Q2 2022 Sherwin-Williams Co Earnings Call

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

With us on today's call are John Marcus Chairman and CEO Al Mr. Sen 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 Sherwin Dot 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 speaks 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.

A 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 up the session to questions I.

I will now turn the call over to Jim Jaye.

Thank you and good morning to everyone.

Our second quarter results came in below our expectations and conclude what we knew would be a challenging first half to the year.

On the top line quarter was characterized by strong demand in pro architectural in North American industrial end markets.

Partially offset by softness in the North American DIY channel.

We first described at our Investor Day on June eight.

And tight supply of certain resin.

Particularly alkyd resins, which impacted our north American non paint sales, namely aerosols and states.

Internationally demand deteriorated faster than anticipated in Europe .

We saw no real recovery in China, following the lifting of Covid lockdowns.

Both of which meaningfully impacted consumer brands and performance coatings group sales.

Our earnings per share were impacted by multiple factors, including no meaningful improvement in raw material costs.

Supply chain inefficiencies incurred in serving our customers.

The sales shortfall in North American DIY.

Slowing European and Asian demand and higher other and interest expense.

I'll go through just a few of the numbers at a high level and then turn it over to John who will talk about the demand and cost trends we are seeing.

How we're responding.

And our revised outlook for the year.

Including what we expect will be significant earnings per share growth in the second half.

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

Starting with the top line second quarter 2022, consolidated sales increased nine 2%.

Slightly below the low end of our guidance and driven by the shortfall in consumer brands group.

Pricing was in the low double digit range.

Consolidated gross margin decreased to 41, 7%.

By cost inflation.

On a sequential basis gross margin improved by 60 basis points, reflecting our pricing actions.

SG&A expense decreased to 25, 9% of sales.

Consolidated profit before tax decreased nine 7% to $739 9 million.

Diluted net income per share in the quarter was $2 21 per share.

Versus $2 42 per share a year ago.

Excluding Valspar acquisition related amortization expense second quarter adjusted diluted net income per share was $2 41 per share versus $2 65, a share a year ago.

EBITDA in the quarter was $976 1 million or 16, 6% of sales.

Moving on to our operating segments.

Sales in the Americas group increased eight 1% against a 22, 6% comparison.

High single digit pricing and higher professional architectural sales volume was partially offset by lower volume in protective and marine and DIY.

Segment margin decreased to 21%, resulting primarily from lower sales volume and higher raw material costs.

Partially offset by selling price increases and good cost control.

Sales in the consumer brands group increased <unk>, 9% inclusive of a high single digit price increase.

Demand was soft in all regions, particularly outside of North America.

And tightness in Alkyd resins impacted North America non paint sales.

Adjusted segment margin decreased to 11, 2% of sales.

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

Partially offset by selling price increases.

Sales in the performance coatings group increased 15, 2% against a 41, 3% comparison and were driven by double digit price increases and low single digit sales from acquisitions, partially offset.

All set by a low single digit FX impact.

Adjusted segment margin increased 80 basis points to 13, 8% of sales due primarily to higher selling price increases and good cost control.

Additionally, I'll point out the admin segment this quarter, where we had a headwind of $45 $1 million year over year or about <unk> 13 per share.

This was driven primarily by investment losses and gains.

Higher interest expense.

Gain on disposition of assets last year.

And higher SG&A expenses, partially offset by lower compensation expense.

Let me now turn the call over to John for additional commentary on the second quarter.

Along with our outlook for the third quarter and full year 2022.

John .

Thank you Jim and good morning, everyone.

Let me be clear that we are not satisfied with our results in the quarter.

Our job is not to just report results, but to influence results.

We fell short of our expectations. This quarter as we continue to operate in a highly inflationary cost environment, coupled with ongoing regional challenges impacting demand.

Saying that we continue to see positive trends in much of the business and we expect to deliver a strong second half of the year.

We have confidence in our strategy.

We have confidence in our business model.

And we have incredible confidence in our people.

Let me start by describing how the quarter played out following our June Investor day event.

Pro architectural demand remains strong.

Currently.

Sales have been particularly strong month to date in July and contractors are reporting strong backlogs, which bodes very well for our second half.

Lower demand for DIY that we described continued.

Tight alkyd resins supply negatively impacted North America non paint categories Europe has significantly softened further and there was no meaningful recovery in China post the lifting of the Covid Lockdown.

This impacted consumer brands and portions of performance coatings.

There was no improvement in raw material costs.

While some key feedstocks have come down sequentially. The issue is timing as resins solvents and other key inputs are taking longer to reflect this trend than anticipated. Additionally.

Additionally, the rest of the cost basket remained highly elevated including labor transportation fuel and other costs.

While the supply chain for raw materials continue to improve it remains tight and subject to shocks.

Notably certain specialty resins crucial to several of our industrial coatings products were in short supply.

With the tightness in the supply chain, we continue to have inefficiencies in our operations, but have chosen to continue serving our customers, albeit at higher costs.

While the cost and regional pressures, we are seeing a real there is no sense of panic amongst our team, which is deep and experienced.

We continue to operate with urgency and great determination and we're taking the following actions.

We've announced and are implementing a 10% price increase in the Americas group effective September six.

Significant pricing actions are also being taken in our other two groups.

We remain highly focused on capturing demand and gaining share.

We are managing our expenses tightly across all our businesses.

We're focused on general and administrative spending rather than growth.

Before moving onto our outlook, let me provide some additional color on our second quarter.

In the Americas group sales growth was strong and volumes were positive and pro architectural market segments with.

Excluding DIY and protective and marine sales were up eight 7% in North America paint stores.

Against very difficult comparisons and as we expected sales gains for the group were driven by price as total volume was down slightly.

The sales growth was led by property management, and new residential both of which increased by a double digit percentage.

Residential repaint was up high single digits and commercial was up by a mid single digit percentage.

DIY was down low single digits.

Limited availability of certain resins impacted us in protective and marine which was up by a mid single digit percentage.

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

From a products perspective exterior paint sales grew faster than interior sales with interior being the larger part of the mix.

We opened 19 net new stores over the first half of the year and still plan 80 to 100 for the year.

We also added sales reps in territories in the quarter, along with ongoing growth investments in management trainees innovative new.

<unk>, new products e-commerce and productivity enhancing services.

Our consumer brands group had a very difficult quarter.

Sales in North America were up by a high single digit percentage, but well below our expectations given a favorable comparison.

The slowing demand we cited at our Investor day did not improve over the remainder of the month and.

And we experienced tight supply in certain resins, particularly alkyd resins.

Significantly impacted our north American non paint sales.

On a positive note the pros who paint segment, while small again grew by a strong double digit percentage.

Sales in China were down by a very high double digit percentage due to COVID-19 related lockdowns and a challenging comparison.

Europe was also down high double digits due to the slowing macroeconomic environment and the challenging comparison.

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

Segment margin decreased significantly due to lower sales volume increased raw material cost and supply chain inefficiencies.

In contrast, our performance coatings group had a very nice quarter.

Sales were up mid teens, including mid teens pricing.

Low single digit sales from acquisitions were more than offset by FX headwinds adjust.

Adjusted segment margin improved 80 basis points year over year, and 200 basis points sequentially indicative.

Indicative of executed pricing actions.

Regionally sales increased strong double digits in North America, and Latin America against difficult comparisons.

Sales in Europe were up low single digits.

Sales were backward in Asia, largely related to Covid Lockdowns nearly every division in the group grew led by coil and packaging both of which were up strong double digits against double digit comparisons.

We are clearly gaining share in these businesses.

Sales in general industrial and auto Refinish increased high single digits against very strong double digit comparisons.

Industrial wood sales decreased low single digits, mainly related to Asia, and Covid lockdowns in a slowdown in Europe .

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

We returned approximately $453 million to our shareholders in the quarter in the form of dividends and share buybacks, we invested 296 million to purchase one 1 million shares at an average price of $269 46.

We distributed $156 $2 million in dividend.

We also invested $129 million in our business through capital expenditures, including $89 million in core Capex and $40 million for our building our future projects.

Additionally, the acquisition of growth in both volume and <unk> closed on July one.

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

We expect to end the year around three times and will drive the ratio to our long term target of two to two five times range in 2023.

We will use cash in the second half of 2022 to manage debt and share buybacks will be done to offset option dilution.

Turning to our outlook as we've communicated multiple times going back to January of this year, we expected 2022 would be a year of two contrasting halves with.

With difficult first half comparisons easing in the back half.

We expect to deliver a strong second half with sales up low double digits to mid teens percentage and diluted earnings per share up by 35% at the midpoint of our guidance.

Within the Americas group, we continue to see extremely strong demand across all of our architectural markets.

<unk>, new residential despite higher interest rates.

With customers reporting strong backlogs that will take them through the end of the year and likely longer.

We also see a unique opportunity to win new business as competitors transition their pro contractor business models.

Within the consumer brands group we.

We expect more modest growth as the North American DIY consumer faces inflationary pressures in Europe , and China remained challenging.

Within performance coatings group.

Demand remains strongest in North America, our largest region.

European demand has slowed in the second quarter, and we do not expect meaningful improvement in the second half of the year.

In Asia, the pace of recovery from prior Covid Lockdowns in China and prospects for additional lockdowns make it difficult to assess demand trajectory.

From an industry supply chain perspective, we're getting the raw materials, we need with some exceptions, such as alkyd resins, which remain choppy.

At the same time, it's not optimal.

In our own operations, we expect inefficiencies to continue near term as we've decided to take the necessary steps required to overcome these challenges and ensure that we are serving our customers with product where and when they need it.

Exiting this era with our customers will prove beneficial to our shareholders.

On the cost side of the equation.

We are raising our mid teens raw material inflation guidance to high teens.

As expected cost moderation did not materialize in the second quarter and appears to be pushed out a quarter or two.

To be clear, while the timing is not precise we do expect raw material costs to moderate we do expect to hold onto our pricing based on the value, we deliver and the customer facing investments we've continued to make.

And we do expect margins to expand.

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

Our pricing actions remain on track.

Additionally, the highest rate of inflation, we've seen in 40 years is affecting the other elements of our cost basket, including labor transportation fuel and other costs.

We're combating these increases with additional selling price increases in all three segments and our second half of the year.

So specifically for the third quarter of 2022.

We anticipate our consolidated net sales will increase by a low to mid teens percentage inclusive of a low double digit price increase.

We expect the Americas group to be up by a high teens percentage.

We expect consumer brands to be up by a low single digit percentage.

And we expect performance coatings to be up by a high single to low double digit percentage.

For the full year 2022, we are maintaining our consolidated net sales guidance based on the momentum we're seeing in pro architectural and North American industrial.

We continue to expect consolidated net sales to increase by a high single digit to low double digit percentage.

We expect the Americas group to be up by a low double digit to mid teens percentage.

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

We are decreasing our earnings guidance for the full year based primarily on the headwinds we described previously.

The incremental pricing actions in general and administrative cost reductions I described earlier will not fully offset these headwinds immediately.

We now expect diluted net income per share for 2022 to be in the range of $7 65.

To $7 95 per share compared to $6 98 per share earned in 2021.

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

On an adjusted basis, we expect full year 2022 earnings per share of $8 50 to $8 80.

An increase of six 1% at the midpoint over the $8 15, we delivered in 2021.

This implies a second half adjusted diluted net income per share of $4 63 per share at the midpoint, an increase of 35% over the same time last year.

In addition, we provided updated guidance on several of our full year data points in our slide deck, including our expectations for FX Capex.

Interest expense depreciation and amortization.

We expect our full year tax rate will remain in the low 20% range.

While we continue to operate in an uncertain macro economic environment, we remain confident in our strategy.

We expect to deliver a strong second half of the year and more importantly create shareholder value over the long term through the following actions.

We will continue leveraging strong pro architectural volume demand in North America paint stores, while investing in future growth with incremental new stores and sales reps.

We will continue implementing appropriate pricing actions across the company to offset persistently higher input costs with a focus on regaining our gross margins back to our long term target range of 45% to 48%.

We will continue to invest in the pros, who paint initiative and consumer brands group.

And in products and services that customers value and the performance coatings group.

We will continue investing in acquisitions that accelerate our long term strategic plan add topline growth and expand our operating margins as we've demonstrated recently through the specialty polymers sika.

<unk> and <unk> acquisitions.

We will continue to appropriately managing our general and administrative costs, while investing in future growth initiatives.

We will continue to review our portfolio of businesses brands and customer programs to ensure they are adding above market growth and long term shareholder value.

We will maintain our disciplined capital allocation philosophy.

We will not hold cash while investing appropriately in capex paying the dividend targeting acquisitions that accelerate our strategy and absent M&A buying back our stock.

Our leadership team has experienced our 61000 employees are focused on the task at hand.

And we expect to win.

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

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.

Asks that while posing your question you. Please pickup your handset before sending on speaker phone to provide optimum sound quality. Please.

Please hold while we poll for questions.

Your first question for today is coming from Ghansham Panjabi. Please announce your affiliation then pose your question.

Hi, Hello.

Hello, everyone Robert W. Baird.

I guess first off I mean, obviously, Jon Lutz changed over the past few months given the increase in interest rates and concerns of a construction end markets here in North America.

Can you first off just update us with your view view if it has changed as it relates to the various sub segments within tag.

We've got some I would say our confidence in TEG remains.

Strong as it has always been.

You look at what's happening within those segments.

Maybe I could just run through them briefly here if you look at the new residential.

Our position there is strong and getting stronger as a matter of fact, we have been.

Very transparent in.

<unk> that we have these exclusive relationships with 18 of the top 20.

National Homebuilders in fact, we've gotten a few inquiries.

Because there are some specific wording at our financial community presentation slide.

We've been able to maintain those.

Our relationships and the fact is that we've actually grown them.

Proud of our team for hanging onto the 18 of the top 20, but we've actually now grown that to exclusive relationship with a top 20.

23 of the 20.

23 of the top 25.

We're selling the majority of the remaining two of the top 25 so.

Customers in this space are telling us they have confidence in the balance of the year demand is strong.

Based on just the simple supply and demand and so as we work with are.

National and regional homebuilders creativity that they are displaying to ensure that they keep building is high.

The market demand here is high supply is.

This is below the demand space.

We think it's.

Pretty visible to those of us in the industry that.

There is a strong level of demand.

If I look at residential repaint.

Here is an area, where the job itself is growing in size and value.

Part of that is a continued positive mix shift into higher quality products.

These higher quality products.

Help our customers with productivity with the appearance touch up.

Ease of application.

Our customers here again are very competent through the balance of the year with demand.

Our position here is growing and I do think that it might be interesting to point out that.

If you go back to the 2008 period, where less really faces significant challenges.

Challenges in residential that's that was really the catalyst for our residential repaint business that we have now so it is a uniquely different position and I think much more favorable position for our company right now because if there is a slowdown in new residential and we have a much stronger residential repaint business now.

Then we did during the last slowdown so it's an area of focus that we've had strategically to offset.

Any puts and takes in the market and we think that the stronger position in raws repaint that we have now will be a strong position going forward.

The other area. If you are following new residential with concern would be what happens if people are not buying new homes again, we still think there's demand strong demand there but.

The maintenance that would be the other area that we would expect to benefit in.

Here again, we've spoken about the relationships that we have in the past we've talked about the 18 of the top 20.

We have exclusive relationships.

We now have exclusive relationships with 21 of the top 25.

In fact in the top 350, we have solid agreements with 70% of them an exclusive relationships with 45% so.

45% exclusive of the top $3 50, while we're pleased with that it still offers a terrific opportunity and again room for growth for us in.

In property management Capex.

Our teams would describe that is.

An area that's off the charts right now.

Considerable amount of investment taking place.

As well as in the terms, which is very robust and almost acts as a bit of an annuity in the business.

In many ways.

Commercial I would describe it ghansham as historic backlog the pipeline here is strong we're seeing a lot of.

Activity here and tilt up in distribution.

Data centers.

And some might even include multifamily and commercial space as well.

We run a good part of our business protective and marine business as you know through our tag business.

This is a business where demand has been strong, particularly in Petro Chem.

Water and wastewater.

Also high.

Other value area infrastructure as I mentioned data centers also battery plants is another area.

This is an area that we were impacted negatively we talked in our prepared remarks about the alkyd resins.

We felt a lot of pressure here, we could have.

We sold a lot more product if we could have gotten more of the orchid resin was in short supply.

Our position here is very good.

One that we believe has tremendous runway ahead of us.

Hey, Ghansham this is al <unk>.

And building on that confidence in the strong demand. This is what gives us confidence in our second half adjusted EPS guidance to be up 35% with strong volume and tag plus we announced as John mentioned in his opening remarks, a 10% price increase effective September six along with the pricing actions we're taking.

Across the rest of the groups our expectation is that we're going to see nice gross margin improvement year over year, starting in our third quarter and trending through our fourth quarter and I'd like to highlight another a couple of other points just to.

Reiterate that confidence if you look at our operating margin in tag at 21% in the second quarter, Yes. It was down year over year, but I think the strong volume and the pricing actions that we're taking are going to help us get into.

Strong improvement in our second half as it is our second quarter was sequentially better by 420 basis points.

Better by 500 basis of 90 basis points for the fourth quarter and I got to talk about performance coatings group because.

As you know that has historically been our lowest operating margin business to date, and we have a lot of confidence in attaining our target operating margin of high teens to low 20% and I think that will move the needle on our overall results and we're making good progress our second quarter operating margin improved 80 basis points year over year.

And increased 400 and.

<unk> improved 200 basis points sequentially, and improved 490 basis points compared to the fourth quarter of 2021, and this came on gross margin expansion and SG&A leverage and even with the macro challenges that we're facing in Europe and Asia that we expect to continue on our second half.

The pricing actions the market share gains that we're experiencing in packaging and coil in particular gives us great confidence that we'll be able to expand our margins in the second half in that business and thats, including the acquisitions that we made.

That John talked about which are going to give us modest.

Tailwind in our second half on an operating profit, but as we integrate and realize synergies next year and we'll talk more about this on our second or our year end call. We expect margin accretion with those acquisitions and then finally I'll talk about our consumer brands group.

Absolutely understand and agree were under pressure in our second quarter.

Sequentially.

Down, but better than a 490 basis points and our our fourth quarter.

Even though the volumes are down our expectations that business returns to 20% operating margins as we improve our operating efficiencies as we focus on our continuous improvement initiatives and we drive shareholder value and generate cash flow and that's going to be part of this.

Portfolio review that.

And we look at as you know.

Profitable gallon growth operating margin expansion, Rona and cash flow and we're committed to driving the businesses within consumer to the targets that we set and as you know if we haven't and don't believe we have a path to hitting those targets. We are committed to making those changes and that includes as you recall, the ANC divestiture and the Ace private label.

Business that we.

Walked away from.

Okay. Thanks, I'll turn it over in the interest of time. Thank you.

Thanks Ghansham.

Your next question is coming from Christopher Parkinson. Please announce your affiliation then pose your question.

Alright, great Mizuho.

Gentlemen, just going and so let's take a look at tag.

Theres some optimism on the pent up demand on the resi repaint side likely commercial.

Even some stuff in multifamily imagine price cost, we know where your pricing is we're all taking a stab at where we think the raw material basket is going to go over the next couple of quarters.

And John when we take a step back from everything I mean, where do you ultimately think the tag margins can go I mean, theres been a lot of focus on the 13th by 'twenty four.

<unk> obviously.

You're going to take a little bit to get there, but on the tax side of it.

Just how should we think about your business how should we think about in terms of like how they are falling into place in the back half of the year and into 'twenty three and even 24 are there any updated thoughts there. Thank you.

Yes, Chris this is going to be.

A little bit of a diversion from what you've talked about and let me just.

I like that we're probably not going to be talking about 'twenty four yet so.

Fair enough.

But.

I don't want to mentioned I'll ask al to get into the details, but I do think as maybe as a preface to your question I think it's important to understand why we have the confidence that the margins improve the way that we're projecting.

I think it highlights highlighted is specifically focused on our ability to make our customers more successful this through products through services through our people.

Adversity, that's in the market right now that we see them. This is actually when we're at our best in servicing those customers and I think you can see that right now.

As we come through this second quarter.

And while TEG hit the number it was on the lower end of the sales.

<unk> patients.

The fact is is that we probably missed by less than a couple of weeks. What we were projecting because we're experiencing that now is June went on sales continued to grow the momentum continued to increase in fact.

We don't normally show this level of color, but I would tell you that coming out of June with a double digit.

Gain in nearly every segment now as we enter into and finish up July our average day in tag right now is averaging high teens low 20. So the momentum that we projected is in fact, there and we believe it's because of the the value that we are helping create.

On the part of our customers to help them to be more successful than what it is that they're doing we've got a lot of challenges in.

Labour, they've got challenges and projects, starting and stopping and our people our stores our products are helping them to do that better than anyone else and as I've mentioned on numerous calls.

Valuate. The most is the research that we do who helps you make more money and by a wide margin we have a.

A great distance between us and our competition here on the professional side, we have I'll walk you through our projections on margins, yes, Chris.

We saw.

Nice sequential improvement in our margins.

Our ROM or pricing that we've put in place to date.

It actually was over what the raw material cost increases were plus other input cost, but just not up to the expectations, we had and what the outlook that we have on.

Raw material costs.

Hi.

Above the high end of our range.

Our cost to serve our customers as we talked about the supply chain is not.

So we're moving product around this.

The desk.

Platform, if you will to make sure we have the right products in the right place, where our customers need them.

And Thats really whats driving this additional 10% price increase September six which we do believe we'll have a similar effective blip newness to previous price increases.

And as you recall and know you go back 10, 11, and 12, when we were out with.

Six price increases in 22 months, our margins intact were under pressure and and coming out of that as raw materials moderated our gross margins grew almost 600 basis points from 13% to 16, and we believe we're in a similar environment.

Because we can hold on to that price.

We continue to make investments, even though we're experiencing these headwinds and if you go back.

Full year 2022, or 2020, we're at a $22 one second half was 23 and a half.

I don't believe we quite get to those levels, but we're starting on a much better base than we were in 2010. So we have a lot of confidence that as the market turns and Ross start to moderate we'll hang on to that price and we will see a nice snapback to our gross margins and operating margins in the tag going forward and let me just.

That off with the key driver behind that we believe and we will always believe that it's our people.

The.

Message on our or defer.

Differentiation here I think is probably as strong or stronger, particularly given the environment that we're finding ourselves in.

We're going to war with.

Store managers that averaged 10 years of experience sales reps that averaged 12 years, our district managers, averaging 22 years are our vice President's averaging 24 years. So there is a lot of experience.

We're leading in.

The fact that we've got.

This training and the experience that we have allows us our customer engagement, we feel thats.

Clear differentiation point between us and our competitors.

The fact that we are now able to get back into in person training as opposed to a as opposed to virtual training.

We're engaging with our people we think is just.

Standing element to our what we call our secret weapon, our people and in.

And our ability to right now attract talent is probably as strong as ever.

<unk> been open about our management training program, which is entering its fourth 40th year, we're recruiting anywhere from 400 to 500 College graduates.

And this high caliber talented employee.

Joining our family helps us to do exactly what Hal laid out as far as the financials. It's the people that set us apart.

And then just a real quick follow ups you as a corollary of Al's comment on the price increase.

It seems as though in the past and understanding it's small part of tag.

All thought as the price increases of the DIY crowd once again small.

Short term contractors long term contractors and kind of the progression to getting that and typically the realization was 60%, 70% plus of the initial price increase could you just give us a real quick comment on how we should be thinking about that as it will ultimately pertained to 'twenty three.

Do you think youll get the expeditious pace of what you've realizing recently or kind of going back to in the past and as my assumption on the actual net realization.

<unk>, so just pace and realization would be very helpful. Thank you.

Yes, Chris I would say that we expect that momentum to continue.

I think for all the reasons I don't want to belabor the services and everything that we believe we bring and the value creation for our customers.

But I would say that it's a market where people are probably more understanding and then go to the gas pump and see what's happening and so our execution on these.

These prices are nothing that we we're not arrogant with it. We're we're determined because we wanted to keep our organization healthy so that we can help our customers remained healthy.

The balance is important that we continue to invest in products and services innovation.

Programs that will help our customers on every part of our business and it's easy to point to the tag business and recite the.

85, roughly percent of their cost of goods is labor and everything that we can do to help make that labor more efficient helps their profitability. So the cost of the gallon of paint is a lower percentage there and.

And themselves deciding to move up in quality, because they see that are higher priced high quality product.

It helps drive their success, but that logic actually carries through to every element of our business. We're driving our customer success. That's how we gauge our success when our customers are successful then we know that we're going to be a better part of their programs and their success and that's what we're focused on when we bill.

We will be able to execute on these prices accordingly.

Thank you.

Thanks, Chris.

Your next question for today is coming from Greg Melick. Please announce your affiliation then pose your question.

Hi, Thanks.

With Evercore ISI.

Question was a follow on I think some of your points there in terms of the margin inflection.

It sounds like now you are on top of Raj just not as much as you would have thought.

And remind us last year of that 450 or 500 bps margin decline.

How much of that was raws versus price as opposed to the volume declines that you saw.

Yes.

It would be the.

Majority of the raws, but theres other input costs that are coming through Greg, but that would be the majority.

Volume is always when our volume is backwards. That's always the biggest driver of operating margin. It's always when it's positive and as we expect it to be strong and our second half going to be the driver of operating margin.

But even if you even if you offset.

Raw material cost increases with selling price increases your margin takes a hit.

And it takes.

Moderation, a little bit of moderation on raws and increasing that last price increase effectiveness to start seeing the recovery and we believe we're going to start seeing that in our third quarter.

Okay. So maybe the backup question on that then is if you look at the third quarter guide if sales are going to be up low to mid teens and that presumably probably has price thats also low to mid teens are you assuming flat volume year on year in your third quarter guidance.

On our third quarter.

Thank you.

We look at the second.

The September price increase I, probably have high single digits, you have to annualize. The August price increase last year, you start to annualize annualizing the surcharge.

So I have volume up high single digit and then that would tell you volume would be up in.

In that high single digit range.

Okay, I'm not as heavy on prices you've got in your.

What youre, saying.

Greg.

A company on the back half architectural gallons I could give you a little color there, we're expecting low to mid single digit gain for the company with TEG up in the high single digits.

Got it on volume.

Got it and then the rest is price.

Great I'll leave it there good luck guys.

Thanks, Greg.

Your next question for today is coming from Vincent Andrews at Morgan Stanley .

Vincent Youre liveliness.

Thank you and good afternoon, everyone, maybe just following up a bit on the consumer brands piece.

Obviously, we've seen what's your volume was in the <unk>.

<unk> can you talk about whether you think that is indicative of what the retail takeaway is in line with it or worse.

And where do you think they are your retail partners are in terms of their own inventories are sort of doing the destocking that seems to be going on and I guess really what I'm asking is just sort of you just mentioned you're expecting.

Tag gallons should be up more than sort of architectural gallons, but you're obviously expecting consumer gallons III, which sounds like that so what gives you the confidence of the consumer gallons could actually be up in the back half of the year.

Yes, Vincent I think.

Careful line here that we are always cautious and crossing in talking about too much of our customers' business.

I will say this that as it relates to our customers' inventory we made great progress.

Filling our customer shelves in the second quarter and there is still opportunities for additional channel fill.

We're going full speed.

To put everything we have behind this we mentioned.

Specifically some of the key areas of the.

<unk> <unk> and <unk> that have been impacted by the alkyd resins, that's going to impact the ability to fill inventory.

As it relates to our customers.

Their inventory levels I think it's only appropriate.

Come from them not us Vincent just to clarify.

What John said is our second half architectural gallons are going to be up low to mid single digits.

Tag would be up high single digits that tells you that consumer is actually going to be backwards.

On a mid single digit percentage.

And that's driven by the.

Continued trends, we talked about with softer North America, DIY and I would say, we did not see a significant destocking in our second quarter remains to be seen going out, but we didn't see it in our second quarter, and then Europe and Asia, We expect to see continued softness in Europe and.

Really choppiness in China as the Rolling Lockdowns continue.

Okay.

Thanks, so much.

Given.

Your next question is coming from David Begleiter at Deutsche Bank.

Thank you good morning.

John I was going back to slide seven and looking at what what changed since June <unk>.

I don't see FX on the slide was that a headwind versus what you were expecting earlier or is it embedded in these numbers.

Yes.

Im going to be a little bit of a <unk>.

Bigger headwind, but David 80% of our of our sales and profit are in North America. So we're not as impacted but we do expect it to be a slightly bigger headwind in our second half.

Got it and John just on North American DIY did it did demand softened versus your june's expectation, just not get better versus that expectation.

Can you repeat that I'm, sorry, yeah, looking at North American DIY, you called out softer demand versus maybe the earlier expectation does that does it get worse versus June 8th or just not improve or how should we think about that.

Yes, I'd say that.

Good.

Get worse than we were expecting some improvement as we went into the holiday.

Fourth of July season.

We're expecting more improvement than we saw in and maybe it'd be good if I could I think.

And so there's a lot of questions here regarding this topic.

I wanted to just make sure that we cover this completely.

And openly.

And as Jim opened his prepared remarks, and we are disappointed with the way that everything came together.

I think that it's helpful for everyone if I put it in perspective.

Two of the three businesses performed within the range that we expected.

I'm going to jump to CBD in a moment, but I do think that it's worthy of just taking a couple of seconds to talk about the other two and then it's been a little bit of time on CPG.

Consumer brands.

Very quickly with performance coatings.

Nice quarter and sales were up mid teens expanded margins year over year, which reflects our pricing actions are taking hold as al mentioned.

And the cost environment remains a challenge.

Again, we're responding with additional pricing actions accordingly.

Tag, we talked briefly about it here.

As I mentioned, we hit our guidance, albeit at the lower end.

Demand remains very strong.

Mentioned.

Very pleased with our sales trends right now averaging in the high teens to low twenties per day.

In this space DIY is an area that remains softer and I talked about the protective and marine.

Remained strong.

The demand the areas areas that were feeling softness is in our ability to.

To supply mainly in the resin area.

Here again as Al mentioned, we're putting pricing through.

Tuesday.

But getting to the heart of your question on <unk>.

CPG on our analyst day that business was trending softener softer.

It did further deteriorate as the quarter went on.

And the deterioration mainly focus on four areas that I briefly talked about in our prepared remarks with DIY demand.

It was disappointing you asked about it we'd like to see a stronger performance there.

No improvement in China, I'll mentioned Covid lockdowns as they were.

Were lifted we saw virtually no improvement after those lockdowns were lifted.

The European deterioration.

Further and faster.

The quarter progress than we expected.

And again not to overplay it but.

There was virtually no improvement in the alkyd resins availability.

That had a significant impact.

On our ability to serve areas that are underserved right now, which is the ability to supply our steams in aerosols to the market.

And as I mentioned, the other two pricing actions and CPG is going to be an important piece as well as we're responding to the cost issues.

In this business just as we are in tag in the other businesses.

The largest parts of our business.

They delivered.

We're executing on our strategy going forward.

This second half of the year, we're going to drive earnings.

Up by 35% at the midpoint of our guidance every.

Every business we believe.

Has the leadership and the people to do it our group Presidents are outstanding adjusted bins are Todd ready to consumer brands.

He is carrying a heavy load right now.

We believe delivering Carl Jorgen who's running our performance coatings group.

Our CLO Heidi petz, each one of them are out there everyday driving doing what's right.

And while this was.

Software quarter than what we expected when we don't take it lightly.

We've got a lot of conversion of a lot of determination, but mostly confidence in what it is that we're doing and we're going to deliberate we've got it.

Thank you very helpful.

You bet.

Your next question for today is coming from Ron <unk> with RBC capital markets.

Okay.

Great. Thanks for taking my question I Hope you guys are well.

I guess I wanted to drill down into North American housing dynamics, a little bit. So we have seen many of the builders start to report slowdown and.

Sales and potential cancellations as well permits also.

Even though the housing reports are okay. The actual numbers from the builders aren't aren't as great. So.

Could you just elaborate on how you see kind of tag playing out over the next little while and maybe even the DIY side.

I guess my specific questions are you noted strength in R&R and residential repaint, but it seems like architectural gallons are still kind of 80% correlated to existing home sales. So if we do see a big slowdown there.

How does tag really kind of manage through that and is it through share gains or what do you expect kind of for a positive growth.

Before just given the housing backdrop. Thanks.

So let me take a run at it and then I'll have Jim get through some of the metrics on the housing that you mentioned, but.

But it absolutely focuses on share gains we've got great confidence in this team I will highlight that the majority of the homebuilders that.

We're out there even a few that have lowered their numbers their numbers have been lowered.

Still an increase over the prior year.

So it may not be as robust as expected initially, but there's still good growth there and the reason that I highlighted the fact that we're expanding our exclusivity.

It wasn't upon my chest is to demonstrate exactly the fact that we know that if it's slowing down we've got to have more customers, we're doing business with to offset that demand and so we're continuing to push hard in new residential and residential repaint and property management commercial is very strong we got it.

Great position there.

And the momentum is very strong behind that.

But our view is is that.

The work that we're doing right now.

<unk>.

Establishing ourselves with these customers is what's going to pay off let me just give you a little bit of background on that so let's just talk.

In our tag business, our outreach effort right now executed by our team is as strong as it's ever been our face to face call activity was at an all time high last quarter. We've never made more sales calls in a quarter than we did last year. So it should be no surprise.

But the number of active accounts in our stores also hit an all time high we've never had more active accounts in our stores than we do right now.

Second quarter, New account activity is very strong. These are the seeds that were planning for the future. So clearly our people are focused on the productivity of our customers and this is how and when we're at our best So we're capitalizing on the choppiness in the market by offering this consistent.

Reliable solution through the very best team that we have and we believe that the products.

The store managers that I mentioned, the reps that services the innovation that we're bringing the whole specialty store format.

Think is very unique and we believe that controlled distribution model allows us to respond to that.

The variables in the market.

Whichever way this market tilts, we're going to be there and we're going to do whatever we have to do the lead in those each of those segments that are benefiting and will gain share in those areas that might experience some softness new turnover agenda walk through his thoughts on the new residential.

Question that you had.

Yes, Arun this is Jim.

No I agree with what John just said there and what we always do first and foremost is in front of our customers.

Recently al and I were traveling and we visited with several of our national Homebuilders and while the pace may be slowing a little bit it's still a lot of confidence out there that I think takes them through the end of the year and well into next year.

Completions right now are up year over year, and where you look at the single family or multifamily maybe multifamily is trending a little bit stronger now, but wherever it may be were there and ready to capitalize on that.

You talk about mortgage rates, maybe a little bit of impact there, but there is still low in comparison to other periods and again, we're still seeing very strong demand there and I think it's underpinned by.

What we've talked about for a couple of years now this overall.

Short fall between houses being built.

Household formation, so I think that feels good on the repaint side as you mentioned.

Customers are telling us strong backlogs home price appreciation continues to be really strong.

Look at some of the third party metrics lira.

HB remodeling index, all those are pointing in the right direction.

I'll remind you that roz repaint, while it is our largest segment is our biggest opportunity.

We feel good about that you made comments about property management and commercial as well I think.

I think our teams are primed and ready and the demand is out there and where we're going.

And after it.

Great I appreciate all the detail guys and then if I could just quickly on DIY. So.

Been kind of weak here.

And it looks like you guys are expecting that to continue.

What would it take for it.

Why did turn around in the past I guess you guys have seen some improvement there with.

Unemployment when it goes higher.

Is that what.

We should be thinking about or what else are we were expecting for.

Either a bottoming and maybe.

Turnaround in DIY.

Okay.

I think if your question is how do we see DIY or would we see DIY.

And driving that DIY turnaround from here I guess.

Just given the weakness that we're seeing here recently.

Well I think first and foremost.

It's fair to say that our focus through our stores is the professional painting contractor with 85% of our business focused on the contractor we're focused on a very isolated DIY customer.

Those that are prefer a specialty store format.

Our outreach there is through various methods of advertising through social media.

<unk>.

A few levers that we pull to drive that business.

Good business for us, but our focus primarily is on the professional side through our stores.

Understood I guess I was asking.

I was asking more about the consumer brands DIY piece, sorry, John Oh, I'm, sorry, I thought you were talking about the DIY through our stores through our consumer brands.

<unk>.

The focus there obviously.

Obviously is on helping our customers to win here you look at making sure that we have the right product right product assortment.

Sure and that we have it at the right price we participate in helping to.

Drive traffic through activities, including as I mentioned brand advertising the training in the store as an examples of it.

We want to help our customers convert.

Yes.

Shoppers into buyers.

The innovation that we're bringing there will help do that to do that and the training that we have inside the company and the centers of excellence that we have we want to share that with all of our customers.

A great deal with that but right now in the rep activity through this pro who paints initiative, we want to continue to invest in that as well.

We believe that.

That customer going through a home center as it was a customer that we have been really not focus on through our own stores and those are the customers that.

Kind of balanced between.

<unk> and <unk>.

Propane by definition in our world as a contractor who's doing remodeling or some element of construction. That's also painting.

With the completion of that project, we are supporting our customers' efforts there as well as various loyalty programs that our customers are initiating we want to support those initiatives. There. So there's a lot that we want to do is execute with our customers to drive every category.

In the <unk>.

Home Center store that ultimately can come back to help drive the paint department as well.

Add to that.

It would be helpful. If we see some moderation in gas prices some moderation in food prices that.

Have been very.

It hit the consumer very hard over the last.

Few months so.

I think you have to start seeing some moderation in those costs.

<unk>.

Get back to some of these discretionary projects.

Got it thanks.

Thanks Arun.

Your next question is coming from Mike <unk>.

At Barclays.

Great. Thanks, good morning.

Just one from me.

I guess why do you think there's this big divergence or at least some level of divergence between DIY and pro painters right now I guess I'm just trying to square the weak North American consumer you're calling out in consumer brands with the pretty strong demand outlook and your pro business.

So I think al touched on it just now I think right now as the.

Gas prices spiked up I think.

Many consumers who might choose to.

To do some of those projects might be more influenced by.

By the price of oil.

Gallon of paint and other areas of inflation than some consumers that can afford and want to have painters in their homes to do projects.

So those prices as they moderate over time I think we'll have a more positive impact on the do it yourself.

And those that.

That are now working from home that are.

And in an environment, where they're saying hey, we want to have a painter come in.

And freshen up my home is a relatively inexpensive very impactful.

The impact on my environment at home and it's something that I want to investments.

Makes sense. Thank you.

Thanks, Mike.

Your next question is coming from Jeff Zekauskas at Jpmorgan.

Thanks very much.

You have a slide where you say softer demand is hurting you by 50 cents a share <unk> 50, a share is about $163 million and operating profit so does that reflect.

I don't know $400 million and lower sales than you expected or $1 billion and lower sales and could you break it up between North American DIY, China and Europe .

Yes, Jeff this is al.

Youre youre closer on the $400 million than the $1 billion.

The way I look at it.

Versus our expectations, which is what this is comparing yes.

Mitch.

About I'd say about half is Europe .

And then the rest is pretty evenly split between the other two.

Okay, great and in the first half now.

Is your.

Raw material price spread about negative $2 50 in other words $250 million was on recovered in the first half by price versus raw materials.

It's not that.

Not quite that big.

A big of a delta.

It's almost.

It's almost flattish to down but not quite to the $2 50 that you talked about and that is why.

Versus our expectations and we talk about this higher input costs.

Being down a dime, it's definitely heavier.

In the first half than the second half with the additional price increases that we're taking in the <unk>.

Actions, we're going to be taking that to help moderate some of those costs, but also on.

The other input costs that we can influence.

To drive those lower or at least flatten those out so that we can start seeing the improvement and like I talked about our gross margin should start seeing year over year improvement in the third quarter and then again in the sequential then again in the fourth quarter and then.

So yes it is.

Kind of a tale of two <unk> versus our adaptations on that on that price cost line.

Okay, great. Thank you.

Yes.

Yes.

Your next question is coming from Mike Tyson at Wells Fargo.

Hey, good morning, guys.

A quick question on sort of the price of the paint can Kevin Tim.

Temporary increase I know that the.

The cost of the paint.

In our project is is the smallest portion but.

You think about labor inflation.

And how much the paint Ken is now.

Are we getting to the point, where paint project becomes starts to impact demand in and could impact sort of pro demand as we go forward or is it still a fairly affordable projects I guess in terms of renovation.

We see the ladder, so very affordable and impactful project.

As labor increases in costs.

It's actually more beneficial to the contractor to use a higher quality product.

We clearly see that in our product mix shift.

A definite shift into higher quality products.

The customers' efficiency productivity, given the opportunity cost if they have to come back.

We were a touch up or whatever it is they.

They are clearly recognizing that moving up in quality. So it's counter to its a good question, Mike, but it's counter intuitive to the.

Whats happening is people are standing in line.

Good list as I've mentioned throughout the.

Throughout the balance of the year our contractors are.

Referencing a very full year and theyre moving up in quality.

Alright, thank you.

Yes.

Thanks, Mike.

Your next question for today is coming from Kevin Mccarthy vertical research partners.

Good afternoon John .

John can you speak to labor cost trends, how much might your labor costs be running up on a year over year basis, and as the trends any better worse or stable. If we think about it sequentially and is labor having an impact.

On your sales internally or your customers' ability to execute at this point.

Well I'll take a swipe at the first piece and I'll ask.

Also talk about the specific impact.

I think many of our contractors would tell you that if they could hire additional labor.

He would.

Certainly higher than the frequently are now paying more for that labor.

Then they were in the past.

In our stores and even in our distribution centers and plants, we've made some adjustments to <unk>.

To ensure that we're in market.

As I mentioned earlier, you don't you don't achieve the retention rates that we have purely on the culture that you have and we have a wonderful culture, but we also know and respect and want to pay our employees competitive wage in the market and maybe you can talk a little bit about that yeah. So Kevin we do expect our.

Labor costs were up high single digits on a consolidated basis, and I would say thats higher than our global supply chain.

As you can imagine it.

Theres less dizzy.

Desire to work in a factory environment of distribution environment.

Drivers have been challenged to get although I would give the team a lot of credit and global supply chain, they've been able to attract.

Drivers <unk> been able to improve their attraction and retention rates in their plants and distribution centers and really have a well thought out plan for the future as it relates to automotive.

We have not had.

Issues within our tag organization just to comment there. We've added 3500 M cheap management trainees over the last two and a half years in that pipeline is strong. So I think we're shoring up.

We need to shore up to retain people because turnover as you know is very costly so sometimes.

And I think it's leveling out.

That doesn't mean, there's not a market here or there where we will have to.

More but we.

We seem to be leveling out at this point it does seem to be leveling out, but I'd also say, we'll take the appropriate steps to ensure that we keep our great team.

Okay. That's helpful and then secondly, if I may.

Wanted to ask you about raw materials and alkyd resins in particular.

I'm cognizant that there was a major outage.

Our kid resin manufacturer about a year ago, but in your commentary I am sensing that.

The shortage there has become more acute recently.

That true and if so maybe you can talk about allocation level, what products are affected and what sort of impact that may have had on your sales.

Well Youre right.

It does date back to the OTC fire in Columbus in 2021.

Net impacted the entire industry is about 130 million pounds of resin disappeared from the market.

The important piece here Kevin is that there has also been <unk>.

Additional fire.

In St. Louis with an <unk> plant.

That will clearly be more pressure in the market something we don't need in my understanding of just this morning was that there might have been another one.

Here.

In the same space.

Also have a negative impact so we're trying to work through that's real time stuff since we've come into the boardroom here I have not heard anything.

What I'd say is we've been working hard to make monthly progress towards improvement.

It's likely going to be towards the end of the year before we're out of the woods.

The solution here is going to be a combination of the internal utilization of assets.

I would say that the recently acquired Spi Reza.

Resins business again has proven its value.

In many ways. This is one of them but.

But we will also utilize.

External assets through arrangements and agreements.

There as well, but it is safe to say that.

Our plans our efforts we were planning on better supply rates than what we experienced in.

And we think it's going to be a lot of work by our team to continue to gain ground, but it's going to be in small increments, but we believe that.

By the end of the year or as we enter into next year, we'll be in a much better situation than we are today.

The issue here I think is and again, maybe just speaking openly and transparently.

Quarters or a quarter ago, we talked about that we.

Didn't believe that the raw material issues, we're going to be an issue that we faced in to the largest degree if not we built inventory in architectural inventory, we supplied our consumer brands customers and.

Growing radio.

<unk>.

Of inventory and so to the largest extent everything we said we stand behind that.

That said, we also said that it was going to be very tight and hand to mouth in <unk>.

In times like this any shocks or any shortages are far more impactful.

Than they normally would be theres no theres no inventory in the system to absorb any shocks or anything so literally in some cases, if one of our suppliers have something that goes down for a shift or two where in the past we would never feel that now we're dispatching in some cases are.

One tanker trucks to offset those are we're producing as al mentioned, we might produce a batch in one plant in <unk>.

Deliberate freight.

From one part of the country to the other to serve our customers and as I had mentioned in my prepared remarks. All of these are very conscious decisions, where we're not just spending money here I mean, we're trying to drive it to the bottom line, but as I mentioned, we believe with our hearts that coming out of this era of challenges with our customers many of.

Whom understand completely what it is that we're doing to serve them will ultimately be in the best interest of our shareholders and so while in a quarter or two we're going to feel this pressure. There's a reason why our.

Our exclusive relationships as an example are increasing because our customers see what we're doing and we'd like to drive it to the.

The bottom line faster and better and we will but some of these challenges and shortages are real and we're responding real time to them and we're going to serve our customers and as I said, we'll come out with our with these customers on the backside.

Thanks, I appreciate the color.

You bet Thanks, Kevin.

Your next question is coming from Truman Patterson at Wolfe Research.

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

Okay traverse.

Hey.

John .

Im hoping you can give just a lay of the land for your supply chains and tag.

Inventory levels are you all still manufacturing as quickly as you can kind of get it out the door.

March April timeframe, you mentioned that architectural volume production was at the highest levels in history.

Should we assume now that July is still at the highest levels.

Yes, Truman I would say we are absolutely utilizing <unk>.

50 million gallons of architectural production capacity.

And we are.

As John mentioned, we actually built inventory in our second quarter.

Latest to architectural and that was both on tag and CPG, where historically as you know we build inventory in our fourth quarter.

And our first quarter and we see inventory reduction on our middle two quarters are highest.

Volume quarters so.

We're we're keeping pace with the level of sales and we're very confident that also tells you to John's point, the architectural availability issues although.

It may not be ideal.

Getting the raws, we need to meet demand and we will.

Be able to feel confident that we can meet the second half strong high single digit demand from tag and also build inventory in our fourth quarter. This year in our first quarter next year to be ready for the next years.

Spring and summer selling season.

Okay.

Thanks for that and then.

New residential if you look at builder orders, it's definitely decelerated and we'll see if that goes into the repair and remodel market as well but.

If I look back at kind of 2008, 2010 time period, clearly different dynamics, but you.

<unk> did slow your net store openings.

According to our data I'm, just trying to understand if we see an economic downturn. What do you all continue to try and open up anywhere we'll call. It I don't know 80 to 100 stores.

Or would you guys, maybe kind of call that back a little bit just trying to see how you all are thinking about the next couple of years.

Yes sure.

Good observation I think if I recall, we lowered our store count at that time to around 60 new stores.

And.

I would say this that we have confidence in that model, particularly what's happening in the market right now with <unk>.

Some of the changes some of our competitors choosing to change their model creates terrific opportunities for us.

So you should expect us to continue to leverage that opportunity to the fullest.

Might we adjust down a little bit maybe.

We're going to take a disciplined approach my right hand, Guy here al and while she is not in the room, our CLO highly I mean, those are conversations that the three of US along with Justin that runs our stores have on a regular basis I think the.

Takeaway I'd like for you to have is is that.

We've seen this movie before investing in the face of adversity.

There is something that we've done we've not done it.

With with without discipline.

We will invest in right.

Right if it's drips.

Drips down a little bit below 80.

We might do that but we see the value long term, we're actually getting continually better at opening new stores.

Focus that we've given.

Justin and TEG and all his division teams is to continue to drive that profitability faster. So that we can continue to invest and get those.

Those stores contributing faster so I guess the quick answer is yes, we might some of those.

Drift down a little bit, but it won't be by much yes, and the only thing I would add to that is if you.

You think about 2008 and nine we were more heavily.

Weighted to new res commercial and over that last coming out 2010.

For 2020, our res repaint.

10 year compounded average growth rate was low double digits that was not at the expense of new res, which was also low double digits, but on a smaller base. So if you look at our mix today, our new reservoir pain is our number one segment fastest growing does offer.

Maybe a slightly different view of how we invest in new stores.

This year and going forward into next year.

And maybe being even more aggressive than we were back in <unk> nine just because of that mix.

<unk>, a great point of our <unk> business now.

Much stronger much better part of our business and it was at that time.

Perfect. Thank you guys I appreciate it.

Thanks Truman.

Your next question for today is coming from Josh Spector at UBS.

Hey, guys. Thanks for taking my question just a follow up on the consumer brands.

If I look at the performance in the quarter your ex U S sales were maybe down 30% volumes down a bit more obviously, China is a factor in there, but curious if you could comment on Europe I think some of the peers volumes were down maybe 15% mid teens ish, where your volumes down similar to that in Europe or down much more if it's more what would be the <unk>.

<unk>.

Let's say they were similarly impacted.

We're impacted by all the same issues since you read in the news everything from inflation to energy costs certainly the war.

Despite that pressure we believe were.

With the right partner there are tempting program has been very well received and we will fight to continue to grow share, but there's clearly some pressure in the market there that we're not immune to it.

Okay. Thank you.

Thanks, Josh.

Your next question for today is coming from Adam Baumgarten at Zelman.

Hey, good afternoon, everyone.

Just curious in res repaint do you have a sense for how much of demand as it related to kind of a larger remodel projects such as a kitchen renovation or in addition versus just a refresh something like someone just painting a few rooms in their home.

I would say that in our tag business. It's a relatively small percentage that is tied to kind of a major remodel big ticket.

Much more likely it's going to be either an exterior interior exterior and interior paint.

Certainly we participate in those larger projects with the largest percentages of painters.

Pulling up.

Jumping on the exterior of a home or knocking off the insurers.

The reservoir.

Okay got it and then just given the slow demand.

And if I may maybe.

Where we would see more of that kitchen remodel in the.

Some of the other areas that you talked about would be through our through our approach to paint program.

Program on the on the consumer side.

The painters that we focus on through our stores would be the guys that are.

Gallons are coming in and focused on painting.

Largest percentage, we'd like to think of our customers is 90 to 90 plus percent focused on painting through our stores.

Got it Thats helpful.

And then just on DIY, just given the slowdown do you expect to see promotional activity pick up going forward.

No.

I think there is more in the area of branding and awareness.

We think there'll be some.

Promotional as supply levels get back into more normalized levels.

With inflationary issues that everyone's facing a pretty disciplined.

Industry because of the percentage of cost of goods and the total cost.

Everyone pretty honest so.

Not likely something that is going to the floor is going to fall out I would suspect.

Got it thanks, a lot John .

You bet.

Your next question for today is coming from John Roberts at Credit Suisse.

Great. Thank you.

Gallons in CAG were down year over year in the quarter. So how do you square that with the record number of customers in record number of sales calls is the.

Average gallon per job down or is there some other mix effect that's going on.

Well I would say.

Part of it is the really strong comparisons that we had last year John I don't have those on the top of my head Alex If you can get those that'd.

That would be great, but John I would say that with what we are seeing from a comp standpoint.

We knew going into the year that the first half was.

Going to be a challenge, but I'm glad you brought that up because that's part of why we have.

Confidence that we do not only in the results. The fact that we have.

We have more accounts now and more call activity, but.

I think as Justin mentioned that the.

At the analyst event.

Our ability to focus on this effort and then see the actual results. There's a lot of people that talk about what they want to do but.

The fact that we have of this controlled distribution model gives us Pos data gives us we have over 3000 reps and.

Our store manager call activity is easy logged as well and so what I'm really proud of is not only can people say hey, we're going to go do this.

But we are.

We're really seeing the impact.

And the results and the fact that we have the number of calls taking place in the.

The number of active accounts.

Really points to the level of execution of this wonderful team.

John I would just highlight.

Last year in the second quarter tax.

<unk> sales were up 22, 6%.

Same store sales was up 19, res repaint was up 36%.

And <unk>.

Commercial property maintenance, new Raspberry, Paul Hi, Hi.

Double digit so really tough comp in <unk>.

As commented on in our press releases our pro architectural.

<unk> are actually up low single digits. So.

That goes to.

On the call and the activity that's happening that helped drive us year over year on volume.

And then John I think you mentioned that interior was a bigger part of the tag mix in the June quarter is that unusual in seasonally in the June quarter, I would think exterior might be bigger in that quarter and whether I think was.

On a vertical essentially was just hot but we didn't have unusual range or anything.

Yes, John you are right in that exterior does ramp up during the season, but interior is.

By far a much larger percentage of total gallons, but youre right for recognizing that during this time of the year exterior does ramp up.

Interiors of pretty significant.

Low to the gallons.

Okay. Thank you.

Thanks, Adam.

Your next question is coming from Garik humans at loop capital.

Oh, hi, Thanks for slipping me I am sorry, if this is redundant, but just on DIY just to be clear did it slow sequentially late in the quarter or did it just not come.

In Meteor your initial expectations just wondering if there was just a material.

I want demand.

Eric I would say that it kind of bounced around.

<unk> been working on trying to drive that we expected a little more.

Positive gallons and we actually saw and so.

It was bouncing around.

Without the gain that we projected.

Got it.

Follow up questions just on the portfolio review you cited just.

Just to be clear is this just normal course of business you look at your portfolio regularly or are you, perhaps accelerating some plants given some macro challenges.

No.

No Gary this is part of what our normal operating.

Process is.

We set.

Market share or sales growth targets.

Gross improvement targets, Rona targets and cash flow targets for each of our significant businesses.

Programs are regions customer programs, even and.

Midterm and longer term.

<unk>.

It's an ongoing thing because the environment has changed you look at just even the last two and a half years the differences.

The beginning of 2020.

So today.

So trying to look at macroeconomic trends and how thats impacting our investments and how thats impacting different businesses and then their path forward and action plans.

To still meet those targets regardless of.

Of what's happened in the macroeconomic environment, we have tremendous opportunities for market share growth in Europe , and Asia across each of the businesses. So use that as one example.

Okay, what's the value proposition that we're presenting to these customers that gives us a clear line of sight.

To attaining those goals mid term and longer term and as an example, I highlighted our commitment if we don't believe we can hit those goals.

Australia as an example, the ace private label.

<unk> program was an example, maybe those programs are better for somebody else.

Understood. Thank you.

Thanks Garik.

Your next question is coming from Chuck Cerankosky Northcoast.

<unk> research.

Good afternoon, everyone.

John .

And now.

When you talk about some of these raw material shortages and transportation interruptions and all the other things that seem to be randomly getting inventories in the supply chain back on track well, how do you deal with allocating the.

The limited inventory of raws between different markets and I'm thinking mainly the professional architectural in the DIY architectural.

Well often times Chuck what we find are we're making the products that we have.

Raw materials for so.

In our consumer brands group as an example, we have.

Primarily a different resin system than we would in some of our most of our tag business product. So.

Sure.

Those raws are becoming available we're converting those as quickly as possible to what's available, but I'll I'll go back to the point that al made.

And what I tried to highlight earlier.

On the architectural front the availability of raw materials now.

<unk>.

Really diminished.

To your point transportation is an area of concern and mainly the.

The issue is on rail.

The points of the two areas most impacted then by rail.

<unk> and buy resin.

And we've previously mentioned that.

We brought on.

The number I think we've ordered 400.

Tanker wagons to be able to.

We think we've gotten 200 I think we bought 400.

Tanker wagons to be able to bridge any gaps we think thats.

We are uniquely positioned in our industry to be able to do that given the fleet that we have.

So Chuck.

What we have we try to get what we need as quickly as possible through our suppliers and worst case scenarios, we work with them to send our own tankers to get there make it as quickly as possible and ship it from whatever plant, we can get it to and converted as quickly as possible Chuck the only add to that would be certainly with Ben tag as we were experiencing.

<unk>.

Severe raw material shortages in our fourth quarter and into our first quarter, we clearly.

Emphasize the pro versus DIY segment was intact. So we certainly can do it when we're in a specific business.

And.

Similar kind of decisions had to be made and consumers. So when youre within a segment or a group you can make those calls when we did.

The best utilization of the.

This precious raw materials, we have.

Alright, Thanks, guys and good luck in the second half.

Thanks Chuck.

Your next question is coming from Steve Byrne of Bank of America.

Yes. Thank you.

Don This initiative of yours.

To grow.

The business in consumer with pros and pains.

Do you feel that.

It's necessary to offer those pros some of the services that you provide in tag such as.

Large volume shipments to the job site.

The ability to place orders without having to call.

The lowest store or are those functions that you are considering or would you consider not necessary.

No.

Steve.

We're in this to win it and so we're working with Lowe's on the services and.

And fulfillment that will help that.

Targeted customer.

Be more successful.

<unk>.

Let's say Bose its entire consumer brands initiative is two.

To align the.

Our customers with the needs of their customers.

So pricing and those types of things, we don't control that our customers will control that.

We're working with them to ensure that they have.

Complete offering everything from the <unk>.

Power brands that attract customers to the innovation and Mccann itself.

We have reps that are working with their teams to to drive.

Their loyalty programs and other initiatives that they have.

So yeah, I mean, if we can do things to help attract.

Those segments.

Wonderful win for both of US those are customers that that will likely not penetrating through our own stores.

They want a broader selection of products that are available and home centers.

And we have great partners that we're trying to help to win and we will take the steps to do that.

And maybe one more drill into the <unk>.

Doug expectations.

For the third quarter is the.

The improvement in volume that you are expecting are those.

On an underlying improvement from the second quarter or is that a year over year.

<unk>.

The comp is challenging in the third as it was in the second is.

Just a question about underlying trends in those pro end markets and do you view do you have any concern about.

Any challenge or pushback from those in those end markets for your price increase that's on the table.

Yes, Steve it's.

Both our sequential improvement and gallon growth and it's also a year over year significant improvement in gallon growth and no we do not expect.

We talked about expecting our price increase to be a similar effectiveness as previous price increases in.

I believe that's going to be the case I agree you don't you don't you don't judge the effectiveness of a price increase on the 30 minute discussion you have on we need a price increase.

We are we have to earn that every day and so every day our reps are out there.

Store people are delivering.

The products that we have every single day, we have to go right back to the point I made earlier, which is do we help you make more money and if the answer is none of that that we don't deserve, but we're working really hard to make sure that we do obviously and I think the fact that we're seeing in the metrics.

And the activity that we are experiencing we think that bodes well for our efforts.

There is no complacency here, though we want to get better every day and we feel as though the activities that we are taking as well as the environment in which we're in will support the <unk>.

Greece that we need.

Thank you.

But.

Your next question for today is coming from Eric Bosshardt at Cleveland Research.

Thanks.

Alan just a point of clarification I felt like earlier on this call you.

You talked about the pricing realization in the quarter not being up to expectations is that.

Again, I'm not sure if I heard you right, but can you just talk about how.

Pricing relative to your expectations behaved in the quarter.

Yes, Eric.

I'm glad you asked that question just as clarity our pricing actions themselves.

Where we expected them to be at the price cost differential was not quite where we wanted it to be.

It was not quite where we wanted to be on our expectations.

Our costs were higher.

Raws were a little bit higher.

Our cost of freight transportation labor at those types of things were higher and then the cost to serve our customers as we came into getting our inventories built that at the end of the first quarter and coming into the second quarter, we thought we'd see less of that gallon movement around our distribution network.

Then then we actually saw so there is higher costs related to that so that's what drove that price cost dynamic I thought would be better than our second quarter than it actually was.

And then within that the pricing.

Effectiveness I think you'd commented early in the quarter was at least if not better than the historic trend that was the experience on pricing in the quarter ends at the same expectation for this that's.

Come in and Chris.

That's right.

We actually did get on top of the pricing in our second quarter was.

Better and got on top of all of those costs just not to the expectation we have.

Okay. Thank you.

Thanks, Eric.

Your next question is coming from Ken Zenner at Keybanc.

Afternoon, and appreciate you guys patient today.

<unk>.

I think.

You made a comment earlier on slide seven.

The 50 <unk> share reduction I believe you said for.

The softer demand you said, 50% was Europe and then it was equal parts.

North America, and China is that correct.

That's.

It's directionally accurate yes.

Okay, yes, not exact and I raise this because it seems obviously with just 9% in line with kind of the earnings revision it seems as though Rob.

If we have the revision was tied to what I would consider lower multiple both non core U S businesses.

Which is to say.

Tag the pricing to Tencent hit them higher input cost is not that much is there something about the operating leverage.

That is different in Europe , and China on the DIY.

Not a large piece of consumer but it seemed to have really outsized impact on the guidance.

The Europe and Asia comment not only includes consumer but it has an impact on our certain businesses within our performance coatings group as well so.

It's a combination of the two it's not just consumer in Europe and Asia.

Thank you very much.

Yes.

Your next question is coming from Adrian to Magno at Barrick Barrick.

Hello, Good afternoon.

Sandra.

It looks like you repurchased $700 million of shares in each one and Youll Street time end of year leverage target.

Thanks to leave very little space for more M&A in interesting so.

So you are taking the view that we'd be current environment.

Growing organically and not adding complexity to your business.

Hey, gene I think we.

Talks about what John talked about in his opening comments.

Our leverage ratio ticked up.

Debt to EBITDA of $3 four to one.

Due to the acquisitions the acquisitions arent, because we only have a half a year because we have amortization and inventory step up we're not going to be able to cover the increase in debt.

The interest that goes with that but what we're committed to doing is using excess cash and our second half to pay down debt.

Well offset option dilution with share buybacks, but as you know that that will mean a lot more cash available.

For us.

To pay debt down.

I would just highlight our second half net operating cash is going to be slightly different than what we've experienced in the past as you know we generate almost.

70% of our cash flow in the second half and it really flips from first half the second half.

Youll see that in our our second half this year and maybe even a little more aggressively because we built so much inventory in our first had a built so much inventory on our first half.

Half of the year, So you will see a flip.

A much stronger second half in cash flow, maybe than even <unk> seen in prior years.

Alright, and just the second one the cash flows.

I've seen you reduced capex by around $100 million.

So how were you able to find these savings without harming the future work.

Yes, that's primarily due to the new headquarters and R&D projects.

Maintaining our core capex, because youre right we are absolutely.

Moving forward with our architectural capacity expansion and we are.

Another part of that we're moving forward with the packaging capacity.

Expansions just so we can keep up with the mid teen compounded average growth rate that we've seen in packaging volumes. So that's going to be a continued.

Investment and then the final one as we've talked about labor and labor rates and the challenges around the labor market is the continued investment in our automation activities within our global supply chain.

Thank you.

Thanks Adrian.

There are no further questions in queue I would now like to turn the floor back over to Jim Jaye for closing remarks.

Thank you Holly and thanks, everybody for listening to our call, obviously second quarter, a little bit challenging, but we're very confident about delivering a strong second half of the year.

That's really led by the strong demand, we're seeing across our pro architectural business in tag.

We're responding to ongoing cost pressures with additional pricing in all of our segments, we're continuing to invest in growth initiatives and we're going to continue to manage our cost tightly.

A very determined and I hope that came across and we expect to deliver value. So thank you for joining us and will be available for your follow up calls.

Have a great day.

Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.