Q3 2022 Sherwin-Williams Co Earnings Call

Good morning, Thank you for joining the Sherwin Williams company's with you a third quarter 2022 results and our outlook for the fourth quarter and full year of 2022.

With us on today's call are John Murray, Kessler, Chairman and CEO al Mr. Shin 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.

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 up this session to questions I will now turn the call over to Jim Jaye.

Thank you and good morning to everyone.

Sure Juan Williams had an excellent performance in the third quarter, including high teens sales growth, resulting in the first $6 billion sales quarter in company history.

Significant sequential and year over year gross margin improvement record adjusted diluted earnings per share and strong cash flow demand remains strong and pro architectural in North American industrial end markets in contrast to continuing softness in Europe and China.

While year over year cost inflation remained very significant in the quarter. We were encouraged by a modest sequential decrease in raw material costs.

Industry supply chain also continued to stabilize.

Conditions remain tight with some previously noted specialty resins in particular remaining and limited supply.

Throughout the quarter, our team continued to focus on growth initiatives.

<unk> innovation.

Customer solutions.

Pricing actions.

Cost control supply chain improvements and business optimization activities, while also taking actions and planning for a wide range of scenarios that could unfold next year I'd.

I'd like to go through just a few of the numbers at a high level and then turn it over to John who will provide some additional color on the third quarter and our outlook.

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

Starting with the top line third quarter 2022, consolidated sales increased 17, 5% to a record $6 billion.

Pricing was in the low double digit range.

Consolidated gross margin increased to 42, 8%.

This was an improvement of 120 basis points year over year, and 110 basis points sequentially reflective of our pricing actions.

Gross margin improved sequentially month to month in the quarter with September increasing 650 basis points year over year.

SG&A expense decreased to 25, 3% of sales.

Consolidated profit before tax increased $265 7 million or <unk> 43, 5%.

Diluted net income per share in the quarter was $2 62 per share versus $1 88 per share a year ago.

Excluding valspar acquisition related amortization expense.

Third quarter adjusted diluted net income per share increased 35, 4% to $2 83 per share.

Versus $2 nine a year ago.

EBITDA in the quarter was $1, one $2 billion or 18, 6% of sales.

Moving on to our operating segments.

Sales in the Americas group increased 21, 4% driven by double digit volume growth across all architectural end markets and high single digit price increases.

Segment profit increased by $132 $6 million and segment margin was 21, 2%, which was about flat with last year and up 30 basis points sequentially.

Sales in the consumer brands group increased eight 5% driven by a low double digit price increase which offset lower sales volumes, primarily outside of North America.

Continued tightness and alkyd resins impacted North America, Spain, and aerosol sales.

Adjusted segment margin was 16, 2% up 150 basis points year over year, and 500 basis points sequentially.

Sales in the performance coatings group increased 13, 7% and were driven by mid teen price increases, partially offset by a less than 1% decrease in volume.

Mid single digit sales from acquisitions were offset by a mid single digit unfavorable FX impact.

Adjusted segment margin increased 590 basis points to 16, 4% of sales due primarily to higher selling price increases.

Let me now turn it over to John to provide some additional commentary before we move on to your questions.

Thank you Jim and good morning, everyone.

As we've indicated since the start of the year, we expected 2022 would be a year of two contrasting halves and that's exactly what we're seeing play out.

We delivered strong results in the third quarter and I want to thank our entire leadership team and all 61000 employees for their focus their determination and drive in what remains a challenging operating environment.

We continue to have great confidence in our strategy.

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

In the Americas Group segment we.

We delivered record sales and PBT.

Mid teens volume growth and high single digit pricing drove sales, which were up by a strong double digit percentage in every end market we serve.

The sales growth was led by DIY, which was compared to an extremely soft quarter, a year ago, where we prioritized our pro customers given limited product availability.

Sales growth was next strongest in our property management.

Followed by new residential.

Residential repaint and commercial respectively.

Sales were also up by a double digit percentage in protective and marine.

But were dampened by the ongoing limited availability of alkyd resins.

We are seeing strong effectiveness from the 10% price increase we announced September six.

Tag segment profit increased due primarily to double digit paint volume growth and selling price increases.

Partially offset by increased raw material costs and higher SG&A costs related to continued investments in our long term growth initiatives and our strategy.

From a product perspective exterior and interior paint sales were both strong with exterior sales growing slightly faster than interior being the larger part of the mix.

We've opened 32 net new stores year to date and expect to open 40 to 50 in the fourth quarter.

We continue to invest in our management training program.

<unk> to hire more than 1400 college graduates that will enter this program this year and who will be the future leaders of the company.

We also added sales reps in territories in the quarter, along with ongoing growth investments and innovative new products e-commerce and productivity enhancing services.

<unk> brands group had a much improved quarter led by sales that exceeded our guidance.

Sales in North America increased by a double digit percentage driven largely by price.

DIY paint demand remains sluggish as inflation continued to pressure consumers, while continued tightness in alcon residents impacted our ability to produce stains and aerosols.

On a positive note.

The pros, who paint segment again grew by a strong double digit percentage.

Sales in China were down by a double digit percentage due mainly to the COVID-19 related lockdowns.

Europe was also down double digits due to the slowing macroeconomic environment.

Segment margin improved significantly primarily due to selling price increases and good cost control.

We offset by lower sales volume increased raw material costs.

And higher supply chain costs.

The performance coatings group, followed a very good second quarter with another strong performance in the third.

Sales were up mid teens, including mid teens pricing and a mid single digit benefit from acquisitions.

Partially offset by a very slight decrease in volume and a mid single digit impact from unfavorable FX.

For the second straight quarter. This team delivered year over year segment margin improvement.

Given by execution of our strategy, including effective pricing actions.

The 16, 4% adjusted margin in the quarter was the highest for the segment since the acquisition of Valspar.

And excluding the impact of acquisitions closed over the last 12 months.

Adjusted segment margin was 17% in the quarter.

Although we are pleased to have reached the low end of our express the margin target of high teens low twenties.

We know there is a significant amount of opportunity ahead.

I am proud of our team's efforts to reach this goal and know they understand the high expectations we have.

For continued improvement.

Sales varied significantly by region.

In North America sales increased double digits against a challenging comp in.

And included low single digit volume growth.

Latin America sales also increased by double digits against a strong comp.

Sales were up high single digits in Asia, driven by price as Covid Lockdowns continued to impact demand.

Sales in Europe were backward mid single digits against a double digit comparison and continued economic slowing.

Every division and the group grew led by coil and followed by packaging.

Aldo Refinish general.

General industrial and industrial wood.

We're also pleased by what we're seeing so far from the recent acquisitions, we've announced in this segment.

Again these businesses added mid single digit growth in <unk> sales in the quarter, though this was nearly all offset by unfavorable FX.

Earlier this month, we announced an agreement to acquire <unk>.

High quality European business focused on innovative wood coatings.

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

We returned approximately $203 million to our shareholders in the quarter in the form of dividends and share buybacks.

We invested $48 million to purchase 200000 shares at an average price of $237 81 per share.

We distributed $155 8 million in dividends.

We also invested $175 million in our business through capital expenditures, including $125 million in core Capex and $50 million for our building our future projects.

We closed three acquisitions in the third quarter for approximately $440 million.

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

We will drive the ratio to our long term target of two to two five times range in 2023.

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

Turning to our outlook.

We expect to deliver a very solid fourth quarter, resulting in our second half sales increasing by a low double digits to mid teens percentage in.

And second half diluted earnings per share increasing by 35% at the midpoint of our guidance.

Within the Americas Group <unk>.

Demand is strong across all of our pro architectural markets, including 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 continue winning new business as our competitor's transition their pro contractor business models and our differentiated model has never been more on display in value than it is today.

Within the consumer brands group, we expect the North American DIY consumer to continue to face inflationary pressures in Europe , and China remained challenging.

Within the performance coatings group demand remains strongest in North America, our largest region.

European demand slowed in the third quarter, and we expect continued softness in the fourth quarter.

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 largely getting the raw materials, we need though the availability of alka and some specialty resins remained choppy and is impacting certain product lines within consumer brands and performance coatings.

While we continue to push hard and we don't expect meaningful improvement in the availability of these resins until the first quarter of next year.

Some near term inefficiencies remain in our own supply chain as we continue to take steps to overcome industry issues and serve our customers.

On the cost side of the equation.

Our full year raw material inflation guidance remains in the high teens.

We expect to see further sequential decline of raw material costs in the fourth quarter, though they will remain elevated year over year.

We expect the trajectory of raw material cost to continue trending favorably as we exit the year.

Though the pace and level of potential relief next year is difficult to project.

Additionally.

Along with the highest inflation rate we've seen in 40 years, we're also experiencing significant higher costs and other elements of our cost basket, including labor.

Transportation and fuel and other costs.

We will continue to monitor these costs.

Hard to offset them and respond with additional pricing if necessary.

So specifically for the fourth quarter of 2022.

We expect our consolidated net sales will increase by a high single to low double digit percentage inclusive of a low double digit price increase.

We expect the Americas group to be up high teens to low 20%.

We expect consumer brands to be down a mid to high single digit percentage.

And we expect performance coatings to be flat to up a low single digit percentage.

We expect North America, which is the largest region within <unk> to be up a low teens percentage.

For the full year 2022, we expect consolidated sales to increase by a low double digit percentage inclusive of a low double digit percentage price increase.

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

We expect consumer brands group to be down a low single digit percentage and.

And performance coatings group to be up by a low double to mid teens digit percentage.

Given the many variables. We've noted we left our diluted net income per share guidance for 2022 unchanged and in the range of $7 65 to.

To $7 95 per share.

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, which represents mid single digit percentage growth from 2021 at the midpoint and what continues to be a challenging macro environment.

This guidance 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 period 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're not prepared to provide any specific guidance on 2023 at this time I would like to comment on demand trends and actions, we're taking that will impact our 2023 outlook that we will provide in January .

We expect slowing new residential demand with elevated interest rates and other costs that are impacting new single family home permits and starts however.

However.

Multifamily production has maintained strong momentum.

It is also clear that macro headwinds are likely to continue and potentially worsen in Europe and China.

Our base case in this environment remains to prepare for the worst and hope for the best.

I'm highly confident in our leadership team, which is deep and experience and has been through many previous business cycles.

We've transformed our business in many ways since the last significant downturn.

And we are now a stronger more resilient company.

We know what to do.

To this end.

We've been evaluating multiple options available to us based on a wide range of scenarios and we are prepared to take appropriate actions beginning this quarter.

These include the following.

We've continued to review our portfolio of businesses brands and customer programs to ensure that they are adding above market growth and long term shareholder value.

As a result of this work we are announcing action plans to simplify our operating model and portfolio of brands and consumer brands group and to reduce cost in all regions and performance coatings group consumer brands and administrative segments.

These actions once finalized could include one time costs or charges in the range of $160 million to $180 million over the next four quarters.

Could result in annual run rate savings of approximately $50 million to $70 million once fully implemented.

Additional details on these planned actions are outlined in the slide deck issued with our press release this morning.

We will call out significant onetime charges and update our progress on run rate synergies on future quarterly earnings calls.

We remain committed to our strategy of providing innovative solutions that help our customers to be more productive and profitable.

In challenging environments, we have the opportunity to become an even more valuable partner to our customers.

We will continue to focus on new account growth and share of wallet initiatives.

We will leverage our strength in recession resilient end markets, including residential repaint.

Property management.

Packaging and auto refinish, all of which are larger than they were in previous cycles.

We will continue to invest in growth initiatives, including adding stores sales reps and innovative products and services.

We will continue to invest in our people.

<unk>, our management training program I previously mentioned.

Along with ongoing training that positions our people.

As one of the most significant amongst our many points of differentiation.

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 investing in acquisitions that can accelerate our long term strategy and top line growth and expand our operating margins, including our most recent announcement of European Wood coatings leader Eco group.

We will maintain our disciplined capital allocation philosophy.

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

In sum, we expect to deliver a solid fourth quarter to complete a very strong second half of 2022.

And we're also taking actions to get ahead of what could be a challenging 2023.

We don't expect to be immune from any number of potentially difficult scenarios, but what we do expect us to outperform our competitors in the market.

We will do this by leveraging the best team in the industry.

We remain committed to creating shareholder value over the long term.

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

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 ask that while posing your question you. Please pickup your handset listening on speaker phone to provide optimum sound quality.

Please hold while we poll for questions.

Your first question for today is coming from Vincent Andrews.

Thank you just a question on tag and the margin both sequentially and year over year.

A lot more improvement in margins in the other two segments you didn't tag. So I was wondering why that was I did notice you called out.

Some long term investment spending.

And tag that might have affected that so perhaps you could talk about that a little bit as well in terms of what that is and whether it carries over not just in the <unk>, but into next year as well.

Yes, Vincent this is down the session.

Yes, I mean, we saw.

A little over 20% increase.

Year over year in our segment profit.

Flow through was little in the low 20% range.

It's typically is the case, we have higher <unk>.

Sales volumes, which generally drives improved operating margin historically talked about a low to mid single digit volume gain getting in a normal state environment mid to high 20%.

We had one really month of selling price increases, but these are still partially offset by the higher raw material costs that we had talked about.

Being sequentially better, but still up maybe a mid single digit in our fourth quarter and really the higher SG&A cost that we called out are the continued investments in long term growth initiatives. So we've added.

67 stores, we've put in over 80 reps, we've added head count into our stores to support the growth outlook and as John mentioned, we're going to add and really accelerate our growth in the fourth quarter by adding 40 to 50, new stores. So what I would expect in the fourth quarter as youre going to see a normal seasonal slow.

Down in architectural demand.

Which is typical and you also see a sequential decline in operating margin, but we expect stronger flow through in our fourth quarter.

Really upwards over 30%.

You get a full quarter of the 10% price increase for for that was implemented September 6th I would tell you that price increase is going even a little better than what we had seen in the past.

The fourth quarter sequential moderation of raw material costs and an easier comp.

So.

Youre going to see.

A bigger year over year improvement, our operating margin in the fourth quarter.

And youre going to see that.

SG&A growth into the first half of next year, and we'll give you more color on that in January .

And just as a follow up we've talked a lot about raw material shortages for a year now and part of what Youre doing this year was trying to get your tag inventory back to a comfortable level to to service your customers.

Are you there now.

And given that maybe a lot of that was done over the last quarter or two when raws were peaking should we be thinking about your carrying sort of peak caused inventory into next year's spring season, or how should we think about the cadence of a sort of lower raw material costs flowing through in <unk> specifically.

Vincent I'll take the inventory piece first and I'll throw it to I'll talk to the accounting yes.

Very good place right now.

For the majority of our products I mentioned earlier the issue that we continue to face with the alkyd resins and some of the specialty resins will fight through that it is getting better as I mentioned earlier, we expect to have the majority if not all of that behind us.

At the end of the first quarter, but for the most part the.

Remaining portion of our product line is available for our customers.

You should and I know you do know Sherwin Williams, our models not unlock the door and hope that people are finding their way back into our stores to find them.

Our sales reps and store managers are very aggressive in the hunt.

Pursuing customers, both existing and new to share with them. The fact that we have.

These products available for them.

And Vincent.

<unk>.

Built a little bit of inventory.

From our second quarter to our third quarter, which is typically not the case, but to meet the strong demand that we're seeing.

Specifically within tag with the.

Mid teen volume growth on our third quarter and.

Low double digit we expect in our fourth quarter.

I think what youre going to see US do is try to manage our architectural inventory.

By year end, maybe up another 4 million gallons.

The reality of that is we're going to monitor that very closely as the quarter progresses.

Look at demand trends, specifically going into our first half next year, and we may adjust that number a little bit.

And that's specifically to the DSC is our store and our store level inventories are in great shape.

Yes.

Meeting, our demand or strong demand with high service levels, and we expect to continue to do that but as you can imagine.

As our inventories getting better shape, we will get back to managing our working capital our working capital at the end of the third quarter is over 12%, we're going to target to try to drive that down between 11, and 11, 5% by year end, but still a very strong inventory position going into next year. Vince at this high is also back to your first.

<unk>.

On the SG&A.

<unk> earlier point, we are continuing and continuing to invest in people to provide the service in the stores. So as the product becomes more available.

You may recall in the last couple of quarters, we've talked about the new account activity at record levels in active accounts.

So now we've got a lot more people coming into our stores new accounts coming in we've got product available we want to make sure that we have the service to deliver on our promise and so they're all interrelated and they're all working very well.

Okay, great to hear thanks, guys.

Yes.

Your next question is coming from Truman Patterson.

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

First clearly there are a lot of moving parts on raw material inflation between suppliers the Petro Ken's oil.

John you mentioned the trajectory of raw material costs are trending favorably as you exit the year can you just help us.

Understand at this point in time, what the gross margin basket.

Or the raw material, sorry, raw material basket might look like.

Exiting the year sequentially versus kind of third quarter levels.

Yes, Truman this is Jim I'll take that one so if you look at our third quarter.

The raw material basket was up by a mid teens percentage year over year, I think as we get into the fourth quarter. We're looking at that being more like a mid single digit year over year number I think as John said in his prepared remarks, the trajectory is good and heading in the right direction I think it's hard to <unk>.

Reject exactly what is going to do next.

Next year, we're trying to formulate that and we'll come back to you in January with our full year guide to give you some more color on that.

Yes, Truman I'd just add to that.

As we typically do.

And our planning for the upcoming year.

We work with our suppliers closely on looking at demand trends looking at volume trends by region.

And it gives us a better line of sight as we get through the end of the year and Thats why January we are able to give you a much better outlook on the raw material basket and other input costs quite honestly, because as we've talked about.

Labor rates.

Been up high single digits and in some cases across our supply chain.

Low to mid teens.

In an effort to reduce turnover, which is very expensive but.

The expertise that goes with that turnover and then freight and other transportation costs. So we'd like to talk about the full basket as we get into January we'll have a better line of sight to that.

Okay, Okay perfect.

And then you all mentioned some of the cost control initiatives and TCG in CPG in preparation of a slowdown right.

Savings of $50 million to $70 million annually I am hoping you can walk through those in a bit more detail.

And then also.

Assuming volumes turn negative or remained negative through 'twenty three how does that impact your thoughts on kind of decremental operating margins.

For both of those segments.

Yes, Truman I want to be careful about getting into too much detail on this call I mean, we're making these decisions and our fourth quarter and going forward.

And it's as we've talked about on our second quarter earnings call in July it's part of our normal planning process.

That we continue and as John talked about we continue assess these portfolio of business brands and customer programs and their ability to drive above average market share growth and the operating margin and cash flow targets, we set for them and we don't see that happening we.

We take action is similar to what we did with the.

Exiting these private label business the sale of our Australia, New Zealand business architectural.

I would say on.

The run rate savings.

More of that is due to the portfolio review than what I would call more purely.

Cost reductions in that.

Relative to the macroeconomic headwinds, we're seeing and it's probably a 60 40 split and why I think that's important is because.

We're not overreacting to.

The macro environment.

It means that we are driving operating margin improvement across consumer brands across the <unk> and I would even.

To say that within TCG.

As John talked about we hit the low end or the high teens, 17%, we have more work to do this.

The actions, we're taking in the coming quarters does not relate it to our long term high teens low 20 operating margin. This is really in response to the slowdown we're seeing in Europe and Asia. So we have opportunities to grow with platform consolidations as we integrate these acquisitions going into next year, though.

Start to be accretive.

As we get to the second half so.

If we see additional.

Slowdowns in demand.

Have more levers to pull to offset any deca.

Decremental operating margins so yes.

Sure.

I didn't answer this.

As well when you.

Further I will talk about not overreacting.

<unk> is a good one but I would also point out that there.

There are many areas of our business that we're actually continuing to invest in some accelerating investments.

So leadership that we have.

The ability to view and see where those opportunities are I think comes with great deal of experience in what we're doing so.

Just talked about adding stores as an example.

35, new stores in the fourth quarter I'm, sorry, 40 to 50, this year fourth quarter compared to 35 last year.

If you look at the staffing that we just talked about investing in.

Digital programs that we're investing in so we are making we believe the appropriate.

Steps in reducing where we need to but we're also investing in those areas that are appropriate.

On the other comment I'd make sure I am unrelated to that on the one time costs.

We will call those out as we have typically done in the past specifically, even with the Valspar integration. So we didn't put them in the guidance in the fourth quarter estimates.

Timing is uncertain.

We're pushing the teams pretty hard.

To take action and get these done but.

We'll call them out over the over the next quarterly calls and we expect to get approximately 170 over the next.

Four quarters.

Perfect. Thank you all and good luck in the upcoming quarter.

Thanks Truman.

Your next question for today is coming from Josh Spector.

Yeah, Hey, guys. Thanks for taking my question a question on the performance coatings guidance I guess when I look at things sequentially normally it's relatively stable you guys. Maybe have a 10% decline understanding things are kind of getting worse in some of the regions, but I think when I look at some of the competitor guidance things were already.

Pretty bad at <unk>, and generally things stay bad into <unk>. Your guidance implies things are getting worse. So I'm wondering if you could maybe dig into some of the details there about what's getting worse or maybe your three key was helped by some items, which go away.

Yes, Josh I think.

We're seeing maybe a little bit more of a slowdown would be in.

Europe and Asia and.

I think our largest.

Region, North America, we've talked about being up.

In the low to mid teens.

Price will start to annualize. So you don't get as much of a tailwind on price.

Our comps are still.

Pretty strong in our fourth quarter relative to last year, and so I don't know there is a.

A significant step change that we're seeing other than.

I think we've got to be prepared.

And try to look at based on our history and what we've seen over the last few years is maybe a little bit wider range on sales as we go into the fourth quarter with holidays and things of that nature. So I don't want to read too much into that other than maybe a little less price as we get into the fourth quarter and then.

Worsening outside the North America, well I do think.

Point, if you look at the comps take for example, our <unk>.

Packaging business, we had high single digit growth.

Past quarter.

Versus strong double digit comp when you go into <unk>.

Next quarter fourth quarter comps last year were up over 30%.

A lot of momentum here in this business, we expect it to continue.

Continue to win with our customers and grow with them. If you look at coil in a similar situation fourth quarter last year comps were up 20%.

Coming off of a strong double digit growth here as well.

So there are some really strong performances here up against some really strong comps and we think that these teams are continuing to to grow in a pretty challenging environment.

Okay got it thank you.

Thanks, Josh.

Your next question for today is coming from Jeff Zekauskas.

Thanks very much.

In the fourth quarter should your <unk>.

<unk> prices and tag.

Be up about six percentage points sequentially.

No, Jeff I think what.

What's going to happen is we're going to get the full quarter of 10%.

We're going to annualize the August 21, 7%, we're going to annualize the September 4% of last year's surcharges stuff.

When you net them all together, it's about flattish quarter to quarter or high single digits.

I'm sorry, the fourth quarter of 'twenty, two relative to the third quarter of 'twenty two.

Couldnt since your <unk>.

Prices are lifting you increased prices, 10% in early September Shouldnt, you capture that all sequentially.

We are but we're also annualizing some of the price we took last year so from quarter to quarter, our dollars there'll be a be higher I agree with that but it's still in the high.

High single digit range for tag.

Okay and then.

In terms of raw material in terms of raw materials.

You can you.

Frame the outfit resin sales and EBIT da penalty for 2022.

And tio to RTI to prices going down sequentially in any area other than Asia.

Yes, I'll take the <unk> piece Jeff.

We did see in the quarter was some inflation that's happening I think.

We go forward.

It will depend on some of the softening demand that we're seeing and I think that's part of our overall view that <unk> two should start to be part of that basket.

It starts to start to moderate.

On the <unk> piece I'll, let Alan Yes, Jeff I think the alkyd impact I mean, it could be around 1%.

On top line.

We're having to make choices. So as an example of why it's difficult to pinpoint it.

We are there's a broad basket of Alcatel.

We're getting.

Fully what we need others, we're not in it and it just trying to look at ordering and Reorders and things like that so I think it's about 1% on the top line. The bottom line I don't think we've quantified or really going to quantify at this time.

Okay, great. Thank you so much.

Thanks, Jeff.

Your next question for today is coming from Ghansham Panjabi.

Thank you good morning, everybody.

I guess first off starting off with tag in the various sub verticals within there.

Residential repaint has been a very strong grower for you for many years I think part of that has just been due to higher home prices and.

Consumers accordingly investing in what typically is your biggest asset.

So just based on that how do you think that category evolves as higher mortgage rates start to impact housing prices.

Perhaps on the downside going forward.

Well good afternoon, I'd say it remains positive.

Talk with our contractors they look at the backlog ahead.

They feel it.

Terrific opportunity for them to continue to grow.

The Libra if you look at the forecasting they have is for double digit growth for the remainder drove.

<unk> 2022 going into 2023.

I would agree that there is some projections that remodel in may slow down mid 2023.

But I'll also remind you that pain.

<unk> represents.

Terrific project to have high impact at a relatively low cost.

While rates are moving house price depreciation has also moved as has the ageing of housing stock the aging stock how home price values I'm, sorry, let me do this.

The aging.

Home.

Continues to require more.

Remodeling more updates people aging in place.

And we see that you see it in the MAA.

NIH be which has slowed just a bit but still well above 50.

And while existing home sales have.

Slowed against strong comps is largely because of lack of inventory in and when people have a tendency to stay at home. They will continue to invest in those homes.

Whereas repaying we've often talked about is the largest segment in the professional subsegment space.

It's a great opportunity for us these customers respond very well to our personal approach of selling with our store managers.

Sure.

Sales reps are.

Focus here is pretty simple and why we have competencies that we focus on the services and the solutions that allow these customers to be more successful.

As I mentioned, just a moment ago about the.

New accounts and share of wallet.

These are accounts that are responding well to us.

I mentioned earlier, the innovation I thought I'd just share one really quick one with you as an example, because here in Cleveland, we've just experienced pretty dramatic swing from cold weather the warm weather.

We've introduced a product called latitude with climate Flex technology.

<unk> and it's a terrific product that fits in.

I think it was a great example of why we continue to grow.

We are responsive to these customers' needs and this is a product that can.

We applied anywhere from 35 degrees all the way up to 120 degrees with the same application same flow same hiring same appearance and so what you end up is with customers that understand we're really focused on making them successful launching products that help them on projects longer.

Allowing them to work later into the season.

This product with very minimal.

Warning if it starts to rain, usually within a few hours.

It was about 30 minutes actually the the product is resistant to moisture so.

These are just small examples but.

Really allows us to demonstrate how we're moving the needle and why we have confidence in continuing to move the needle in this space.

Okay. Thanks for that John and just for my second question just on your comments on pricing effectiveness, which sounds like it's better than your initial expectations.

What do you attribute that success towards in context of just the visible.

Sort of plateauing of some of the inflationary numbers out there with oil prices stabilizing et cetera.

Well, it's really simple.

It's not a 30 minute discussion, we don't win or lose.

Our price increase on how well we talked to them about the price increase and a pricing meeting.

It's everything that I, just talked about everyday we earn the value that our customers are willing to pay us for our products and services.

And so the fact that we're out there helping them to be more successful more profitable when our costs go up they understand that we're doing everything we can every customer that does business with Sherwin Williams should know we are doing everything we can to drive our costs down in both raw material and every other item in that basket, but when we're with them in a meeting.

Talk about pricing.

We need it we've done everything to offset it but what's most important is we are helping them to be successful and we're partnering with them in their business and so yes, we're more effective now because we're helping our customers to win.

Thanks, Sean.

But.

Your next question is coming from Kevin Mccarthy.

Yes, good afternoon.

John last year, I think you spoke about adding 50 million gallons of architectural coatings capacity can you provide an update on that is any of it come online and if so what percent.

Is loaded these days.

It is online it's allowed us as al mentioned earlier to build inventory in a time, where we typically would have been running flat with demand.

Outside of Orlando terrific team I've got to hand, it to our entire supply chain team for the great work. They did in getting that capacity up and running as quickly as they did.

It's pretty well utilized we don't talk to the specifics but.

We run a <unk>.

10 year model out on capacity.

This.

This capacity was needed came in perfectly.

Had a great time, and it's allowed us to be responsive to our customers, we've got more capacity coming in statesville.

Which will allow us to further meet the growing demands.

That we're projecting and again.

Hope that you see exactly what we're seeing which is confidence in our ability to deliver and the investments to support the demand that we're going to create.

Okay.

Great and then secondly.

If I may I wanted to talk a little bit about the acquisition activity that you've done.

Thank you mentioned three bolt ons closed.

During the quarter what is the aggregate sales contribution that you would expect from those <unk> and <unk> and based on your margin comments and performance. It sounds like maybe the acquisitions feature significantly lower margins.

That correct.

If it is maybe you can talk about.

The game plan to raise those to the company average or beyond over time.

Yes, let me start with the latter part of your question.

We'll talk about the first piece.

You are right when we split out the acquisitions it was to highlight.

To our investors.

Sure.

The ability to reach the commitments that we've been talking about in fact, when we first announced the Valspar acquisition.

We painted a picture of that.

We were proud of the performance of our tag business and that we expected to drive this industrial business.

In that direction.

Citing our desire to get into the high teens low 20 operating margins.

In fact that we've reached adjusted backing out to your point the last 12 months of acquisitions up into the 2017.

No one popping corks here, we're not done we know that and it's one quarter, we understand that as well, but it clearly demonstrates what it is that we're out to do and how we're doing it. The fact that we've reached 17%.

We think as an indicator of where we are.

And I will tell you, where we're going is higher.

The fact that we backed out these acquisitions should in fact.

Indicate that we believe in these acquisitions.

Some of them are as little as 30, or 60 days old and we've not had the opportunity to drive the synergies that we know we can drive into these acquisitions were making these acquisitions with a long view in mind, we're not trying to.

Add on the first 30 days of their joining our family.

Do we expect them to be contributing what is it that we expect them to do we buy them with a goal of bringing our synergies and plugging them into our platform driving more volume and cost reductions and synergies in so we're excited about these wonderful companies. The people that have joined our company.

As well as the technologies, they bring and we will drive those in the right direction and they will contribute to our profit.

Yes, Kevin.

Acquisitions that we've had to date about it.

Little over one 5% in the third quarter expected to be similar in the fourth quarter when I look at TCG that.

They would add about a mid single digit percentage in <unk>.

The highlight John's point.

And over 600 or about $630 million for the year on acquisitions, most of that or two thirds one third.

Third quarter.

The offset is we talked earlier two of those acquisitions as an FX. So about even if you're looking just at the scoreboard.

That's helpful. Thank you.

Thanks, Kevin.

Your next question is coming from John Mcnulty.

Yes, thanks for taking my question.

So there's been a tremendous number of price hikes and announcements throughout the year at different times. So I guess can you help us to think about it if no further price hikes were announced.

Should we be thinking about what the pricing in 2023 is year over year, just to kind of help us to level set a little bit just given how much you've been putting through.

Yes.

John with all the annualized <unk> should expect mid mid single digit.

Price effectiveness.

As you roll off the February 2020 increase and you annualize. This last increase along with each of the price increases we went out with through the other regions and segments.

Right now that's our estimate.

Got it Okay. That's helpful and then earlier I guess in the prepared remarks, you spoke to.

Some of the e-commerce investment that you're making I guess can you give us an update as to some of the investments that youre, making there and how that market seems to be evolving at this point. We know it's still relatively early in that process, but I guess an update there would be helpful.

Yes, John I think what's important to understand is that our E. Commerce initiative is not just a transaction.

More than selling paint the ability to transact over a platform like that as table Stakes and ours goes well well above that.

It's a much broader.

Approach towards trying to tie in the entire ecosystem that we bring.

So that last mile delivery through our local store is something that we want to be able to deliver in but we are reaching in.

To the contractor base that we have relationships with and.

Beginning to conduct more and more business along with the Rep and the store manager in a very unique and differentiated way.

We want these customers living on our platform running their business on our platform and seamlessly doing business with us as a result of that.

It's working quite well we've got.

A number of painting contractors as well as a lot of national accounts that are there.

There are really dialing into <unk>.

Our platform.

I will never be a finish line onto this we're investing pretty heavily right now but.

As we're ramping up.

As part of our plan that will stabilize and diminish overtime, but right.

Right now.

I think we're in such a unique position with our store platform and the ability to conduct business in a way that no one else can.

We're excited about it we're leveraging it and more and more people are using it.

Great. Thanks, very much for the color.

Thanks, John .

Your next question is coming from Christopher Parkinson.

Good morning can you just hit on your broader expectations.

Whether it's <unk> or 'twenty 'twenty three on what you are hearing in your general industrial businesses.

Perhaps just parsing out various content from geographies and then also more consumer versus core industrial businesses. It would be particularly helpful. Thank you.

Hello, Chris.

Industrial business I would say.

Just briefly about our packaging but are.

Packaging non BPA coating is continuing to gain great traction we mentioned that we're investing in this business.

We've got great relationships with our customers here and we are investing alongside with them with great agreements that allow us to really collaborate well in to grow with them.

Strong growth for example in beverage in both North America and Europe .

Is the preference more and more moves away.

From other other containers into aluminum cans.

The Euro food Safety Association opinion in Europe is also driving increased demand for non BPA coatings.

That continues through 2022 and 2023.

So this is a <unk>.

Really really unique technology.

<unk> customers, we've got a wonderful team here, that's really executing very well we're excited about this business.

Business has been up double digits in seven of the last eight quarters.

I mentioned earlier that we're facing some tough comps here with a 20% comp in the fourth quarter, but we're not running for the quarter were running this for years to come.

Really excited here again about this leadership team as well as the technology. Our solutions here are allowed us to be much more responsive to our customers' quick.

Quicker turn smaller batches works well in the.

In the face of adversity for our customers and that's where we're headed allowing them to be more responsive to their customers. So it's working very well.

Our industrial wood business is another area that we believe will we're growing share.

Kitchen cabinets is a big part of this business is still positive now, but we do expect to see a little bit of a slowdown in this business as new residential slows down.

Furniture same way we are growing.

Sure but.

New residential slows down that will have an influence.

On industrial wood, there are other opportunities, though we see a terrific opportunity in industrial wood flooring to continue to grow.

Building products.

Our share position there offers tremendous opportunity.

We do have a good position here in Europe .

So as Europe impacts <unk>.

Industrial wood will feel that in our industrial wood business.

Auto Refinish I would say there is very high demand and we're really pleased with this team and the job. We're doing here. We know we're growing share here, particularly in North America.

Sure.

Our shop count is growing dramatically.

There is a shortage here of body techs in parts that's having.

A material impact on backlog.

But our results in this business are terrific.

This is another one where we have a very similar model in our automotive as we do our tag business with our control distributions on our ability to serve and be responsive to our customers along with the shift that we're seeing very positive mix shift towards our premium products.

It gives us great confidence in this business the combination of the Valspar and Sherwin technology that came together is really helping us win.

<unk> refinish.

GI General industrial.

Strong demand here in heavy equipment expected through 2022, and 'twenty, three, especially large in AG and construction.

As you would expect us.

Positive impacted by that positively impacted by the infrastructure opportunities that that exists and then finally in protective and marine.

We're really pleased with what's happening here demand is strong in all end markets.

Oil and gas water wastewater.

Again same issue here as far as an opportunity in multiple high value infrastructure opportunities.

Solutions here go a long way as well our customers are willing to pay for products that help get them off the job quicker either with less codes quicker Rico times, whatever it might be.

We've been investing in this business in the flooring business, we're putting together a nice portfolio of technologies services and capabilities that.

We believe we will again further help us to differentiate.

Our model here again is also differentiated particularly in North America, where we have our store platform to use a distribution where many of our competitors are trying to drop ship in large orders our customers can work with our teams and leverage the local Sherwin Williams store.

To source product and have it there when they need them.

Teams are working really well together on that so so a lot of momentum here.

We see some.

Pressures in the market as you look at.

Asia and Europe .

And what's happening in those we're not going to be immune to those but we absolutely do believe or we expect and hold our teams accountable to outperform the market and we have a lot of confidence.

We'll be able to do that and we're making investments to help support them doing that so we're feeling pretty good about this.

That's very helpful color just as a very brief follow up.

There's been a lot of debate regarding pent up demand in both resi and commercial repaying could you just quickly assess what youre currently hearing from your customers in terms of backlog longevity.

I mean, there's been some rumors about the scope of certain projects, especially on the resi side actually expanding for people that are waiting a lot of time can you just give us your latest assessment on what Youre hearing from your customers and what how that drives your confidence at least into year end. Thank you so much.

So Chris hold on one side just wondering.

You talked about new residential.

No rajeev repaint and commercial repaint I apologize.

Okay got it well commercial and resume I'd say the underlying demand on commercial is strong.

Projects are resuming and starts are positive if you look at the Dodge momentum.

Mentum index, a strong positive for every month in 2022 and the Abi.

Architectural billing index.

I'm sure you all know that's the index that.

Really.

The metric for how architectural billing.

Has been positive for 20 straight months, so that typically means projects in the next nine to 12 months, we're going to be coming out of the ground and the fact that they remain positive. We believe is a good sign and customers who are positive they are still reporting.

Lays resulting from some labor and material shortages.

But we are seeing.

A terrific opportunity for our products.

Infrastructure spending here as well as strong in schools airports spending current hospitals and also areas such as.

Data centers.

Our position here is strong again.

We really leverage our platform, we'd leverage our specification teams.

Calling on architects and <unk>.

We drive new products for customers that allow them to be more productive on the job.

Combination of those local stores reps.

Really a great stable of products.

So our innovation team continues to do that I know they've been gathered just in the last couple of days.

Talking about how they can continue to add more to our success and we're doing a wonderful job doing that so I want to call out to them as well.

It relates to the residential repaint side.

As I mentioned earlier.

It's still positive we see contra.

Contractors in our stores every day they are talking about the strength of the balance of the year and turning the corner into next year still a pretty good backlog.

I would say that we've talked to them about bidding and what's in the pipeline and really dial into our CRM to understand that I would say what we.

What we have been witnessing as more and more.

Project scope has increased so the size of the projects continue to grow I think some of that might just simply be I. Finally found the contractors that'll come give me a quote and I'm not going to let them out just doing my living room I'm going to have them do the entire house.

Expanded areas that they may not have planned on in the past.

The quality of the leads seem to be going on so there is.

Our contractors would refer to it as less tire kicking.

People that are interested in projects introduce interested in getting quotes and starting these projects.

Right away so.

We're very aggressive in pursuit of these customers, we feel as though our right to win in our value proposition is strong and getting stronger and we're looking forward to continuing to leverage. This one last point I would make is that we are.

Notwithstanding the falloff.

Call out that we're making for adjusting our expenses and everything that we're doing I think highlights exactly the fact that we're grounded in reality.

I will say this though that when we exited the last.

Slowdown in the last recession, we did a postmortem and really tried to understand what is it that coming out of the next slowdown we want to be prepared and how would we be better.

Positioned to withstand the next slowdown.

So throughout the periods in 2018 period, all the way to now we've been working strategically on how do we better position the company and when you look at residential repaint.

It's a much larger percentage of our business now and Thats because when we do the last one new residential while were.

<unk> been successful and we've been growing and our success there.

We wanted to offset this and diversify our business a little bit more so we've been hard at work driving more and more residential repaint and now its a larger percentage of our business and we think it's going to allow us to weather storms much better than we have in the past.

Thank you as always.

Thanks, Chris.

Your next question is coming from David Begleiter.

Thank you good morning.

Al should gross margins be up in Q4 sequentially.

Yes, yes, and part of that.

David is.

Full impact of the 10% price increase.

Yes.

We do have a softer comp.

But really you also have the strong <unk>.

Low double.

Digit volume in and tag, which is our highest margin segment. So we should see a nice a better flow through if you will in our in our fourth quarter relative to our third quarter and tag, which will help drive that gross margin up.

So, yes, I'm expecting sequential and a bigger year over year improvement in our fourth quarter and.

Possibly even getting to that low end of that long term, 45% to 48% range.

Very good and John just on the home depot PPG relationship has there been anything of any negative impacts in your business in terms of business losses, our share of losses.

Well no.

I would say this our belief is that we're in a really really good position.

We've been working hard developing our approach towards.

Our controlled distribution model that allows us to differentiate.

When we're doing our job, but we would expect people to react and change their models.

And when they do that we'd like to take advantage of that change.

We think we're executing really really well we think people are reacting in exactly the way, we would expect them to react.

And we'd say that we're capitalizing on that.

And we will continue to capitalize on.

Thank you very much.

Thanks, David.

Your next question is coming from everyone Vishwanathan.

Great. Thanks for taking my question good morning.

I guess.

First off.

There could be some challenges in 2023.

Could you just describe that a little bit more is that.

Continued slowdown in Europe and China.

And potentially that spreading over into North America, and the tag business or is it mainly still kind of.

More likely in <unk>.

I will start there thanks.

Yes.

I think we've talked about we do expect continued.

Slowdown in Europe and Asia.

I think as we get into North America architectural demand I'd prefer as we've gone through our going through our normal <unk>.

Reparation for the coming year and the operating plan to give you more color on that in January we will have a few more months under our belt.

There's a lot of moving macro.

Trends and things that are happening and they are moving daily so rather than try to give you an outlook for 2023 on arc in the regions.

Preferred we'd be better prepared to do that in January I think the fourth quarter like we talked about.

Strong.

High teens, low 20% and tag.

And.

Low double digit volume likely to carryover into the first quarter and then the price of high single digits that we've got.

Certainly carries over into the first quarter I think that's as far as.

We can go on color.

Okay. That's helpful and just as a follow up then.

Have you seen your customers changed their order patterns at all and maybe some different market segments as the backlog actually growing or is it that theyre getting to jobs that maybe that were deferred.

During 'twenty, one because of lack of availability to raws and labor.

Maybe you can just comment on that thanks.

Well there is certainly some of that.

And I would say that.

Two things one is I think we're working much closer with our customers.

He brings out the best sometimes you have to find it.

Fact that we've gotten through this challenging time with raw materials.

With a closer relationship with our customers.

We better understand what projects they are on in the past.

Just walk into the store and they knew they could have it.

Whatever the whatever it was when they needed it was there.

As we went through that process of working through the enrollment.

Raw material shortages.

We're more responsive or better responsive when we understood what the needs of the customers were.

I'd say the pattern first of all for US is it's a closer pattern, we're working better with them, we do see some I would call it maybe more fluid.

They're moving the projects when they become available and if it's weather changing or getting outside when they can.

The fact that.

They're racing with a pretty sizable backlog they don't want to take any time off that they don't need to so I mentioned that product that I mentioned earlier, an extended the painting season for them, but I would say as it relates to the pattern themselves.

On the architectural side, we see.

More frequency I would say, we're seeing people in our stores more and on the industrial side I'd say, we're probably seeing.

Small orders more frequently smaller orders more frequently.

Customers are trying to to prepare for cash management, while being responsive for their teams.

With their teams or their customers.

And again that works to our advantage given our model of responsiveness.

Thanks.

Thanks Arun.

Your next question for today is coming from John Roberts.

Thank you and nice quarter.

One of your longest lead time planning items as new store openings I assume you have your sights for 2023 selected can you give us some insights into what new stores might look like next year.

Okay.

You are right, we do have that planned out I would say that.

While we get at this point going to tell you it's going to be in the 80 to 100 range.

And Youll see those in a combination of metro markets, where we're continuing to feed in.

Locations as well as in some markets where.

We want to.

Supplement some of the previous investments with added locations for our customers.

Youre right John as we go into the year a good portion of those are already identified and the deals are just good.

Got it finalized and we're working through those so we're prepared and again confidence.

<unk> in our model confidence in the differentiation of Sherwin Williams, adding stores, while others are closing stores, taking advantage of the market opportunities that exist as a result.

Okay.

The one year comp the DIY in your stores when it's obviously very different than the DIY and your consumer segment, because a year ago, you were prioritizing the propane and Rover DIY in your stores. If you looked at a two year comp is the DIY in your stores roughly up the same amount as the DIY in the consumer segment on a two year.

<unk>.

I think it would be up higher than that John .

I think we've.

<unk> had really nice strength in.

DIY customer with fantastic and the fact that we've been able to do.

Turn on Super sales again to bring them in as really helped drive that growth.

Alright, thank you.

Thanks, Tom.

Yeah.

Your next question is coming from Mike Tyson.

Hey, guys nice quarter, just one question for me you sort of mentioned.

Or sort of managing the business on a worst case scenario, what would that look like for the stores, but with demand.

It'd be flat down down a lot in the event some of that.

Unfolds, what can you do to help mitigate some of that.

Some of that potential volume decline.

Yes, Mike.

Trying to guess how bad that could be is not something that we're going to do on this call.

Reality is is that we prepare prepare for a number of scenarios.

Our view is that.

Particularly in that stores business that one.

Things get tough we go hunting.

The reality of a really difficult time in stores might include scale.

Scaling back on some of the staffing if we didn't have the transaction count.

Other expenses that we might feel are appropriate.

But I would say this.

And the 37 soon to be 38 years I've been with the company. Our approach has been to take advantage of these situations. So I mentioned earlier.

Work, we've been doing to grow res repaint.

As a percent of our business.

Coming through Covid I think it is.

Right demonstration of what we do in really difficult times.

Go find customers those customers need to paint to put food on their plate feed their families.

We grow share we grow.

Active accounts.

And we outperformed the market and I'd say, that's what you should expect us to do in difficult times, Mike I would just add to that.

Kind of how I frame it so to speak because if you go back and look at.

New residential.

Nine where theres a lot of housing speculation and things of that nature are new RASM was down.

22% range and as John talked as we've come out of that and back then <unk> and new <unk> ratio was one to one fast forward that to today in our residential repaint versus new res is two to one.

And when I look at also property maintenance over that same time period.

You look at the combination of resi repaint property maintenance that are less resist a recession more recession resistant.

We're probably over 50% of our sales relative to just over 40 back then so.

When he talks about how we've re.

Map the company to help us.

Mitigate a recession and those are the types of things and the metrics I look at to say, Okay. I don't believe it can be bad as 2000, 2022, 8% and 29.

But if it is we are much larger than other segments to help offset it.

<unk>.

Again, not to keep everyone here all day, but we think it is important part of it the program paints as another piece when we think about the residential.

As a new focus for us as well as in that industrial side, where packaging auto refinish.

These are growing parts of our business that werent as strong in the past so.

We don't wait for bad things happen, we're trying to make good things out of it.

Great. Thank you.

Good morning.

Your next question is coming from Mike Harrison.

Hi, good morning.

You guys noted that you are working through some inefficiencies in your supply chain still presumably that means that youre starting to get back to playing a little bit more offense when it comes to procurement.

I'm curious when you're talking about raw materials coming lower sequentially.

That really just a decline in market prices and thats, mostly what youre talking about or does it also include.

This greater supply chain and procurement efficiency that you should see overtime.

Yes, Mike I think what we're speaking to there has been our willingness to serve our customers even at a cost.

And so I think it will.

Ghansham rather than that asked about the supply of the capacity that came on the $50 million and gallons.

As our raw materials have become available we don't want to turn those down we may need finished product in one part of the country, but the raws because of the supplier base might be available.

And another part another plant, we manufacture that product and shifted to our customers to serve them.

We have worked with our suppliers at times, where they have been unable to ship raw materials to us we've used our own tank wagons or our own vehicles 18 wheelers to secure product.

And get it to our plants when needed so.

There is an advantage of doing business with Charlotte.

Starts with the customer in the store or the rep and our plants, but it works all the way through to the raw material and manufacturing piece and we'll do what we have to to keep our customers.

In business and producing because we know in the long run the better job, we do at keeping them in business the better supplier we are to them.

In our best interest long term.

Alright, and then looking at the restructuring actions it looks like a good portion of those are targeted at.

The Asia Pacific region is that a region, where you're still investing for growth and still seeing a lot of opportunities or is that.

Is there kind of a retrenchment going on there maybe talk just a little bit about your strategy in the APAC region.

Yes, Mike I'd say on the industrial side.

Our investing and continue to grow.

Nearly every one of our <unk> business does has a.

Good and growing business there, we expect that to continue as you would expect.

We are taking.

The appropriate actions based on slowdowns and as I would say is our custom we continue.

Valuate our businesses.

As al mentioned, not only our businesses our programs our customers relationships everything we can to ensure that they they reached the hurdle for us to continue to invest in those I think it is safe to say that we're doing a deep dive review of our architectural business in China.

And based on how that review comes out we will.

The cycle will be due on the future the industrial side, we know we can demonstrate the value.

For our customers.

It can allow us to win there.

Yeah.

Alright, Thank you very much.

Thanks, Mike.

Your next question is coming from Greg Melick.

Hi, Thanks.

Thanks for the insight on the gross margin going forward I'd like basically asked the same thing on SG&A.

I think it was up almost 12% year on year in the third quarter or is that or should we assume a double digit growth in SG&A as well in the fourth quarter.

Yes.

Greg I think what youre going to see in our fourth quarter with the tag stores that we've invested in and then opening another 40 to 50.

And.

And our fourth quarter, along with the reps to support that.

We'll continue to grow our control our.

Our SG&A pretty tightly I do expect to get leverage still in our fourth quarter on SG&A, but as you typically see with the seasonal slowdown in.

Architectural demand.

<unk> as a percent of sales will be up.

I don't expect our SG&A to be up as much in our fourth quarter, just because some of the actions we have.

Taken on holding new positions, reducing travel and things of that nature will help offset some of those additional investments.

Got it and then I guess my follow up is.

Given that the we tend to focus on getting on top of raws and clearly it seems like you're there now.

But given all the other costs that are going up.

Is it possible next year that there could be another round of price increases even if.

Raws are flattening out.

Greg I think we've got a.

Get through our planning normal planning process here, we will evaluate the merit increases and different other inputs like labor and transportation and if we.

So if we if we need to go out again.

We will but we are.

Not in a position today to talk to that specifically and if we need to go out we will rustled everything we can to the mat to try to avoid having to go out but I think we've demonstrated an ability and a willingness if we have to but we don't take that likely our goal is not to have too but.

There are some inflationary areas.

Wages or whatever it is we also want to make sure that we retain the best talent and so we know we need to be competitive as well.

Great and then my last is really a follow up on gross margin.

Could you help us if gross margins end up being I guess they were up 110 120, this quarter and let's say, they're up 300 or more in the fourth quarter is that going to be more from price versus raws or more just from volume increases I think last year you called out.

That was hundreds of bps of help just us help us on that.

Yes, I think it's going to be the strong volume through tag up double digits pricing and then then the ROM moderation in that order.

Got it thank you guys and good luck.

Thank you.

Your next question is coming from Adam Baumgarten.

Hey, good afternoon, everyone.

Just maybe sticking on DIY I know you mentioned that volumes in tag really strong there were north American DIY volumes positive and consumer brands in the quarter.

North American volume was up strong single digits.

Yes, I would say.

Volume side.

We are up.

Low to mid teens in the third quarter volume was up low low single digits.

Okay got it and then.

As we're thinking about the raw materials, if we were to keep the current basket at the levels, where they are today and flow that through to next year, what would that look like from a raw material inflation perspective, if everything just stays stable where it is.

Yes, Adam I think you are.

Sure.

If everything stayed exactly the same which we know youre still tuck in probably.

So mid single digit by the time, you annualize everything.

That's a hard answer today like we talked about let us get through our planning cycle, let us get through our demand outlook with our suppliers and let us.

Give you a better view of our full basket of input costs raw materials labor freight transportation on our January call I think I think it's too early to be speculating too much on 2023 costs at this point.

Okay got it thanks.

Yes.

Your next question is coming from Garik <unk>.

Oh, hi, Thanks, I'm curious if you could speak to any mix impact in tag or are you seeing any signs or anticipating any signs of a trade down.

No actually we see the opposite.

As.

Customers are facing labor shortages I'm trying to get through <unk>.

Projects as quickly as possible.

I have a tendency to move up in quality.

Actually even seeing that in our new residential as well.

<unk>.

We've introduced new products.

New painters edge plus.

It's an ultra flat product that hides imperfections funds as an example, so.

You're getting some of these projects, where the drywall contractors are struggling to high higher than fine.

Experienced dry wall.

They're passing drywall on that may not be perfect as the painter might have liked and so we're helping them with products that high some of those imperfections our customers are willing to pay for those 90%, 85% to 90% of our cost is labor so shifting up in quality helps them overall.

Profitability of the project.

Got it. Thank you follow up question is just one more on DIY.

A bit more sluggish coming out of two Q. Just curious are you seeing a sequential strengthening there.

I'd say some of what you've seen in our DIY first in our stores.

All right.

We see more DIY in our own stores, but it is.

Relatively small percentage of our business, we're mainly focused on the.

Contractor through our own stores, but the comparisons there, where we were shifting product away from DIY products into contractors.

A portion of the benefit that we see and then also on the consumer brands side.

We've reached.

More.

Level state if you will of raw materials.

We've been able to.

The benefit from some of the pipeline filling into other customers that we've not been able to in the past just because of availability. So we're seeing some benefit there as well.

Got it thanks again.

But.

Your next question for today is coming from Steve Byrne.

Yes. Thank you.

RV equivalent sales that youre paying contractors, sometimes buy from you the spring machines and so forth are they still a good leading indicator of demand for you or does that depend on which which of the businesses and I was just curious if it's still useful.

How would you characterize those sales.

In recent months.

And on the same theme, John you talked about having visibility for the paint.

The probe backlog for.

Through the end of the year here.

Here, we are almost November would you would you normally have a view of our backlog beyond year end at this time.

So let me answer the first question you are right that the spray equipment sales.

<unk>.

Given time of the year could vary.

How much of a leading indicators.

B so.

Residential repaint as an example, I don't think many of us would appreciate.

<unk> contracts are coming into our homes, where we're living with an aerospace are trying to spread the inside of the home.

And as exterior slows down they are less likely to purchase.

Spray equipment.

So I'd say that for the most part right now spray.

Spray equipment is riding along.

As you would expect with the sales volume of paint that we're experiencing.

And then the.

Second part of your question was.

Just whether whether you want to do more and more of a backlog beyond a couple of months at this time of euro.

I would say.

I'd say right now.

As we've talking historically to our customers.

The outlook that we have is pretty much in line with what we would normally hear from them commercial contractors generally have a longer view. These are larger projects that go out to bid as far out as a year earlier residential repaint would be on the other end of the spectrum and those contractors could get.

No.

Contracts or agreements that could start in weeks.

Others in months, so I'd say.

It's pretty much in line with what we would normally see if you put them all together.

Look at the backlog, it's pretty consistent with what we've said.

And then with respect to the.

The consumer business in China is that basically the Walgreens brand and I was just curious whether that that's that brand that you acquired with Valspar just hasn't worked out as well as you had hoped.

But as the war room brand.

Im talking on a call about a deep dive at probably a safe to say, it's not worked out as well as Idaho.

Okay. Thank you.

But.

Your next question for today is coming from Eric Hart.

Good afternoon, two things for you first of all.

Alan in terms of production and inventory from here could you just clarify.

What the plan is as you head into what you characterize a bit uncertain in volume in some areas. What is what is the plan through <unk> and into 'twenty three.

Yes, Eric.

Talked about building some inventory in our fourth quarter on architectural specifically I think of those as maybe some of the.

If you ranked <unk>.

<unk>.

And your fastest mover rebuilding some inventories and BS and CS and DS just to make sure.

We got the full spectrum of products covered going into next year's selling season that being said as John talked about we're going to stay very close with our customers on what their backlogs and outlooks are.

We will adjust production accordingly, I don't want to get too far out in front of demand.

Knowing that we were able to keep up with demand through the summer season with the additional capacity. We brought online that we talked about earlier. So I think it gives us more flexibility to manage inventory.

Lower if need be going into the summer, but I think those are things that we're very going to be very cautious about like I said I want to get our working capital back down towards that 10% to 10.

10, 5% of sales, where we I would like to run the company. We think we can get down there around 11% 11 five by the end of this year, knowing we are going to carry a little bit more inventory intensive.

Next year.

I should say it that I should say, we will be back to a more historical level of inventory.

Then we were a year ago, obviously, but I think thats, something we will manage pretty tight.

Yes.

Okay, and then secondly.

Got it I understand your comments on how the portfolio is different with more resi repaint versus new in the last cycle.

The industrial business is also I'd say, notably bigger.

Then it was before as well Im curious how that influences the gross margin path.

Are you talking about getting to the low end up to 45% to 48 and <unk>, but how does the gross margin recovery path behave.

In this cycle should it behaved like in prior cycles or is the inclusion of industrial change the arc of that cost.

Yes.

Eric I think what you saw.

He is.

That mix shift of on the industrial side is.

A little bit better for us from a gross margin standpoint.

And then you got to kind of look at it even within architectural the mix shift is a little bit better for us. So.

Yes.

I get your question, we didnt have packaging through the last cycle.

A larger portion.

Larger portion of industrial even now than it was two years ago. So I think when you look at margin profiles, we might have a pause that little bit more positive shift when you get in.

And to the slowdown we're seeing some of that I would argue with a slowdown in Asia and Europe across some of our of our businesses within industrial.

North America hangs in there and.

Sure.

Has better demand our margins will be a little bit better.

The way in segments like our auto refinish and coil.

It's a very good question, Eric I think if you look at the overall, we think we're not only better position.

Demand standpoint, we've talked about whereas repaint, but you also would have to include property management in there.

The.

Auto refinish packaging all of these are really better position, but we're going to be.

<unk> better positioned to grow volume as well more absorption through the plant than.

And then we made it through the last cycle as well.

And.

A lot that we bring in our approach even with existing segments. Our strategy work that we've done to allow us to better focus on the sub segments in those customers within there that are willing to pay for the solutions that we bring is where we're focused and we think thats going to benefit us.

Thank you.

Thanks, Eric.

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

Thank you Holly and thank you everybody for joining us today.

You heard we're looking forward to delivering a very solid fourth quarter that will result in 35% growth in our second half adjusted earnings per share.

We're also very focused on preparing for any number of scenarios that might unfold next year. Our team is very deep and experienced as John said so very.

Very confident heading into next year and we are.

Looking to execute continuing to execute at a high level.

I will be available along with Eric Swanson for your questions Afterwards, and again, thank you for joining us today.

Have a great day.

Thank you ladies and gentlemen, this does conclude todays event you may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.