Q2 2019 Earnings Call
Good morning, Thank you for joining the Sherwin Williams Company's review of the second quarter of 2019, and the outlook for the third quarter and full fiscal year of 2019 with US on today's call are John Morikis, Chairman and CEO Alma session CFO , Jane Cronin Senior Vice President corporate controller, and Jim Jaye, Senior Vice President Investor Relations and communications.
This conference call is being webcast simultaneously in listen only mode. I guess your direct via the Internet at Sherwin Dotcom, an archived replay of this webcast will be available at Sherwin dot com to get involved.
Approximately two hours. After this conference call concludes and will be available until Friday August nine 2019 at five P.M. Eastern time. This conference call will include certain forward looking statements as the front of the 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 Companys prepared remarks, we will open the session to questions I want to turn the call over to Jim Jaye.
Thanks, Jessie and good morning, everyone. Thank you for joining us on the call today.
All comparisons in my remarks are to the second quarter of fiscal 2018, unless otherwise stated.
Consolidated sales in the second quarter of 2019 increased $104.1 million or 2.2% to $4.88 billion.
Currency translation rate changes decreased sales by 1.5%.
Consolidated gross profit dollars in the quarter increased $142.8 million or 7% to $2.18 billion.
Consolidated gross margin in the second quarter increased to 44.7% from 42.7% in the same period last year.
Excluding impacts from purchase accounting adjusted consolidated gross margin in the quarter increased to 44.9% from 43.1%.
Selling general and administrative expense increased $23.4 million or 1.8% to $1.33 billion in the second quarter, but decreased slightly as a percentage of sales to 27.3% from 27.4% in the same quarter last year.
Interest expense for the quarter declined $4.3 million to $89.2 million.
Consolidated profit before tax in the second quarter increased $137.6 million.
Or 25.6%.
To $675.7 million.
Our effective tax rate in the quarter was 30.3%, which includes the previously disclosed tax credit investment loss.
Excluding acquisition related costs and the tax credit investment loss.
Our effective tax rate on adjusted income for the quarter was 19.7%.
Diluted net income per common share for the second quarter 2019 increased to $5.03 per share from $4.25 per share in the prior year second quarter.
Earnings per share in the second quarter of 2019 includes charges for acquisition related costs and a tax credit investment loss of 75 cents and 79 cents per share respectively.
The $4.25 per share reported in the second quarter 2018 included charges for acquisition related costs, and environmental expense provisions of $1.23 and 25 cents per share respectively.
Excluding these items adjusted diluted earnings per share increased by 14.7% to $6.57 in the second quarter 2019 for $5.73 last year.
We have summarized the second quarter earnings per share comparison in a regulation G reconciliation table in our press release.
Let me now take a few moments to break down our performance by segment.
Sales for the Americas group in the second quarter increased $131 million or 5% to $2.76 billion.
Comparable store sales in the us and Canada increased 4.3% in the quarter.
Regionally in the second quarter, our Southeast Division led all divisions, followed by Midwest Eastern Southwest and Canada.
Sales were positive in every division in the quarter.
Second quarter segment profit increased $42.5 million or 7.5%.
To $612.4 million.
Second quarter segment profit margin increased 50 basis points to 22.2% from 21.7% last year.
Turning now to the consumer brands group.
Second quarter sales increased $26.7 million or 3.4% to $804.5 million.
Sales from continuing operations, excluding approximately $16 million in revenue from the divested garden business.
Increased 5.6% in the quarter.
Second quarter segment profit increased $49.8 million or 54.7% to $140.7 million.
Purchase accounting expense decreased segment profit by $22.5 million compared to $28.5 million in the second quarter 2018.
Second quarter segment profit margin increased to 17.5% from 11.7% last year.
Excluding the purchase accounting expense in both quarters adjusted segment profit margin increased to 20.3% from 15.4% in the second quarter 2018.
For our performance coatings group second quarter sales decreased $52.4 million or 3.8% to $1.32 billion.
Currency translation rate changes reduced second quarter sales by 2.7%.
Second quarter segment profit increased $6.1 million or 4.3%.
Two $150.3 million.
Purchase accounting expense decreased segment profit by $53.9 million compared to $47.6 million in the second quarter 2018.
Second quarter performance coatings group segment profit margin increased to 11.4% from 10.5% last year.
Excluding the purchase accounting expense in both quarters.
Segment profit margin increased to 15.5%.
Compared to 14% in the second quarter 2018.
I'll conclude my remarks, with an update on our California led litigation.
As we reported in a press release last week.
10, California cities and counties.
Sure when Williams and two other companies have mutually agreed to resolve litigation subject to court approval.
The agreement ends a nearly 20 year legal battle that challenge the company's legal advertising of lead based paints over a century ago.
Such paints, where the gold standard and specified for use by the federal government as well as state and local governments across the country.
Terms of the agreement called for a total payment of $305 million with each defendant paying approximately $101.7 million over six years.
The 305 million is a significant reduction from the courts original $1.15 billion judgment and the reduced $409 million judgment ruling following the defendants appeal.
Sherwin Williams continues to believe the California case was an aberration.
All other appellate courts have found that companies should not be held retroactively liable for lawful conduct and truthful commercial speech decades. After they took place.
Seven other states have already rejected public nuisance claims similar to those brought in California.
Sherwin Williams is pleased to have reached an agreement to resolve this litigation and it will continue to vigorously.
And aggressively defend against any similar current or future litigation.
That concludes our review of our operating results for the second quarter.
So let me turn the call over to John Morikis, who will make some general comments on the second quarter and provide our outlook for the third quarter and full fiscal year 2019.
John .
Thank you Jim and good morning, everyone.
Thanks for joining us.
I'd like to make just a few additional comments on our second quarter before moving onto our outlook.
Our second quarter was a strong one.
With record results in net sales EBITDA.
Profit before taxes and net operating cash.
While consolidated second quarter sales came in at the low end of our expectations.
North American paint stores the growth engine of our company.
Performed well in the quarter and was above the high end of our revenue guidance as we anticipated.
Overall, our consolidated sales results continue to highlight significant regional and end market demand variability.
With growth in North America, and Latin America.
Partially offset by softness in Asia and to a lesser degree Europe .
Pricing was favorable across all of our businesses in the quarter.
Consolidated gross margin on an adjusted basis improved sequentially and year over year to 44.9%.
Just below the low end of our annual long term target.
The improvement was driven by the realization of previously announced pricing actions and a sequentially lower rate of raw material inflation.
Yes, DNA in the quarter came in largely as expected and will continue to maintain appropriate discipline on spending as the year unfolds.
All three segments delivered sequential and year over year profit margin improvement.
Within the Americas group sales increased 5% against the prior year comparison of 7.7%.
Sales were positive in all North American customer end markets in the quarter led by residential repaint, which was up high single digits.
Sales in protective and marine new commercial and property management were all up mid single digits and new residential sales were also positive.
Selling conditions remain challenging throughout much of the quarter likely delaying a number of projects in multiple end markets.
Our customers continue to report very solid backlogs heading into the back half of the year.
Looking at total segment profitability segment profit dollars increased by more than $42 million segment margin expanded by 50 basis points to 22.2%.
And incremental margin was nearly 33%.
Year to date, we've opened 20 net new stores, finishing the quarter with 4716 stores in operation.
Compared to 4642 last year.
Our plan calls for this team to add approximately 80 to 100, new stores in North America.
By the end of this year.
In the consumer segment second quarter sales increased by 3.4%, including the impact of the guardsman divestiture, which was about 2.1%.
Sales and profitability improved in North America and Europe .
But were partially offset by softer demand in Asia, and Australia New Zealand.
Volume leverage and cost control, which were partially offset by incremental investments in the new customer program.
Our enabling us to continue to drive the profitability of this business as segment margin, excluding purchase accounting expense increase both sequentially and year over year to 20.3%.
We continue to feel very good about our strategy in this business and in particular, our relationship with our largest customers.
Performance coatings group sales were down 3.8% in the quarter with variability by region and business.
Comparing businesses revenue growth in our packaging and coil divisions was more than offset by softness in the segments. Other businesses, most notably in our industrial Wood division, which continues to be impacted by tariffs.
Geographically.
Sales were up in Latin America, and flat in North America, which were more than offset by softness in Asia and Europe .
Where sales decreased by low double digit and mid single digit percentages respectively.
Notably packaging and coil continued to be positive outliers in Asia and Europe .
Despite the sales decline adjusted segment margin increased 150 basis points to 15.5%.
Evidence of good cost control and that recent pricing actions are gaining traction to offset the raw material inflation, we have experienced over the last two years.
EBITDA in the quarter was $908 million or $921 million adjusted to exclude integration costs.
Adjusted EBITDA margin was 18.9% in the quarter.
Adjusted EBITDA year to date was $1.5 billion or 16.8% of sales.
Year to date, we have returned approximately $660 million to shareholders through cash dividends and share repurchases, an increase of 33% year over year.
At the end of the quarter, we had approximately $9.5 billion of debt on the balance sheet.
We reduced debt by approximately $375 million in the quarter and intend to retire a total of approximately 600 million this year.
Which will result in a net debt to EBITDA ratio below three to one by the end of 2019.
We paid $105 million in cash dividends and purchased 325000 shares of common stock for $145 million in the second quarter.
At quarter end, our share repurchase authorization stood at 9.05 million shares.
Capital expenditures were 77 million in the quarter depreciation was $65 million and amortization was $78 million.
As we move into the third quarter 2019, we expect consolidated net sales to increase by a low single digit percentage compared to the third quarter of 2018.
Although we do not typically provide quarterly sales guidance by segment.
I'd like to provide some additional color this quarter due to end market variability.
We expect growth in the Americas group to be in the mid single digit range.
I want to reiterate that we continue to feel very good about the demand environment for our North American stores with our customers reporting fall order books and working to catch up on jobs that were likely delayed by weather in the second quarter.
For the consumer brands group in the third quarter, we expect sales to be down by high single digits as we faced tough comparisons to the largest portion of last year's load and volume for the Lowe's program as well as the final quarter of the divested garden business.
We anticipate performance coatings sales to be up by a low single digit percentage.
While comparisons do ease in the back half of the year, we do not see a near term catalysts driving significant improvement in the European or Chinese macroeconomic environment at this time.
We expect demand in these regions to remain highly variable as it has over the first half of the year compared to a relatively more stable demand environment in North America.
As a result of our revenue outlook for the third quarter, we are reducing our full year 2019 revenue guidance and now expect sales to increase 2% to 4% compared to the full year 2018.
At the same time, we feel good about north American stores volume in the second half the progress of our pricing initiatives the trajectory of raw material inflation in our ability to control spending.
Given these dynamics, we are reaffirming our adjusted 2019 full year diluted net income per common share guidance to be in the range of $20.40 to $21.40 per share, which excludes valspar acquisition related costs and non operating items.
This is an increase of approximately 13% at the midpoint compared to the 18 53 reported last year on a comparable basis.
We've included a regulation G reconciliation table with this mornings press release to reconcile adjusted and GAAP earnings per share.
A few additional data points for the full year may be helpful for modeling purposes.
These data points have not changed from the guidance we updated in April .
We expect raw material inflation for full year 2019 will be in the low single digits compared to 2018.
The rate of our year over year inflation, assuming stable petrochemical feedstocks and no supply disruptions should diminish from the level. We saw in the second quarter as we progress through the year.
We expect incremental synergies of approximately $70 million to $80 million in 2019 with a total annual run rate of approximately $415 million a year end.
We expect our 2019 effective tax rate to be approximately 20%.
We expect full year capital expenditures to be approximately $320 million.
Depreciation to be about $257 million.
And amortization to be about $315 million.
With that.
I'd like to thank you for joining us this morning, and we'll be happy to take your questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation that indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Jeff Zekauskas with Jpmorgan. Please proceed with your question.
Hi, Thanks very much.
Your cost of goods sold was down about <unk> percent in the quarter.
And.
A match fund your volumes were up can you analyze decrease how much of that was lower raw materials and how much of that was cost reduction efforts.
Hi, Jeff This is Alice decision and.
You're absolutely correct, we did see.
On a sequential decrease in our raw materials from quarter to quarter as we discussed on our first quarter call. We thought the first quarter will be our highest raw material costs year over year declining into the second quarter and then.
Sequentially from there so.
A good part of it was raw material costs, but you're absolutely right. We continue to focus the teams on implementing the synergies that we have talked about we had approximately 75 million in synergies in our and our.
Guidance.
We talked about two thirds of that being realized in the first half and the remaining one third in the second half and you are seeing the benefit of that as well.
And our raw materials, continuing to move sequentially lower for you in general.
Correct and that's what we talked about Jeff in our.
Guidance at the beginning of the year and that Hasnt dramatically changed now what we talked about was low single digits for the full year.
Probably the highest in the first quarter.
The basket tick down in the second quarter, and we think it's reasonable based on what we're seeing now to expect the back half to be slightly deflationary.
Okay, great. Thank you so much.
Thank you. The next question is from Ghansham Panjabi with Baird. Please proceed with your question.
Hey, guys good morning.
I guess first question John on your comments on customer backlogs can you sort of expand on those comments.
Is that a reflection of just stronger fundamentals given the drop in interest rates or just weather disrupting twoq and pushing it out into Threeq you what are your customers sharing with you.
Well I think there is an overall confidence that we started the year with Ghansham and I think its continued as we progressed through the year to your point.
Clearly weather did impact our.
Our customers not not just our customers I'd say all trade certainly painters, but.
Construction in general, but I think as we look forward in the back half of the year, it's going to be a dead sprint for our customers Theres a backlog that that they they're carrying over and we believe.
Quite frankly, it's an opportunity for us to shine for our customers because of the the backlog that exist and the demand that they'll have on them.
We think that position that our teams are end to serve those customers.
Will ultimately end up with.
Customers that have a higher level of loyalty to our people and our stores as a result of the service we provide.
Okay. Thanks for that and then for my second question, you've had valspar in your portfolio for a few quarters now.
And the industrial facing businesses are already facing a tougher macroeconomic backdrop, especially overseas.
How are these businesses performing relative to your initial expectations from a cyclicality standpoint, how would you characterize that.
Well, we're very pleased as you would expect in these businesses are are doing very well. If you look at packaging. For example, we had growth in all regions and we continue to focus on great relationships with great innovation to help grow those that business. Our coil was strong across all regions, except for North America, which was down slightly and.
I'd say that was.
Largely the impact of some of the tariffs.
When we look at the opportunities from a market share standpoint, and the growth opportunities. We're really very very excited our challenge right now is prioritization as we move forward it's.
Terrific opportunities terrific customers and we've just got to make sure we're focusing on the right opportunities and executing well.
Good thanks again.
Yes, thanks, guys.
Thank you. Our next question is from the line of Robert Koort with Goldman Sachs. Please proceed with your question.
Thanks very much.
Could you give a little more granularity on the the big margin lift in consumer brands are the buckets, where that came from where those costs price.
Raws et cetera.
Sure Bob.
Yes, theres a number of levers.
Starting with the strong volume performance, we saw in North America, and as you know we always.
Start with volume is that the one that gives us the most leverage from an operating margin standpoint.
We we did get a little bit of a.
Benefit from the raw material.
Decrease.
Sequentially.
The synergies that I talked about.
With Jeff also impacted our consumer brands grew in the quarter, So you're seeing a nice volume lift and in North America and those are the two factors is what's helped driving that margin expansion.
Great. Thanks, Phil.
Thanks, Bob.
Thank you. Our next question is from Christopher Parkinson with Credit Suisse. Please proceed with your question.
Great. Thanks. Thanks.
In terms of the low agreement do you just have any general views on how much of the legacy business at home depot, So Thompson's been lax pretty et cetera, you've recaptured thus far and how much. They are more is to go and just do you have any additional programs in the pipeline to further help low close the gap with some detail maybe at pros et cetera et cetera. Thank you.
Yeah, Chris we have a number of programs initiatives and focus on execution on those that are out already so yes, I think that we have a number of initiatives and programs or.
For our customer and we're really focused on the execution as you would expect and we're not going to disclose what those are here on this call but.
We clearly have a terrific relationship and a lot of in a lot of areas that we're focused on to grow.
Okay and just in Pcs can you comment broadly just how youre feeling of longer term competitive positioning in each of those markets pricing power ability and just how those views funnel into your longer term outlook offer PC margins. Thank you.
Yes, so we've spoken about our goal to drive this business up to a 20% operating margin and we feel as though the businesses the customers the technology, all give us even more confidence than when we initiated this acquisition.
The key area here is our focus on on the solutions that will help our customers to be more successful when we look at this business, we're not driving and chasing every shiny object were really focused on those areas that are meaningful for our customers that allow them to reach and exceed their goals and in turn allow us to provide a reward for our shareholders. So we're very focused on the right customers. The right programs the right technologies, having the right people the right place doing the right things that drive these results and we have great confidence in our ability to do that and Chris I would just add to that on the pricing side.
You can see after two significant inc. raw material inflation on inflationary years, the past few years plus the inflation, we saw year over year in our first quarter, our operating margin adjusted operating margin improved 150 basis points in the quarter that tells you we have to be getting price and it's working.
But again on top of that raw material inflation.
Thank you.
Thank you Chris.
Thank you. Our next question is from Steve Byrne with Bank of America Merrill Lynch. Please proceed with your question.
Yes. Thank you.
How have your new stores that you're building now compare to your legacy stores with respect to size.
Does it affect the cost to build these build out these stores in the operating costs of these stores.
And has your view of optimal store density changed.
Yes, Dave I think they they are changing and I think I would describe it as this way historically one when I was in our stores organization. We typically look for 5000 square feet that that was a model. We tried to put those everywhere now I'd say that our our teams and we have terrific leadership team teams here 30 years plus experience with Pete if alito build a Santa some of these these people really have been with our teams.
For quite a barrier to a bit of time and they are really driving us to be more responsive and more selective in what it is that we're doing to drive the results in the markets that we need in some cases, we might be going with a little smaller stores. Some cases, we might go a little larger store. We're focused on these different end markets and so we are tailoring the footprint and the store as well as the staffing to be responsive to those segments that were pursuing so I'd say they are adjusting you're exactly right, but it's not adjusting one way or the other it's adjusting more to reflect the market opportunities.
And the optimal store density any any update on that.
Now I'd say, we're still continuing to learn we continue to add stores and I would say that.
We have not reached the saturation point here, where we're saying.
We're not going to add any more stores, we can point to markets like.
Cleveland or Atlanta, where in our saturation is.
Is stronger than some other markets and we still need stores in these markets and we're excited to continue to add them and.
And our and I would also say to us that our field organization is doing better job of getting these stores up and profitable faster as well. We're we're students of continuous improvement and so these new stores. Our focus we don't just plug them in and wait for them to get better every day, we have teams working on how do we get these new stores up and profitable faster.
Just a quick one on the consumer segment any any changes in the spray paint business.
At Lowe's.
I.
There is not a meaningful change there was I believe some area outside of the paint department that there was some adjustments but.
Now, we're really focused with this customer on making that paint department. The most successful it can be and that's what really focused on.
Okay. Thank you.
Thank you Steve.
Thank you. Our next question is from Duffy Fischer with Barclays. Please proceed with your question.
Yes, good morning.
In the PC segment in particular can you talk about what you're seeing from your customers as far as their inventory are they de stocking. Your products is that part of the volume issue there or do you think thats just closer to their real demand and consumption.
I'd say there their consumption consumption as a bit choppier Duffy I would say.
The the demand, it's not a smooth line up down or or or sideways or theres choppiness and so we're starting to see I wouldn't say starting see weve have seen.
Perhaps more orders of smaller volume as they are trying to adjust.
Their inventories.
From our perspective, the ability to serve those customers with our facilities close to these customers with a quick response and platforms that were building to be more responsive. We think it's a way of differentiating with our customers.
Duffy I would just add to that John talked about the macroeconomic headwinds we're seeing in in China that have continued.
Through the first quarter and in Europe .
You know, we don't expect those to get materially better that being said we have had businesses that is that we called out packaging and oil that are still performing well.
Latin America has performed well in the quarter for for industrial and.
No we still feel most optimistic about North America.
Okay, and then the change that Ace hardware made is that big enough to that will be.
Seen in your results and if so kind of what's the timing of that.
I'll, let al in a second talked about the impact on financials, but I will say they've announced to.
Decision to augment their assortment with Benjamin Moore, and though continue to offer.
Our many of our well known brands the men wax thompsons.
Cabot's.
Purity.
And this this was a deal that.
We assumed with the with the Valspar acquisition.
And the program itself had many assumptions assumptions and if that really just didn't play out and as you'd expect.
So we began reviewing these programs.
We found ourselves where immuno immuno.
Mutually beneficial path for.
It was difficult to construct and under the terms of that agreement we felt as though.
We're our view is we've got to be focused on those areas that we can drive.
Meaningful results for those customers, but also the.
Same token the results for our shareholders.
And the timing is such Duffy that we don't believe there's going to be.
Any material impact on our 2019 results.
From an operating margin standpoint, it's well below the segment average.
But would you include those.
Both the topline and bottom line impacts on our 2020 guidance.
Great. Thank you guys.
Yes.
Thank you. Our next question is from Vincent Andrews with Morgan Stanley . Please proceed with your question.
Thanks, Steve just wanted to dig in a little bit more on the paint stores comp in the quarter, which was which was quite impressive given the weather and some of the third party data that.
That's that's out there so I guess a couple of questions.
To this.
Hey, I know there were some initiatives starting a couple of years ago to really go out and try to build the customer base or maybe you could discuss sun on if you have sort of reached a tipping point on that and or.
Strategically you figured out a better way to service serve clients into end to pickup incremental share when when the conditions are challenging does your does your service offering.
Play it play a real role in that.
Yeah, well, let me begin by pointing out that the Q2 was the toughest comparison to last year. So it was up on a same store sales were up 6.8%. So comps were tough in and you're right.
Our teams finished up five three and this focus that we have been talking about on new accounts on share of wallet.
Even the new products that we're introducing those efforts are clearly come into fruition.
It was wet no question about it and it impacted as I mentioned earlier, both the painters and all trades.
By some measures out there that this was the wettest on a 125 years.
But this as you mentioned is the resilient team, we as I mentioned earlier, we've got great leadership and.
This is a point, where we love our model in the position that we have in the market and our teams executing very well.
Are we doing anything specifically different I'd say, we continue to train our people we continue to hire the best people. We can we've talked openly about hiring around 1400 college graduates a year to ensure that we've got a steady pipeline of people and we continue to focus on the training that will allow them to differentiate.
When you look at some of the areas inside the store with staffing and the quality of people even the inventory you might notice that we've had a slight uptick in our inventory that's on nearly all in the architectural business, we want to make sure we have the inventory when they need it close to the customers and we're really focused on those areas that will help our customers be on the job and most productive the products that we're introducing are helping them. The services that we're introducing but theres not one silver bullet that we'd say this is what we did this quarter I'd say, it's a combination of many many years and have good leadership by that team and a lot of execution in the field and want to thank our teams in the field because they're doing a terrific job representing our company.
And just maybe as a follow up Thomas can you give us sort of your sense of where the M&A outlook as both first of all transactions and then.
Something potentially larger than that particularly given.
One of the announcements that was out there by large competitor.
Yes so.
There are no.
Number of.
Of comments out there regarding what's out in the market, we don't make a practice to talk about any of any particular project.
I will say because I've been consistent in this though that we've been very clear in our.
Physician on automotive OEM and that it's not an area of interest for us.
As far as M&A I'd say, we're very very active we're pleased with the progress that we have on a number of projects.
And we think it's an important part of what it is that's going to help us grow but we don't feel that we're we're sitting here with the absolute need for acquisitions to grow we think it's an opportunity, but we've got a lot of growth opportunities.
And sales synergies as as Valspar unsure when come together and Vincent I, just like to add to that that M&A is an important part of our capital allocation policy like as we've discussed in June .
As John mentioned in his opening remarks, we returned $660 million to our shareholders on form of dividends and share buybacks over the 33% increase year over year.
We're going to do with Capex continue to invest.
And growth opportunities in new stores, and and capacity expansions in a number of our north American businesses, and then as as we talked about the dividends up 31%, but absent M&A, we're going to continue to buy back our stock.
Okay very clear thanks, very much guys.
Thank you.
Thank you. Our next question is from PJ Juvekar with Citi. Please proceed with your question.
Yes, hi, good morning.
John I think you talked about your consumers brands margins jumping up 580 basis points.
And so factors behind that.
I was wondering if you can talk about how different brands like Valspar GTV band are doing at Lowe's.
And what is that any surprises positive or negative in your first full season.
Well, we're not going to talk specifically on any brands, but I will just say that.
The process that we're going to going through.
With Lowe's.
We continue to learn.
I think we're trying to be responsive.
And we believe that.
We're we're very driven we I mentioned earlier, a continuous improvement mentality here, we think.
That as we as we go through this its important that.
Our efforts are always on finding where we are and how we get better and we think we share that culture, not only with Lowe's Loza terrifically important customer, but if you look at other customers like Menards and our other I mean, that's our mentality is to gain alignment and seek improvement and so I don't want to get into any specific profitability of brands products use any of that but I would tell you that when we set these goals to to March up into that into the 20% operating margins for the for this business. We know that there's improvement needed and it's not just going to be by setting the can on the shelf. We want we want to help our customers succeed and thats in all facets of the business.
Okay.
And then back in June you pushed out your 2020 goals due mostly higher raw materials.
But since then the raw materials, particularly ethylene propylene James have really come down.
You know your margins seem to be improving here, despite a difficult weather quarter.
Total weather last quarter.
So do you have any updated comments on your 2020 goals as we sit here today.
Yes PJ.
We're very pleased with the progress were making.
On the gross margin of 44.9% in the quarter.
Saw nice improvement there.
But.
Year to date, our gross margins are 44% and.
The pricing activity that Weve had needs to continue as you know our long term rates are 45% to 48%. So we have work to do to get to that and.
I expect as we progress obviously to and I talked about this on the previous call to get to.
Almost 13% increase in our at our midpoint free cash we're going to need margin expansion and were up 9.5% year to date.
That tells you we have to be up a little bit over 16% in the second half.
To get to that midpoint and that tells you. We do expect margins to continue to expand in the second half.
Thank you.
Thank you thanks Peter.
Thank you. Our next question comes from the line of Greg Melich with Evercore ISI. Please proceed with your question.
Hi, Thanks, two questions both.
On the sort of the outlook as much as what we just saw if we look at the Americas business to get that mid single digit growth in the third quarter.
Is that going to be more volume more price, especially if you consider it.
Looks like the second quarter was probably.
2% volume a 2% price if I look at the comp is that is that correct.
Yes, Greg I think the price would be a little bit better than that maybe closer to two and a half and I would expect a similar type of cadence.
In our third quarter, which would tell you that.
We have to be up low to mid single digits in volume, but I do expect volume to improve sequentially.
So an acceleration in comp in the third quarter is more likely to be volume and price.
Correct.
Then second on consumer brands.
Just a little more color on the inflection of it being up.
Going to down high single digits. Thank you mentioned it was the cycling just the load slowdown and then guardsmen is there anything else there and then.
How should we think about when those those items cycle for the fourth quarter and beyond.
I think.
Like we talked about in the second quarter, we felt very good about the North American volume.
We did see some.
Softness continued softness in the retail channel I would expect that to continue and.
Then we have outside of that we have a couple of our smaller businesses outside the us specifically Asia and.
Australia that were soft in the first half I don't expect them to get materially better in the second half.
So that decline that you see in the third quarter could also persist.
Not not to the degree our our fourth.
Our largest load in was in the third quarter for Lowe's.
The headwind of Guardsmen goes away after the third quarter. So I think I'd say, it's materially as largely the load in guardsman that's right Annualization.
Got it that's great and then just if I can sneak in one more on the three times leverage.
And getting to that point yet.
How important is that points.
So were you.
Where do you want that to stabilize or do you think about.
From buying back stock after you get to the dividend increase and invest in Capex.
Yeah, Greg committed.
Yes, I think long term, we talked about two to two and a half will be under threex by the end of this year, we committed to paying down $600 million debt.
We paid off the 300 million seven in a quarter.
And in June and the rest will come on a on a short term, but yes, I think we'll be below three to one at the end of this year and the target is still two to two and a half.
That's great. Thanks, guys. Good luck.
Thanks, Greg Thank you Greg.
Thank you. The next question is from John Roberts with RBS. Please proceed with your question.
Thank you.
What's going on in coil, that's allowing that business to be an outlier and industrial coatings.
Well, we've got a lot of good products and a lot of really good people serving really good customers. John I don't think there's a blanket statement that we'd make.
Across the board, except that we've got some really good things that are happening and we are determined to continue to drive them.
Okay, and then in industrial would do you need to restructure that business or do you just wait to see how the trade issues play out.
No. It's a good question, we're taking we're forced to take some cost out of that business Weve.
We've seen a material change in the market at least for the time being and we're adjusting accordingly as you'd expect.
Thank you.
Yes.
Thank you. Our next question is from Scott Mushkin with Wolfe Research. Please proceed with your question.
Hey, guys. Thanks for taking my question. So I guess I wanted to talk a little bit more on the on the volume outlook I think last call asked what would generate upside surprise and you guys said increased volumes over expectations.
So it seems like volumes did come in better.
In the second quarter, maybe the volume outlook, specifically talking to the Americas.
And I'm just wondering what's changed in the thought on volumes.
Is it the market is its things you guys are doing specifically and then I had a follow up.
Yes, Scott.
The.
Coming into the quarter, we talked about our paint stores group being at or above the high end of our range and that happened there are five three.
And and that that was a positive even with in spite of the the wet weather we saw.
Our consumer group.
Came in pretty much as we expected, but at the tail it too.
Kind of a tale of two cities. If you will we had.
Strong growth in in our North America business.
Even including the soft retail sales that I talked about but we also saw continued softness in Asia Pacific and Australia.
And I expect those to continue and they're probably softer than what we had it had planned and then finally in performance coatings group is where we really saw softness in Asia Pacific and Europe .
With a macro economic headwinds, although we expected them to continue in the second quarter, we did not expect them to be as heavy as they work so.
Not again, we expect to continue on our second half. So I would say we had a we have to be realistic about about the forecast.
Our teams have opportunities in the wake up every day.
Driving market share growth and with new products, and leveraging technology and services to provide solutions to our customers, but it's very difficult to come.
Over the top when when we're seeing the headwinds we're seeing from an act of macroeconomic environment.
So.
That's really what we're seeing it's continuing to retail sales softness in more than we expected and consumer along with Asia Pacific and Andy and then in performance coatings, its primarily Asia Pacific and Europe .
Perfect My follow up is just.
Again, it goes to the paint store group or the Americas.
I know you guys have been pretty active and remodeling stores and just wanted to get any color you have there how much of that the comp is being attributed to that activity. So any update there would be would be great.
Yes, I'd say, we've always maintained a commitment to the store we call store readiness the appearance and that includes not only just the physical appearance.
Painting and displays, but even our employees and I'd say, it's a contributing factor, but Scott as we look at the model there.
It's really important to understand the theres not one lever we want to continue adding.
In those areas the services.
Quality of products and the differentiation that helps our customers to be the most successful and if we continue to do that and and help our customers to win and then.
Funny thing happens, we become successful as well and so that's that's what we're really focused on.
I know there's been a couple of questions now pointing to is there one thing here and this is just a continuation of a long term strategy.
Executed by really wonderful leadership and outstanding people in the field.
Appreciate it guys congratulation on a good quarter.
Thank you. Thank you Scott.
Thank you. Our next question is from a room Viswanathan with RBC capital markets. Please proceed with your question.
Great. Thanks, Good morning, guys.
Just a question on the the outlook.
You provided it sounds like there is an element.
Of conservatism in your in your TCG outlook and its related to kind of macro challenges in Europe , and China still remaining weak I guess.
Is that is that correct and.
Yes, there is some resolution on the trade side do you see that kind of helping you to get to the upper end of guidance or how should we think about the range you provided.
With regards to PCG. Thanks.
Yeah, Ryan I wouldn't use the term conservatism I'd I'd say realistic is more apt to be.
How we how we have approached the forecast.
If the if the trade wars ended today.
I don't it it will not help us through the rest of this year many of those customers.
And we we try to characterize this in the past have have already decided to move and and.
That process has started its tough for them to stop and then start so.
But we're well positioned to accept.
That business and wherever they go whether it's in southeast Asia as they come to Mexico wherever those.
Businesses land.
What will drive the needle on Oct guidance towards the high end is North America stores volume and that's always the case it's the.
Engine of our growth engine of our company.
We expect to continue to grow our market share and grow at one and a half to two times the market and I believe were doing that in the second quarter and I believe we'll do that through the back half it just.
That will be and what drives us to the high end of the range.
And just on that point.
It sounds like resi repaint is still holding up pretty pretty nicely high single digits commercial likely pretty strong. So it seems like most of your end markets are doing quite well.
But you do face tough comps there so.
What gives you the confidence that some of these markets will continue to grow so heavily.
Especially resi repaint, where we've seen.
Double digit quarters for for many years here.
So I think it's five years compounded growth rate of double digits you're right.
Rune and I would say this as far as your your comp question the back half of the year actually gets a little bit easier. It was the first half this was a little tougher and in fact, the second quarter itself was the toughest comparison, so from that standpoint.
We feel the comparison comparisons get a little bit easier.
We don't like to.
Flag.
Fly the victory flag as a result of easy comparisons, though I mean, it's a reality, but what we're really trying to do is continue to invest in those areas that allow us to continue to grow our account base and our share of wallet with those customers and so.
All of these initiatives if as the new products as the skill training that we put with our employees. The addition of the specification reps I mean, you can go through the long list of things that we're doing all of those we think are driving in the right right right direction and we're going to continue to feed. This this is as we have said a number of times already. This morning is the engine of the company and we're going to continue to put fuel and thus this machine and pushing as fast and as hard as we can go.
Thanks.
Thank you.
Thank you. Our next question comes from Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Hi, good morning.
Mortgage rates as you know have fallen more than a full percentage point since last November .
My question is if you look back at history can you speak to how lower mortgage rates flow through to demands for architectural paint and if there's a positive linkage there.
What's what sort of lag effects.
You know should we be thinking about in terms of impact on.
Remodeling or existing homes any thoughts along those lines would be appreciated.
Sure I think the drop in rates over the last few months in general is supportive.
Of of new build if you look at builder sentiment. Most recent data that I've seen is June and builder sentiment is pretty positive in June , but I think Kevin what's fundamentally the driver and we've talked about this for several quarters now is the rate of household formation.
Which continues to be very strong, but new home construction has not been keeping up with that it's been unsustainably low. So we think there is still.
Some pent up demand out there that eventually that it's certainly there's demand out there for new homes, especially at the entry level and that's what we're starting to see some of the builders are adjusting to that we had positive growth in the new red space than our first quarter.
From a re modeling perspective, one of the things that people often point to his existing home sales and thats been very choppy over the last year or so new data was out this morning that wasn't particularly particularly great but at the same time. There is a lot of other drivers beyond existing home sales that I think are are helpful for remodeling in the repaint business for US, though you have things like.
Baby Boomers aging in place and they are doing a lot of remodeling to make homes the way they want them to be.
You have strong employment numbers, you have home value appreciation continuing to move in the right direction may be a little bit slower than the past, but still continuing to appreciate and the other thing I'd point out. The fact that we presented at our analyst day as well as you know since the last peak there has been about close to 20% growth in square footage that's out there to be repainted and so we think.
There's there's plenty of demand out there and the repaint, we're very well positioned to to continue growing that part of our business.
Thanks for that Jim as a brief follow up with that as a backdrop.
Would you be confident that industry architectural gallonage.
Can rise Directionally in 2020.
Don't want to comment specifically on an outlook for 2020, but we've seen gallon growth over the last several years and I think based on some of those factors that I've just said the new.
The pent up demand and the increased square footage that's out there, yes, I think we can see gallon growth continue to improve.
Thanks very much.
Thank you. Our next question is from Mike Sison with Keybanc. Please proceed with your question.
Hey, guys nice quarter still winning them I bought me you're also I'll say, that's not part of cost savings.
On a serious now.
So think about.
When you think about the Americas grew.
The outlook for the second half of the year you now that the first half you had weather issues that if weather is favorable and the backlog for your customers are really good.
Where could go see it could be a couple of percent better yes.
Whether it plays its part.
Yes, it's really hard to speculate Mike you're right I mean, I think if.
If the weather's better we have a a more mild entry into winter and our customers are able to paint a little bit longer or whether we are able to capitalize on the weather and catch up on some of these projects. It would definitely add to what it is that.
That we've projected but as al mentioned, we're trying to be realistic. We've we're in the midst of some pretty unique weather patterns and we don't know what's going to happen a mall that anyone does and we're our forecast we think reflect the best that we have as far as Arlo Crystal ball as it relates to the customer, though and the demand. That's the piece that we're blessed with we've got over 4000 stores over 3000 territories out there we're getting the feedback from our store managers were get the feedback from our reps about how our customers are feeling that's the most important part to us if it gets delayed it gets delayed and we don't think those projects are going to go away.
But what we are confident as to how our customers are feeling about their pipeline of projects.
Got it and then just a quick follow up how are you thinking about pricing for the store setting in the 2020, you know every year.
It's hard to tell what inflation is going to do but.
That's definitely think about you know usually October as you start to think about some sort of pricing action potentially.
Can you maybe give us an update on your kind of thoughts there.
I would tell you more about how we think about it than our current thoughts and we get together on a monthly basis, we look at our total cost basket not just raw materials, such as total costs and we make a very informed decision as a team on a monthly basis.
And as you know given your coverage of our company. The first people to know that clearly our employees. The second our customers and then we we go public with our investment community. So we have nothing to announce right now we will stay close to it and we'll make adjustments as needed.
Great. Thank you.
Thanks, Mike.
Thank you. Our next question is coming from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you John just following up the prior question if you do see deflation in raw materials.
What areas are you most at risk for giving back some pricing I assume it's not the stores, but perhaps performance is that fair.
Well you know what weve typically have seen over.
A long history is.
That you know on some of these large projects as it relates to the stores you know more stadium or you know very large kind of marquee projects on the store side those might get a little pressure overall.
And on a piece on the underperformance coating side.
You know that's a I was very.
Deliberate in my conversation over my response earlier about looking at total costs.
You know, we're we're continuing to add in those areas that we believe can help.
Our customers reach their goals and some of it clearly isn't the raw material cost in other areas it could be in.
Facilities or or different investments that we might make to help a customer be more successful and more profitable themselves. So you know as we look at it I'd say that it's a discussion that we always have to have but but the discussion isn't a discussion that takes place on one day.
If we're doing our job all year.
We're doing our job in delivering the solutions and services that allow our customers to be successful that conversation is a is a better discussion and and one that our customers understand the need for us to stay healthy as well.
And John just on 'em T O. Two do you expect to pay higher price for tier to the back half the year not in the first half the year.
Yeah. This is Jim industry pricing for tea aisle to has been fairly stable over the past three quarters, and we don't see anything.
Really changing a whole lot in the global demand environment favorable or unfavorable so you know our view at the beginning of the year was T O two fairly stable for the year and I think that's still.
Still our view at this point.
Thank you very much.
Thank you.
Thank you. Our next question is from the line of Garik Shmois with Longbow Research. Please proceed with your question.
Thank you Tom I was wondering if you can comment on this new residential construction does increase in the second half of the year just given some of the leading indicators that you cited see usual lag between when starts increase when you start seeing that demand comes for us.
I would typically see in a few months.
Okay hasn't changed over over the last several years has gotten extended due to.
Whether it's labor constraints or any other factors.
Yeah. It it may it may push it back depending on the market I would say it may get pushed back or be a little more volatile in some markets, where the labor shortage might be a little tougher to your point, but.
I don't know that it's a material amount.
Okay, well build the builders are clearly working on how to deliver efficiency into their process. So there's there's some opportunity there for us from a speed standpoint that there is some volatility to your point about labor as well.
Okay. Thanks for that I, just want to follow up on consumer.
You talked about some of the us comp headwinds you're facing in this third quarter, but should we expect volume growth to turn positive in the fourth quarter as you anniversary the.
We'll lose a loaded in the garden exits.
I would I would say garik.
We got to see how.
The inventory levels.
What happens to the inventories levels as we come out of season, obviously, we are working closely with.
With Lowe's, but last year being the first year, and where we're putting a ton of inventory and to make sure. We're servicing these.
These end customers.
It's an anomaly. So this year is the first year, we're going to see a more normal normalized run rate and process and we're still going through that right now with them, but importantly, I think at the core of the question is we do expect to help our customer grow their business.
Okay great.
Thank you.
Thank you. Our next question is from Mike Harrison with Seaport Global Securities. Please proceed with your question.
Hi, good afternoon.
Hi, Mike and Mike I was wondering if you could maybe break out. The this same store sales growth number between exterior and interior is it fair to assume that the the exterior growth was was much weaker.
No actually a broader broader markets. The exterior believe it or not was up slightly a ahead of interior.
And when we went back and started the dial in on that what we saw were on those days when the weather had been.
You know HM supported by Baxter your pain.
We saw some really incredible increases and.
And so we saw chunks of business going out on the exterior side, which gives us great confidence in the future.
If a if we get a little more stable weather pattern of what we're capable of but we had a very good good performance as you.
In both interior and exterior.
And then I wanted to ask also you made several references in the press release and then your comments.
Cost controls or cost management I know you mentioned, specifically that you were taking some actions in industrial wood coatings, but are there some other areas, where you're taking additional actions or should we think of these as being part of the the Valspar synergies I'm just how do we how do we think about that cost management, that's going on yeah, Mike I I think part of it is on the Valspar synergies part of it is just our normal part of our culture of continuous improvement.
And you know as we talked about going into 2020, we are not going to be calling out synergies because we want to roll that into just part of our culture and you can expect as John talked about we're going to take action, where where we need to uncertain, whether its markets or geographies or <unk> or parts of our business, where we see.
Softness and continues to soften us over a period of time on the other hand, youre going to see us continue to invest in growth opportunities whether that be in our stores group consumer group programs or performance coatings to drive future sales.
Thank you very much.
Thanks, Mike.
Thank you. Our next question is from Dmitry Silversteyn with Buckingham Research Group. Please proceed with your question.
Hi, Good afternoon, guys. Thanks for squeezing me in just wanted to follow up on a couple of things number. One is as you look at your margin recovery in a in performance coatings. You know you talked about continuing to sort of process Oh for pricing I'm, just trying to understand if by that you mean getting greater traction on the pricing you've implemented at the end of 2018 in the first quarter 40, 19, or do you plan on going out with new pricing as the year unfolds that because you feel that you still have a couple of quarters of catch up to do a and then secondly, if it's the latter how does that jive with the with the slowing industrial markets, but you're seeing beyond would just in general sort of macro slowing in industrial not necessarily maybe in your business.
Yes, I mean, I would respond that we have a little bit of everything that you've talked about we've got some areas where weve already had those discussions and we are we are working with our customers rolling pricing and we have some areas where.
If you look reflective in that.
Past here on what's happened to raw material costs, we've yet to recover some of what has rolled in and raw material costs, while there might be some relief on the basket is still higher in some products and some areas and when it was.
You know 2016.
And so were having those discussions on a on a customer by customer basis and.
You know our goal I know it sounds a bit repetitive here, but you know in helping our customers to be most successful.
And helping them by bringing them the solutions that help them when we need to stay healthy as well and we're having those discussions on a regular basis.
Okay that that that's very helpful. And then just as a quick follow up staying with the industrials theme you talked about the coil coatings being you know a stand out for you in terms of growth and what coatings, obviously for a for last couple of quarters has been a problem child and that's totally understandable up can you talk about perhaps maybe not regionally, but so much as a sort of a product type. If you will what your other businesses of industrial in performance coatings kept on in the second quarter and what your outlook for the second half of the year as in terms of capital projects or or protective and marine.
I know you were the pipeline business and a few other businesses. So if you can kind of look at the end. So maybe end market, our product categories and give us a little bit more granularity on what's your view was on the market.
Sure Dimitry, maybe if I could.
Break it down a little bit by region initially and just tell you.
In North America.
Overall, I'd say it was flattish our general industrial business was positive and we expect that to continue here.
Europe I would say.
Was soft for the most part.
Excluding as I mentioned.
Packaging and coil and I want to give our packaging team there do I've spoken about coil, but really as packaging as leading the pack. So I don't want to get a phone call as soon as this call's over from my President Sam.
In our packaging business to correct me or they're doing a terrific job. So I want to give them their do Asia Pacific was soft overall again packaging coil where are the exceptions here both of those were up double digits and.
In Asia, we expect that to continue and in both packaging and coil and Latin America was a positive in every category as well.
And so our focus.
Giving you the best forecast, we don't generally like to forecast by segment, but I would say that we don't see a lot of change to what's happening right now we expect to continue to grow in those markets.
And continue to work closely with our teams to make sure. They have the resources that they need to win and you know as I mentioned earlier.
Every day, we feel as though we have to earn the business that we have.
And when we're blessed enough to to work with some of these new customers are focused on making them successful.
Okay, Thats fair and thankful. Thank you.
Give me three.
Thank you. The next question is from Truman Patterson with Wells Fargo. Please proceed with your question.
Hi, Good morning, guys and a nice quarter. Yeah first just wanted to look at your EPS guidance you all lowered your sales guidance from about 5.5% at the mid point to 3%. So a a decent deceleration if you will.
But you left Dps guidance unchanged could you just walk us through some of the positive offsets relative to your prior expectations, our raw materials easing more.
Getting better pricing power synergies cost controls or anything like that relative to your prior expectations that help keep EPS unchanged.
Yeah, Truman I think you know.
Part of it is as volume and in North America, and the continued strength, we see in our North America stores.
If you think about the tag organization in the second quarter.
Then flow through of over 32% and you asked the question in on the first quarter, we were down 80 basis points.
What is the outlook for that tag organization, and we said we are confident in our ability to grow our operating margin year over year, we were up 50 basis points in a in a considerably considerably bigger corridor that bring us about flat and we're optimistic about the continued progress we are going to make in that in that group. Its the largest segment we have it's the.
Fastest growing.
The other the other other segments.
We talked about the softness outside the U.S., but continued progress and.
You know holding the price.
With Ross flattening as it as we need to keep that price to get back up to.
Hole on our margins over the past two years, and then synergies that continue to flow through both first half and second half. So it's really a combination of a number of things in mix being one of them a bigger faster stores in North America stores grows its our highest margin business, that's going to help drive the margin and drive our NPS.
Okay. Thanks for that and then jumping back to a few previous questions on on performance coatings, you know revenues fell 4% in the quarter it looks like.
Demand it will be a bit of a headwind in the back half the year as well.
Could you just run us through how pricing has acted historically in this type of environment and really what I'm trying to look at is.
In the back half of 2019 do you think you can improve your operating margin sequentially versus the second quarter because the past couple of years you guys have mentioned you know an ability to do that.
Yeah, Truman one one point that before jumping into that as you are exactly right on the numbers, but I'd also point out that the comp for the quarter was 11% for the PC right.
So some tough comparisons there, but I think if you look at the pricing historically, what has happened and this is over the decades and not just sure when but also valspar is that we've we've historically gone out with pricing and we've worked with our customers to get the pricing.
Into a into the market.
Our goal has always been to get the get the pricing and retain the customer and I'd say that.
In this.
Time of integration, we've been very open with our customers about our willingness to work with them in stepping this pricing in but the fact that we needed to get the pricing and during that same time, we've been working very very hard to provide those solutions if its products services whatever it might be to make them more successful and you know.
Our success in rolling as soon as evidenced by the most recent quarter in our results.
We think continues to point in the right direction going forward and.
We're never going to reach the point here, where we just sale were not going to we can we can do better or worse.
Don't accept expect this improvement we clearly see opportunity for improvement. This this was a better performing business, we need to get back to those levels and our teams understand that we're working hard to get it.
All right. Thank you guys.
Thank you drew.
Thank you. The next question is from Justin steer with Zelman and Associates. Please proceed with your question.
Hi, Thanks for the time guys.
Just a few questions are two questions. One if you could characterize the monthly cadence and trends in the quarter and maybe even into July thus far in your core Americas business.
Yeah, I'd say just in July is in line with the guidance quarterly guidance we provided.
For that for that business.
In the quarter its hard to hard to look when you had the changes in that we talked about.
You know even gotten a number of notes about may be in the what if may in the history of mankind.
You know so as you would expect there are ups and downs within a quarter.
Depending on weather patterns, but so its hard to hard to point to one month and say, okay that was good in this one softer because of that so we feel good about the.
4.3 same store sales growth on top of a six eight sales same store sales growth last year.
Okay, and then I think you know the one thing that kind of stood out to me in the quarter positively as well it was the cash flow side of things.
And in a very strong into the first half this year was particularly in the second quarter. We don't have I don't think we have your cash flow it yet.
On your from your filing, but just trying to get a sense for what drove that.
Above and beyond working capital was there any one time item. It explains the strength there and how should we think about the full year free cash flow as a percentage of revenues. This year, given how strong the first half's been thus far.
Yeah, Hey, you know we did have a very nice very soon.
A strong first half 758 million up.
170, my 9 million year over year.
You know core net income and earnings always is a big driver our working capital.
With the lower use of cash.
So even though we're carrying more architectural inventory.
Like we talked about into the into year and into the first quarter you start seeing that.
Improve as the year goes on and we get through the summer selling season. So I would expect some benefit there not any any real one timers I would say.
You look at a free cash flow.
Again, we're targeting.
You know in a modified I'd say free cash flow over.
11%, we're going to make progress towards that I don't.
I'm not committing that we'll get to it exactly this year, but we're certainly going to make progress through that this year.
Okay, and then you had a lot of people picking up this question a lot of different ways and I know you're.
You know in terms of reading the tea leaves for performance coatings. You you put you recast your view in terms of the timing of achievement of the margin goal their immediate term destination for performance coatings.
Is there anything incrementally in a softening macro environment and the dissuade you from from achieving that goal. It sounds like you're still confident but does does it make it harder pipe in terms of slower conditions and maybe what we were thinking even a few months ago.
Yeah I know.
For our businesses, we get the most leverage out of volume.
You know if you get per Jack projected macroeconomic headwinds.
No for longer periods of time, you know, we had talked even in our first quarter that we thought we'd get past. These these trade impacts and we start seeing a better cadence into our second half.
No we still May I.
And I talked about maybe not not a helping our guidance number for this year, but certainly heading into next year that that remains to be seen so it's hard to hard to predict.
When these these businesses come back that being said like I talked about we have market share opportunities in all our businesses across all our regions and we have people waking up every day.
Trying to drive growth in those businesses aside from any macroeconomic headwind so were still confident about getting that high teens low twentys timing.
If it moves a little bit it moves a little bit, but we're committed to hitting those and we believe we can.
Excellent. Thank you guys.
Thank you.
Thank you. Our next question comes from Chuck Cerankosky with Northcoast Research. Please proceed with your question.
Good afternoon, everyone. Just one quick question before a a financial question for al.
I saw John you opened a I think five paint stores in the quarter versus 18 or so in the second quarter last year was showing itself delay by the weather and getting the stores open.
Well, we had some im sure, but we had some impact I think our net stores. So yeah. That's a net store number 10 for the six months, we've opened 29, new stores versus 33 last year.
In that tag a number we have some closures in Latin America, we did have some closures in North America, but this is a process that we.
Go through every quarter every year looking at stores and trying to refine the base to be more effective both on the topline and ER and our bottom line. So I wouldn't read anything into anything as far as a net new stores, but we're still going to open 80 to 100 stores and we made that a little bit below that.
Okay.
And more importantly, looking al as you as you are paying down $600 million in debt.
Good.
Good free cash flow behind the company.
With the stock price, where it sat do you lean towards paying down more debt than that or do you bite the bullet and and the year as you use you like to say without cash and buyback the stock.
Yes, Chuck we are going to be consistent istent in that approach, we're not going to hold cash.
And after that like I said earlier absent M&A.
We believe our stock price is a good value and we'll continue to opportunistically buy it.
Thank you.
Thank you thanks, Jeff.
Thank you. Our final question comes from the line of Rosemarie Morbelli with GE Research. Please proceed with your question. Thank you. Good afternoon, everyone and thank you for hanging on for me.
I was wondering if you could give us a little more details on the performance coatings the packaging side of it Joe.
Well, how do you see most of the growth CZ done the food cans is that on the day of which <unk> beverages and considering that there was some kind of a secular decline in North America, where are you seeing the gross.
Well we're experiencing.
Good growth.
Across the.
Market.
Rosemarie if you.
Go back to the comments I made about the European Asian, and Latin America growth of packaging. It may vary a little bit in.
Each of those segments, if you had to lean one way or the other I'd say, probably beverage a little bit slightly higher than than food, but we're you know.
By market focused on those areas with the greatest opportunities.
Okay, and and then I was.
Wondering we see a election of Johnson as the new Prime Minister is a in the UK a is that good and he is you know for expectations of getting out of right of way 'cause it regardless of how is that changing your UK strategy.
Oh European strategy for that matter.
Well, we've we've put a number of war games on this as you would expect you know from an inventory standpoint, we've built up we've taken down we've built up and now we've taken down again, we'll we'll we'll play this out business by business to understand.
The best approach our supply chain teams have really dialed into this as well as our procurement teams. So at the core of the question I think you should know that we've looked at this a number of different ways and we'll be responsive by business and with our vendors and suppliers to make sure that that were positioned properly in the market. So you don't think it is going it could have a negative impact based on what you are doing.
No I I don't think it'd be significant but we're like you and everyone else, we're going to stay close to it and adjust accordingly.
Oh, Thank you and just lastly, if I may if since you are out of the private label at a at Ace My.
Ah conclusions based on your comments would be that yes. It will have an impact on revenue on the revenue side in 2020, but we could see a higher margin just to that particular piece of the business am I correct.
That's that's fair Rosemary.
Okay, great. Thank you.
Thank you.
Thank you we have reached the end of our question and answer session. So I'd like to pass the floor back over to Mr. Jay for any additional concluding comments.
Thank you Jesse and thanks, everybody for participating in our call today. Appreciate your continued interest in Sherwin.
I will be available for calls the rest of the week as well my colleague Eric Swanson.
Please contact Natalie Dar to get yourself in the Q and thank you again have a great day.
Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.