Q1 2023 The Sherwin-Williams Company Earnings Call

Good morning, Thank you for joining the Sherwin Williams Company's review of first quarter 2023 results and our outlook for the second quarter and full year of 2023.

With us on today's call are John Marcus Chairman and CEO al Mr. Shin CFO , Heidi Petz, President and C O L. Jane Cronin Senior Vice President Enterprise Finance.

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 statement 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 will now turn the call over to Jim Jaye.

Thank you and good morning to everyone Sherwin Williams delivered excellent first quarter results compared to the same period a year ago.

Consolidated net sales grew by a high single digit percentage.

Head of our expectations.

And were led by a mid teens percentage increase in our.

Personal architectural end markets.

On the industrial side of the business sales increased in all regions, except Asia Pacific.

Gross margin significantly improved sequentially and year over year, driven by strong volume in the paint stores group and effective pricing.

Cost of goods sold includes higher inflation in wages and other employee related categories, which were partially offset by a slight decrease in year over year raw material costs.

We expect to hold the majority of the pricing we have put into the market.

The ongoing investments we have made to drive innovation enhanced services and secure the talent that provides differentiated solutions to help our customers reach their goals and drive their success.

Segment margin in all three reportable segments expanded sequentially and year over year.

We also delivered strong double digit growth in diluted net income per share and EBITDA.

Additionally, we continued to execute on the portfolio realignment actions, we announced late last year.

<unk> the divestiture of a noncore aerosol business, which closed on April <unk>, and our recently announced agreement to divest our China architectural business.

I'd like to highlight just a few of our consolidated first quarter numbers.

Parison and my comments are to the prior year period unless stated otherwise.

Starting with the top line first quarter 2023, consolidated net sales increased eight 9% to $5 $44 billion.

Consolidated gross margin increased to 44, 5% an improvement of 340 basis points.

SG&A expense as a percentage of sales was 31, 1%.

An increase of 140 basis points.

Driven by investments in the paint stores group's long term growth initiatives and investments in our people across the company through year over year increases in compensation and other employee related benefits.

Our people remain our key differentiator in the marketplace.

Consolidated profit before tax increased $153 7 million or 33, 3%.

Diluted net income per share in the quarter was $1 84 per share versus $1 41 per share a year ago.

Excluding valspar acquisition related amortization expense and costs related to previously announced restructuring actions.

First quarter adjusted diluted net income per share increased 26, 7%.

The $2 <unk> per share versus $1 61 per share a year ago.

EBITDA in the quarter increased $185 million or 26, 7%.

And was 16, 1% as a percent of sales.

Let me now turn it over to Heidi, who will provide some commentary on our first quarter results by segment.

John will follow with comments on our outlook before we move on to your questions.

Thank you Jim I'll begin with the paint stores group previously known as the Americas Group.

We described this change on our last call and in this morning's press release.

No impact to prior year consolidated results related to the change.

Current and prior year segment results have been restated to reflect this change.

First quarter paint stores group sales were ahead of our expectations and increased 14, 8% driven by high single digit volume growth and continued effective pricing.

Segment profit increased by $97 $9 million and segment margin improved 120 basis points.

18, 4%.

Our pro architectural sales grew by a mid teens percentage in the quarter.

All pro market segment increased by double digits led by property management, and followed by commercial residential repaint and new residential respectively.

Sales in protective and marine and DIY also increased by double digit percentages.

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

Moving on to results in our consumer brands group, which again now reflect the addition of a Latin America architectural business in the current quarter and prior year.

Sales were well ahead of our guidance and increased by two 4% in the quarter.

Performance was better than expected in North America, where sales were down less than 1% and in Europe , where sales were down low single digits.

In other regions sales were up strong double digits in Latin America, and down double digits in Asia.

Effective pricing led by Latin America was partially offset by a mid single digit decrease in volume and low single digit FX headwinds.

The tightness in alkyd resins impacting our ability to produce stains and aerosols improved significantly during the quarter.

Expect this issue to be behind us by the end of the second quarter.

Adjusted segment margin was 13% up 120 basis points year over year.

As Jim mentioned, we divested of noncore aerosol business at the beginning of this month and we also entered into an agreement to divest our China architectural business we.

We expect these actions will benefit segment margin overtime as we drive our return to our high teen low 20 adjusted margin target.

One time restructuring costs in the quarter were immaterial.

Sales in our performance coatings group increased three 4% against the 24% comparison.

The increase was driven by low teens pricing and mid single digit sales from acquisitions, partially offset by a low teens decrease in volume, which included the impact from discontinued operations in Russia, and a low single digit unfavorable FX impact.

Adjusted segment margin increased 390 basis points to 15, 7% of sales.

This is the fourth straight quarter. This team has delivered year over year segment margin improvement driven by execution of our strategy, including effective pricing.

Sales in TCG varied significantly by region.

In North America sales increased high single digits against a nearly 30% comp.

Latin America sales increased by double digits also against a strong com <unk>.

Sales in Europe were up mid single digits, while sales in Asia were down double digits.

From a division perspective growth was strongest in auto refinish, which was up by a mid teen percentage.

Followed by coil and general industrial which were both up mid single digits.

All three of these divisions grew against double digit comparison.

Industrial wood sales were down mid single digits as expected due to slowing in furniture, cabinetry and flooring related to new residential softness.

Packaging sales also were down mid single digits against a 30 plus comp with volume down about a point and the remainder due to our exit of Russia and unfavorable FX.

We continue to feel very good about our position and growth prospects in this end market.

With that let me turn it over to Jon for his comments on our outlook for the second quarter and the full year.

Thank you Heidi.

I want to thank our teams for working hard to deliver a strong start to the year, especially the margin recovery we are seeing.

Following the relentless cost inflation, we've experienced the last two years.

As we said in January .

We expected to have a strong first quarter and that's exactly what our team delivered.

We also indicated that we would not be updating guidance after the first quarter.

We know we have work to do and we're under no illusions about the macro headwinds, we're likely to face as the year progresses.

We have a much better idea of how the year might unfold as we get deeper into the painting season over the next few months.

As we enter the second quarter, we will remain focused on what we can control.

This includes leveraging our recession resilient markets growing new accounts and share of wallet.

<unk> appropriate growth investments in stores and sales representatives and managing price cost dynamics.

We remain confident in our differentiated strategy capabilities and product and service solutions and we continue to expect to outperform the market.

For the second quarter of 2023, we anticipate our consolidated net sales will be up or down by a low single digit percentage compared to the second quarter of 2022 <unk>.

Inclusive of a high single digit price increase.

For the full year 2023.

We expect consolidated net sales to be flat to down mid single digits inclusive of a mid single digit price carryover from 2022.

Our sales expectations by segment.

Second quarter and the full year are included in our slide deck and reflect the move of the Latin American architectural business from paint stores group to consumer brands group.

There is no impact on our sales guidance in the quarter for the year from the divestiture of the China architectural business at this time as the transaction has not yet closed.

On the cost side, there is no change in our raw material outlook, where we continue to expect costs to be down by a low to mid single digit percentage in 2023 compared to 2022.

We expect to see the largest benefit occurring in the second and third quarters.

We expect to see decreases across many commodity categories.

Range is likely will vary widely.

We expect other costs, including wages and energy.

Up in the mid to high single digit range.

The first quarter is typically our smallest and we need to see second quarter trends in performance to better understand the potential impacts on our second half outlook.

We expect to provide an update on our full year sales and EPS guidance and.

In our second quarter.

As a result, there is no change at this time to our guidance for full year 2023 diluted net income per share.

Which we expect to be in the range of $6 79.

To $7 59 per share.

Full year 2023 earnings per share guidance includes acquisition related amortization expense of approximately 81 per share and.

That includes expense related to our previously announced targeted restructuring actions of 25 to 35 per share.

On an adjusted basis, we expect full year 2023 earnings per share in the range of $7 95.

The $8 65.

We provided a GAAP reconciliation in the Reg G table within our press release.

There are also no updates to the additional data points on capital allocation priorities, we provided on our January call.

I'll also refer you to the slide deck issued with our press release this morning.

We'll provide guidance on our expectations for currency exchange effective tax rate capex, depreciation and amortization and interest expense.

All of these remain unchanged from our January call as well.

Given the many variables at play limited visibility beyond the first half and the high level of uncertainty in the global economy. We continue to believe our current outlook is a realistic one.

As we get through our second quarter, and we see more information the assumptions, we laid out in January could change.

If those assumptions changed for the better.

We would expect to deliver stronger results.

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

And we're now a stronger and more resilient company.

I'm highly confident in our leadership team, which is deep and experienced.

And it has been through many previous business cycles.

We anticipated 2023 would be challenging we planned accordingly.

We have and will continue taking appropriate actions.

We expect strong momentum coming out of this period of uncertainty.

<unk> to prior downturns.

That momentum will stem from our strategy of providing innovative solutions that help our customers to be more productive and more profitable.

In challenging environments like the current one.

We can become an even more valuable partner to our customers.

We're also earning new ones.

The bottom line is we expect to outperform the market and our competitors in 2023.

And for years to come.

That concludes our prepared remarks.

With that I'd like to thank you for joining us this morning, and we'll be happy to take your questions.

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One moment, while we poll for questions.

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

Thank you and good morning, everyone.

Could I ask in tag in the quarter just was looking at the incremental margins, obviously at a very strong sales performance.

And I know there was about 5% carryover pricing in there. So it seems like the volume was quite strong.

So was there just a lot of investment spend in the quarter.

Store openings or just some of your initiatives.

And that if you could sort of bridge as to what the underlying total company SG&A expense was in the quarter and whether that is a good number to run with.

As we move through the balance of the year.

Yes, Vincent this is ambition and let me let me start with the <unk>.

Consolidated SG&A was up 14%.

Paint stores group.

It was just over two thirds of that increase.

And excluding acquisitions was approximately 80% of the increase year over year and this is due to the increase in new stores and additional sales reps, which probably represented about two thirds of the increase and then in addition employee related costs were higher year over year due to multiple merit increases beginning in the second half of last year and into <unk>.

The first quarter of this year, let me just jump in here before you carry on the on the.

Investments of our employees I think it's.

It's absolutely critical to understand in a controlled distribution model.

Particularly we see the value of the retention of our employees is a key element of our strategy.

To build relationships with our customers, we want to make sure we have the right talent.

They are trained they are developed and that we retain them and so the investments that we've made beginning actually about mid year last year.

We are clearly seeing the benefits of that.

Some benefit in the market as the economy has taken its course and clearly that has had an impact on <unk>.

Some employees and employers, but our relationship with our customers.

Employees has improved dramatically.

And I would point to our retention.

We've often boasted about our.

Turnover rate down in the 7% to 9% range and we're proud to say that we're back in that range.

Floyd turnover, so our retention was back to a historic low and we think thats, an important element and an important investment that we made.

We want to make sure that those employees are there when our customers are walking into our stores. So let me turn it back over to you.

Only thing I would add to that is as we.

<unk> January we're going to continue to manage our G&A expenses tightly.

And just other discretionary marketing and other spending as we get a better outlook on demand.

In the second half I would say I would expect a smaller year over year year over year increase in our second quarter as we annualize the merit increase from last year, we start realizing more cost reductions from the restructuring activities.

Typically we see a slight uptick in SG&A in our paint stores group as it ramps up staffing to service the increased seasonal architectural demand uptick.

Acquisitions will be slightly less than what we saw in our first quarter, which is low single digit impact and then.

We'd expect those to annualize and not see much in the second half so as the year goes on.

My second.

Quarter, I'd expect the lower percent of sales because of the seasonally higher architectural sales, but then the year over year change gets tighter as the year goes on as we annualize some of these things.

Thanks for all the details very helpful.

Thanks Vincent.

Your next.

Question is coming from Jeff Zekauskas at Jpmorgan.

Thanks very much.

The SG&A increase of 14%.

I understand that.

It should moderate from that level, but.

This year with everything you're considering or are we going to be up more than 10% as a base case year over year.

No.

Jeff I'd expect.

If you look at how paint stores group in particular.

SG&A rolled out as the year went on last year it ramps up as we get into our second half because we added more stores, but the merit increases happened in our second half so the comp gets.

Higher so the percent change gets lower as we go through the year I would say the other groups have done a really nice job of managing.

Their SG&A consumer paint.

<unk> would have a similar impact with the merit increases, but they've been managing their SG&A very tightly and then an admin will continue to invest in system upgrades and things like that but.

We're going to manage it tightly so I would not expect that high of a percentage increase for the year.

Hey.

<unk>.

Secondly, your new residential business seems to have held up reasonably well given market conditions, when we get to the fourth quarter or the <unk>.

First quarter of next year.

The base case, where do you think what do you think those volumes are like year over year in new residential.

In paint stores, so Jeff we've said that the single family housing starts are expected to be down year over year in the range of 20% to 35%.

And our expectation would be that in our business would be.

Better than the market, so our expectations would be that it would be down in the 10% to 20% range.

We've also talked openly about the fact that we expect some of our.

More recession resilient.

Segments to pool heavier during that period of time so.

As we saw the.

Quarter unfold.

We saw exactly the sequential trend that we that.

You just described.

Year over year.

January .

We saw high teens percentage increase in February low double digit increase in mid single digits in March.

So we expect that type of a trend to continue through the balance of the year. If you look back 90 days 120 days and you see the number of starts.

In comparison to.

Previous quarters, you can see the downturn and then the impact on our new rug sales as it unfolds.

Great. Thank you so much.

Thanks, Jeff.

Your next question for today is coming from Christopher Parkinson at Mizuho.

Great. Thank you so much for taking my question John .

John can you just hit on it a little bit more on what Youre hearing from your customers and contractors.

In terms of backlog specifically in the resi repaint market.

Property maintenance and then perhaps just hit a little bit on what youre seeing in protective it would be greatly appreciated. Thank you.

Yes, Chris.

With the fact that.

Sorry.

New stores group is our largest business as you know, it's a $12 billion portion of the company, 90% of our paint stores group is made up of professional sales.

And as <unk> mentioned pro sales in total grew by mid teens percentage.

With every one of our professional segments growing double digits. So these are large segments growing double digits.

So were growing real market share in absolute dollars.

<unk>.

Justin bins and his team a lot of credit for the new account and share of wallet initiatives that are clearly working.

To your question specifically on residential repaint.

Probably best describe the bidding activity is having returned to a more.

Normalized bidding market where in the past.

12 to 18, maybe 24 months it was difficult to get a painter to even come out and give you a bit because they were so busy and so backlog.

I'd say that its likely does describe as a more level were more normalized bidding activity. If you look at the Libra.

The NIH be remodel index, both are positive, but clearly some deceleration and what they are projecting.

Our double digit quarter this year.

Was on top of a mid single digit.

Performance last year.

So I would say that we have confidence in what we're doing we have confidence in our ability to continue to grow.

And grow it our competitors expense.

We are proud of it back in our stores. We've just talk briefly about the people in our stores. We think that's a very important element in what it is that we do so the retention of our people. We believe has a direct correlation to the retention of our customers.

And we continue to introduce new products, we can get into some of those details perhaps later as we'd like but.

Introducing new products to help keep that residential repaint customer.

Not only successful in what they are doing but also go into new segments as well.

Talk a little bit about new roads, there a moment ago. After jeffs question, but I will say that.

Our ability to work with our builders.

And helped to drive their business and their efficiency. We believe has been an important element in our ability to retain the relationships that we have.

In fact grow those relationships, we're introducing in the face of an adverse market here and the diversity of new residential we are introducing new products that will help our customers.

Build products that will help in.

Imperfections and improve durability, and thats, helping us to grow our new residential business.

And we expect that to continue to grow we expect to come out of this.

Time here of some challenges in the market with absolute new.

Greater market share.

On the commercial side you asked about.

This was one of the markets that clearly came in with stronger than expected.

Our results for the quarter.

Our position in this segment is very good strong and growing.

We've been long investing in reps products specifications and the fact that we have local stores and local reps is an important element in growing this segment.

Again, we've introduced a number of innovative products here as well.

When you think about.

Labor, we often talk about.

That labor represents on average about 85% to 90% of the cost of goods for a painting contractor.

The cost for a commercial contractor is likely higher than that than the average perhaps in the 90% to 95%.

As many of the commercial contractors are either union or the.

Applying paint in the Metro markets, which are higher costs. Our model. Therefore is even a greater value to these customers our ability to collaborate with the architects worked with the designers work with these contractors.

Absolutely paying dividend and we're excited about this business the commercial side there is a lot of <unk>.

Work is still coming out of the ground.

And we expect to continue to grow with this market.

The expense of our competitors.

Property maintenance you asked about as well as in other segment that grew stronger than expected occupancy and rents are returning to more normal rates and growth here was driven by.

Not only our continued share gains, but capital improvement projects as well as an increase in turns so.

The pro side by segment is really going well and we're going to continue to put fuel in the tank and feel really good that while we're growing share normally expectation we have for our team is to grow it even faster.

And just as a quick follow up on the raw material basket just to keep it simple.

You've got a few things that are sticky, but broadly it seems like we're moving in the right direction can you just hit on the two most pleasant surprises in terms of the basket and perhaps the two most frustrating substrates as we stand here today. Thank you.

Yes, Chris good morning.

I would say that raw materials are really trending as we expected and not sure that I'd say theres a lot of surprises there they were down slightly in the first quarter. The moderation was led by monomers solvents and resins to.

To your point.

<unk> and pigments, maybe a little stickier near term, but we expect to see some moderation there as the year goes on I.

I would remind everyone. As a reminder, our cost of goods also includes higher inflation and wages and other employee related costs.

For the second quarter, we're expecting to see some further moderation.

As we move towards our guide for the for the full year, which as we said in our opening is unchanged raws down low to mid single digits.

Thank you so much.

Thanks, Chris.

Your next question is coming from Mike Harrison.

Port Research partners.

Hi, good morning.

All right Mike.

Was hoping you could talk a little bit about the additional architectural capacity that you brought on.

Probably probably a little over a year ago.

As you look at the <unk> housing challenges that.

Seem to be ahead.

Is that additional capacity is something that we should think about as weighing on utilization or fixed cost absorption as we're going forward and I guess in hindsight should you maybe have pulled back or wait a little bit longer.

To expand some of that capacity.

Absolutely not.

We expect and are filling that capacity, Mike and when you believe like we do and what's happening in the market and where we're going if you were sitting in my chair you would've invested exactly as we did I wouldn't pull back one penny of it.

Yes, Mike I'd, just add to that.

As you remember on the January call I talked about.

Potential headwind with just lower architectural volume because everybody in the industry how to build architectural inventory backup. So that's a short term long term, we have a lot of confidence in the growth across each of the segments architectural pro segments that John talked about and we'll fill up that capacity.

Very quickly so even though it might be a short term headwind as we have lived through some of these cycles before the bounce back in the strong growth I'll go back to 2008, and nine and we grew high single digits for the three five and 10 year compounded average growth rate and we're a much bigger architectural business today then.

When we were back then we will fill that capacity so.

And I would argue or add to that we're going forward on statesville because of the confidence we have in the future outlook and the growth in architectural.

Alright, great and then on the performance coatings business.

A little bit surprising to me that the Asia was the weakest.

Region for you can you comment on how you expect demand to play out in the rest of the year across the different regions I guess with particular emphasis on are you going to be seeing some recovery in China, and then that Asia business. Thanks.

Well, Mike we're positioned well to do just that.

It's yet to be seen.

The.

Market.

Yes, the market tries to kind of resume back to some normalcy in Asia.

We're positioned very well our technology our assets our people.

I think a lot of that has to do with what happens in the market and our expectations as in any situation is to grow faster than the market.

We're in a very good position from a technology, but also a relationship perspective, so yes, I'd say that there is.

Uncertainty with the market in general.

As it opens up and our customers.

Our back producing product, we expect to capitalize more than our share there.

Thanks, Mike.

Your next question for today is coming from John Mcnulty with BMO capital markets.

Yes, thanks for taking my question.

Can you it sounded like in the consumer brands side business was maybe a little bit better than you expected can you speak to the stocking patterns that are going on there or are we seeing kind of a normal stock. It seemed like the expectation was it was going to be a little bit below normal, but again youre kind of coming in better than your thoughts on maybe at a little bit of color there would be helpful.

Yes, John I would say that Youre, absolutely right we have.

We saw better performance in North America, and in Europe and.

If you remember on our January call I said, we had not seen the destocking in our fourth quarter.

Maybe some had seen so we anticipate it may be a slower build in inventory at the retail channel.

We actually saw a slight increase.

The retail channel inventory and I think thinking.

Thinking back if I look at across the chain from the retail channel back through our DSC is we're back to more I would call historic levels of inventory, so we're well positioned.

To service this spring and summer selling season.

Coming up.

Just highlight also Latin America was a mid single digit tailwind in the quarter Latin America had a very strong double digit quarter in that.

That help.

When you brought them into the consumer brands group.

Got it okay. Okay, and then when you I know you guys don't tend to do much around the weather or blame a lot or take much credit for things on the weather front, but literally was a much wetter start to the season, particularly in regions, where you can paint in the first quarter out west and what have you and it looks like the Midwest and also maybe started.

A little bit more slowly due you have pent up demand is that why maybe some of the.

It looks like some of the some of the data that we've at least been seeing.

From the contractors is maybe a little better than expected I guess, how would you characterize that.

I would characterize it is we don't like to talk about whether you are right.

I think there are areas that are going to be under pressure, whether John and theyre going to be other areas that are.

Little better and weather.

Does it have some impact on some of those areas sure but.

Sort of significant impact on our businesses, we try to stay away from that our expectations from our team.

Includes the opportunity to go out and grow business and so I. Appreciate the question, but we're not going to we're not going to follow the weather.

Means for what's driving our results right now we're proud of what we've accomplished we're determined to accomplish more and we're not going to let whether standing in our way.

Fair enough. Thanks, a lot.

Thanks, John .

Your next question is coming from Ghansham Panjabi of Baird.

Yes, thanks, good morning Ghansham.

Good morning, good morning.

John you've given us parameters as to how to think about new residential for 2023, which was a reiteration of your previous view three months ago.

Your view changed on commercial for the year in context of the credit issues that the U S banking system.

Also Europe went through starting in March or is it still pretty consistent with before.

Ghansham I'd say this year, we should see a pretty solid year.

Buildings are reaching the painting stage now they started 12 to 18 months ago.

So we'll have to see if there is in fact, an impact on construction and commercial 12 to 18 months from now but.

The long line of sight that we have in this space, we're growing share and Theres a lot of projects coming on which we expect to be.

Okay got you and then in terms of packaging I know very tough comps for the first quarter, but how are you thinking about the rest of the year for that specific business.

We don't.

That's an interesting one because I think when you look at packaging, we never accept for many of our businesses softness.

But this is a very unique situation with our packaging business on top of a 30% comps.

This team has continued to expand the commercialization of what we consider a very unique technology. So we continue to see the lines.

Our product design.

They grow they're growing we're growing share.

<unk> right now is there is a level of destocking, that's taking place within mini brands impacting on our customers as they work through high inventory levels.

It's not often that I am accepting two team thats brought in softness but in this case given the line of sight that we have and the share that we're gaining and the incremental production lines that were going on every day.

We're giving them a break so I think the first quarter was a little tough, we'll probably have a little little choppiness here in the second quarter and as the year progresses, our expectations will resume for this team to continue to grow or to be able to demonstrate the share that they are growing.

Perfect. Thank you so so.

So short term short term issue for this team.

Confidence in the technology the team and what we're doing will be fine here.

Got it.

Thanks Ghansham.

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

Hey, guys nice start to the year John .

John I know you mentioned that you need to see how China for Q2 on a false to have a better idea for the second half, but I'm just curious.

Yes, 10-Q unfolds as you expect today.

And I think it means I think your outlook suggests that PSG volumes are going to flatten out versus a pretty strong first quarter.

What does that mean for your second half outlook.

If <unk> comes in better or worse, but is that sort of thing.

Yes, Mike I would say.

As John talked about our.

Our first quarter is the smallest quarter.

We expected a strong quarter, we delivered on that.

Closely monitoring the demand trends and expect as you mentioned.

And we said it on our year end call that new residential demand.

Slowing in our mid mid second quarter.

We've experienced a lot of market uncertainty before I just look at the last three years I think it's better to get a better view of demand.

After our seasonally higher second quarter.

Gives us the best opportunity and more certainty for for our second half and we will continue to manage our SG&A per check, particularly our G&A tightly.

Continued investments and other discretionary items will be managed with the demand outlook. I think we believe these long term growth investments allow us to grow market share in any environment, and especially as we come out of.

This slower macro environment, but that's how we're going to manage the company going forward we believe.

Our second half outlook as realistic, but we also believe we'll outperform the market and if the market is demand is better.

Then our expectations will perform better than what we currently have here.

And we'll be covering all of those variables together and give you our best outlook after the second quarter for the year.

And as a quick follow up on this.

Given your new capacity better cost structure and such.

If you do get your volumes back to where they were.

Prior to this downturn, where do you think.

Earnings and margins should be at this going forward.

Well, we've talked about are just speaking to margin gross margin. We'd expect we expect will be in the range of $45 to 48%.

I think <unk> demonstrated the incremental sequential margins in this quarter getting close to that.

Bottom level of the range and we expect to poke through that and the reason we do expect that as is that we believe we're focused on the right customers with the right solutions.

Our focus is really simple we want to help them make more money.

To help them to be successful and as a result.

We are in.

Positioned to be able to.

To build that.

Combined success and as a result, we expect to be able to to provide margins for both our customers and our shareholders.

The combination of the right customers with the right solutions, we believe will lead us to that.

Anything I would add Mike is when I start thinking about it by segment, we have a lot of confidence our performance coatings group.

To drive operating margins to that.

<unk> slowed 'twenty first quarter, excluding acquisitions, we were at 16 four again, if you remember we hit that Mark in the third quarter, It's an all time high.

We evolved the Valspar.

And we're confident in driving consumer brands group back up to that high teens and low 20%. So we get our cost structure right that'll be a tailwind we hold onto price, but as we come out of this we drive strong architectural gallon growth market share growth in our performance coatings business and that's what's going to drive those operating market operating margins back up.

So the high watermarks, we experienced in different different occasions on the different businesses.

Thank you.

Thanks, Mike.

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

Yes. Thank you.

Fraction of your consumer business.

Pros the paint category.

Versus what was it back.

Back when you first got that exclusivity with Lowe's, what would you say is driving that growth.

For example, as it is it.

The product offering or I know loews.

Has at least in some stores offering free delivery to the job site can you comment on how extensive that is is that is that meaningful and are you involved in that.

Yeah go ahead John .

Just going to say.

I want to start and then kick it to you.

First of all is there is a commitment.

Both companies to grow this terrific leaders inside our organization and they are working with terrific leaders inside the lows organization outstanding partner and I think we will combine looking at the right elements of the business and so we're not going to disclose the percentage.

On that Steve, but it would like for you to maybe.

Maybe we could talk a little bit about the pros, who pains, but also on a broader view of the importance of this relationship and in the consumer brands portfolio.

Portfolio as well as the initiatives that we have to grow.

Yes. Good morning, Steve This is highly pathway John covered a good bit of that I think that at the end of the day, we want to make sure that we are demonstrating that we're at the very best partner with the fact, we want to be there number one partner. So we think that some of the engagement here and how we're activating certainly theres a lot of support as Theyre working theory, there or most of their promotional calendars.

Making sure that we're investing in the right areas not only to drive traffic, but to make sure that we're converting.

And those shoppers.

In the aisle certainly and we've got a lot of great brands. We've got some launches that are taking place right now we won't get into too much detail here, but we want to make sure that we're in lock step with them in terms of driving those conversions.

Ron mentioned this but the leadership team certainly all the way through the organization I would say our partnership has never been better than it is right now in terms of making sure. We've got the alignment across the organization both with their.

<unk> <unk> and the DIY segment. So when you think of the structures you've got to make sure that those are mirrored and that the metrics are aligned there. So I feel really confident in the way that we're moving forward and got big plans for the year. So we're going to keep moving.

On the propane specifically Steve to your point there are customers that prefer a home center platform.

Purchase everything from dry wall to every other element that they might use on a on a project and so to get to your question about who supplies.

Delivery or sales calls.

There is a team effort that goes along with that and while we don't disclose the details of those for.

For strategic and competitive reasons I.

I think I hit it best collaboration and focus has never been stronger.

And maybe one more for you hired Ian Thats, the Wolverine brand over in China that there is an old Valspar brand I recall, a few years back when when the post the merger the company was going to drill into that.

Those wall Rune brand stores in China, and see if that.

That could that could be driven into.

Paint stores type of model because in the U S was was the conclusion of that effort is it really didn't have that potential and thus you're not the best owner for that brand.

Steve I think you answered it perfectly yes.

There is a battle better model here I think the divestiture it certainly it does align with our strategy.

As we have done a lot of work in that group to optimize the portfolio of the brands certainly making sure that we're driving a focus on where we can get a return for our shareholders and I think you said it.

Sometimes they're just assets that are more valuable to others and this is an example of just that we had the business was about $100 million in revenue with 300 employees.

And frankly, it was acquired as part of the Valspar acquisition you remember in 2017.

So as we move down the next quarter here, we would expect to close on this second half of 2023.

Thank you.

Thanks, Steve.

Your next question for today is coming from Gregory Melick at Evercore ISI.

Hi, Thanks.

Thanks for the helpful volume trends through the quarter in architectural.

Is it fair to say given the deceleration in top line that you expect.

April is running.

Negative volume year over year, now or is it as a deceleration Ben Lester.

Less dramatic than that.

Yeah, Craig I would just say that April is trending as we would've expected at the trend not any better or worse.

Alright, well I had to try.

But how about this.

The first in the first quarter could you break down the sales growth of eight 9% into.

I think volume was down slightly and just sort of what was price.

And FX and that just sort of help us frame.

The sales going to flat in the second quarter, how much of it is from volume deceleration how much of it is from price staying where it is.

Sure Greg.

Price was up high single digits.

And with that being a little bit higher acquisitions add at a low single digit percentage, which was mostly offset by FX headwinds and youre right. The volume was flattish.

If you look at that in our second quarter effective price is going to be slightly lower year over year in the second quarter compared to the first quarter as we annualize the paint stores group, 12% price increase February one.

And some of the other price increases as you know the other divisions and groups are out with we're out with significant price increases as well. So there's just not as uniform desk paint stores group, but they will annualize as we get through our first as we've gotten through our first quarter and into our second quarter. The main difference is lower volumes.

Primarily due to lower.

New residential and that we talked about some.

Some softening in North North America performance Coatings group, and then FX headwinds will mostly offset acquisitions in both quarters.

And is it fair to say that or maybe you could help by breaking down the gross margin expansion in the first quarter was that primarily getting.

Price on top of raws or.

The fact that that volume sort of held in there where you were able to get some margin expansion from volume not being down so much.

Yes, I'd say I'd say most of the impact of our price increases.

But the benefit we did see a nice benefit of the increased volumes in paint stores group is there.

A reminder, that is our highest gross margin segment and plus the slightly.

Moderating raw materials.

The.

John talked about.

And we are we are getting on top of raw material costs. As you as you know as we get into significant raw material inflation, we see that short term contraction as.

As pricing start catching up we moderate our raw.

Gross margins flatten out and then we see growth as raw materials moderate.

And we hang on to most of the price and it's because of the investments we continue to make and.

I think it's important element we continue to invest.

Now in the products, but the services and technologies as well as the other assets.

I would say the.

The obvious and important investment in talent that we just talked about retention of talent and as well as new talent. So it's more than what's in the can.

Best in the success of our customers with every Rep every tech Rep every.

Store, even the trucks, we're adding to our fleet all designed to improve the profitability of our customers. So.

There's more to it than the cost of whats in the can and.

We're trying to drive the success of our customers with the investments that we're making.

And with that John maybe I'll jump on that given those investments youre, making and wage pressure on other costs. Besides Ross is this a year, where you actually could have a price increase even if raws are slightly down.

Greg.

We've talked for many years together about our approach and it's not it doesn't change every 30 days, we sit down.

Heidi myself with the entire leadership team and we have a discussion in the discussion isn't just on raw materials to your point is on every cost that we have.

And we do everything we can to try to drive more and more efficiency into the operations that we have we try to.

You use our leverage with purchasing we try to drive efficiencies in the plant everything so that we don't have to go out with price increases.

Our first choice, but there are times when we find ourselves as you've described in situations, where it may not be the lever on raw materials that drives it might be some of the others and energy transportation whatever it might be so on a monthly basis, we evaluate that we make that decision we take it to our customers and then we talked to our investors at this point, we're not in a position to.

Talk about any increases because we're not out with us.

On a broad scale inside our stores I will say that with some customers in different parts of our businesses, where we've been working to put pricing in we're still putting pricing in so.

There is no finish line in this area.

Yeah.

That's great well good luck.

Thank you Greg.

Your next question is coming from Mike Lee at.

At Barclays.

Great. Thanks. Good morning, guys. Just one on my end I wanted to dig in on the performance coatings outlook I guess.

<unk> was up call. It three 5% in <unk>, you're guiding to down low single digits. So call it flattish for the first half.

And the full year guidance down about 10, or so which it seems to imply some pretty steep second half decline. So can you maybe just unpack that a little bit.

Sure Mike Let me start and then I'll, let <unk> jump in.

We do expect continued strength in auto auto refinish.

Positive sales and general industrial in the second quarter, maybe a little bit slower than what we saw in our first quarter. We expect a continued softness in industrial wood.

And then we expect coil and packaging.

To be download single digit.

Primarily due to the strong double digit comps in the second quarter I think if you look at it by region North America, our largest region.

As expected.

It will be up or down low single digits compared to a high single digit.

First quarter, both against strong double digit comps in.

We're not expecting a ton of improvement in Europe , or Asia Pacific and even Latin America moderate a little bit.

Yeah, and I would just hit a few highlights here on the segments I think obviously a lot of this is based on our strategy of differentiation I'll hit on some of the regions up just a couple of highlights if you look at where.

We have said based on being recession resilient automotive refinish is a great example, where we were up mid teen percent, we do see strong demand in most regions and I would also comment on the really good price realization for the value that we're able to create and demonstrate for our customers.

And then number of calls here the last few quarters, we've been talking more about our installations and we're now seeing the momentum really building here, we would expect to continue to build that momentum and think you could expect to see us taking some meaningful share here.

New challenges, we're still working through and you'll probably hear a consistent theme across performance coatings group and some of these segments, where we've largely recovered raw material challenges, but it is now a race on tech.

<unk> convert to finished goods as soon as possible. So you can imagine automotive refinish space that is absolutely a priority and also working closely with our customers where labor does continue to be a challenge for these customers.

The shop technician part shortages are impacting some of these customers that are working through backlog backlog rather than that automotive refinish highlight.

A highlight quickly here too Mike is the protective <unk> marine.

Whereas you know we're servicing this segment through our paint stores in North America, and very strong double digit sales in the quarter and still a strong aggressively strong outlook I would say through 2023.

Demand is strong in North America, and Latin America.

Through most of the segments in protective and marine.

Europe Asia, we've talked about is certainly seeing some pressure there which is leading to some project delays.

And as I mentioned, we're on the path here, making sure that we're taking every ounce of the the resin as it continues to prove to raise to conversion hearsay, but we'd expect to see growth.

And incremental share gains there as well.

I'll comment just briefly on the general industrial you mentioned it I think I.

I would categorize it as more of a mixed bag across the segments and our regions.

However globally heavy equipment remains our strongest.

<unk> got some areas that are showing early signs of slowing.

Appliances would be a good example of that just adjusting the inventory levels.

So we're going to continue to ramp up production there.

Briefly on coil and I'll hit industrial wood.

And certainly come back to any additional comments coiled North America is remaining strong with very consistent demand our metal buildings business is performing better than expected.

And seeing some softness in areas like deep aluminum trim business Latin America.

To be very strong with the performance that is built on new business and new accounts with <unk> and laser focus there, but we're still seeing pressure across EMEA and Asia and coil.

And I'll briefly hit on industrial wood.

<unk> talked about this segment, where we feel the most pressure and I would say within the actual segment. The most pressure is coming from furniture.

Other segments like kitchen cabinets and flooring, we mentioned in our prepared remarks that are tied to new residential will continue to be a challenge.

So we're seeing the continued pressure there, but importantly, what the leadership team. There is working on is expanding aggressively through market share gains while our competition.

In some cases, it's reacting to the market softness differently. So we're working on getting these gains with a focus on introducing new technology and I'll give you. A quick example here. The example with than our furniture category. This technology is going to allow our customers greater service quicker turnarounds.

And ultimately smaller batches, which brings benefits to the customer with less working capital less waste and less obsolescence on bringing this to you just as another example of beyond what's in the can how we partner with our customers to bring them solutions that are meaningful to their business fall. So quick quick boral around those segments, but just a little bit of color.

Sure.

Great. Thank you.

Thanks, Mike.

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

Hey, good morning, everyone.

Just following up on one of Greg's questions just for a little clarity.

Pricing trends during the quarter.

In each of the segments were you actually able to realize or capture incremental pricing in each of the three segments or was it really just kind of carryover from what was already in place in the fourth quarter.

Well Truman it's both for paint stores group.

Mostly carryover for consumer.

<unk>, where maybe we didn't have product, but now we're able to.

But our service the customer with improving alkyd resins situation, but in performance coatings group for sure. There is some incremental pricing across specific businesses in specific regions that John even talked about where maybe we haven't been as effective as we needed to be in the past or are there others. Other.

Inputs that are causing our cost to go up.

I use energy in Europe is one example, where we've had had a b out to offset some of those higher costs. So maybe some incremental the mass majority of it though is.

The carryover pricing from 2022.

Perfect. Thank you and then.

In performance coatings.

Op margin was up like 400 bps year over year to 15, 7%.

Highest first quarter in like eight years, even though volumes were down like low teens.

Normally you see a sequential ramp.

And those margins in <unk> and <unk>.

Were there any onetime items in the first quarter that we Shouldnt think margins will follow normal seasonality in <unk>.

Or is that kind of a good cadence to think about.

Yes, I would say.

That's probably a good cadence there wasn't anything one time that jumps out chairman as you can imagine across our global business. There is there is puts and takes every quarter, but nothing that drove the over over increase.

The increase in our gross and our operating margin Truman I'd give a lot of credit to our leader there Karl Jorgen route and his lieutenants that are out driving everyday to your point, we see the sequential improvement.

There's a lot of hard work the identification of the right customers the right segments, the right technologies and really demonstrating the ability to help our customers to improve their profitability.

We've said for a long time that we expect this to be in the high teens low <unk>.

Carl was in the room right now look them in the eye and tell them I am expecting them to get there very quickly so.

He would probably respond that he is going to so.

We've got a lot of confidence in that team a lot of expectations high expectations, and we are going to deliver.

The other thing I would add to that is acquisitions were slightly dilutive in the quarter as we continue to integrate those acquisitions.

Realized synergies as the year goes on my expectation that that will improve.

As the year progresses, and help drive better operating margin in this segment.

Perfect. Thank you all and good luck.

Coming quarters.

Thank you Truman.

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

Thank you John just on Q2, historically, you see about a $5 75, an increase sequentially from Q1.

Would you expect a similar increase this year or perhaps a little bit less given the demand weakness that you've been talking about here.

David we're not we're not going to give guidance on our second quarter EPS I understand the question.

What I think you can expect to see in our second quarter is.

Gross margin, we expect sequential and year over year improvement.

We've talked about the price increases in our sequential and carrying over and a sequential improvement in raw material costs will have a positive impact partially offset by higher wages.

Within manufacturing distribution I would say SG with SG&A I do expect a smaller year over year increase in our second quarter as we annualize that merit increase from last year, and we start realizing more of the cost reductions from restructuring activities. So.

We typically see an increase in SG&A as I talked about with paint stores group.

Ramping up to service the increased sales, but as a percent of sales I would expect our SG&A as a percent to be lower than our second quarter because of that.

<unk> higher architectural sales so.

You do expect a lift in our second quarter because of the improvement in paint stores group quarter to quarter architectural sales, but we're not going to we expect we expect to have a good second quarter and we're going to update you at the end of the quarter, but.

We see right now we expect a good quarter.

Understood and John just on the paint stores group are you seeing any price erosion and I'll get back in that business.

No actually David normally what we see is a small percentage.

Large, perhaps what we might call marquee jobs that get a lot of attention.

We're all proud and.

Some of those heavy goes we admit that we wanted to see are paying on specific projects, but for.

For the most part what you see is a pretty disciplined industry because we all understand that it is competitive and the ability to continue to keep your company healthy and invest in those drivers that will help your customers to be successful requires that health and so.

It's competitive for sure but.

For the most part.

<unk>.

It's a race to demonstrate the value that you can bring and we believe that in that race <unk> wins.

Very good thank you.

You bet. Thanks, David.

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

Yeah, Hi, Thanks, I wanted to follow up on the pro contractor side of things I think last call. John you made some comments that.

Some of your customers you need almost educate them about the fact that they are going to be market declines and they werent really seeing declining in backlogs or anything to that extent has that change does that conversation change and from what you guys have visibility on the backlogs now has that changed much versus a few months ago.

Yes.

I should be careful in making general statements like that because to characterize an entire industry like that.

Good.

Can be challenging to say, the least but yes, I would say that many customers that have <unk>.

In the past not been able to even return phone calls on bids bid requests are now.

Either returning those calls were looking for some of those bid requests.

There is understanding that there is an opportunity to continue to grow if you look at the <unk>.

Homes in the U S.

They are aging.

The residents of those homes are aging.

While many of those people may choose to move into a new home many are choosing to stay in those homes.

Pink remains relatively inexpensive highly impactful project and those painting contractors are pursuing those so again I mentioned earlier I would describe it as a more normalized market.

Contractors are.

Looking and doing a lot of work in there also probably a little more aware that.

Having a marketing aspect to what Theyre doing is important part of their future success, and we're helping them with that and that's an element that most people don't recognize.

When I say, it's not just what's in the KN <unk> been at this for over 150 years, obviously in.

Our ability to align with our customers help them to understand not only that they should be looking around the corner, but how to prepare for that they might've been great painters now they own a pain company when they started the business. They put a sign on a project and every person in the neighborhood came to them, we're helping them.

Understand how to reach out and grow their business how to in some cases specified products in some cases, even how to interview potential painter. So we're lockstep with these these firms helping them to grow their business in ways that most people wouldn't understand.

Okay.

Thanks, and I guess, if I ask about the repaint demand side of things just we've been in this downturn now for the last six to nine months or at least when it starts coming in.

Come down and some of the housing turnover softened.

Given the higher DIY demand during COVID-19.

And you know where interest rates are more people staying put.

I guess, how do you square, although as I say it is repaint that 75%, which is more defensive is that staying defensive is that less defensive more defensive now or any way to characterize how youre thinking about that based on what youre seeing today.

I'm not sure I quite understand your question, but.

Might say that we see this residential repaint business and have seen it as an important element to offset some of the softness in the market coming out of the last downturn.

Al myself and many of the leaders that are currently running the companies and reviewed during the slowdown like we had experience than what would we.

Like to have going forward and it was a larger more meaningful residential.

Repaint business and we've been successful in doing that we were successful in growing new residential our position there we love our position and we over index now given the success that we've had and so the offset to that has been the residential repaint the property management and on the industrial side businesses like our R. R.

The motive refinish and some other <unk>.

Even sub segments within some of our areas. So we.

We manage this business with a long term view and we're always looking award game of if this happens then what and residential repaint right. Now is an important element. If you look at our DIY business, our DIY business was up double digits, but it's because the comparisons were so small last year we may.

The decision to deemphasize, we werent, making our DIY product and the reason we did that is that we were allocating that to our DIY retail customers are important we want to maintain that long term relationship.

A hit there les.

<unk> sales in DIY to help our large and important customers grow.

As a result, our DIY comps look good now but.

On a small base the residential repaint business. It is important element that we expect to continue to grow.

I will take that business, but our focus is on the 90% of the professional through our stores and just one more thing I would add to that on the residential repaint side I think if you look at your back to your question on the backlog and how we think about this this is offsetting some of the other softening demand or <unk>.

Producing new products. So when you think about these contractors going in largely focused on the wall.

We've introduced a new professional cabinet coding.

It's essentially a one component the performance much like a two component of boxes, so excellent chemical and moisture resistance and allowing these contractors to go in and essentially helped to complete an entire kitchen from the walls to the cabinet, so really trying to arm them with the ability to take advantage of while they are in the home where else they can generate revenue.

Okay I appreciate it thank you.

Thank you Josh.

Your next question is coming from Aleksey for MAU at Keybanc capital markets.

Thanks, and good afternoon, everyone.

Two questions on the cost side, one is on the labor cost what are you seeing in terms of trends any signs of.

Inflation leveling out there and the second part is on the real estate as you sign new leases or renew existing leases are you seeing any.

Cost moderation there.

Yes, let me I'll take the first one.

Our labor costs.

We've talked about mid high single digit labor costs.

Through our non.

Factory distribution facilities.

We do expect that to level out.

Especially as we get into our second half in our factories and distribution centers I would say.

The rate of increase has been higher to attract and retain.

Those individuals in our in our sites.

I would say on that side Alexia.

Going to continue to do.

Specific market studies to make sure we don't get out of bed. If you will are outside of the market in any given area I think what what I would admit to us we maybe got a little behind.

Previously, we're not going to let that happen. So I believe it's leveled out as we see more more.

Unemployment rates tick up.

It will put less pressure on wage inflation going forward, but I think we've got to be diligent in the manufacturing distribution areas to each.

Each market is a little different each one is going to be more specific to whats happening in that market and will be more diligent there, but I do expect them to level out.

The rent side I would tell you that for the most part I would say rents seem to be relatively flat.

We make a very good tenant we tried to use that and leverage that the fact that.

As the.

Predominant.

Premium brand here.

We'd like to talk about what it is that we bring we talk about our financial strength and the and.

And the fact that we're investing in our industry, while others are closing closing stores. We think plays well to those tenants that are looking for a long term.

The tenant that can pay their bills and we fit that bill.

Thanks, a lot very helpful.

Thank you.

Your next question for today is coming from everyone. This <unk> at RBC capital markets.

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

So first question I guess was you guys have obviously many many businesses.

If you were to characterize maybe the top two or three that.

Are performing better than expected or have the capabilities are performing better than expected.

Those be would that be maybe commercial.

And maybe new home.

Rajeev potentially not being as bad as you initially thought or how should we think about that.

Well I would say that commercial certainly has performed better our property maintenance is performed better our protective and marine has performed better.

I think that our residential repaint is we had high expectations of that going in.

So we.

I think I would never say, they're meeting our expectations when they meet our expectations, we raised our expectations.

On the industrial side, I think our automotive businesses.

Is really doing very well.

And I would say that.

There are some others that.

It's hard to answer this question Arun because in each of our business businesses there are opportunities.

In our business the way we look at it is not a one or zero.

When our teams come in and talk about.

If youre looking at our paint stores group you can come in and talk about new residential being under pressure, but then the focus is on where are the opportunities and so even within new residential we know there are opportunities there for growth and so there is I often say there is no finish line in each of these businesses there are opportunities.

And.

The role of our our leadership teams.

<unk> been through many of these in the past is to find those opportunities and they exist in every single business, even in industrial wood, where theres a lot of pressure there are opportunities for growth and we expect the team to find those opportunities grow in those segments, while improving their position within the segments for the sub segments that we play in now so that when the market does.

A return that we are that coiled spring, we take advantage of it but we expect them all to grow faster than the market.

Okay. Thanks for that and as a follow up I wanted to ask about the EPS outlook here a little bit. So prior to your last earnings report I think several of us rightly.

<unk>, our Raleigh, where in the 950 to $10 range for 'twenty three.

Yourselves and Rebase, our expectations to 835 or so at the midpoint.

So does that dollars 50, or so that we had to remove from our outlook.

What would it take for that to come back in 'twenty four as it is it mainly lower.

Better affordability environment driving higher housing turnover.

I know there are several things you can probably mentioned John but similar.

Maybe a couple of the top drivers that would get you back into that near $10 range on EPS.

Yes, yes.

First and always the biggest is volume growth I mean, theres been a lot of macro headwinds with a lot of uncertainty.

The mortgage rates are higher existing home turnover is lower new new family single family starts are lower.

As we keep investing in new stores in new reps.

And some of the other long term growth opportunities reps across each of the businesses.

As the market improves because of the added investments we've put in over time, we expect to grow much faster than that market. So instead of a headwind with the macro environment becomes a tailwind.

And then we grow.

I keep going back to eight or nine because I believe at the similar environment in the similar.

Dynamics.

We expect to grow not one to two times the market, but two to two five to three times the market and that's how we're going to drive that operating margin back.

To where we expect it to be capitalized.

Ron mentioned in the last response to that.

And every one of these segments I agree volume is the key and in growing share is important and even we've talked about we've talked a lot about new residential and we point to single family frequently when we're having that discussion but.

The fact that multifamily starts have been more robust since last summer is a terrific opportunity and our ability to shift.

Resources and attention to those opportunities is what differentiates us and why we believe that.

We will get there and the opportunity to really.

You'll see that expansion.

We're not we're not just waiting for the market to come back we're working everyday to take that volume and be in a better position to capitalize on it once the.

The markets improve.

And just one last quick one I know you guys have moved the FTP to August .

Mainly to so you had a little bit more visibility into the year or I.

I guess, usually it's done in May or June . So just if there was anything to that just wanted to understand that move thanks.

We wanted to bring it to Cleveland in August it's a beautiful time to be here.

Great.

Yes.

To bring you in and be able to talk a little bit more about.

Our line of sight in August is going to be much better.

And quite frankly, we are proud to put our teams in front of you.

We think we're going to have a lot of really good things to talk about so we're looking forward to hosting here.

Thanks.

Thanks Arun.

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

Thank you your auto refinish business has been consistently strong for a long time right now.

During the pandemic I thought it was duplicate but.

Now we're out of the pandemic and its still strong is it controlled distribution is it new products, what's what's driving that above market performance.

Yes, that's control distribution, it's technology, we talked about the combination of the technology.

Our system between some some technology combined combining sherwin and Valspar technology.

We are.

One of our leadership, we have great products, great distribution control and we've been talking to your point John about our position here for some time and is expected to grow in.

We think the numbers.

Moving exactly what we said was going to happen is in fact happening.

And then you've got you've got over 300 stores in Latin America.

Now that they are in the consumer segment do you run them differently or are you going to be repositioning those stores.

No.

All along we've been sharing talent as well as.

Best practices amongst the consumer brands and our paint stores group.

There is a realization that more and more of that business represents or mirrors.

Business that might most likely be found in our consumer brands group.

We've got talent and our consumer brands group, Todd Ray and that team is.

Really done a wonderful job and we think bringing their expertise to that market, where we can leverage their experiences.

We will be terrific and quite frankly, it will work both ways.

Terrific leaders in Latin America, as well and we expect to learn from what it is that they do down there and bring some of that back to North America. So it's a win win for them.

Both businesses and certainly for customers on both sides.

Okay. Thank you.

Got it.

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

Good afternoon, everyone with regard to your performance coatings group busy cure sense that customer Destocking is done as we sit here in April or is it still playing out among certain businesses within the segment.

I would say, it's likely played out although I would say there might be some differences and region by region.

Sure.

Kevin.

If you look at what's happening in Europe as an example.

There's a lot of concern in the market. So we might have some customers that might still be in a.

Our unique position, but for the most part.

Particularly here in North America.

I don't think Theres, a great deal of inventory in the segments that we play in.

Good to hear and then secondly, if I may what percentage of your performance coatings group sales are.

Our linked to contracts that would feature.

Some sort of indexed pricing mechanism as it relates to raw materials.

A very small percentage.

Okay. So when you say in your prepared remarks, John that.

Hang on to the majority of your price increases it sounds like that would be vast majority. Indeed, if index pricing is quite small.

That's correct.

Okay. Thank you very much.

You bet Thanks, Kevin.

Your next question is coming from Duffy Fischer at Goldman Sachs.

Yes, hi.

Just first question on structural raw materials, a year ago, you guys were shorted and could supply your customers what you wanted.

Obviously now things are slack in the system, we're seeing prices rollover, if we get back to a normal demand level, let's say next year, our raw materials structurally short again or have you guys taken steps and what steps have you taken.

To increase the availability of raw materials, if we get back to a normal demand level.

Duffy I would say they will not be structurally short.

The availability has recovered very nicely for us we've taken a number of steps over the past couple of years in response to what we've seen one of those was certainly our purchase of <unk>.

Specialty polymers, which has increased our internal resin production.

We work closely with many of our suppliers, we've simplified the portfolio as well. So there are maybe not as many raw materials that we would have to procure as we would've been in the past.

I don't know I'd say, I'd say from an assurance of supply.

That is very important to understand that would be we're not trying to return to our supply chain of the past.

Our goal has been to improve.

Our position and our ability to supply our customers and we've taken appropriate steps for competitive reasons, we're not going to lay out what those steps are but.

And her team is leaning on the edge of receipt wanting to answer this question.

We're not going to get into those details right here right now I would tell you that we have been.

Very forward thinking and how we're going to work through future issues and we learned a lot. During this process and I would say, we're coming out better and smarter as a result.

Fair and then a decade ago. The Glidden brand bumped you guys out of Walmart once before and I think if my notes are right. It was like a $250 million opportunity back. Then this time does it move the needle it's no longer Dutch boy, but as Valspar, but does it move the needle for you guys, but thats kind of a non event and what will.

See in your printed numbers.

Yeah. We don't think this will really have any impact to be really candid with you and I think if you look at the business in general Walmart.

Walmart is still a very important customer to us we saw them a lot of our key brands such as men wax Thompsons Krylon and while we have to your point enjoyed the private label in the past.

I think this is an exciting opportunity for us as we move forward because we're going to continue to service.

The existing brands that we have and we will look forward to an opportunity in the future.

If there comes to be something where we can both create value on both sides of both companies will absolutely be interested in looking at that.

Thank you.

Thanks Duffy.

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

Hey, good afternoon, everyone.

Just one for me.

There are any other businesses at this point in the portfolio that are under strategic review, where you kind of through that process.

That when we look at every business every brand every program everything constantly we have that discipline.

Okay. Thank you.

Thanks, Adam.

Your next question is coming from Chuck Cerankosky Northcoast research.

Good afternoon, everyone.

Hey, Chuck when you look at.

Paint stores group.

<unk> was up double digits in the quarter.

And I think you've touched on some of that but in the consumer group in North America DIY was soft.

More to talk about there than just a short supply a year ago at paint stores.

Not really Chuck I'd say, we had really.

<unk> DIY last year to serve our customers and so.

So we now have product to sell and so it's on a smaller base because of last year.

And again I think it's important to mention that.

Our focus and our success is going to largely be determined by the professional sales that we have represented about 90% of what goes through our stores.

So we will take the DIY business, where they are.

Helps us, but the focus is on our pro business.

Got it thank you.

Yes.

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

Hi, Thanks for taking my question wanted to follow up just on the inventory shortage. We saw consumer brands was that across both DIY and pro and do you expect any of that to bleed into the second quarter.

The.

Typically what we see in our.

Mid spring and summer selling months or you would start seeing the declines in inventory.

As we come out of the season, so I wouldnt expect to see.

Inventory.

Bill.

Like we saw in our first quarter. So I think youll see a more typical seasonal inventory pattern. This year raw materials are in a good place like I said were through the total supply chain inventories are in a good place so.

Just to put in perspective, we're back to servicing our customers at the level that we expect to service them at and they expect to be serviced that so I would expect that.

Management of inventory will happen similar to the flow of past cycles.

Got it thanks for that just wanted to follow up.

It doesn't sound like it but just wanted to confirm if youre seeing any trade down or any change in mix at all be it in paint stores or in the consumer brands.

Now the opposite.

Usually a positive mix shift.

Okay.

Yes.

Customers that have a labor as a percent of sales continue to.

Learn that higher quality product might cost them, a little bit more per gallon, but they actually make more on a project. So.

Our our mix is positive in our stores.

Thanks Garik.

Your next question is coming from Eric Fuller hard at Cleveland Research.

A follow up for you I guess on gross margin the upside performance in the first quarter.

Our strong performance, however, you'd characterize it I am assuming there was some benefit from strength in volume.

What I'm trying to figure out is the volume behaves differently in the coming quarters as you've talked to build from the <unk> gross margin.

Is that having an impact on the gross margin how should we think about the linkage between volume and gross margin as we move through the balance of the year.

Yes.

Certainly because paint stores group had a better <unk>.

Had increased volume and it's our highest gross margin margin segment. It certainly improves.

Improves our gross margin going.

In the first quarter for sure I think as you were.

Moderating some volumes, but still paint stores is still going to be our best performing segment in our second quarter.

And we do also expect to hang on to the price and get to see that sequential raw material.

Moderation, so I think the.

Volumes help for sure when in paint stores group is stronger than the other segments because of that mix dynamic. It will help our gross margin, but I do expect to see sequential and year over year improvement in gross margin in our second quarter.

And then we will give you an update Eric on the rest of the second half after the second quarter.

Okay. That's all I have thank you.

Thanks, Eric.

Your final question for today is coming from J D.

On field research.

Okay.

Thanks.

Question really is on industrial food could you tell us when did the destocking actually start and.

Is there any signs of relief.

Destocking or weaker demand coming towards.

<unk>.

And then the second question really is on the multifamily homes.

One of your competitors was sort of alluding that there was a decent backlog this year, but there could be some applecare next year at the project sort of finish.

So do you expect weakness in the multifamily homes or for that matter in commercial slash property management in.

In 2024, or it's not something you worry about thank you so much.

While on the industrial wood.

Sure.

And multifamily I'd say.

Let me start with the multifamily work backwards I'd say our line of sight right now on both commercial and multifamily is strong for the balance of this year and certainly going into next year.

We'll see what happens as we move forward, but right now our confidence is high and the pipeline is full.

A good amount of activity with the contractors in this space.

So I would say our future looks.

Pretty positively on that.

In the industrial wood.

Timing.

It's been under pressure.

Well likely along with the <unk>.

Housing. So if you if you want to look at housing starts as a.

A good precursor for this business.

It's not exact but.

We'll give you some some insight as to how that business has been.

Paved and again, our expectation is that there are opportunities in this business too.

<unk> the market.

In both.

All of the segments, you talked about multifamily as well as.

Industrial wood, we have teams that are out there focused on growth every day.

Thank you.

Thank you.

We have reached the end of the question and answer session and I will now turn the call over to Jim Jaye for closing remarks.

Yes. Thank you everybody for joining us today I did want to remind you that please save the date for our annual financial community presentation that will be in Cleveland as John said on August 24th.

The event will also be webcast registration details on that will be available soon and we will look forward to seeing many of you here.

To close out the call here you heard today that we're off to a very good start to the year with today's results and at that same time, our team knows we still have work to do we're prepared to do that we know theres going to be macro headwinds as the year progresses.

But we'll deliver strongly in those conditions and we're going to remain focused on what we can control.

So thank you for attending today and as always I will be available along with Eric Swanson for your follow up phone calls. Thanks for your interest in Sherwin and have a great day.

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