challenges we faced the last two years.

I'm excited by the momentum we are gaining as we progressed towards what we expect will be a very strong second half of the year.

In addition to today's call I'll remind you we will provide additional commentary on the market and our business at our upcoming financial community presentation event scheduled for Wednesday June eight in New York City.

Details are available on our website and we're very much looking forward to seeing many of you in person.

And that concludes our prepared remarks, we'll be happy to take your questions at this time.

Certainly ladies and gentlemen, the floor is now opened for questions. If you have any questions.

Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time we.

We do ask that while posting a question. Please pickup your handset if you're listening on speaker phone to provide optimal sound quality.

Once again, if you have any questions or comments. Please press star one on your phone.

Please hold while we poll for questions.

First question is coming from Vincent Andrews from Morgan Stanley . Your line is live.

Thank you and good.

Everyone.

Wondering if you could just talk about.

Your volume possibilities and tag in the second quarter.

If I sort of back out the.

The price, we think youre going to get in the second quarter to sort of imply some volume I'm just wondering how much better you might be able to do versus that and if youre concerned that maybe just I know you had big volume production in March but is there any limit at all for the amount of volume you could flow through the stores in the second quarter.

Yeah, maybe the way I'll go out this is just to take a quick run through the different segments and give you a little bit of color on the demand because I think that speaks to what you're asking here. So.

Let me start with res repaint and tell you that our customers are experiencing really strong backlogs.

Positive mix shift in quality, that's also taking place in.

We believe that plays really well to our advantage. So when you talk about volume our ability to grow our volumes faster than market also includes the ability to drive greater productivity.

Through for our contractors as this quality that we're providing them helps too.

Provide the finished product.

A more experienced painter, our applicator might be able to apply.

And so we're helping them do that with new product.

If you look at this area.

Clearly see home appreciation driving demand.

The forecasting for.

With growth in 2022 is in double digits. If you look at the <unk>.

Remodeling indexes.

Strong well above 50.

And existing home sales have slowed year over year against a very strong comp and lack of inventory, but overall, it's a very strong market for us so.

We expect to continue to see a good.

Good strong demand market in residential repaint contractors are telling us.

Mentioned many of them are looking through through the end of the year with a pretty solid backlog.

Of projects.

We're going to grow with those customers, but this is an area that we absolutely expect to continue to grow market share at a pretty aggressive rate.

Property maintenance.

Really underlying demand is solid here as well there has been delayed maintenance, that's now being addressed and we see improved areas in apartment terms along with the return to travel office, even school, that's driving demand and.

And I would say in this area as well as an increased awareness of the need to keep these assets fresh current and clean and as you know paint is inexpensive yet impactful solution in this area.

Commercial I would say the underlying demand here is also solid projects are resuming, albeit at varying paces with the starts of positive customers are reporting labor constraints and material shortages on these projects are acting as governors of growth. So.

Any aspect of this projected.

It could be anything from drywall to roofing project products anything could have an impact here that could be significant Dodge momentum index. Here is strong as is the architectural billing index, which has been positive for straight months and as you know that tracks. The current billing by architects, which generally leads to the commercial construction.

Spending nine to 12 months out.

And the other area, obviously that we're really focused on is new residential we've got a great position here and growing by the way starts and permits remained strong year over year with multifamily.

Stronger than single, but both really terrific markets for us.

Completions are softer due to material availability here in some cases labor as well.

Not seeing any meaningful slowdown as I mentioned earlier from rising mortgage rates.

Which are still low in comparison to other periods.

And this is an area we've gotten a lot of questions about throughout the quarter and I thought I'd just highlight one area. This.

Article by USA today that I think captures kind of the sentiment that we have in new residential can you talk about the housing units shortfall ranging between $5 5 million and $6 8 million.

Despite an annual average of $1 5 million new housing units completed.

A $1 7 million Spike in 2020 alone.

New construction would.

We need to accelerate to a pacesetter well above this current trend to more than 2 million housing units per year to close this gap.

Even if building were to continue at the current level. The most rapid pace in more than a decade. It still take more than 20 years to close the $5 5 million unit gap.

So as I mentioned, we've got a strong position here.

Determined to get stronger here.

I would tell you that regardless of what happens in these professional areas way that we've been driving this company for years now with our strategy development and strategy deployment is to be in position to capitalize on it whichever way it till so.

Any one of these areas.

For some reason slowdown.

Worked really hard to position ourselves to be able to capitalize on whichever way the market might shift to and we believe that we'd be able to capitalize on it.

Touch on one more area that I'm going to ask Albert to talk on the volume a.

A little bit further.

Why.

We did talk about the fact that DIY behaved as we expected.

As demand continues to return to more normal level.

This was against as I mentioned earlier, a difficult comp, but we also prioritized.

Our professional contractors in our key strategic customers and our consumer brands business.

That impacted this DIY business.

Yes, Vincent this is al <unk>.

Just as a level set on our January call.

We talked about our expectation for the first half architectural volume, which includes consumer and tag to be flat to down low single digits, primarily because of the <unk>.

Difficult comps that John talked about.

And our second quarter with our tag sales projected to be up high low high single to low double digits with price up low double digits and volume flat to down slightly.

Our sequential improvement for the first quarter. So we talked about the first quarter.

Being down mid single.

Flat to down slightly in the second quarter that leads you to the momentum on an easier comp in the second half we talked about the full year tag sales up mid to high single digits with North America paint stores at or above the high end of that range. When you look at price low.

Digital in our first half as you annualize the price increases we took in the second half of last year, our price in the second half will trend.

For the year to be up mid to high which gets you a low to mid single digit volume growth in tag in North American paint stores, and I fully expect that to get to be the case.

Thanks, so much.

Thank you Vincent.

Thank you. Your next question is coming from Jeff Zekauskas from Jpmorgan. Your line is live.

Thanks, very much can you comment on the effects.

Raw material shortages on volumes and the <unk>.

First quarter <unk>.

And can you talk about your volumes in the first quarter end.

<unk> repaid to new residential and commercial.

What was the business like excluding the volume contraction in DIY.

Yes, Jeff on the <unk>.

We're all material availability, what I would say as we talked about on our year end call that we thought it might be a low single digit to mid <unk>.

Headwind.

The way the quarter rolled out with availability, which saw some choppiness in January it improved in February as John talked about it was significantly better in March.

And it continues to improve in April .

The data points that I have to show that as John talked about March was our single largest architectural production volume.

In the history of the company, we significantly improved our architectural gallons.

From December year end through the end of March.

Okay.

Our historic levels, but it is a significant improvement 20 plus million gallon increase so.

Now to pinpoint exactly how much availability had on the quarter, it's really really tough because I look at how much of that would've been in sales versus how much. We could've put an inventory. The fact is the availability behind us we have a lot of confidence to fill our 50 million gallons of additional capacity along with the help of STI.

And the other data point I would I would highlight is our expectation for architectural inventory through our seasonally highest second and third quarter sales quarters to be flattish from the first quarter as you know, Jeff historically, our inventory would decline through the summer quarters because.

You can't keep up with the volume.

Because of the capacity, we put in were going to be able to keep up with.

Sales volumes and increased volume.

Tori in our fourth quarter similar getting back similar to where we were back in 2019 and significantly higher than the last few years. The only thing I'd add to that is great response, I think the trend.

Manufacturing will continue to your point all the way through till probably this time next year, we will run our assets hard to.

To build that inventory back up and.

Maybe clarifying point that I think is important is that.

To your question about volume or.

Each of those segments, Jeff I don't need to break them all down because they were all very similar they all improved as the quarter improved.

Quarter went on.

Or are they higher for the quarter or lower.

Year over year, they were lower yes, Jeff they'd be lower primarily because of the more difficult comps that we had whereas repaint was up whereas repaint new risk.

DIY were all up strong double digits in.

New res and commercial were up as well so a tougher comp in our first quarter, Okay and for my second question.

Are you done with price increases in the Americas Group you commented in your.

In your slides that you have more pricing actions to Callaway consumer brands and performance coatings.

But I didn't see that in America. So we done in Americas for this year, yes.

Yes, Jeff I wouldn't say, we're done I would say when we look at the visibility and the volatility we have in the market around not just raw materials, but other input costs.

That visibility is out.

One quarter at best.

I think what Youll see us do is like we have in the past, we'll monitor those input costs very closely and if we see a meaningful or if we see a meaningful change in them.

We're prepared and discipline to go out with additional price similar to what we did last year. We went out August one.

8% and we went out in September with the surcharge. So we have to monitor these situations closely and really react to what we anticipate.

Great. Thank you so much.

Thanks, Jeff.

Thank you. Your next question is coming from Josh Spector from UBS. Your line is live.

Yeah, Hi, Thanks for taking my question.

So just on the consumer side, and then kind of goes to some of your prior points on the Americas group.

Wondering how much of the 20% growth would you say volume resale versus pricing moving up from the high single digit level.

If I look at.

Yes.

You say that 20% growth in our first quarter.

Josh are you talking about.

And your second quarter guide.

Alright, thank you.

When you look at high teens to low 20%.

Expect.

Price to be up a similar amount as tag we are significantly easier comps.

Which was down strong double digits.

I think when you look at our inventory build we had an inventory build in the first quarter.

Through our strategic partners as you would expect we are in it.

Similar situation that we talked about it.

Third and fourth quarter went on we drove our inventories down.

Across the chain, both attack consumer and our retail partners. So we did have to build some inventory.

At store level with these partners, but.

Really.

Did have a weak top we expect North America.

To be strong we do expect with Asia.

In Europe to be softer than our second quarter.

That's about 15% of our sales and.

Pretty pretty strong.

Comps outside the U S and Europe and Asia. So.

I don't have an exact number to say how much is building versus sell through but.

Rest assured we had to build inventory in our first quarter and our retail partners.

Thanks, and I guess, just as a follow up are you seeing any change in the consumer channel and the DIY channel either your own stores or in your consumer brands Group I guess is pricing goes up is there any trade down or.

Generally pretty stable.

I would say they are pretty stable I would say.

As it relates to the consumer side of our stores and in our consumer brands customers I'd say in our professional side as I mentioned earlier, we are seeing more of a positive mix shift moving into higher quality.

Rather than shift down.

Thank you.

Driven mainly off of labor and the desire of the painting contractor has to be as productive as they can so they can attack the backlog that they are facing.

Thank you Josh.

Thank you. Your next question is coming from Chris Parkinson from Mizuho. Your line is live.

Great. Thank you so much so you had a little on the raw material shortages can you just.

You hit on your own as well as probably the industry's effort.

To further backward integrate into certain resins and also some additives, just where do we stand with that and when should the investment community.

CD effects from those efforts. Thank you.

Importantly, our customers are starting to see the effects as we purchased this spi with the idea of really trying to leverage that asset Chris I think it's doing that and it's only going to get better for us I don't think you should expect us to continue further upstream we have always had a resin strategy and we've always.

Richard resin.

Hi.

A toll producer for us terrific people terrific assets and an opportunity to get in there and get the most out of that.

Set of assets. It also as you mentioned.

We mentioned when we announced this at <unk>.

Helped us too.

Deleverage, if you will a little bit of the dependence on the Gulf Coast.

Manufacturing facilities are on each coast and.

Get a little bit away from some of the hurricane risk.

While they are on the coasts are inland and terrific assets, we're already starting to see more productivity out of these assets. We expect that to continue there'll be some investments in there, but very reasonable with great return.

Expect us to get into the additives <unk> business, that's not where we belong.

Got it.

It's also been a lot of chatter just in the investment community at least in the past quarter or two just regarding market share shifts potential market share shifts.

Some part due to finished product shortages.

Now that you have the opportunity to speak to all of US Whats your public response to those debates and what confidence level can you convey to us regarding your ability to maintain or likely build market share once everything normalizes in the supply chain. Thank you so much.

Yes, Chris I appreciate that question and I would tell you that our confidence level is very high.

We can only speak to our strategy and I would tell you that we're blessed with a controlled distribution model that serves us well.

And we leverage this model and that includes strong and very consistent brand strategy, and we think that branding strategy and the consistency of it is equally important.

We have an innovation program designed to develop segments specific products. So.

Because we have a controlled model, we're able to talk to.

Each of these segments to understand what are the needs of these customers what are the challenges and we develop products that are specific for these segments.

And we do the same with our services. So that we have a very good understanding of what the needs are of these painting contractors.

We build the services to help them make more money.

And finally the.

The reason I have probably the most confidence is our people.

I believe we have the best people in the industry I'm not apologetic about making that claim.

We hire around 4500 to 500 college graduates a year to enter our management training program.

And we recruit outstanding talent.

We train and develop this talent and we retain this talent.

These are the people that serve our customers.

And for nearly 40 years, we've been investing in this program. This training program is 40 years old.

Now have thousands of graduates from our management training program throughout the company.

And just our tag business as an example, four of our five division Presidents, where management trainees our group President was a training.

And throughout the company, we have over 26, Vice presidents that where management trainees and by the way one CEO that was a training.

We think this is important our customers there.

They are buying more than a gallon of paint.

We tell our people constantly.

Companies don't compete.

People do.

70% of our field leaders our graduates are our management training program and they provide the leadership and direction to our tenured organization. They know what to do they know how to win and I say tenured because.

Over 7000 of our employees.

We have greater than 20 year service.

That's nearly 15% of our workforce is 20 years or more of paint experience.

And these leaders created an environment, where people win and they want US day, one half of our Rep Force is over 10 years of service.

Turnover of our customer facing reps and managers is still in single digits. In this environment is still in single digits. We're hanging onto the most important assets, we have and that's our people.

And our people wake up everyday they focus on two things paint and.

And making painting contractor successful.

So this specialty store format. It works for painting contractors.

We've always talked about avoiding complacency and our company in fact, we often say that complacency kills.

We're working to get better every day and we're working to make our painting contractors better every day.

But I'll say this I do believe this will come down to our people versus others.

We have a 40 year head start a lot of drive a lot of determination.

We're not going to win by a little bit.

Yeah.

I am looking forward to competing against any model.

Great color. Thank you so much.

Thanks, Chris.

Thank you. Your next question is coming from Ghansham Panjabi from Baird.

Your line is live.

Thank you good morning, everybody.

I guess just going back to your earnings guidance reiteration for 2020 to.

The macroeconomic backdrop seems a bit less certain especially in Europe , and China, along with any potential supply disruptions in these regions as well now understanding that you have a wide earnings range still for the year, what would you call it as sort of incremental positives relative to your initial view that are offsets to some of the risks on the global macro is.

Is it as simple as just better raw material access visibility or.

What else would you have us think about it.

Well I'd say first.

Just talk a lot about people, let's say, that's a third advantage, but I'd also say that if you look at the assets we've talked about that we've deployed.

The responsiveness that we have in and I will say this.

Our our chief procurement Officer, Colin Davies and his team are.

We are working really well with our customers and I've learned to appreciate the demonstration of rewarding suppliers, who have stepped up to serve us in these suppliers have been creative in responding to our needs.

The assurance of supply to your point.

Continues to be an important element in this market and once you have that supply I think we demonstrated in the month of March we had a record record month in the company's history of producing product.

And so what I'd say is that it's not one thing.

Ecosystem, it's everything we're doing everything that we bring and it's all focused in starts with one thing the customer. So we're looking through that lens, we're working back.

And this large 156 year old company is learning to be nimble and quick and respond.

I'd say that if I'm looking at it from the outside in.

Im looking at a lot of assets that are.

Really positioned well to be able to respond to a.

High demand market.

Got you and I would just add to that you look at our.

Sequential.

Gross margin in <unk>.

Operating segment.

Improvement sequential improvement across each of the operating segments.

All of the hard work that those teams have done an up I'll highlight one.

What particular performance coatings group.

I took the really the brunt of the raw material increases in the second half have been out with price on multiple occasions, you look at our first quarter operating adjusted operating margin about flat year over year, and if you recall the.

Significant increases we took for raw materials for that segment were primarily in the second half. So that team has done just an absolutely terrific job.

<unk> price holding price and it's showing it and we're going to see that continued improvement in our gross margin in the second quarter.

To see sequential improvement in our gross margin and across each of the operating segments, albeit consumer.

From a historic low operating margin and adjusted operating margin in the fourth quarter, but the pricing actions are volume and all of the continuous improvement efforts across each of the segments that are helping to drive our bottom line faster than.

Our our top line. So that's what gives me confidence that we're going to continue to see improvements as the year goes on.

Okay. Thanks for that and then if we just switch to performance coatings several of the businesses in their packaging coil et cetera have had a very very good run volumetric Lee.

There's lots of evidence of kind of mean reversion of consumer habits that occurred post COVID-19 as mobility sort of normalizes. So as you kind of think about these various individual businesses within GCG.

How do you expect the volume trend line to unfolds over the next few quarters.

Well.

We're really excited to your point, we've got a lot of momentum in these businesses.

There's no expectation for less if that's the question we sit in this room. This boardroom and we talk with our teams regularly about the.

The confidence that we have and maybe I can walk through quickly if you'd like on each of these segments just to give you a little bit of color because.

There is a lot of strength, but boy, there's so much opportunity. If you look at our packaging, we had a strong double digit growth in the quarter and in fact each of the last three quarters, we've had record quarters in this business.

Packaging sales with.

With sales of around 30%.

Per quarter for the last three or so.

If you look at this business the demand is very robust and food and beverage are non BPA coatings continues to gain traction.

Both we and our customers are investing in capacity expansions in anticipation of a strong demand year here in 2022 and beyond so we're thrilled about that business the differentiation that we have in the <unk>.

Technology and the people we have is just phenomenal.

Nugget that came obviously with the Valspar acquisition as this coil.

We had a double double dose of double digit growth.

Quarter in coil is the fourth straight quarter, we've had sales of double digit growth here.

Double digit in every region led hereby extrusion and metal buildings. So we're excited about this business going forward.

Our general industrial again double digit growth in the first quarter.

The fifth straight quarter with double digit growth in Gi.

Every region was positive led by North America.

Our Latam business transportation and general finishing were strongest here.

Our auto refinish had double digit growth.

<unk> driven here are below but nearing pre pandemic levels continue to leveraging our.

Our technology is the key here, we brought in some wonderful technology from Valspar that worst terrifically with our Sherwin.

Technology, and we're growing share here.

Aggressively.

And in industrial Wood, we had a high single digit high single digit.

Quarter, we've got very good momentum here.

Furniture kitchen cabinet cabinetry and flooring.

Which obviously correlates to similar positive trends in new construction. So we.

We saw increases in all end markets.

Most by double digits.

Clearly really pleased with packaging and coil, but all of them were.

Strong and by region North America, our largest region grew the fastest.

In Latam Asia, and Europe , right behind so XP.

The expectations of this team.

Really strong we've got a terrific leader here as well Carl Jorgen root came to us from.

Valspar.

And a lot of division presidents.

Beneath.

Carl that are really experienced as well.

Talk a lot about our tag organization and the retention of people and the importance of that in <unk>, but the same stands true and PSEG.

Our average division Presidents' averaged 29 years between Sherwin and Valspar.

Again, when you look back we talked openly about this greatest infusion of talent and Valspar and Sherwin came together and we've been terrific and the retention of those people are turnover still and this is years after the integration.

Is below 7%.

So on the architectural side.

I think if you look at the legacy Sherwin and the talent we have on the architectural side, where we were pretty we'd like to think were pretty strong I always could get better. They brought obviously some talent came in from the architectural side of Valspar in fact, our new Chief operating officer came through the architectural side of Valspar, but when I look at the.

The PCB side and the benefits we've had on the talent that's come in from Valspar, and our ability to retain it yes. It gives us terrific confidence going forward. So fundamentals, we've got great assets. We've got great technology, We've got great people and we have great customers and we're going to leverage that for everything we get.

Thank you.

Thanks Catherine.

Thank you. Your next question is coming from Greg Melick from Evercore ISI. Your line is live.

Hi, Thanks, I wanted to follow up a little more detail on the gross margin progression in the quarter I think you mentioned.

That that gross margins were down year over year more due to volume than the raws price could you give us the number on that.

Do you think that continues that that mix of gross margin pressure in the second quarter.

Yes, Greg.

The volume as you know and what we've always talked about is the single biggest driver.

Not just gross margin, but operating margin and.

That clearly is.

The higher <unk>.

Impact if you look at year over year.

Price costs in our first quarter.

But we're still chasing a little bit I think we get on top of that as we get towards the end of the second quarter. So it will be less of a drag.

Also in our second quarter.

You see a seasonal increase in our architectural volume as you normally would that's going to help drive.

Our gross margin its going to help drive our operating margin.

Granite is still tough comps against tags, but you look at the <unk>.

Volume down mid single digits, that's a significant drag on our first quarter and to be down flat to down slightly in our second quarter is.

We're going to be a positive.

Mix shift as well in our second quarter, that's going to help grow the margin.

Got it and when we look to the back half.

Rice is on top of raws by the end of the second quarter.

For the back half do we need another round of pricing.

To stay on top of the costs given what we've seen year to date with I guess rosnay right at the higher end of the range.

Great I think.

Yes.

What we're looking at is more on the industrial side right now I think when we talk about the basket moving to the high end of.

The range, it's more on industrial.

Yes.

As you know industrial price increases aren't as uniform so.

Maybe I talked about on our year end call. Some in the first quarter some of that roll into the second quarter I think the timing of those are pretty much. The same it's just the.

Amount.

The percent increase that may have had to get adjusted.

But like we talked about earlier I think our visibility is one quarter out at a lot of volatility.

<unk>.

And we will continue to monitor that based on the last.

Year and a half.

I'm not going to say, we don't need more we're just going to have to monitor it and go out and react accordingly, what we will say is that if we need to we will.

Agitation.

And maybe John .

Just a follow up on that given the volume.

Shortfalls, especially in the back half last year.

Are you a little more resident too.

Hike prices again within a quarter I'm just thinking in the past you've waited about four months.

Now as you are trying to rebuild that volume and share.

Thanks.

Do you think obviously youll get the pricing, but is there a tendency to want to wait an extra month or two just to just to be sure.

I think we have you're right Greg.

Good for you because I know you know our company well, we have done that and I think what's different now is that were.

A little bit further into the volatility.

Portions of this cycle and we've been communicating to our customers with greater clarity about the volatility. So I don't know that we need to wait as we've had in the past because we've been communicating to the customers that our intent is to try to keep the price increase to a minimum but with that.

We're not building a buffer to be able to absorb the volatility and if there is more volatility that will need to be out quicker with additional price. So I think we would be moving quicker.

And to your point, it's nothing we prefer to do or enjoy doing we've yet to get a thank you note for many of our customers for it but.

If the need be we're going to do it really quickly.

Great Thanks, and good luck.

Yes.

Thank you. Your next question is coming from John Mcnulty from BMO. Your line is live.

Yes. Thanks for taking my question you had mentioned early in the call that you were using your own fleet and the flexibility that you have with that to help your customers from a logistics perspective can you help us to understand one is that is that something that you actually incrementally charge for or is it just kind of part of the service that your customers are appreciate it Bob.

And I guess on top of that how should we think about if it is just more of a.

Hey, it's part of our service then how should we think about the cost of that and how that might decline once the all the big logistic issues kind of get put in the rearview mirror for us all.

Yes, John let.

Let me first go back to your question and the comment that we made earlier, what we were speaking to specifically there was.

Suppliers not customers.

And.

We do work with our suppliers mainly to bridge gaps to ensure that we have the product when we need it where we need it.

Not our intent to do their jobs, but we're in this together with them trying to work with them and as you would expect when that happens.

A discussion about what it cost that goes along with the fact that we're going to do that so.

Right now.

You know our company our focus is on taking care of the customer and the fact that we've got our fleet. It is a point of differentiation.

We do leverage those.

And there are times, where less efficient doing that for example, one of our largest customers on the consumer brands side was.

It was very adamant about a south to north recovery approach that was a little less efficient than we would've liked to have seen but important to our customers.

And so we took that undertaking and served our customers in a way that allowed us to respond to their needs not was what not which was most or least expensive to us.

That's our DNA and so if it is to use our fleet of trucks to help in the pinch to be able to get raw materials to a plant or in some cases right now.

Reducing where we can get the raw materials.

And we're shipping it in some cases across the country.

To ensure that we have supply where we need it.

A little less efficient than what we would like.

We have this terrific.

We want to optimize our supply chain to its fullest, but when it comes down to it we're going to choose serving our customers and overtime that efficiency will work its way back in we're not just waiting for that to happen you should expect that as a leadership team. We're very focused on it our teams understand that but we also understand that servicing our customers.

Our highest priority we have yes.

Yes, John Thanks, very much.

So anything I would add to that is we did call out that supply chain comp.

Comment that John talked about on our consumer brand group being a little bit of a drag on our first quarter.

Clear.

To John's point, that's an investment we are willing to make and servicing our customers better that drag if you look at the operating margins and what they were down volume is still number one in consumer driving that operating margin lower year over year and then.

Probably a third is the supply chain efficiencies just to make that clear.

Got it thanks, thanks for the color I appreciate it.

Thanks, John .

Thank you. Your next question is coming from Steve Byrne from Bank of America. Your line is live.

Yes. Thank you the inventory build at the end of the quarter.

Noteworthy is that largely driven by the raw material costs or do you really have much more volume.

Ben previously.

You might have been a low going into the quarter, but you commented that March was a big volume production month for you. So is that if thats volume driven is that a reflection of.

What you are seeing your your pro contractors have ads.

Backlog.

And is that what is giving you that this.

This confidence in such a strong second half.

Well, Steve let me be very clear, we have incredible confidence in the second half hard stop.

We're growing inventory sequentially each month of the first quarter, because raw materials became more available.

We added 50 million gallons of capacity, it's online it's supporting the demand and we're building inventory. We don't have the inventory that we normally would have had coming out of the first quarter, but given the additional capacity that we have we're able to serve our customers and we're going to utilize that additional capacity and everything we have between now and.

Likely this time next year to run full speed all out building inventory to be able to continue to serve our customers.

We have to put a little more in working capital to be able to serve our customers we're going to do that.

And perhaps relative to historical splits between first and second half sales how much stronger do you think second half of this year could be.

Okay.

It's going to be a much stronger part of our success. This year, partially because of the comparisons that we have for sure and second.

We've just talk.

The ability to make a record year a record month of production in March says that we have product right have raw materials.

And so the demand is strong we have raw materials, we have capacity.

We're going to have a good time in the back half.

And maybe just one quick one what fraction of your consumer sales R.

Our pros that pain.

How do you get that data is that from your partner.

Yes, we're not going to comment about our customers the mix of business I will tell you that it's overall a relatively small but.

Very important and growing area and we've been talking for a number of quarters about the investments that we're making here the commitments that we're making here back to even the fact that we just came through a pretty challenging time, and we were prioritizing that business with raw materials I think it should speak volumes.

We love this controlled distribution model through our own stores, but we are very excited about this pro who paints model.

We have through our own stores.

No.

If we look at it marginal success because there are customers that prefer a home center channel they want to be able to get in and they want to be able to buy.

Full array of products that are only available at a home center.

In the marketplace.

Theres been limited amount of competition in this.

In this.

Space for for too long.

We believe along with our strategic partners that there is a terrific opportunity and we're determined to help our strategic partners win in this space.

Thank you.

Beth.

Thank you. Your next question is coming from P. J <unk> from Citi. Your line is live.

Yes, Hi, John you.

You talked about raw material shortages and supply chain issues for a while.

Do you think adding any new.

Stores, just want to add to the complexity or do you think you'll have this new capacity and excess inventory that you can loading days of new stores.

Also what's the cadence of those stores I think you.

You said four new stores in the fourth quarter. So what is the cadence of that.

Well, let me start with your finishing portion we're going to be between 80 and 100 stores this year and.

The answer as to why perhaps in a market like this to add stores as we believe in the model and we play a long game here.

We didn't predict that the world was coming to an end because we couldnt get the raw materials. We knew we would and we continued to invest in every aspect of our business, including if you look at it.

And our manufacturing we invested in and labor to have people in our facilities. So that when raw materials became available we could convert them. We did that and I think March demonstrated that so now you follow the pipeline a little bit further and you say, okay. Now, we're producing products I'm not going to be sitting here, saying boy I wish we would've had the courage.

To invest in stores when things got a little bit tight.

Maybe it comes with a 37 years of scar tissue that I have in the 30 plus years that al has on our other important we've seen this movie before we know how it works.

And we've got confidence.

Have confidence you look at versus the other and you say, we're going to run right at this and during these tough times, we knew that others would do exactly what they do close stores close territories.

And their bunker and we're going after where bunker Hunter and right now and we're going to continue to do that.

Great and also about the cadence of the new stores.

Yes.

For the net for I think it was in the first quarter, we'd like to see a little bit more than that but.

It's going to ramp up here between now and the end of the year will be in the 80 to 100 before the end of the year great.

One of your competitors has a new partnership with home depot target pros.

And at the Big boxes have you seen any any any impact of that on your business.

Well as I mentioned earlier.

We have a.

A model that we believe is the right model and the market is certainly is for us.

We believe painting contractors thrive in a specialty store format with.

With people behind the counter that have 10, 20, and 30 years of experience with products that were built for them in their specific areas and services that are focused on making them.

As productive as possible and as profitable as possible. So.

I would just say we welcome with no arrogance.

Competition competition makes you better.

I'm going to bet really big onshore wind.

Great. Thank you and good to see your confidence thank you.

Thank you. Your next question is coming from Mike <unk> from Barclays. Your line is live.

Great. Thanks, Good morning, guys.

Maybe to start John in the release, you talked about the worst of the supply chain challenges being behind US was that mostly a U S architectural comment or I guess when you look at your international operations or maybe the legacy Valspar businesses.

Are you seeing conditions, there meaningfully improve as well.

I want to give.

Earlier, I mentioned, Colin Davies, our CPO and also highly.

Heidi Petz, our chief operating officer, I'm going to give her credit as well.

Started in her role March one and I don't think she came up for air.

Throughout the balance of the quarter.

Out of this area.

Terrific work by the entire team really ensuring that.

We had the raw materials, we need and importantly, where we had it.

When you look at what's been happening I don't the impact on our architectural business outside of the U S is.

Is obviously, a very small part of our business not not significantly impacted by this.

The confidence that we have.

By working with our suppliers.

In a partnership way I think.

Why we have this confidence in.

Again, the talent that we have in procurement.

So that has to get the attention here Joe <unk>, our president of our global supply chain is is the one that takes all of these products and quickly is turning those in.

To finished goods and getting them to our stores into our customers.

Very nimble and quick way.

It's amazing behind the scenes that the things that are happening to be able to convert quickly and take advantage of these opportunities we expect that to continue going forward.

Great Super helpful. And then second I was just hoping to drill a bit more into the raw materials basket. Obviously, there's a lot of focus on oil based inputs.

Curious what youre seeing on the inorganic side, both <unk> colored pigments. Thank you.

Yes, Mike this is Jim.

I'd say on the oil prices.

We talked about.

Probably going to be at the higher end of our guidance. This year and part of that is because of the oil prices that we've seen I think it remains to be seen how long those oil prices are going to stay sustained and I'd remind you really that propylene is more meaningful.

As an input for us for our resins and solvents than as oil so, yes oil and propylene are connected.

Over the long term, but in the short term we've seen disconnects in the past. So I think as Al said earlier, we will continue to monitor all of these things if we need to go out with more there.

In terms of price we will.

Your question on the <unk> side.

We've seen inflationary pressures there given the strong demand there is tight inventories and certainly rising energy costs, which are used to convert the ore into tio too we haven't had any availability issues really there.

We're in a good place with our suppliers I think so really on the supply chain.

We'll continue to monitor monitor.

We'll get pricing as necessary.

We expect it to from an availability perspective, that's really behind us.

Great. Thanks, so much.

You're welcome Mike.

Thank you. Your next question is coming from David Begleiter from Deutsche Bank. Your line is live.

Thank you John There've been some reports that Sherwin is discounting paint prices in the U S.

Reports and.

Inaccurate.

Yes.

Very good.

Same trend of the 12% pricing you announced for February 1st how much youre getting and how has that compared to historical.

Levels.

Yes, David.

The price increase has been.

On <unk>.

Actually a little bit better than the price increases we went out with last year. So the effectiveness is.

Been maintained and improved as the months have gone on has it been has been filtered through the market and we feel very good about where that is at right now.

Thank you very much.

Thanks, David.

Thank you. Your next question is coming from Kevin Mccarthy from vertical research. Your line is live.

Yes. Good afternoon, two questions on performance coatings, if I may.

First on the margin side, John It looks like you've made some nice sequential improvement there of 290 basis points at one time, though I think you had a goal of high teens or low twenty's is that still the case for <unk> margins and if so it looks like volumes are running pretty nicely nowadays.

What do you think the path is to get there over the medium term.

Kevin It absolutely is and we have great confidence in our ability to do that I think youre going to continue to see that with volume we have.

Obviously seen the.

Pick up in raw material costs has had an impact on it so.

Price that has been announced rolls through that's going to have an impact.

We've also talked publicly about some of the other synergies.

We are available to us that we're continuing to emphasize an attack.

Some of that includes the simplification of our product lines, our raw materials.

Less complexity going through our plants.

I want to be very clear and our confidence.

Our ability to reach those those metrics that we've been talking about we were gaining some ground on and unfortunately with the raw material spike.

We gave up a little bit of ground in this.

We've got this isn't just.

No.

Bravado, we're going to we're going to do it we're going to take that we've got confidence we've got plans that we're executing on those so we're going to deliver on this.

And then secondly.

You acquired Cecos industrial coatings business, just recently on on April 1st I believe.

I realize it's not a huge deal but can you can you speak to.

What the opportunity is there and why you chose to do that.

Yes I.

I think a great example of our M&A strategy, which we've always said, we're not trying to be everything to everyone everywhere and that we don't need practice for creating shareholder value and so when you look at the opportunity to.

To acquire a strong position in protection and Germany with local production.

Sure Williams is strong in fire protection in the U K also with local production and <unk>.

And to leverage the strength of each and production capabilities in each in the primary markets.

And drive new corrosion protection and fire protection sales.

Together, and then really connect the dots.

As a terrific opportunity for us and I think it's a great example of our ability to identify.

Assets work with.

Owners and to really.

And really capture the best.

Both the leadership team just as we've talked about with Valspar.

The leadership team of CECO is also join US Thomas Kirkman is.

Very strong leader in the Sika business Thats joined and we believe that the combination of.

The legacy Sherwin, and new sika assets and people.

<unk> going to provide a great platform for growth.

Great I appreciate the thoughts.

Yes, you bet.

Thank you. Your next question is coming from Erinn, the Swanson from RBC capital markets. Your line is live.

Great. Thanks for taking my question.

Real quickly so I guess.

Just curious when you think about that mid to high single digit sales growth for the year, you said tax would be at the upper end or even above that.

I think you already covered this but.

Is there a possibility that you could do so.

That should be more weighted towards price I imagine.

So when we look at same store sales do you expect that to remain in that $3 eight.

And above level as they go through the year.

Yes, it will improve as the year goes on.

Sure.

Arun you still there.

Your next question is coming from Garik <unk> from loop capital Your line is live.

Oh, hi, Thanks, a couple of Big picture questions for me I'll, just talk about the number of positive leading indicators.

For tagging your salary.

You seem pretty bullish about the outlook, but just curious if you're anticipating any impact from the increase in interest rates and how you could see attack volumes.

Beyond the existing contract.

Loss.

Well.

I'm sure that you're all getting tired of talking about leadership, but I would say I'm going to start here with <unk> got a terrific leader and our group President Justin bins there.

Has this team really positioned very well, so I'm going to take your answers slightly different.

Then what you've asked and start with.

The fact that our.

Our team is positioned to be able to capture market share in any situations. So if new residential slowdown we're gonna captured in residential repaint and property maintenance or any other way that it tilts that said given my comments earlier about just the shortage in new residential.

Housing and the demand, we expect that theres going to be.

Strong demand and it's going to continue.

The.

Uh huh.

Homebuilders that we're working with.

Describe this is.

A bump in the road here, but they are driving through it and I suspect that as.

As demand continues there is going to be more and more starts and we're going to be there, but if it does tell to another way.

Okay, we're going to be right on top of it whichever way it helps.

And just to put some perspective on that Garik just to remind you I mean, new residential is sort of a mid teens type percentage of our tag business. So while it's meaningful to us.

John points out we're strongly positioned in all of these other segments as well.

Yes.

Got it makes sense I guess the follow up question is just with respect to the $2 billion a capacity increase.

And just to be clear it was not fully ramped at this point.

<unk> production, particularly in March.

More capacity.

Yes.

Okay.

Well, it's up and running.

To say is there more capacity there to be captured the answer is yes, just laid out because I mentioned the global supply chain President he and his team are constantly working on Debottlenecking and finding more capacity in every asset that we have but the 50 million gallons that we spoke to is up and running I also mentioned the $300 million.

Investing in statesville in that facility to add additional capacity that will be coming up I believe in 2024, it will be coming online. So we're looking ahead, we expect to continue to drive volume and we're ahead of the curve again speaking to the confidence and determination. We have we're not going to look back and wish we would've and great.

Determination and confidence in the execution of our strategy and we're going to have the capacity to be able to take care of it.

Great. Thank you.

You bet.

Yes.

Thank you. Your next question is coming from Adam Baumgarten from Zelman Your line is live.

Thanks for taking my question.

I think you said you expect input cost to decline or moderate at least in the second half is that the case.

I think what we've talked about.

Input costs, Yes, we said the first quarter would probably be the highest inflation of the year second quarter, we expect it to moderate and then come down a little bit further in the back half based on what we see now as Al mentioned, we've got the best visibility is maybe about a quarter or so but yes. That's correct. Our current outlook shows moderation in the back.

Half.

Okay got it and then just on the positive mix shifts in quality, how much of that is related to simply more higher quality product availability given the SKU rationalization and then maybe some weaker DIY demand versus a true mix up and the business well I.

I would say, it's a very good question, except that we've been witnessing this for some time now and it's only continued.

Would attributed largely to more of a labor issue then avail.

Availability.

Painting contractors when you recognize it.

<unk> represents 80% to 85%, sometimes 90% of their cost.

If you can make that.

Per man hour more productive.

Do you have more projects that you can complete less call backs the opportunity cost issues resolved and so more and more people are moving up in quality. We have a full breadth we have the full breadth of products and I would tell you even going back to when I was in a store.

Rarely did you see people that would stay in that lower price typically what they'd find what you'd find is people that would be very price conscious would get in there and there are some applications for it.

The ceilings of closet.

I get that but what you find is people quickly.

They learn that spin.

Spent a little bit more on that.

Higher quality product and get more productivity better touch up.

Get off the project with no callbacks and go on it's well worth it when you look at the cost of it.

High cost market.

Per man hour expense.

It's not a big investment to pay a little bit more of a higher quality product and get onto the next project for sure and our people are trained and that they understand how to do that and again it speaks to the tenure of our people again, Justin and his team all our division presidents.

This is a this is a.

Program, we don't just wait for this to happen, we don't open doors and hope people walk in we don't hope that they just move up the food chain and quality by themselves. These are programs that we execute and it's working very well.

Got it thanks a lot.

You bet.

Thank you. Your next question is coming from Eric Bosshardt from Cleveland Research Company. Your line is live.

Thank you.

First of all on raw materials.

Inflation broadly it seems like it's worse versus 90 days ago.

You talked about energy and oil.

Two.

Is the proper read something today Youre still comfortable with the original guidance for raws I mean is there something incremental you are doing to manage to stay within that original range. In this environment. It seems a bit more difficult to 90 days ago.

Yes, Eric as we said on that range, we are trending towards the higher end of that low double digits to mid teens range.

But we feel right now.

As I mentioned on my previous answer related to oil and propylene and some of the other things.

We're comfortable in that range right now if it moves beyond that I think you've heard multiple times today, we will be ready to react with more pricing as needed Eric I would just add to that you talk about what are we doing in response to it is not in response to any short term tweak.

Tweaks that we see in our raw material basket, our labs, whether it's industrial working with marketing working with procurement or architectural working with marketing working with mature procurement really driving platform consolidation simplification. So that we can drive more volume through a smaller base of raw materials Thats an ongoing.

And not respond to the current environment.

Okay.

Then secondly.

John you talked about reactivating customers.

In the architectural business in this environment.

But I've heard you talk about that before so if you can just give us a little bit of color of what that looks like that would be helpful.

Yes.

I might give you a more of a description of what we're doing and what it looks like for obvious reasons, we'll tell you about it after we've done it and show you the scoreboard on how we've achieved it but I want to be very clear on Eric is that it's not through price.

We bring solutions and we bring profitability to our customers.

And we do it in a way that people are willing to pay for.

Earlier, there was a question about.

There was rumors about are we discounting to be able to do that and I want to be very clear in.

Very direct that that is not the case, what we are doing though.

Is leveraging what I just spoke to.

Quality of the people the products and services that we have.

Booked and they have a strong desire to.

To complete as many projects as they can and protect their reputation.

So if you can imagine all of the activities you would do if you were a store manager or sales rep of Sherwin Williams and building relationships building Trust.

The connectivity and consistency is important ever.

Every day.

Over 3000 sales reps wake up.

Sherwin Williams reps determined to go be a better partner for their customers and our ability to reengage with those customers and be responsive to their needs have the products they need.

No.

Anticipate what challenges they might have shifts in weather to project delays whatever it might be all align and helping us to reengage and while we don't think we lost customers.

Through these challenging times, we do feel as though we've lost some sales and.

And we take great pride in our controlled model of anticipating what products, they're going to need and having them there, but there were times, where it may have gotten there late or we couldnt get it there when they needed it and they might have had to go somewhere else, where you can rest assured of one thing here, we're not going to just assume they are coming back and so we're going to be very deliberate very act.

And engaged with these customers to ensure that they are back in our stores start with a cup of coffee Mega friend use our paint we're going to be after a pretty regularly.

Okay. Thank you.

You bet.

Thank you. Your next question is coming from Mike Sison from Wells Fargo. Your line is live.

Hi, This is Richard Thanks for taking my question.

Just one point on the <unk>.

Americas Group when you look at.

Volumes, which were down.

Largely due to raw material availability now that you have.

That easing and you have more capacity that you can bring on.

Do you expect to increase production.

On the DIY side or are you going to focus the majority of production on building inventories on the architectural side.

Well, we're going to be <unk>.

Converting these precious raw materials into finished goods and pursuing all segments of our business and so I think at this point. That's the extent of we want to talk about we'll talk about what we did next quarter, but we.

<unk>.

We see a terrific opportunity to utilize the capacity that we have.

Okay.

And then just related on that in terms of Skus in your stores.

So in the past you've talked about potentially.

Limiting the number of Skus in order to get more production out or is that still happening or.

Is there any skus that are getting.

Increased demand that you want to focus on.

Okay.

This was a challenging time it did give us an opportunity to look at.

At our Skus and rationalize some of those down that will never return.

There'll be simplification opportunities and what we come out of <unk>.

<unk> line with.

And I would suspect that what youll see.

The very near future is a little bit of expansion beyond.

What we had coming through last year.

But we're not going to just jump back to where we were going to be a better company more efficient with our working capital we will have.

The inventory, we need but it may not be spread out as wide as it has in the past, but we will have what our customers need.

Great. Thank you.

You bet.

Yes.

Thank you. Your next question is coming from JD <unk> from on field Research. Your line is live.

Yes.

Thank a lot.

It's sort of a two part question to the same topic.

Tycho.

Yourself and a lot of your peers have done a phenomenal job on pricing increasing prices very dynamically in the last sort of four or five quarters.

And in the previous cycle whenever you have sort of had inflation the gross margin progression in the subsequent two years increase thats quite dynamically and the regional sort of four 5%. So do you expect in this cycle when you catch up with raw raw.

Raw materials with your pricing and other inflation with your pricing.

Should sort of see gross margin expansion in 'twenty three 'twenty four the same magnitude.

Do you think that because prices pricing went up so dynamically in the cycle you will have to give back some of this price increases as raw materials stabilize and potentially go down.

<unk>.

Demand, we couldnt be in Asia, and Europe , Thanks, a lot.

So I would say this that you are right. If you look historically there has been an opportunity there, but there's also been the opportunity to invest back in the business.

And so.

I would answer your question this way our determination is to make our.

Festival and help them make more money.

There are other costs that go into this labor transportation all of these things that we're doing it and that might not necessarily hit the gross margin line, but our investments that we.

We invest into help our customers.

And their profitability, so I would say that each one of these.

We take.

Take a very.

In depth view and very thoughtful.

Thoughtful view and how we can continue to ensure that what happens as a result of.

All of these investments all the pricing everything that goes into it is that our customers win and when they win we win and if for whatever reason, we got Piggish and tried to put pricing and that didn't help our customers to achieve their goals and be more profitable then we don't deserve that business and youre not going to see us do that.

And so our investments in our commitments and the ability to help customers be successful we will be the drivers.

Judy if I just add to that we do believe we're in a in a similar.

Our environment, where as raw material costs go up and we put pricing and pricing starts to catch up.

With the raw material costs, and we see a short term margin contraction.

Start seeing recovery and you saw sequential improvement in our gross margin in our first quarter. Our expectation is that we'll see sequential improvement in our in our.

Sure.

Second quarter, and then as I talked about on our year.

Year end call, we expect to start seeing a recovery in the second half with.

At the midpoint adjusted EPS up 16%, we talked about we need to see gross margin expansion for the year and then going out you would expect to start getting back to that long term gross margin target of $45 to 48%, which we are not coming off.

Thanks, a lot and just one follow up on Valspar Randy I. Appreciate there's been so much that has changed but if you go back to your original plan, excluding the sale of five ish years since you didn't appeal.

What are the areas, where you are running well ahead and what are the areas, which.

In hindsight, you could have done better and actually there is still more room for us to be positively surprised on the deal.

Well.

I'd say, we're well ahead I think is.

Okay.

The leverage of talent.

Number one.

Mentioned, starting at the top with our new COO Heidi Petz, all the way through to group President in performance coatings and.

Throughout the company I would say there is a.

Terrific infusion of talent I'd say, the assets and the technology and the leveraging of the customers and exciting I mentioned earlier automotive the combination of some technology there is.

I was with one of our larger automotive refinish customers, who asked if that's why we bought or bought Valspar for the automotive finished.

It was that good.

So I'd say there are terrific opportunities there the brand itself.

As a very strong brand and growing in relevance and importance and I think that's a <unk>.

Terrific opportunity and one that we're in.

Ed.

I'd say, if I, if I look back and say, what we could have done differently or.

Or faster or better I do think that.

Coming out of 2016, when there was.

Some hesitation on the previous leadership of Valspar to put pricing in it took us years to recover that and I think we learned from that and I think that's a big part of why you see the determination or at least I hear I hope you hear that determination that we have.

Not to allow that happen and part of that is so that we can remain healthy and serve our.

<unk>. So that we can continue to invest in our business I think the working capitals and other area I think we got we've gotten to it I think there's still more opportunities as are their asset utilization the plants.

So we are proud of what we've accomplished there.

But I would tell you just as we mentioned earlier complacency kills we're not done there's still plenty of opportunities and we find ourselves still prioritizing.

And that speaks to I think the quality of the company that we acquired in the quality of the people that came along with it but we're just getting started there is still a lot of work to be done there.

Thanks, a lot you.

You bet. Thank you.

Thank you that concludes our Q&A session I will now hand, the conference back to Jim Jaye for closing remarks. Please go ahead.

Thank you Matthew and thanks, everybody for joining the call I Hope you heard today that.

We're operating here with a lot of momentum a lot of confidence and we're really focused on driving results and before we sign off I'll just remind you about our upcoming financial community presentation that'll be June eight in New York City and.

And we look forward to seeing many of you there.

Thank you once again and as always I will be available along with Eric Swanson for your follow up calls have a great rest of your day.

Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.