Sherwin-Williams Company (The)

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 Marakis, Chairman and CEO, Al Mestician, CFO, Jane Cronin, Senior Vice President, Corporate Controller, and Jim Jay, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode by issue direct via the internet at Sherwin.com. An archived replay of this webcast will be available at Sherwin.com beginning approximately two hours after this conference call concludes and will be available until Friday, August 9, 2019 at 5 p.m. Eastern Time. This conference call will include certain forward-looking statements as defined under U.S. federal securities laws with respect to sales, earnings, and other matters. Any forward-looking statement speaks only as of the date on which such statement is made and the company undertakes no obligation to update or revise any forward-looking statement. whether as a result of new information, future events, or otherwise. A full declaration regarding forward-looking statements is provided in the company's earnings release transmitted earlier this morning. After the company's prepared remarks, we will open the session to questions. I will now turn the call over to Jim Jay.

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 percent 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's 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 percent to $6.57 in the second quarter 2019. from $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 U.S. 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 guardsman 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 codings 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%, to $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 coding 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, Sherwin-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 challenged the company's legal advertising of lead-based paints over a century ago when such paints were 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 call 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 court's original 1.15 billion judgment and the reduced 409 million judgment ruling following the defendant's 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 Marikas. 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 on to 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. SG&A 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 a prior year comparison of 7.7%. Sales were positive in all North American customer end markets in a 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 remained 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 4,716 stores in operation, compared to 4,642 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 Guardsmen 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 and New Zealand. Volume leverage and cost control, which were partially offset by incremental investments in a new customer program, are enabling us to continue to drive the profitability of this business. as segment margin, excluding purchase accounting expense, increased 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 Codings 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've experienced over the last two years. EBITDA on 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've 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 3 to 1 by the end of 2019. We paid $105 million in cash dividends and purchased 325,000 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 of 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 full 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 face tough comparisons to the largest portion of last year's load-in volume for the Lowe's program, as well as the final quarter of the divested guardsman business. We anticipate performance coding 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 catalyst driving significant improvement in the European and 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 two 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, and 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 percent at the midpoint compared to the 1853 reported last year on a comparable basis. We've included a Regulation G reconciliation table with this morning's press release to reconcile adjusted and gap 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 to $80 million in 2019, with a total annual run rate of approximately $415 million at year end. We expect our 2019 effective tax rate to be approximately 20 percent. 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 the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation turn will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. 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 Sikowskis with JPMorgan. Please proceed with your question.

Thanks very much. Your cost of goods sold was down about a percent in the quarter, and I imagine your volumes were up. Can you analyze the decrease? How much of that was lower raw materials, and how much of that was cost reduction effort?

Hi, Jeff. This is Al Mastician, and you're absolutely correct. We did see... a sequential decrease in our raw materials from quarter to quarter. As we discussed on our first quarter call, we thought the first quarter would be our highest raw material cost year over year, declining into the second quarter and then sequentially from there. So a good part of it was raw material cost, 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 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 are 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 hasn't dramatically changed. You know, what we talked about was low single digits for the full year, probably the highest in the first quarter. The basket ticked 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 Gansham Punjabi 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? You know, is it a reflection of just stronger fundamentals given the drop in interest rates or just weather disrupting 2Q and pushing it out into 3Q? What are your customers sharing with you?

Well, I think there's an overall confidence that we started the year with Gantram, and I think it's continued as we've progressed through the year. To your point, clearly weather did impact our customers, not just our customers, I'd say all trades, 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. There's a backlog that 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 exists and the demand that they'll have on them, we think the position that our teams are in 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, and these businesses 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 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. You know, 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 They're terrific opportunities, terrific customers. We've just got to make sure we're focusing on the right opportunities and executing well.

Thanks again.

Thanks, Constance.

Thank you. Our next question is from the line of Robert Court with Goldman Sachs. Please proceed with your question.

Thanks very much. Could you give a little more granularity on the big margin lift in consumer brands, sort of the buckets where that came from, whether it was costs, price, performance? raws, et cetera?

Sure, Bob. Yeah, there's a number of levers, starting with the strong volume performance we saw in North America. And as you know, we always start with volume because that's the one that gives us the most leverage from an operating margin standpoint. 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 group in the quarter. So you're seeing the nice volume lift in North America and those other two factors are what's helped driving that margin expansion.

Great. Thanks, Al.

Thanks, Bob.

Thank you. Our next question is from Christopher Parkinson with Credit Suisse. Please proceed with your question.

Great. 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, Minwax, Purdy, et cetera, you've recaptured thus far and how much more is to go? Do you have any additional programs in the pipeline to further help low close the gap with Home Depot, maybe with 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 for our customer, and we're really focused on the execution. As you would expect, we're not going to disclose what those are here on this call, but we clearly have a terrific relationship in a lot of areas that we're focused on to grow.

All right. And just in PC, can you comment broadly just about how you're feeling the longer-term competitive positioning in each of those markets, pricing probability, and just how those views funnel into your longer-term outlook for PC margins? Thank you.

Yeah, 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 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. We're 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 at 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 raw material 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. Yeah, it's working. To be able to get on top of that raw material inflation.

Yeah.

Thank you. Thank you, Chris.

Thank you. Our next question is from Steve Byrne with Make of America Merrill Lynch. Please proceed with your question.

Yes, thank you. How have your new stores that you're building now compared to your legacy stores with respect to size? Does that affect the cost to build out these stores and the operating costs of these stores? And has your view of optimal store density changed?

Yeah, Steve, I think they are changing, and I think I would describe it as this way. Historically, when I was in our stores organization, we typically looked for 5,000 square feet. That was the model. We tried to put those everywhere. Now I'd say that our teams, and we have terrific leadership teams here, 30 years plus experience with Pete Ippolito, Bill DeSantis. I mean, these people really have been with our teams for quite a bit of time, and they're 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 store. In some cases, we might go a little larger store. We're focused on these different end markets, and so we're tailoring the footprint and the store as well as the staffing to be responsive to those segments that we're 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 update on that?

No, I'd say we're still continuing to learn. We continue to add stores, and I would say that we've 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 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 I would also say this, that our field organization is doing a better job of getting these stores up and profitable faster as well. We're students of continuous improvement. So these new stores are focused. 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.

And just a quick one on the consumer segment, any changes in the spray paint business at Lowe's?

You know, there's not a meaningful change. There was, I believe, some area outside of the paint department that there was some adjustments, but we're really focused with this customer on making that paint department the most successful it can be, and that's what we're really focused on.

Okay, thank you. Thank you, Steve.

Thank you. Our next question is from Duffy Fisher 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 destocking your products? Is that part of the volume issue there, or do you think that's just closer to their real demand and consumption?

I'd say their consumption is a bit choppier, Duffy. I'd say The demand, it's not a smooth line up, down, or sideways. There's choppiness. And so we're starting to see, I wouldn't say starting to see, we have seen perhaps more orders of smaller volume as they're 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 we're building to be more responsive. We think it's a way of differentiating with our customers.

And Duffy, I would just add to that. John talked about the macroeconomic headwinds we're seeing in China that have continued through the first quarter and in Europe. We don't expect those to get materially better. That being said, we have had businesses that we called out packaging and coil that are still performing well. Latin America has performed well in the quarter for industrial, and we still feel most optimistic about North America.

Okay. And then the change that Ace Hardware made, is that big enough that 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 talk about the impact on financials, but I will say they've announced a decision to augment their assortment with Benjamin Moore, and they'll continue to offer many of our well-known brands, the Minwax, Thompson's, Cabot's, Purdy. And this was a deal that we assumed with the Valspar acquisition. And the program itself had many assumptions in it that really just didn't play out. And as you'd expect, as we began reviewing these programs, We found ourselves where a mutually beneficial path board was difficult to construct. And under terms of that agreement, we felt as though, you know, our view is we've got to be focused on those areas that we can drive meaningful results for those customers, but also, in 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. You know, from an operating margin standpoint, it's well below the segment average, but we include those, both the top line and bottom line impacts in our 2020 guidance. Great. Thank you, guys.

Thank you. Our next question is from Vincent Andrews with Morgan Stanley. Please proceed with your question.

Thanks. I just wanted to dig in a little bit more on the pain stores comp in the quarter, which was quite impressive given the weather and some of the third-party data that's out there. So I guess a couple of questions to this. I know there were some initiatives starting a couple of years ago to really go out and try to build the customer base. So maybe you could discuss if you've sort of reached a tipping point on that and or strategically you figured out a better way to serve clients and to pick up incremental share when the conditions are challenging? Does your service offering play a real role in that?

Yeah, well, let me begin by pointing out that Q2 was the toughest comparison to last year. Same store sales were up 6.8%, so comps were tough, and you're right. Our team's finished up 5.3, and this focus that we have been talking about on new accounts and share of wallets Even the new products that we're introducing, those efforts are clearly coming to 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, this was the wettest in 125 years. But this, as you mentioned, is a resilient team. As I mentioned earlier, we've got great leadership. And this is a point where we love our model and the position that we have in the market and our team's 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 1,400 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 see a Notice that we've had a slight uptick in our inventory. That's 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 there's not one silver bullet that we'd say, this is what we did this quarter. I'd say it's a culmination of many, many years and good leadership by that team and a lot of execution in the field. And we 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, if you give us sort of your sense of where the M&A outlook is, both for small transactions and then something potentially larger than that, particularly given one of the announcements that was out there by a large competitor.

Yeah, so there are a number of of comments out there regarding what's out in the market. We don't make a practice to talk about any particular project. I will say, because I've been consistent in this, though, that we've been very clear in our position on automotive OEM, and 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 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 Valspar and Sherwin come together.

And, Vincent, I'd just like to add to that that M&A is an important part of our capital allocation policy, as we discussed in June. You know, as John mentioned on his opening remarks, we returned $660 million to our shareholders in the form of dividends and share buybacks. It was a 33% increase year over year. We're going to, with CapEx, continue to invest in growth opportunities and new stores and in capacity expansions in a number of our North American businesses. And then, 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 Juvicar with Citi. Please proceed with your question.

Yes, hi. Good morning. Good morning. John, I think you talked about, you know, your consumer brand's margins jumping up 580 basis points and some factors behind that. I was wondering if you can talk about how different brands like Valspar, HGTV Paint, are doing at Lowe's, and were there 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 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. I mentioned earlier a continuous improvement mentality here. You know, we think that as we go through this, it's important that, you know, our efforts are always on finding where we are and how we get better. And I think we share that culture not only with Lowe's. Lowe's is a terrifically important customer. But, you know, 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, SKUs, any of that. But I would tell you that when we set these goals to march up into the 20% operating margins 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 to help our customers succeed, and that's in all facets of the business.

Okay. Okay. And then back in June, you pushed out your 2020 goals due to mostly higher raw materials. But since then, raw materials, particularly ethylene propylene chains, have really come down. You know, your margins seem to be improving here despite a difficult weather quarter or weather-wise quarter. So do you have any updated comments on your 2020 goals as we sit here today?

Yeah, PJ, you know, we're very pleased with the progress we're making on the gross margins, the 44.9% in the quarter. Saw a nice improvement there. But, you know, year to date, our gross margins are 44%. And, you know, the pricing activity that we've 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, and I talked about this on the previous call, to get to almost 13% increase at our midpoint for EPS, we're going to need margin expansion. And we're 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, PJ.

Thank you. Our next question comes from the line of Greg Malich with Evercore ISI. Please proceed with your question.

Greg Malich Thanks. I have two questions, both on 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 or price, especially if you consider it looks like the second quarter was probably 2% volume and 2% price if I look at the comp. Is that correct?

Yeah, 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 than price.

Correct.

And then second on consumer brands, Just a little more color on the inflection of it being up to going to down high single digits. I think you mentioned it was the cycling, just the loads load in and then guardsmen. Is there anything else there? And then how should we think about when those items cycle for the fourth quarter and beyond?

You know, I think, you know, like we talked about in the second quarter, we felt very good about 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 U.S., 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 to the degree. Our largest load-in was in the third quarter for Lowe's. The headwind of Guardsman goes away after the third quarter, so I think it gets materialized.

Yeah, it's largely the load-in and the Guardsman annualization.

Got it. That's great. And then just so I can sneak in one more on the three times leverage and getting to that point, how important is that point to where you would, you know, Where do you want that to stabilize when you think about, you mentioned buying back stock after you get through the dividend increase and invest in CapEx?

Yeah, Greg, we're committed. Yeah, I think long term we've talked about two to two and a half. We'll be under three by the end of this year. We committed to paying down $600 million of debt. We paid off the $300 million of seven and a quarter debt in June. and the rest will come out of short term. But, yeah, I think we'll be below 3 to 1 at the end of this year, and the target is still 2 to 2.5.

That's great. Thanks, guys. Good luck.

Thank you. Thanks, Greg. Thank you, Greg.

Thank you. The next question is from John Roberts with UBS. Please proceed with your question.

Thank you. What's going on in COIL that's allowing that business to be an outlier in industrial codings?

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're determined to continue to drive them.

Okay. And then in industrial wood, do you need to restructure that business or do you just wait to see how the trade issues play out?

No, that's a good question. We're forced to take some cost out of that business. We've we've seen a material change in the market, at least for the time being, and we're adjusting accordingly, as you would expect.

Thank you.

Thank you. Our next question is from Scott Mushton with Wolf Research. Please pursue with your question.

Hey, guys. Thanks for taking my question. So I guess I wanted to poke a little bit more on the volume outlook. I think last call I asked, you know, 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. I'm specifically talking to the Americas. And I'm just wondering, you know, what's changed in the thought on volumes? Is it the market? Is it things you guys are doing specifically? And then I had a follow-up.

Yeah, Scott, you know, coming into the quarter, we talked about our paint stores group being at or above the high end of our range, and that happened. They were at 5.3, and that was a positive even in spite of the wet weather we saw. Our consumer group came in pretty much as we expected, but it's a tale of two, kind of a tale of two cities, if you will. We had strong growth in our North America business, even including the soft retail sales that I talked about. But we also saw the continued softness in Asia Pacific and Australia, and I expect those to continue. And they're probably softer than what we had planned. And then finally in performance coatings group is where we really saw softness, Asia Pacific and Europe, with a macroeconomic headwind. Although we expected them to continue in the second quarter, we did not expect them to be as heavy as they were. So in that, again, we expect to continue in our second half. So I would say we have to be realistic about the forecast. Our teams have opportunities, and they wake up every day driving market share growth 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 we're seeing the headwinds we're seeing from a macroeconomic environment. So, you know, that's really what we're seeing. It's the continued retail sales softness and more than we expected in consumer, along with Asia Pacific and ANZ. And then in performance codings, it's primarily Asia Pacific and Europe.

Perfect. And my follow-up is just, again, it goes to the paint store group or the Americas. I know you guys have been pretty active in 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 great.

Yeah, 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 of painting and displays, but even our employees. I'd say it's a contributing factor, but Scott, as we look at the model, it's really important to understand there's not one lever. We want to continue adding in those areas the services, the quality of products, and the differentiation that helps our customers to be the most successful. If we continue to do that and help our customers to win, then, you know, funny thing happens. We become successful as well. And so that's what we're really focused on. I know there's been a couple questions now pointing to is there one thing here. And this is just a continuation of a long strategy executed by really wonderful leadership and outstanding people in the field.

Appreciate it, guys. Congratulations on a good quarter.

Thank you. Thank you, Scott.

Thank you. Our next question is from Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

Great. Thanks. Good morning, guys. Just a question on the outlook you provided. It sounds like there's an element of conservatism in your PCG outlook, and it's related to kind of macro challenges in Europe and China still remaining weak. I guess Is that correct? And if 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've provided with regards to PCG? Thanks.

Yeah, Arun, I wouldn't use the term conservatism. I'd say realistic is more apt to be how we have approached the forecasts You know, if the trade war is ended today, it will not help us through the rest of this year. Many of those customers, and we've tried to characterize this in the past, have already decided to move. And, you know, that process has started. It's tough for them to stop and then start. But we're well positioned to move. accept that business in wherever they go, whether it's in Southeast Asia, if they come to Mexico, wherever those businesses land. What will drive the needle on a guidance towards the high end is North America stores volume. And that's always the case. It's the growth engine of our company. We expect to continue to grow our market share and grow one and a half to two times the market. And I believe we're doing that in the second quarter. And I believe we'll do that through the The back half, that'll be what drives us to the high end of the range.

And just on that point, it sounds like Reti Repain is still holding up 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, you know, what gives you the confidence that some of these markets will continue to grow so heavily, you know, especially resi repaint where we've seen, you know, double digit quarters for many years here.

So I think it's five years compounded growth rate of double digits. You're right, Arun. And I would say this, as far as 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. In fact, the second quarter itself was the toughest comparison. So from that standpoint, we feel the comparisons get a little bit easier. We don't like to 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. All of these initiatives, if it's the new products, it's the skill training that we put with our employees, the addition of 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 direction, and we're going to continue to feed this. We have said a number of times already this morning, it's the engine of the company. We're going to continue to put fuel in this machine and push it 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.

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 demand for architectural paint And if there's a positive linkage there, what sort of lag effects 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 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, you know, 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 res space in our first quarter. From a remodeling perspective, one of the things that people often point to is existing home sales, and that's been very choppy over the last year or so. New data was out this morning that wasn't particularly great, but At the same time, there's a lot of other drivers beyond existing home sales that I think are helpful for remodeling and the repaint business for us. So you have things like baby boomers aging in place, and they're 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, maybe a little bit slower than the past, but still continuing. to appreciate. And the other thing I'd point out, you know, a fact that we presented at our analyst day as well is, you know, since the last peak, there's been about close to 20% growth in the square footage that's out there to be repainted. And so we think there's plenty of demand out there in the repaint. We're very well positioned to continue growing that part of our business.

Thanks for that, Jim. And as a brief follow-up, you know, with that as the 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 Sisson with KeyBank. Please proceed with your question.

Hey, guys. Nice quarter. Still waiting on my Bob mural, so hopefully that's not part of cost savings. But on a serious note, so when you think about the Americas group, you know, outlook for the second half of the year, you know, the first half you had weather issues. And if weather is favorable and the backlog for your customers are really good, you know, where could growth be? Could it be a couple percent better if weather plays its part?

Yeah, I mean, it's really hard to speculate. Mike, you're right. I mean, I think if – If the weather's better, we have a more mild entry into winter and our customers are able to paint a little bit longer or they're able to capitalize on the weather and catch up on some of these projects, it would definitely add to what it is that we've projected. But as Al mentioned, we're trying to be realistic. We're in the midst of some pretty unique weather patterns and we don't know what's going to happen. I don't know that anyone does, and our forecasts, we think, reflect the best that we have as far as our little 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 4,000 stores, over 3,000 territories out there. We're getting the feedback from our store managers. We 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. We don't think those projects are going to go away. But what we're confident in is how our customers are feeling about their pipeline of projects.

Got it. And then as a quick follow-up, how are you thinking about pricing for the stores heading into 2020? Every year, it's hard to tell what inflation is going to do. But just when you think about usually October-ish, you start to think about some sort of pricing action. potentially. Can you maybe give us an update on your current thoughts there?

I would tell you more about how we think about it than our current thoughts. We get together on a monthly basis. We look at our total cost basket, not just raw materials, but just total costs. We make a very informed decision as a team on a monthly basis. As you know, given your coverage of our company, the first people to know that clearly are our employees. The second are our customers. 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.

Thank you, Mike.

Thank you. Our next question is coming from the line of David Begleder with Deutsche Bank. Please proceed with your question.

Thank you. John, to follow 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 we typically have seen over, you know, 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 the performance coding side, you know, I was very deliberate in my conversation or my response there earlier about looking at total costs. You know, we're continuing to add in those areas that we believe can help our customers reach their goals. And some of it clearly is in the raw material cost and other areas it could be in facilities 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 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 better discussion and one that our customers understand the need for us to stay healthy as well.

And, John, just on TIO2, do you expect to pay higher price for TIO2 in the back half of the year than the first half of the year?

Yeah, this is Jim. Industry pricing for TIO2 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 our view at the beginning of the year was TIO2 fairly stable for the year, and I think that's still our view at this point.

Thank you very much. Thank you. Thank you.

Thank you. Our next question is from the line of Garrick Schmoy with Longbow Research. Please proceed with your question.

Thank you. I was wondering if you can comment on if new residential construction does increase in the second half of the year, just given some of the leading indicators that you cited. What's the usual lag between when starts increase and when you start seeing that demand come through?

I would typically see it in a few months.

Okay, and has that changed over the last several years? Has that lag gotten extended due to whether it's labor constraints or any other factors?

Yeah, 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. The builders are clearly working on how to deliver efficiency into their process. So there's some opportunity there from a speed standpoint, but there's 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 comp headwinds you're facing in the third quarter, but should we expect volume growth to turn positive in the fourth quarter as your anniversary, the lows load in and the guardsmen exit?

I would say, Derek, we got to see how the inventory levels, what happens to the inventory levels as we come out of season. Obviously, we are working closely with lows, but last year being the first year and we're putting a ton of inventory in, to make sure we're servicing these end customers. It's an anomaly. So this year is the first year where we're gonna see a more 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, thank you, Rich. Thank you.

Thank you. Our next question is from Mike Harrison with Seaport Global Securities. Please proceed with your question.

Hi, good afternoon. I was wondering if you could maybe break out the same store sales growth number between exterior and interior. Is it fair to assume that the exterior growth was much weaker?

Actually, in broader markets, the exterior, believe it or not, was up slightly ahead of interior. When we went back and started to dial in on that, what we saw were on those days when the weather had been supportive of exterior paint, we saw some really incredible increases. And so we saw chunks of business going out on the exterior side, which gives us great confidence in the future if we get a little more stable weather pattern of what we're capable of. But we had a very good performance in both interior and exterior.

And then I wanted to ask also, you made several references in the press release and in your comments to 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 Valspar synergies? Just how do we think about that cost management that's going on?

Yeah, Mike, I think part of it is the Valspar synergies. Part of it is just our normal, part of our culture of continuous improvement And as we talked about going into 2020, we're not going to be calling out synergies because we want to roll that into just part of our culture. And you could expect, as John talked about, we're going to take action where we need to in certain, whether it's markets or geographies or parts of our business where we see softness and continued softness over a period of time. On the other hand, you are going to see us continue to invest in growth opportunities, whether that be in our stores group, consumer group programs, or performance codings to drive future sales.

Thank you very much.

Thank you.

Thanks, Mike.

Thank you. Our next question is from Dimitri Silverstein with Buckingham Research Group. Please proceed with your question.

Good afternoon, guys. Thanks for squeezing me in. Just wanted to follow up on a couple of things. Number one, as you look at your margin recovery in performance codings, you talked about continuing to sort of press 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 and the first quarter of 2019, or do you plan on going out with new pricing as the year unfolds because you feel that you still have a couple of quarters of catch-up to do And then secondly, if it's the latter, you know, how does that jive with the slowing industrial markets that you're seeing, you know, beyond wood, just in general, sort of macro slowing in the industrial, not necessarily maybe in your business?

Yeah, Dimitri, I would respond that we have a little bit of everything that you've talked about. We've got some areas where we've already had those discussions and we're We are working with our customers, rolling pricing in, and we have some areas where if you look reflective in the past here on what's happened to raw material costs, we've yet to recover some of what has rolled in in raw material costs. While there might be some relief, the basket is still higher in some products in some areas than when it was in 2016. And so we're having those discussions on a customer-by-customer basis. And our goal, I know it sounds a bit repetitive here, but in helping our customers to be most successful and helping them by bringing them the solutions that help them win, we need to stay healthy as well. And we're having those discussions on a regular basis.

Okay, 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 standout for you in terms of growth, and wood coatings obviously for the last couple of quarters has been a problem child, and, you know, that's totally understandable. Can you talk about perhaps maybe not regionally but so much as sort of a product type, if you will, what your other businesses and industrial and performance coatings have done in the second quarter and what your outlook for the second half of the year is in terms of capital projects or protective and marine. I know you were in the pipeline business and a few other businesses. So if you can kind of look at maybe end market or product categories and give us a little bit more granularity on what your view was of the market.

Sure, Dimitri. Maybe if I 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 their due. I've spoken about COIL, but really it's packaging that's leading the pack. So I want to get a phone call as soon as this call is over from my President, in our packaging business to correct me here. They're doing a terrific job, so I want to give them their due. Asia Pacific was soft overall. Again, packaging coil were the exceptions here. Both of those were up double digits in Asia, and we expect that to continue in both packaging and coil. And Latin America was 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 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 work with some of these new customers, our focus is on making them successful.

Okay. That's very thankful. Thank you.

Thank you.

Thank you. The next question is from Truman Patterson with Wells Fargo. Please proceed with your question.

Hi. Good morning, guys, and nice quarter. First, just wanted to look at your EPS guidance. You all lowered your sales guidance from about 5.5% at the midpoint to 3%, so a decent deceleration, if you will. But you left EPS guidance unchanged. Could you just walk us through some of the positive offsets? Relative to your prior expectations, are raw materials easing more, getting better pricing, power synergies, cost controls, anything like that relative to your prior expectations that help keep EPS unchanged?

Yeah, Truman, I think part of it is volume 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, they had flow-through of over 32%. And you asked the question on the first quarter, we were down 80 basis points. What is the outlook for that TAG organization? And we said we're confident in our ability to grow our operating margin year over year. We were up 50 basis points in a considerably bigger quarter. That brings us about flat. And we're optimistic about the continued progress we're going to make in that group. It's the largest segment we have. It's the fastest growing. The other segments, we talked about the softness outside the U.S., but continued progress in holding the price with raws flattening as we need to keep that price to get back up to a 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, and Mix being one of them. You know, the bigger, faster stores in North America stores grows. It's our highest margin business. That's going to help drive the margin and drive our EPS.

Okay. Thanks for that. Um, jumping back to a few previous questions on, on performance, uh, coatings, you know, revenues fell 4% a quarter. It looks like, uh, demand will be a bit of a headwind in the back half of the year as well. Could you just run us through how, how pricing has acted historically in this type of environment? And, and really what I'm trying to look at is in the back half of 2019, do you think you can improve your operating margins sequentially versus a second quarter? Because the past couple of years, you guys have mentioned, you know, an ability to do that.

Yeah, Truman, one point before jumping into that is you're exactly right on the numbers, but I'd also point out that the comp for the quarter was 11% for the PCHP. So some tough comparisons there. But I think if you look at pricing historically, what has happened, and this is over decades, and not just Sherwin, but also Valspar, is that, you know, we've, We've historically gone out with pricing and we've worked with our customers to get the pricing into the market. Our goal has always been to 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 it's products, services, whatever it might be, to make them more successful. And, you know, our success in rolling this in, as evidenced by the most recent quarter and 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 say, oh, we're not going to, you know, we can't do better or we're or don't expect this improvement. We clearly see opportunity for improvement. This was a better performing business. We need to get back to those levels, and our teams understand that, and we're working hard to get it.

All right. Thank you, guys.

Thank you, Truman.

Thank you. The next question is from Justin Spear with Zellman & Associates. Please proceed with your question.

Thanks for the time, guys. Just a few questions, or two questions. if you could characterize the monthly cadence, you know, trends in the quarter and maybe even into July that's far in your core America's business.

Yeah, I would say, Justin, July is in line with the guidance, quarterly guidance we provided for that business. You know, in the quarter, it's hard to look when you have day changes in that. We talked about, you know, even I've gotten – a number of notes about May being the wettest May in the history of mankind. So as you would expect, there are ups and downs within a quarter depending on weather patterns. So it's hard to point to one month and say, okay, that was good and this one's softer because of that. So we feel good about the 4.3 same-store sales growth on top of a 6.8 same-store sales growth last year.

Okay. And then The one thing that stood out to me in the quarter positively as well was the cash flow side of things. Very strong in the first half of this year, particularly in the second quarter. I don't think we have your cash flow yet out 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 that explains the strength there? 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, you know, we did have a very strong first half, you know, $758 million up, $179 million year over year. You know, core net income and earnings are always a big driver. Our working capital was a lower use of cash. So even though we're carrying more architectural inventory Like we talked about, end of 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 real one-timers, I would say. You know, you look at, you know, free cash flow. Again, you know, we're targeting, you know, 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 know, a lot of people picking at this question in a lot of different ways, and I know you're, you know, in terms of reading the tea leaves for performance codings, you put, you recast your view in terms of the timing of achievement of the margin goal and intermediate term destination for performance codings. Is there anything incrementally in the softening macro environment that dissuades you from achieving that goal? Are you It sounds like you're still confident, but does this make it a harder putt in terms of slower conditions than maybe what we were thinking even a few months ago?

You know, for our businesses, we get the most leverage out of volume. You know, if you get projected macroeconomic headwinds, you know, 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, we still may. I talked about maybe not helping our guidance number for this year, but certainly heading into next year. That remains to be seen. So it's hard to predict when 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 headwinds. So we're still confident about getting the high teens, low 20s timing. You know, 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 Sarenkoski with North Coast Research. Please proceed with your question.

Good afternoon, everyone. Just one quick question before a financial question for Al. I saw, John, you opened, I think, five paint stores in the quarter versus 18 or so in the second quarter last year. Was Sherwin itself delayed by the weather in getting the stores open?

Well, we had some, I'm sure, but we had some impact. I think our net stores.

Yeah, that's a net store number. For the six months, we've opened 29 new stores versus 33 last year. In that tag 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 top line and our bottom line. So I wouldn't read into anything as far as net new stores, but we're still going to open 80 to 100 stores, and we may net a little bit below that.

Okay. And more importantly, looking, Al, as you are, at paying down $600 million in debt, good free cash flow behind the company. With the stock price where it's at, do you lean towards paying down more debt than that, or do you bite the bullet and end the year, as you like to say, without cash and buy back the stock?

Yeah, Chuck, we're going to be consistent in that approach. We're not going to hold cash. And 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.

Thank you. Our final question comes from the line of Rosemarie Morbelli with G 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. Where do you see most of the growth? Is it on the food cans? Is it on the beverages? And considering that there is some kind of a secular decline in North America, where are you seeing the growth?

Well, we're experiencing good growth across the market. Rosemary, 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 food. But we're, you know, by market focused on those areas with the greatest opportunity.

Okay. And then I was wondering with the election of Johnson as the new prime minister in the U.K., and his expectations of getting out of Brexit regardless on how, is that changing your U.K. strategy or European strategy for that matter?

We've played a number of war games on this, as you would expect. 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 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 we're positioned properly in the market.

So you don't think it could have a negative impact based on what you are doing?

I don't think it would be significant, but like you and everyone else, we're going to stay close to it and adjust accordingly.

Thank you. And just lastly, if I may, since you are out of the private label at ACE, my conclusion based on your comments would be that, yes, it will have an impact on the revenue side in 2020, but we could see a higher margin just on that particular piece of the business. Am I correct?

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, Jessie, 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 will my colleague, Eric Swanson, please contact Natalie Darr to get yourself in the queue. 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.