Q2 2023 Sherwin-Williams Co Earnings Call
Good morning, Thank you for joining the Sherwin Williams Company review of second quarter, 2023 results and our outlook for the third quarter and full year of 2023.
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 the U S. Federal Securities laws with respect to sales earnings and other matters.
Any forward looking statements speaks only as of the date on which such statement is made and the company undertakes no obligation to update or revise any forward looking statement, whether as a result of new information future events or otherwise.
A full declaration regarding forward looking statements is provided in the company's earnings release transmitted earlier this morning.
After the Companys prepared remarks, we will open the session to questions.
Now I'll turn the call over to Jim Jaye, Senior Vice President Investor Relations and communications.
Thank you and good morning to everyone.
Joining me on the call today are John <unk>, Chairman and CEO .
Pets, President and Chief operating officer.
Mr Shinn, Chief Financial Officer.
And Jane Cronin Senior Vice President of Enterprise Finance.
Sure Williams delivered excellent second quarter results compared to the same period a year ago.
These results coupled with a similar strong performance in the first quarter led to an excellent first half that exceeded the expectations, we laid out back in January .
Given the strong first half and current visibility into our second half we are significantly increasing our full year guidance, which John will talk about in just a few minutes.
But first let me touch on a few second quarter highlights.
Consolidated net sales in the quarter exceeded our expectations and grew by a mid single digit percentage.
Sales in all three reportable segments came in above our guided range.
Gross margin significantly improved sequentially and year over year, driven by strong volume in the paint stores group and moderating raw material costs.
Pricing discipline remains strong.
SG&A expense increased over the prior year quarter, though the year over year percentage increase was lower than that of our first quarter.
Excluding the impact of incremental acquisition and restructuring costs SG&A increased 8% year over year.
Approximately 85% of that second quarter increase was related to investments in paint store group long term growth initiatives.
With the remainder driven by increases in compensation and benefits.
We are highly confident these growth investments will deliver strong returns and benefit our customers.
And while we recognize SG&A expense was higher year over year in the quarter, we ultimately manage the business to drive operating profit and margin both of which expanded meaningfully in the quarter.
We are committed to investing in and profitably growing the business at the same time.
Segment margin in all three reportable segments expanded sequentially and year over year.
We also delivered strong double digit growth in adjusted diluted net income per share and EBITDA.
With adjusted EBITDA margin of 29% near the high end of our current long term, 19% to 21% target range.
Let me now turn it over to Heidi, who will provide some commentary on our second quarter results by segment.
John will follow Heidi with comments on our outlook before we move on to your questions.
Thank you Ken I'll begin with the paint stores group.
Quarter paint stores group sales were ahead of our expectations and increased 10% driven by mid single digit volume growth and continued effective pricing.
Segment margin improved 280 basis point to 24, 3%.
Growth was led by our protective and marine business, which was up strong double digits and was driven by industrial flooring infrastructure and oil and gas applications.
And our pro architectural end market the strongest performers were commercial and property maintenance, both of which increased by double digit percentages.
Residential repaint was close behind with sales up by a high single digit percentage.
Demand in this market is being somewhat tempered by the extended period of weak existing home sales.
New residential sales were flat against a double digit comparison, reflecting the softer start that we saw at the end of last year, which have continued into this year.
As we've previously noted we anticipated new residential would be challenging in 2023, though we are performing better than the market as we continue to focus on new accounts and share gains.
Our DIY business was up strong double digits, albeit against a softer comparison, where sales were impacted by supply chain challenges.
From a product perspective interior and exterior paint sales were both up high single digits.
With interior sales growing faster and representing a larger part of the mix.
Sales in our consumer brands group also exceeded our guidance and increased by five 1% in the quarter, primarily driven by mid single digit pricing.
Sales in North America, our largest region increased by a low single digit percentage.
We continue to invest here with our strategic retail partners for growth.
Another region sales were up strong double digits in Latin America and Europe .
Sales in China were down double digits.
We expect the previously announced divestiture of the China business to be completed in the third quarter.
Adjusted segment margin, but 15, 7% up 470 basis points year over year.
Sales in our performance coatings group increased less than 1% against a strong 15, 2% comparison.
Volume decreased low single digits, but was offset by mid single digit increases in price.
Adjusted segment margin increased 420 basis points to 18% of sales.
Which is within the range, we had been targeting for the business.
Sales the N P C G varied significantly by region.
North America sales increased low single digits against a nearly 30% comp.
Sales in Europe were up mid single digits.
Latin America sales were down less than a percent also against a strong comp of over 20%.
Demand in Asia remained weak with sales down double digits against the tough period a year ago.
From a division perspective growth was strongest in auto refinish, which is up by a high single digit percentage, followed by general industrial which was up mid single digits.
Industrial wood sales were up less than 1% as softness in new residential continued to impact demand for furniture cabinetry and flooring.
Coil sales were down mid single digits driven.
Driven mainly by Europe , which was impacted by last year's Russia, Egbert and against the nearly 40% comparison.
Packaging sales were also down low double digits against the 20% plus comp.
We anticipated this decline given the near term Destocking by brand owners that we described on our last call.
We continue to feel very good about our position and growth prospects in this end market.
With that let me turn it to John for his comments on our outlook for the third quarter and the full year.
Thank you Heidi.
As we said in January we expected to have a strong first half of the year.
Our team exceeded those expectations and I want to thank all 64000 of our employees.
With a relentless focus on serving our customers and.
And for driving continuous improvement across the organization.
We also understand that our good first half does not make a good year.
We know we have work to do and that's exactly where we're focused.
On our April call. We said, we would have a much better idea of how the year might unfold as we got deeper into the painting season.
Here's what we're seeing as we begin the second half along with our plans for seizing the opportunities in front of us.
In paint stores group, we're facing a strong comparisons in the second half a year ago, where sales were up 19%.
We see customer backlogs has been solid and commercial property maintenance and protective and marine.
Throughout the second half and we expect to deliver very solid strong growth in these end markets.
Residential repaint should also be good for us as based on contract or feedback.
Though visibility here is only about six to eight weeks and existing home sales are likely to remain weak.
There are some recent optimism from new residential homebuilders regarding starts but it won't be enough to move the needle meaningfully for us in 2023.
We are more tied to completions, which are slowing.
While we are confident we are growing share we expect new residential volume will be challenging for us in the second half.
Though the year will likely come in closer to down high single digits compared to the down 10% to 20% full year range. We provided in January .
In DIY double digit growth in the first half was aided by software comparisons to the prior year.
Where supply chain headwinds impacted our sales.
We do not expect this pace of growth to continue as comparisons become much more difficult in the second half of the year.
And consumer brands North America, DIY demand remains soft.
Europe demand has stabilized in Latin America markets remain mixed.
In performance coatings, many of our customers continue to report a high level of uncertainty regarding demand.
Auto refinish demand remains an exception and is solid in most regions with shortages in parts and technicians, increasing shop backlogs.
Installations of our systems in North America are up strong double digits year to date.
This continues to bode well for future sales in this business.
General industrial end markets are choppy with North American customers reporting mixed demand by end market served.
Industrial wood demand remained soft, though some positive signs in new residential construction indicators, we may have reached the bottom.
In coil demand is holding up better in the Americas versus Europe and Asia.
And finally in packaging customers with returning to just in time versus just in case supply chain management, resulting.
Resulting in Destocking that we expect will continue in the second half.
Longer term view here is still very robust.
With customers already committed to fill the additional capacity, we're bringing on this year.
Let me be very clear on our expectations here.
We do not accept the excuse that markets are soft and therefore, our opportunities are limited.
Our job is not to report conditions.
But to influence results.
We know we cannot defy gravity in terms of the macro environment.
But in every business, we are aggressively pursuing new accounts and share of wallet opportunities to drive market share gains.
Going to the cost side, we are revising our raw material outlook.
Now expect cost to be down by mid to high single digit percentage in 2023 compared to 2022.
We expect to see decreases across several commodity categories. So the range is likely will vary widely.
We expect other costs, including wages and other input costs to be up in the mid to high single digit range.
Compared to the guidance, we laid out in January full year sales growth and raw material costs are trending better than we anticipated.
With this first half outperformance, we expect considerable year over year operating margin expansion and earnings growth for the year.
At the same time. These dynamics also afford us the opportunity to accelerate growth and service investments at a higher level than anticipated at the beginning of the year.
As a result of these disciplined and enterprise wide investments, which will drive our customers' continued success.
We now expect the year over year increase in SG&A.
To be in the high single digits.
To low double digit range for the full year.
As in the past.
We are highly confident in our ability to drive future above market growth.
And our returns will justify the actions we are taking now.
Now moving on to our specific guidance.
We anticipate our third quarter 2023, consolidated net sales will be up or down a low single digit percentage compared to the third quarter of 2022 with.
With volume down low to mid single digits.
For the full year 2023, we expect consolidated net sales to be up a low single digit percentage with a volume down a low single digit percentage.
Our sales expectations by segment for the third quarter and the full year are included in the slide deck issued with our press release this morning.
We are increasing our full year 2023 diluted net income per share to be in the range of $8 46 to $8 86 per share.
We believe this increased range accurately reflects our first half outperformance continued pricing discipline and moderating raw material costs.
While also acknowledging the ongoing uncertainty in the second half demand environment.
This guidance includes acquisition related amortization expense of approximately 81 per share.
It also includes net expense related to our previously announced targeted restructuring actions of <unk> <unk> per share.
On an adjusted basis, we expect full year 2023 earnings per share in the range of $9 30.
To $9 70.
This is an increase of 14, 5% at the midpoint compared to our prior adjusted guidance of 795 to $8 65 per share.
We have provided a GAAP reconciliation in the Reg G table within our press release.
Our slide deck includes additional information on our updated assumptions for the year, along with guidance on our expectations for currency exchange.
Active tax rate.
Capex depreciation and amortization and interest expense.
We have also provided an update on our previously announced restructuring effort.
One time costs will be lower than previously anticipated.
The estimated annual savings from our actions are unchanged.
As we begin the second half will remain focused on what we can control.
Across the business this means growing new accounts and share of wallet.
It also means developing and retaining talent.
Improving and simplifying our operations and managing price cost dynamics.
We remain confident in our differentiated strategy.
Our capabilities and our product and service solutions.
So the demand environment proved to be better than we are currently assuming we would expect to deliver better results.
What we can't control is the market.
We're not interested in trying to time the economic recovery.
We are interested in is taking full advantage of it when it eventually arrives.
This means investing in our growth now ahead of the curve.
This approach has served our customers and our shareholders well over multiple past cycles.
Confidence that it will do so once again.
Above all I have the utmost confidence in our leadership team and our people.
They are the true differentiators.
Together, we expect to continue outperforming our competitors in the market.
This concludes our prepared remarks and with that I'd like to thank you for joining us. This morning, we will be happy to take your questions.
Certainly everyone at this time, we'll be conducting a question and answer session.
If you have a question or comment please press star one on your phone at this time we.
We do ask that will posing your question. Please pickup your handset if youre listening on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Your first question is coming from Greg Melick from Evercore ISI. Your line is live.
Hi, Thanks and congrats.
Guys great quarter.
Okay.
A little bit into that the deceleration that you still expect into the third quarter I think it sounds like volume.
Total sales are kind of flattish that that will we expect volume to be down.
Low to mid singles and maybe give us little more color on why you expect that deceleration what youre, saying.
Yeah, Hi, Greg I think it's a great question I think if you look across our entire enterprise right now.
Qualify this are characterized as it's choppy I think thats true both by division and by region.
When you break it down our volume is down low to mid single digits. If you look at paint stores group alone.
Low single digits I would say, that's primarily due to the new residential slowdown.
But confident in the the increase in starts that we're seeing remember that's against a really tough comp of 19%.
That's a bit offset by some of the heavy impact that we're seeing with both <unk> and confident in our ability to drive above market growth here.
Got it and I guess my second question is on getting back to those that margin range that you have a 46% gross margin.
Could you remind us of the range that you're targeting and is there a potential to be above that.
In this cycle given that it sounds like at least the pricing environments remaining quite rational.
Yes, Greg this is al <unk> and.
We're really pleased with the performance of our gross margin as a reminder, our target is the mid term 45% to 48%.
As we have talked about in the past week and are placing raw material inflationary environment, we put price in.
To offset those dollars and then as raw materials moderate we start seeing the benefit of that.
That pricing to increase our gross margin and helps US cover the continued investments we make to help our customers drive value in their business. So I would expect.
The sequential gross margin to be similar.
So to what I saw in the what we saw in the second quarter.
As you know, we'll we'll start annualizing the price increases in our third quarter, specifically the September 610% in paint stores group plus the other other items other segments that have put pricing in.
So for.
For the full year I think our gross margin, depending on where paint stores group volume is could be in that 45% to 46% range.
And then as you know us well evaluate that 45% to 48% range over time and as we can get consistency in that range. We will look to raise the bar and move that target up.
We refer to that as our current range.
In addition to every point that I'll just made the additional steps that we're taking on a regular basis and reviewing.
The programs that we have the investments that we're making the mix of our products everything that we're doing goes into driving the margin. It's not simply just a price was a lot of activity on the operation side to drive inefficiency, we talked last year about some of the inefficiencies as we served our customers we were shipping product.
From one point of the country into the other and so as we continue to optimize our supply chain, we expect to continue to drive that as well.
And it sounds like even with the lower raw material.
Expectation for this year, you're your pricing expectations are unchanged.
Fair.
Yes, that's correct. So as we continue to invest in our business and bring more value to our customers, we'll invest into that and drive their profitability and naturally we would expect that our shareholders participated in that as well.
That's great and good luck.
Thank you Greg.
Thank you. Your next question is coming from Vincent Andrews from Morgan Stanley . Your line is live.
Thank you.
Two questions on SG&A I guess first if you could just help us understand I know we've talked about this in the past, but but the incremental spending for this year.
What details can you give us in terms of what a target and then secondly.
Should the back half of the year play out better than you forecast do you have more SG&A activities that you can get into in the back half of the year when you're already guiding to or is this SG&A guidance for the year.
Yes, So let me let me kick it off kind of my thinking on it and then I'll ask al to get into some of the details.
First we are going to adjust.
Our investments to market conditions, and these are things that we monitor closely.
The amount of the trends in the market as you just mentioned the activities and opportunities costs, even the activities of our competitors.
We've seen this before we will capitalize on the market opportunities the competitive shifts and missteps that our competitors make these are all opportunities so to your point as we see raw material trends.
These are part of our dataset.
All roll into what you should expect to see from Sean Williams, we're going to be aggressive.
To drive market share and invest in our businesses.
I think it comes down to when you have confidence in your strategy and competence and your leadership team. Mike. We do you can invest and while others are adjusting their strategies, we're going to take advantage of any shifts we will be on the attack.
As you know.
We're all about managing operating margin growth.
Operating margin growth over the long term. So your comment about will we be done with.
SG&A commentary as the second half goes on I would say no.
I think as we see how the demand environment and volumes unfold.
As they are at or above our expectations. We will look at that we'll look at gross margin performance in the second half.
The beautiful thing about our model is we can be very agile across each of the segments. Both field sales and tech service reps reps with the pro paint within the consumer brands group. So if if.
If we see a path of <unk>.
Higher gross margin.
Then what we have on our current outlook, we will look to put more investments in our long term growth initiatives to drive higher share as the market returns.
Thanks, guys I appreciate it.
Thank you Vincent.
Thank you. Your next question is coming from John Mcnulty from BMO Your.
Your line is live.
Yes. Good morning, Thanks for taking my question so.
So in the paint stores group you had been looking for kind of a flattish guide now youre looking for up mid to high single digits. When you look at the.
The major sub segments of that group I guess, where are you surprised the most whereas where things kind of working out better than better than you expected.
So let me start with new residential because I think that's an important piece.
Maybe what we'll do here John is I'll start with new residential and maybe talk about commercial and then ill ask <unk> to talk about some additional segments because to be truthful with you. We're very pleased with the execution of our team.
Talk a lot about our secret weapon.
We've talked about the recruitment and retention of this team they are truly executing we couldnt be any more proud.
New residential I think it's clear to all of US as there is pressure in the new residential space.
Our flat sales in this quarter I believe are indicative of the share gains we're executing.
We talked about penetrating the top 100 builders for last couple of quarters and quite honestly, we're working on that.
We are experiencing terrific success in fact, even deeper into some of the more custom homebuilders as well.
It's growing and we expect to continue to grow there.
We continue to execute on our strategy of bringing solutions to these builders to make them more successful and I think thats the key and core behind everything we do so in the builders area. The efficiency that were bringing in our supply chain to help them and innovation quality consistency, even as they're adapting in the different substrates.
Defray costs, we're working with them to ensure that we have the right coatings for them.
Importantly, I just talked about are people I think our stores and our reps in this area, they're doing a fantastic job of St close and contact with not only our builders, but theyre applicators, which is very unique and we've got a distribution platform that wherever our builders are building whatever developments. They are pursuing our stores are where they are building.
And where they might want to build so we're not out there promising if you will invest here, we will invest with you. Our people are there and our assets are there and we're capitalizing on that so we're growing share.
We have not experienced the depth of decline as you mentioned we originally.
Projected although I would say, we do expect to see softness in the second half.
You talked about our strategy here.
And our commitment to favorably position the company.
We think this segment absolutely demonstrates that.
In the commercial side I'd say, we're experiencing very good performance.
And again I think it highlights the advantages of our control distribution, we expect the balance of 2023 to be strong.
We're really focused on the sub segments inside commercial going forward. So again really leveraging the value of this controlled distribution model our reps.
And our.
Specification teams are really dialing into those areas that provide opportunity.
And even within those areas that might be strong now that could dry up.
Even in those areas, we know that there will be opportunities could be antenna tenant build out or wherever in commercial.
It might shift.
Going to be there so again, our focus on applicators the specifier in.
The owners, we believe will pay off for us.
<unk> is another area that I think is really important to talk about let me turn it over to Heidi.
And as you know we've had seven years of double digit growth here in this segment and we're confident in our in our execution.
But it's important to know that we are never complacent and doing what we know how to deal. We believe we'll take share, especially in this environment.
It is currently positive we know a slowdown is coming and it's also being tempered by as we mentioned in our prepared remarks by the extended period of weak existing home and sell.
Having said that even in that challenging environment will continue to outperform other categories. Since it is an inexpensive and <unk>.
Really impactful category.
There's been a lot of speculation about next year and I will tell you that the bidding activity has somewhat normalized and believe it or not these are actually very good times for Chevron lands, where we believe that diversity brings about opportunity for us.
In large part our controlled model as many of US talked about previously this allows us to dig deeper and not just trying to sell our contractors products, but really taking the time to intersect them, where they are in their business and helping them to focus on growth and profitability.
We have a lot of data that we've talked about in the past, but I think and we won't get into specifics or details here, but it's important that is the team is working hard John mentioned, the talent and the frontline here mining this data for opportunity and getting very surgical in addition to the data leveraging our rep force. So that we can be very thoughtful as we approach.
These contractors then.
Making sure that we're taking advantage of the talent that we've got out there that we're currently focused on building these relationships and confident that we'll continue to see some aggressive share gains here on.
Briefly on the DIY relative to stores and I think John Your question was specific to stores sales were up double digits in Q2.
Against a fairly soft comp you don't expect this to continue at this.
Pace, but I will note that there has been some very positive foot traffic in our stores.
Relative to the segment and with that maybe just a brief touch on P&L property maintenance I think there is another area that performed a little bit better than we expected and we have a lot of confidence here a lot of the delayed maintenance. We believe now is being addressed to apartment turnovers.
Our.
Strong and bodes well for us and again I think.
The idea of return to travel office in school all help and.
We leveraged our national platform of stores and reps to be able to really capture that business as well. So it's a good business for us and one that performed better as well.
Protective and marine was another area that that.
In our stores that performed stronger than I would say we expected.
I will say that here not to our team we expect more from our team would be the answer I would give them our core business was very strong double digit growth.
But we've been investing in this business and our expectations are higher this team. We've got terrific leaders in this area and we've been making investments in areas, we've announced a number of acquisitions for example in flooring and that's helped us get into some really key opportunities in food and beverage pharma even airport hangars all have been very strong.
Energy has been very strong for US is another Great example, where we focus on everything from extraction of the processing as well as alternative energy.
Government.
Activity here is trying to stimulate has been good for us as well.
We see.
Business in the area.
Mega plans for chips that have been good for us.
As well as I mentioned in alternative energy, where we really have done a very nice job of bringing technology from all aspects, we're taking into wind farms for example.
It's been promoted in the northeast.
<unk> going to be a terrific opportunity to bring our marine coatings as well as our heavy duty Petro Chem technology to bear in a very unique way so.
We're bringing technology, we're bringing the strength of our distribution platform specifications and it's driving businesses that the business.
Business is very strong just one piece I would add to that John mentioned recent acquisition in flooring I think that really is a great illustration of how we're looking at this as a broader portfolio of both technologies and services that we're bringing together in terms of our value proposition, but if I look specifically at something like the EV battery plants or semiconductor.
We're not just excited for those projects, but that candidly for the infrastructure that will eventually surround those projects as well. So we feel very uniquely positioned to take advantage of that waste.
Great. Thanks, very much for the detailed color I appreciate it.
Thanks, John .
Thank you. Your next question is coming from Christopher Parkinson from Mizuho. Your line is live.
Great. Thank you so much.
I was just hoping to get a little bit more color on your longer term thoughts on PC margins, just given the competitive dynamics in each of their respective end markets.
Obviously ongoing price cost I mean as I think.
Safe to say, it's significantly better than we thought at least for the quarter, but go into that kind of unofficial 20% marker.
Assuming youre feeling pretty good about that but if you could just give an update on the longer term thoughts there would be very helpful. Thank you so much.
Yes, Chris Thanks for the question I'll start and kick it to al Youre right. We do feel very good very proud of.
Jorgen route and his entire team.
<unk> team is really focused on.
Doing this the right way so the solutions that we're bringing our customers and the focus and discipline that we're bringing as part of the strategy we keep repeating.
And as we do that we bring value to our customers.
And we've been successful the discipline in that.
Is that.
Every gallon is necessarily a good <unk> for us as a result, we're focused on key segments key customers, we're trying to introduce technology and services that help them to make more money and again as a result, we believe that our shareholders to participate in that but the push is to make our customers successful and have discipline in doing that and that's exactly what.
The <unk> team is doing now Chris I think the takeaway.
I'd leave you with is as we've progressed through 2022 and into 2023, you start seeing consistency in that segment operating margin in the either at the bottom of the range or in the range and a couple of additional points one.
<unk> got the discipline to get price and when you look at the last two years 'twenty, one and 'twenty two they took the brunt of the 40% increase in raw material costs and they were able to get price, while still drought driving volume and when we look at the acquisitions that were made last year and the integration activity.
<unk> and the synergies that the team is working on we feel very good about coming out of this year with the operating margin. So those acquisitions being accretive to <unk> and then they are also focused on a number of other initiatives, whether its SKU rationalization simplification.
To make operations more efficient that's can better serve their customer at a higher level. So I think you put those things together and that team is on it.
Strong trajectory to hit that 20%.
Target and then we'll ask for more from there.
Got it and just a very quick follow up and also quite frankly, a corollary of what you just said.
Sure.
I don't think I have myself nextera, mark, but it seems things are generally progressing a little bit better than expected. Obviously, that's reflected in the guidance range, so and so forth, but when you take a step back and you look at your portfolio, obviously, you've taken a few extra actions over the last 12 months 12 to 18 months in both divesting as well as acquiring.
Can you just give us kind of a very quick update on where you stand is standard with that thought process are there any technologies or would you still feel you are focusing on are there still assets, which you would consider divesting you just given the actions over the last quite frankly, five plus years any update there would be very helpful. Thank you.
Chris We've done 20 transactions since announcing Valspar 16 were acquisitions and six were divestitures.
What we're focused on is and where we want to grow are those areas that we can bring value.
<unk>.
B rewarded for bringing solutions to our customers and we take a hard and disciplined.
In other areas. So we've divested the Valspar wood divestiture was required by the FTC.
Divested guardsman.
It came with Valspar What'll in Australia, which came with <unk>, we've announced the wall room in China.
Tim with Valspar and the specialty aerosol plant.
We have recently announced also came with Valspar and one legacy Sherwin business was the thermal plastic road marking business.
Zero Sherwin, we're focused on high value products in areas, so that didnt fit our portfolio.
But we've done a lot of really good deals that we believe that.
Can help drive value for our shareholders, while bringing solutions to our.
To our customers and with that discipline to your question on where we continue.
That discipline continues every day here, we're having discussions every day about programs.
The hard discussions about customers.
Geographies, we don't want to just put flags.
On a map we're here to create value for our shareholders.
It's sometimes hard to make those decisions, but quite frankly, we look at all of these businesses.
As part of our capital allocation when we put.
Our money in to buy Valspar and we.
Heralded a lot of these businesses.
That was capital that was allocated and if it doesn't meet the threshold for our shareholder return then we make those difficult decisions and that's part of who we are and when we're out looking for acquisitions.
Not just.
What's for sale, we take a very disciplined approach.
We've got a team led by Brian Young here.
Our team that does a wonderful job in helping to identify what would be fit if it's for sale or not and if it is not for sale. We go try to have those honest discussions with the owners about why it might be a better fit.
With Sherwin so it's a disciplined approach that we take we're proud of it we're not out just trying to buy volume or sales.
Our book of business it has to fit strategically or we're not interested.
Thank you for your thoughts.
Chris.
Thank you. Your next question is coming from Ghansham Panjabi from R. W. Baird <unk> company. Your line is live.
Thank you operator, good morning, everybody.
Yes, John as you kind of think about 2020 through specific to paint stores group. What do you think the common theme is as it relates to the volume outperformance across your various categories. I'm. Just curious is it customer backlogs that were a bit stronger than relative to what you initially thought or market share gains or something else and then on residential repaint do you think that vertical could be.
Directionally less sensitive to existing home sales on a go forward basis relative to the historical baseline.
Well, how about if I take the first piece and I'll throw it the idea on the on the resale because she is working very closely on that.
There was a number of areas ghansham.
I don't want to spend a lot of time on this because I did just hit this but I think the foundation of our strategy and our focus.
Really comes down to the people that I just mentioned.
We talked about this management training program that we've had for over 40 years, we recruit 500 college graduates every year. So we're recruiting and we're training and developing.
The best talent, we believe in and yes, we've made some compensation adjustments that appeared in our SG&A to retain this talent and we think that there is a great investment and we'd make it everyday because we're going to win or lose by our people and so when you ask about what's happening in the market.
Quite honestly our people are executing it's a very choppy market out there right now there were times when you would talk with customers and they would say they have not advertised in five years in some of our customers had never advertised at all they were spinoff of working for someone else in the market had been so hot that they just put a sign up in the first half.
Painted then it started to roll.
Now with the adversity in the market.
We look that much more attractive to painting contractors that are looking for assistance and looking for help and we welcome that and Thats. The reason we have over 3000 sales reps and nearly 5000 stores in the market. We don't look at our position nationally we look at our business market by market customer by customer.
And we're trying to address their needs and so I don't think that Theres a lot of wind in the sales of a lot of people.
The architectural side there is good.
Good book of backlog businesses, Heidi mentioned, but there is there is some uncertainty and there is some choppiness in our people are there to.
No.
Paraphrase this enormous hold the hands of these important customers and help them through that and as a result, we get rewarded so we're executing really well in a choppy market. That's how I would respond however.
Forming in the market regarding <unk>, specifically, how do you maybe I'll have you answer the yes, Ghansham I think good question that in terms of the reliance on resale I think that the inverse insurance law, which is that those that are staying in place and making sure that they're aware that this is really about the opportunity to raise value up there.
Their home if they chose to stay we mentioned earlier and extensive and having impactful project I mentioned the data earlier and I'd like to go back to that I think it's a great example of how we're able to penetrate and not be reliant on the resale market and in terms of our ability to go back and I'll give you. An example, again without getting into too much detail mining.
The data for those customers that haven't bought paint in a while.
For customers based on a certain demographic that we now.
Or more likely or certain region that are more likely to reengage in the category I mentioned earlier our team.
The thing that really differentiates us in the space, We've got 500 graduates every year.
That really own the P&L in their store and they are hunting for the exact customer there are a lot of respect for the people out that are building these relationships and making sure that whether it's a homeowner or a contractor making sure that we're being very surgical in terms of how we approach. These these really important customers.
And I'd add one thing to that as well ghansham, what youre seeing with the softness in existing home sales.
<unk> tended period, what we're seeing is people can't wait so that's driving them to new resin I think that's also supporting some of the new <unk> business and as we've spoken many times about our business as a table whichever way the market may till I think is a great example, as John walked through new Rez, telling you how well prepared.
How much value we bring in that area as these folks simply can't find a home to move into because the inventory is so low theyre going to go Newbuild and we're right there.
Got it and then for my second question on TCG several categories seem to have been impacted by destocking across the various regions.
Where are we in that process do you think you gave some comments on packaging what about the other major verticals.
Well I would like to talk about packaging because if there is one ghansham that fits your description there would be packaging, we've got customers working through.
Softer demand and overstock and <unk>.
As we see that continue.
It's likely going to continue to continue through Q.
Q3, perhaps even Q4, but we feel really confident this is a strong team with a growing position with great technology. We've talked about this <unk> 70 unique technology that has that is really fantastic and we hear it from our customers. It's it's a plug and play it's really highly efficient.
It's superior in its ability to keep flavor protection product.
Nextgen non BPA, it's just a fantastic product and it's been very well received.
By our customers.
So.
We've got confidence in this business is just going to be bumpy.
While we have high expectations.
We often push hard we also have to be realistic with our team. So we're feeling good there when you look at the rest of the businesses inside of our PCB business. We mentioned, it's bumpy, we've got some that might be more resilient as others. We talked about auto refinish. This is a team that's really.
Hitting on all cylinders pun intended.
That is really leveraging the technology combination from Valspar and Sherwin together, along with the platform of stores. Many people think about stores through our architectural.
Paint stores group, but we bring the same value through our automotive stores.
Direct to a customer.
Really growing business there as well.
Our general industrial business is one that.
As kind of a mixed bag. If you if you look at.
Areas, such as large AG and construction is doing well.
Building products and general finishing is soft so when you look at this business. When you look around wherever you are right now the office.
Every substrate that you see likely as one of two businesses.
General industrial or industrial wood.
Our businesses, there offer terrific opportunity, but they're going to be a little bit bumpy and coil I would say we had a decrease in coil largely driven by <unk>.
Europe and Asia, North America is holding up a little bit better than other regions, but.
Again as a.
Team.
Bringing a unique responsiveness to customers needs in a way that help us grow market share even in a down market.
Thank you so much.
You bet. Thank you.
Thank you. Your next question is coming from Jeff Zekauskas from Jpmorgan Securities. Your line is live.
Alright, Thanks, very much is it fair to say that and is it fair to say that in the first half raw.
Raw materials went down by a low to mid single digit rate and in the second half as a base case should be down by a high single digit rate.
Yes, Jeff I would say you are correct, maybe not quite high single digit on the <unk>.
Second half or close to it yes.
Third quarter actually it will be up or higher would be the best improvement year over year.
Our highest til.
And as the base case for.
For 2024, when you look across your businesses.
Do you expect your general level of prices to be higher or lower or flat.
Sitting here today, Jeff we continue to talk about.
Our pricing and our ability to maintain pricing as the raw materials moderate because of the solutions that we drive I don't think were ready to talk about incremental pricing for 2024, we have.
We look at the total input cost basket to determine if we need a price or don't need a price and as you know any price discussions we have.
We'd have them with our customers first and then talk to the street. So we have time to talk about 2024.
Over the next quarter and a half.
Okay, great. Thank you so much.
Thank you Jeff.
Thank you. Your next question is coming from David Begleiter from Deutsche Bank. Your line is live.
Good morning.
How should we be thinking about second half earnings in terms of the cadence between Q3 and Q4.
Yes, David I mean, when you look at the earnings.
<unk>.
As John and highly talked about.
Our visibility in demand, which is going to drive.
Our performance through the second half is limited so we probably have a better line of sight on our third quarter than our second quarter.
We're not we don't give EPS guidance, our fourth quarter, we don't give EPS guidance.
But couple of.
Other things I would note I do expect to see.
A seasonal slowdown in architectural and our fourth quarter.
Which will impact our gross margin as it historically has done so I believe this is a year that is a second half more.
What I would say typical than some of the last three years.
But our third quarter is typically a stronger quarter and I expect that to continue.
Very good and John one of your competitors announced a couple of homebuilder wins over the last few months.
Why do you think they won that business and you may have lost that business and overall how is the competitive landscape in that portion of the business.
Thank you.
Yes, thanks for that.
With every single customer is important to us everyone.
Also think it's important that you understand how we think to us.
Play everyday in the World series, and we want to sweep the series we want to win every single game, but we're also realists.
We're not going to expect every one of our pitchers throw a perfect game or.
To win every game as I set out, but I will tell you. This I believe we have the best team the best resources.
And great momentum, so even if our competitors score and occasional run or if our pitchers throw up.
<unk> ball here or there, we're not going to panic.
But we believe the right team.
We will sweep the series.
And we're out there right now.
We believe if you look at that top 100 builders and the penetration that we have.
We're growing it and grow it aggressively and.
And we expect that to continue and we're doing that all our competitors expense, we just don't choose to talk about it.
Thank you very much.
You bet. Thanks, David.
Thank you. Your next question is coming from Mike Sison from Wells Fargo. Your line is live.
Hey, guys nice quarter.
With the third quarter volumes potentially being down.
Do you think things are bottoming as I think about the fourth quarter volumes look like they could be flattish to maybe even up and then.
How do you think about 'twenty for volume growth next year do you think it's.
Yes, we could be in a position to start growing again.
Okay.
Yes.
Take one more run at that question here maybe.
Just.
Yes, I guess, so help me understand order I guess I'm trying to understand if you think things are bottoming here in the third and then potential for volume growth for the total entity maybe into the fourth and into 2024, Yes, I think I think Thats a challenge the answer I would say if you look at new residential we're saying, we're suggesting that.
We've outperformed for example in new residential and that we expect.
The balance of the year to be a little bumpier.
Housing starts are starting to come back because I talked about in my prepared remarks, but.
Even homes that are broke they break ground today, it's likely going to be for the future.
Likely next year before we start painting those.
So I don't.
I'd say were probably bouncing around here a little bit we will see what happens, but our approach has been.
Now that.
The market is soft our goal is to outperform it.
Going forward between Q3, and Q4 gallons I'd say, it's likely going to trend about where we are.
Thanks.
Thanks first group if you look at.
We said projected to be flat to up low single digits, but when you look at the dollars.
Sequentially, they are pretty close in and Thats with new raise.
Declining more on our third quarter than we expected in our fourth quarter, which tells you we have some strength in our other segments that John and I talked about and it's going up against the 21, 5% comp last year. So.
So when you think about the second half paint.
Paint stores group has a tough comp I'd say the other other segments as we talked about are choppy.
And its by business by region I think some businesses in certain regions have have bottomed out I think there is.
Still challenges that we see in Asia Pacific, but as an example, Europe in our second half, we expect to do better than what we did in the first half.
2024, that's a whole different discussion that we'll have as we get into it into January in our year end call.
One piece I would add to that I think is just an indicator of the strength in the backlog I think if you look at.
Stronger and more solid backlogs across commercial property maintenance and PNM and I would also say, it's not just the backlog, it's the way in which we're interacting with these customers or closer to these customers than we've ever been before which is in large part based on our controlled distribution model, but it's also based on coming out of last few years of a lot.
Challenge is I think we've essentially become that our planners together. So those backlogs are component parts of our closeness to the customer against getting a lot of confidence in the outlook.
Got it thank you.
Thanks, Mike.
Thank you. Your next question is coming from Arun Viswanathan from RBC capital markets. Your line is live.
Great. Thanks for taking my question.
I guess I just wanted to follow up on that last point as far as backlog.
Do you potentially provide us with some backlogs across maybe some of the different market segments that you are seeing in P&C I know when you started out the year.
Did that there was quite a few jobs.
Still in the backlog on the on the new side through the first half, but then it really kind of limited after that so.
How would you characterize the backlogs now if you could provide a little bit more granularity on that.
Yes.
Hi.
Jumping here I think if you if you look at the points that he is making I think theres two points you are asking one very good question, but there's another element here that I want to tie to this one is if you look across the various segments and say, okay. Commercial we see strong residential repaint little bit choppy with resales, but we can see out six to eight months.
Property maintenance strong DIY has been strong but is on software comps. So we don't expect that to continue I think all of those are opportunities for us to continue to grow market share and we will the other point, though that I think she is talking that she spoke to that I think is important is coming through COVID-19 and then the shortage.
Work much closer with our customers in ways that quite honestly I wish I would have had that opportunity when I was in a store. We're now working collaboratively with what projects are now are taking place now what's next even to the point, where if it rains. My fallback is this position and the fact that we've got our reps and our stores out there close to.
The backlog and close with our customers closer than ever before as a terrific advantage that we're trying to leverage.
By segment I would say yes.
We see new residential likely to slow down a little bit as the as the slowdown works its way through the painting phase of the one of the.
Homes that Werent started.
Eight months ago.
Property maintenance, we're really leveraging the fact that their.
Capex money is freeing up.
Our national agreements or are opportunities for us and the others as I described so.
It's a good market for us because there's a lot of diversity in the market and Thats, what we thrive on.
That's helpful and then a follow up on the raw material side.
Could you just maybe provide us with some idea of what <unk> been for carrying out in the second quarter I would imagine, it's maybe down mid to high single digits and does that flow through I guess second half.
And have you seen any declines in <unk> as well or do you expect any of those.
Yes, Arun so our raw material basket in the second quarter was down in that high single digit range and what was really driving that deflation for us as you might expect as the petrochemical side of the basket resins and solvent even plastic packaging.
The decline in some of the key feedstocks such as propylene is now flowing through into the things that we're buying and we expect that to continue this is a cycle that we've seen many times over.
Over the years.
With regard to <unk>. Your question there those costs are still a little bit elevated for us, but we expect to see them starting to trend in a more positive direction as the year goes on.
Some of the key input costs on Tio two are elevated right now chlorine being one of the main ones and I'd also say some suppliers are also trying to manage their capacity a little bit more tightly but with demand soft here.
Youre going to see are we believe we're going to see and expect to see.
Some decreases in the tio to pricing.
Thanks.
You bet.
Thanks Arun.
Thank you. Your next question is coming from Duffy Fischer from Goldman Sachs. Your line is live.
Yes, good morning.
I was hoping you could help me just triangulate a little bit when.
When you look at the midpoint of your guide what it implies is the back half versus the first half. This year is going to be down 22% on EPS, but when you look at the last seven years. The average is for that to be up 6% and it's been up five of the seven years. So when you add to that.
Materials should be better in the second half versus the first I just have a hard time triangulating that new <unk> will be a big enough negative to take the earnings down on a sequential basis first half to second half. So could you just talk through what else might be negative first half to second half.
Yes Duffy.
It starts with that.
That sales outlook.
Down mid single digits from.
For second half versus first half.
Less price would be in that so we've got a nice tailwind.
First half for price that helped drive our operating or gross margin.
And.
So you also see.
Lower volume specifically in consumer and performance coatings group, So I think.
As you would expect youre going to get lower gross profit dollars I do still expect gross margin expansion on our second half.
Not.
Quite as good as year over year anyway that we saw in our first half because of our comps.
And then you do get some help on the raw material.
A reduction but that is partially offset by lower fixed cost absorption in our second half due to lower production volumes I think SG&A, even we talked about SG&A and the opening and <unk>.
Being more aggressive.
Adding.
Investments for our long term growth.
Our strategy both in stores reps fuel Tech service reps.
And the final piece is.
<unk>.
These non operating costs that I would call out that were.
Are probably going to be an incremental $60 million to $70 million headwind versus our first half because some of the gains that we had on sale of assets and marketable securities. So I think.
Those are the things that are driving that sequential.
Movement.
Okay.
And then just again, if we ever get back to normal whatever that is do you still believe that your structural footprint as the second half earnings profile is better than the first half earnings profile for the company.
Yes, Duffy I tried to go back to a normal year 2019, so to your point I'm not sure what normal is.
But.
I think as we continue to see growth in our performance coatings group that's less seasonal.
You might not see as big of a.
Increase in our second half versus our first half as we move forward.
But if we can get back to the way paint stores group brand and our consumer business rather than yes.
Should typically see that hopefully I guess I'd just add on to the investment strategy.
Al mentioned were 157 year old company and we're not.
Trying to run the company for a perfect quarter here, we've got confidence in our strategy.
Proven strategy with proven leadership team.
Through a proven and growing asset base in stores in the facilities that were running so well.
At this point, we're going to invest into that.
We play the long game here.
What we're doing and quite frankly, we're going to do more of it.
Terrific. Thank you guys.
Thank you Duffy.
Thank you. Your next question is coming from Adam Baumgarten from Zelman and Associates. Your line is live.
Hey, good afternoon guys.
If you could give an update on the proceeds paint business and how that's been trending.
Yes. Good question, Adam I think there's a lot of growing and certainly growing interest here as it relates to how we're partnering with our strategic retail partners than certainly the investment.
It's following that with a lot of confidence in growth to begin there.
I won't get into a lot of the details because I think those are certainly.
For our retail partners to share, but I can tell you that the level of collaboration.
At alignment from the planning standpoint.
Certainly understanding how the calendar lays out laying in key events throughout the year, making sure that the data is aligned the reps are aligned that the structures are aligned.
We're just getting started here and we've got a lot of confidence in where this can go.
Got it thanks, and then maybe just if you could discuss some of the simplification efforts youre, making across the enterprise and the kind of the timeline there and the impacts you ultimately expect that to have on the business.
Yes, it's a great question and I will tell you that that's going to be a journey onto itself. So when you think about it how were kind of broadly defining this is truly looking end to end al mentioned this earlier what were looking to bring some efficiencies. So I think with our global supply chain team Al mentioned the performance coatings group, it's a true for all our groups.
And for our supply chain as well really understanding all the way from the.
The raw materials.
I was asked earlier, Jim mentioned, how we're thinking about procurement in general the conversations that we're having are.
I would say a lot more detailed relative to the sub supplier level and making sure that when we step back and look at our supplier strategy.
The distinction between strategic suppliers and transactional suppliers. So we're having those vary.
Important conversations at the front end and then if I take you all the way through Al mentioned, our rationalization efforts that are underway.
You can imagine.
The basket and continued the rationalization efforts from a customer facing standpoint, it puts us in a much more optimized and efficient standpoint from an operational manufacturing logistics and so theres a lot of milestones that the team is setting forward here. This will be a multiyear journey as I mentioned, but I would expect that we will see.
Some customer facing.
<unk> as it relates to how we can compete with a more aggressive.
<unk> portfolio of products here in the short run and then Youll see that continue to show up to the bottom line as we move faster and faster towards automation and alike.
I would add to that Adam is we talk about efficiencies, but we also are focused on.
These efforts too.
Increase our capacity so that we're not having to put cash.
Capital back into capacity and then also looking at opportunities for working capital reduction so.
John talked about the divestitures and the part of our capital allocation.
Philosophy, it's really.
<unk> and focus on delivery.
Delivering cash generation back to our target.
Targets that we laid out and also how we utilize our best utilize our assets.
Thanks Best of luck.
Thank you Adam.
Thank you. Your next question is coming from Josh Spector from UBS. Your line is live.
Yes, hi, so just a follow up on working capital and specifically inventory.
I mean, your inventory step down a few million dollars $200 million sequentially. Just curious if you would say you have in your volumes of inventory at the right level for what Youre expecting in terms of second half volumes or if youre continuing to destock that inventory through the year and really what that means for your expectations for working capital for 2020.
Thanks.
Sure Josh.
Yes.
Typically is the case as we get into the summer selling season will you will see a sequential decrease in our inventory gallons as you've mentioned.
I think youll see a sequential decrease in our third quarter, which is also typical and then we'll build inventory back in our fourth quarter to our targeted.
Numbers that are similar to prior.
Similar to last year, but tomorrow historic levels. So I feel very good about where inventories are at today.
That being said.
We will adjust production.
Through the second half to maintain that targeted year end inventory I don't want to get us too far ahead.
Going into next year.
So we will monitor demand trends closely and adjust production schedules accordingly.
We'll try to push that working capital back towards our target by year end or 11, 5%.
I think thats going to be.
Difficult considering accounts payable is because of the lower production.
Is what's driving our increase over that 13%, but we'll get we'll get that working capital back towards the target of 11 to 11, 5% going forward.
Okay. Thank you.
Thanks, Josh.
Thank you. Your next question is coming from Steve Byrne from Bank of America. Your line is live.
Yes. Thank you.
10% roughly increase in SG&A that youre expecting for the year can you talk a little bit about what exactly is driving that is that is that underlying wages.
Yes.
Variable comp to incentivize.
Aggressive.
Effort in sales does that head count.
Something else. This is a digital app what would you say is driving that what are the primary buckets driving a 10% increase in SG&A.
Yes, Steve I don't think its in our best interest to lay out exactly where our investments are to be truthful with you I would say that we.
We have a proven leadership team we've been at this for a long time, we see opportunities and we invest in many of the topics that you brought up our areas of investment so yes, we're going to invest.
In securing our people the retention of our people the training of our people, we're going to add reps to our stores and through other channels that are important to us we're investing in innovation and digital.
We're not going to get into any specifics deeper than that but we believe and quite frankly, we're very proud that when we make an investment.
Our shareholders can count on a return and we've demonstrated that discipline to be able to do that.
And then on your cost structure.
Al if I heard you right. Thank you.
Low single digits.
Deflation in raw material costs, and I believe that was not.
Current purchases, but what flow through Cogs in the second quarter.
Is there something else that is.
Was a meaningful change year over year in the cost structure like freight or logistics or something because youre your gross profit.
Priest year over year significantly more than revenue there seems to be maybe something else in there other than just low single digit raws.
Steve.
We had better than low single digit raw in the second quarter, if that's what I said.
That wasn't correct.
We had more like high single digit.
Reduction in raw material costs, and what I said is.
The offset partially offset by lower fixed cost absorption because we had lower production volumes in our second quarter, mainly because we had to rebuild inventories last year and we didn't have to redo that so we're at a more typical production schedule. This year than last year. So thats, maybe what the the little bit of a headwind would have been in the quarter.
<unk> versus raw material benefit with a more optimized supply chain this year versus last year.
Steve last year literally we were taking raws wherever we could make them or get them manufacturing paint and sending it to customers wherever they need it and we absorb that into our margin.
But.
I think again it speaks to the commitment we make to our customers and why they can count on us.
That's helpful. Thank you.
Thanks, Steve.
Thank you. Your next question is coming from Patrick Cunningham from Citi. Your line is live.
Great. Thank you you talked about the fixed cost drag from lower production volumes, how much lower our utilization rates versus historical levels and if the recent uptrend, maybe in housing starts or commercial and property hangs in there and do you expect to bump up to historic high utilization rates in 2024, and perhaps even pre builds.
Or more of additional inventory in <unk>. Thank you.
Yes.
Patrick.
We don't talk about capacity utilization I will tell you. This that we've added some capacity. So we've got the ability to be more responsive to our customers' needs. When we talked about taking working capital down.
Al's comments about getting down in the 11 five range, we have confidence in our ability to do that while improving service to our customers as we.
Go through the simplification efforts that bleeding through the company on the operational side as well as the capacity that we have.
Thank you.
Thanks, Patrick.
Thank you. Your next question is coming from Alexia <unk> from Keybanc. Your line is live.
Thanks, I just have one question on DIY easy.
Lindsay comps from the first half getting to harder comps in the second half.
The underlying trends in the aircraft for Europe business and the market overall is it sequentially still decelerating improving or stable.
I'll start with that I think if you look at DIY and our paint stores group.
Give you a slightly different response versus what we're seeing in the rest of our business and largely based on the premise that there is a slightly different segment.
When a customer that's looking for more service that once more that specialty paint store experience. So as I mentioned earlier, we're seeing traffic.
Up in our stores I think the challenge on the softness.
And Youll see this in consumer brand side as well.
We've gotten back into a strong position of inventory youll see some more promotional activity that's been happening.
In an effort to drive traffic.
But still continuing to see some of that softness coming in in the current state of lease to the balance of the year.
Thanks, a lot.
Thank you.
Thank you. Your next question is coming from Kevin Mccarthy from vertical Research partners. Your line is live.
Yes. Good afternoon in your consumer business can you speak to the outlook for repair and remodeling activity and given that backdrop.
Do you expect your market share among pros, who paint to rise or fall or stay about the same over the next year or so.
We expect our market share to grow.
And if you look at what's happening from a <unk> standpoint.
Predictions on what's going to happen right now I'd say.
There is a slowing in the remodel business, but the truth be told US This is an opportunity for us.
In our business there are a lot of people that talk about percentages.
Most large percentage increases on a relatively small business and quite frankly, this is a new and growing opportunity for us. So the dollars are not where we believe they can be percentage wise, we have significant increases and we expect those increases to continue as we partner.
With.
Our customers who are interested in growing this.
And importantly, I think I understand the strategy here.
There are customers, particularly those that paint is a part of their project that prefer a home center model some of those customers might find their way into our stores and a natural question is the concern about cannibalization, we're not concerned with that we will gladly put that share of business up knowing that there is a significant opportunity.
<unk> for us to grow with our partners to pursue the remodel or if you will was using paint on a project.
So yes it is.
Going to grow we're focused on it with our customers and we are determined group combined so we expect positive growth.
Okay. Thank you for that John and secondly, if I may perhaps for al. It appears as though your 2023 capex outlook declined by $100 million to $700 million.
Why is that is that a function of timing or any meaningful changes to the project roster.
Yes, Kevin it's all related to timing.
We're still moving forward with the Statesville expansion that we had talked about earlier. This year, we are still moving forward with the.
Warehouse automation projects that we had talked about and continued.
Driving the packaging capacity expansion that we talked about so it's just timing and with a better line of sight to the second half.
We thought we would update that number.
Perfect. Thank you so much.
Thanks, Kevin.
Thank you. Your next question is coming from Mike Harrison from Seaport Global Your line is live.
Hi, good afternoon.
You completed a handful of acquisitions and you're integrating those in the performance coatings business can you just give us an update on how you're seeing those operating and commercial synergies progressing on some of the key deals that you've completed.
Yes, Mike It's a great question I think there is a.
There's a whole host of acquisition as John mentioned earlier, and I would say that the team is laser focused on first and foremost making sure that these integrations are seamless to the customer.
We're very focused on the integration at the team level I think when you look at some of the acquisitions that have been around technologies, our ability to quickly that the tech transfer has been an area of focus so that we're able to get those products.
Outside of one necessary region and in some cases.
Moving across the country are moving them across globally. So we're really focused on making sure we're getting the value capture out of some of these in the synergies that we know are there, but theres a lot of great work being done by the teams to make sure that we're keeping our customers focus on a fuller assortment, while our portfolio of choices based on these acquisitions.
Alright, and then.
Mentioned in the consumer business that you were seeing some stabilization in Europe was hoping that you could maybe provide a little more detail on what youre seeing there and maybe what your expectations look like for the second half in Europe . Both in terms of demand and as you think about the price cost front.
Youre talking about on the consumer side in Europe .
<unk> in Europe , Yes, yes.
Yes.
So first.
To capture this it's a relatively small percentage of our overall business.
We're proud of our relationship there we player.
Kind of a niche role if you will an intended paint.
Through the Valspar brand is came to us with our acquisition.
Got a terrific relationship that we're interested in growing and.
I'd say the momentum that we have is is good and we're excited about it.
Based on some of the economic recovery that stability that we're seeing coming in and I think it's playing to our favor based on this tinted program Thats unique in a lot of these countries.
Yes.
Thanks very much.
Thanks, Mike.
Thank you. Your next question is coming from John Roberts from Credit Suisse. Your line is locked.
Thank you could you just remind us how big U S. New rents is as a percent of total sales.
Even though your paint doesn't get applied until completion I think you bid it closer to the start so what's the can you quantify at all with the bidding activity has been.
Backlog.
John New residential is a mid teens percentage of our paint stores group.
We don't bid house, John we quote our customers on a regular basis and those are fluid discussions that we have with our customers.
So.
It varies by customer.
The timing of any agreements that we have.
And.
And we just work closely with our customers to ensure that they have as much lead time to any adjustments to pricing as possible.
Okay, even the largest homebuilders.
Given the largest.
Thank you.
Thanks, John .
Thank you. Your next question is coming from Eric Bosshardt from Cleveland Research. Your line is live.
Clarity on two things if you could first of all I'm Ross.
<unk> full year.
It was the first half of raw material.
Yes, the first half I would say our second half is going to be better than our first half.
Eric.
The first quarter was a pretty modest if you remember we said is a pretty modest deflation got better I mentioned sort of high single digit range in the second quarter.
It'll be better in the second half with probably the third quarter, probably the peak year over year benefit.
And then secondly relative to the original guidance.
Is the increase relative to what you thought the year would look like is it does that even between the first half and second half or is that more first half loaded.
Yes, Eric I would say, it's more first half loaded and as we talked about we expected a strong first half and demand as we again talked about was stronger than our first half so its more first half loaded.
Okay, and then is there anything.
Different that that makes it more first half loaded or is there I understand the comparisons the comparisons there were comparisons in the first half as well is there something that makes.
Create some more benefit in the first half than the second half.
Yes, the comparisons are better at the.
We get more price.
A tailwind in our first half.
And even with that within admin we had some.
Gains on sale of assets and stuff like that that maybe helped us a nickel in the second quarter, but.
Yes, the comps are going to get steeper in and then it's the outlook on the choppy demand environment.
I would say Thats why you don't see a bigger tailwind on our second half plus the investments, we're making for future growth.
Okay that makes sense. Thank you.
Thank you Eric.
Thank you. Your next question is coming from Garik <unk> from loop capital. Your line is live.
Oh Hi, Thank you just wanted to follow up on the strength, you're seeing in commercial within paint stores group. It runs a little bit contrary to some of the macro that's been a bit choppy here on commercial so I'm just wondering how much of that is.
Share gains versus a particular vertical where <unk> been over exposing ourselves to.
We do believe we're gaining share there.
Great opportunity again to highlight.
This controlled distribution.
The approach that we take.
As Ben.
Grounded in the.
Focus.
On the applicator on the specifier and the owner through a distribution platform that is first class.
So our reps.
Our working hand in hand with our <unk>.
Customers.
I would say that many of our customers would see our reps almost as part of their team.
More.
<unk> the market the more valuable that sales rep is in the facilities that we build to service those.
Those needs so.
Yes, I think we're growing share I think theres a good really good momentum through the balance of the year rolling into next year.
From there as I mentioned earlier.
We're not waiting for the business that to finish up.
We're very focused on those sub segments that I mentioned earlier that are a bit more resilient that we're focused on to continue the momentum.
Okay. Thanks, and wanted to follow up on was you repaint you talked about contractor visibility and backlog several times I'm. Just wondering if you could put that in context is the visibility and backlog of what youre hearing from your contractor customers are these back to more normalized levels at this point or are we still running.
Below normal given some of the headwinds.
Last couple of quarters.
Let's say they are back to more normalized levels I think youll see depending on the size of that risk repaint contractor. Some that are willing to take on more and have the labor and the support and the resources to do that and some that are smaller in size and that might be more governed by shortage in labor and we're really trying to intercept them at.
That point and help them focus on how they can be as productive as possible. So everything from our product assortment to our tools to our reps and how we're engaging these contractors, making sure that when they're on the job site, they're as productive as possible.
They did how they quote how they get paid so really trying to help them from an entire business standpoint, regardless of the maturity of our their size.
Got it thanks again.
Thanks Garik.
Thank you that concludes our Q&A session I will now hand, the conference back to Jim Jaye for closing remarks. Please go ahead.
I just want to thank everybody again for joining our call today.
Hope you heard come through loud and clear our team is aligned and committed to growing our business profitably, but we're also going to invest in growth and customer facing initiatives, that's going to drive our success and our customer success over the long term.
I'll remind you that our annual financial community presentation is going to be held here in Cleveland on August 24th.
In addition to John Heidi and Al Youre going to hear directly from our group presidents at the event.
And they're looking forward to sharing their plans in each of those operating groups and Youll hear how they are planning to execute and drive those businesses forward as we described.
Much of the call today.
You can register for that event at our website and we look forward to seeing you at that event. So thank you again for your interest in Sherwin and have a great rest of your day.
Thank you everyone. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.
Okay.