Sherwin-Williams Company (The)

Good morning. Thank you for joining the Sherwin-Williams Company's review of the third quarter of 2019 and the outlook for the fourth quarter and whole fiscal year of 2019. With us on today's call are John Morages, Chairman and CEO, Al Mastichian, CFO, James Cronin, Senior Vice President, Corporate Controller, and Jim Jang, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode by the company's two-year direct via the Internet at .sherwin.com. An archived replay of this webcast will be available at Sherwin.com begin approximately two hours after this conference call concludes and will be available until Friday, November 8th, 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 that 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 Jang.

Thanks, Jessie, and good morning, everyone. Thank you for joining us on the call today. All comparisons in my remarks are to the third quarter of fiscal 2018 unless otherwise stated. Consolidated sales in the third quarter of 2019 increased $136.2 million or .9% for $4.87 billion. Currency translation rate changes decreased sales by 0.9%. Consolidated growth profit dollars in the quarter increased $215 million or .7% to $2.23 billion. Consolidated gross margin in the third quarter increased to .7% from .5% in the same period last year. Excluding impacts from acquisition-related amortization, adjusted consolidated gross margin in the quarter increased to .9% from 42.8%. Selling, general, and administrative expense increased $72.1 million or .7% to $1.35 billion in the third quarter and increased slightly as a percent of sales to .6% from .9% in the same quarter last year. Interest expense for the quarter declined $7 million to $85.3 million. Other expense for the quarter increased $29.3 million to $31 million, primarily a result of debt retirement expense and expense associated with Argentina hyperinflation. Consolidated profit before tax in the effective tax rate in the quarter was 18.8%. Excluding acquisition-related costs and the reduction of the California litigation expense, our effective tax rate on adjusted income for the quarter was 19%. Deluded net income for common share for the third quarter 2019 increased to $6.16 per share from $3.72 per share in the prior year third quarter. Earnings per share in the third quarter of 2019 includes a charge for acquisition-related costs of $0.77 per share and a reduction of the California litigation expense provision of $0.28 per share. The $3.72 per share reported in the third quarter 2018 included charges for acquisition-related costs and the California litigation expense of $0.87 and $1.09 per share respectively. Excluding these items, adjusted diluted earnings per share increased by .1% to $6.65 in the third quarter 2019 from $5.68 last year. We have summarized the third 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 third quarter increased $232.5 million or .7% to $2.90 billion. Comparable store sales in the US and Canada increased .1% in the quarter. Regionally in the third quarter our Eastern Division led all divisions followed by Southwest, Southeast, Midwest and Canada. Sales were positive in every division in the quarter. Third quarter segment profit increased $85.9 million or .9% to $663.7 million. Third quarter segment profit margin increased 120 basis points to .9% from .7% last year. Turning now to the consumer brands group. Third quarter sales decreased $92.1 million or .9% to $678.5 million. Sales from continuing operations excluding the Lowe's Loading and the divested Guardsman business decreased approximately 6% in the quarter. Third quarter segment profit increased $31 million to $114.9 acquisition related amortization decreased segment profit by $22.6 million compared to $26 million in the third quarter 2018. Third quarter segment profit margin increased to .9% from .9% last year. Excluding the acquisition related amortization in both quarters, adjusted segment profit margin increased to .3% from .3% in the third quarter 2018. For our performance coatings group, third quarter sales decreased $4.3 million or .3% to $1.29 billion. Currency translation rate changes reduced third quarter sales by 1.6%. Third quarter segment profit increased $32.6 million to $137.4 million. Acquisition related amortization decreased segment profit by $54.3 million compared to $55.4 million in the third quarter 2018. Third quarter performance coatings group segment profit margin increased to .7% from .1% last year. Excluding the acquisition related amortization in both quarters, segment profit margin increased to .9% compared to .4% in the third quarter 2018. I'll conclude my remarks with a comment on our balance sheet. In the third quarter, we refinanced and extended the maturity of our debt to improve our liquidity position and to lock in favorable interest rates ahead of expected rate increases. Specifically, we tenured approximately $1 billion of our 2020 senior notes and $500 million of our 2022 senior notes. We financed this transaction with $800 million of 10-year notes at 2.95%, $550 million of 30-year notes at 3.8%, and $150 million of commercial paper. That concludes our review of our operating results for the third quarter. So let me turn the call over to John Marikas who will make some general comments on the third quarter and provide our outlook for the fourth 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 third quarter before moving on to our outlook. Our team continued to execute at a high level. We delivered another strong quarter as adjusted EPS increased more than 17% to $6.55. Our results were driven by outstanding performance in our North American paint stores where we grew same-store sales by a high single-digit percentage and generated growth in every customer and market. On a consolidated basis, adjusted growth margin increased over 300 basis points -over-year to 45.9%. While we still have work to do, this improvement shows that we are making progress towards offsetting the significant raw material inflation we experienced over 2017 and 2018. We remain committed to achieving our long-term full-year growth margin target of 45% to 48%. The increase in growth margin in the quarter was driven by strong North American volume growth, operating efficiencies, and moderating raw material costs. Adjusted EBITDA margin expanded 150 basis points over the prior year to 18.9%. And for the second consecutive quarter, all three operating segments increased segment profit and margin compared to the prior year. I'm also pleased with our ongoing integration efforts and we remain on track to exit the year at a synergy run rate of $415 million. Looking at our top line, consolidated sales increased .9% in a quarter in line with our revenue guidance of a low single-digit increase. Our sales varied by region with North America and Latin America each increasing by mid single-digit percentages in the quarter. We continue to see softness in Asia and Australia and to a lesser degree Europe. Within the Americas group, sales increased .7% against the prior year comparison of 5%. Sales were positive in all North American customer and markets in the quarter, led by residential repaint, which commercial and DIY were up high single digits, while protective and marine, new residential, and property management were all up mid single digits. Looking at total segment profitability, segment profit dollars increased by more than $85 million and segment margin expanded by 120 basis points to 22.9%. We leveraged the strong volume growth to deliver incremental margin of approximately 37%. We ended the quarter with our customers continuing to be very optimistic, reporting solid backlogs for the remainder of the year and a strong sense of confidence heading into 2020. -to-date, we've opened 31 net new stores, finishing the quarter with 4,727 stores in operation, compared with 4,653 last year. Our plan calls for this team to add approximately 80 to 100 new stores for the year. Similar to prior years, we will have a significant ramp up in the fourth quarter. In the consumer brand segment, third quarter sales were down mainly related to the comparison to last year's load-in of the Lowe's program and the impact of the Garg's Men's Disaster Tour. Sales decreased slightly more than we expected due to weakness in international markets, most significantly in Asia and Australia. In North America, we remain very encouraged with our relationships with our largest customers, where we are also committed to helping them accelerate sales to the pros who are shopping in the home center channel. Segment margin excluding acquisition-related amortization increased -over-year to 20.3%, driven by synergies and moderating raw material costs, along with improving -over-year supply chain costs. We continue to feel good about our strategy in this business and our portfolio of hero brands that serve the North American retail market. Performance podium sales were down .3% in the quarter, as choppy industrial demand led to variability by region and business. Geographically, total segment sales were up in North America and Latin America, but were offset by softness in Asia and Europe, where sales decreased by high and low single-digit percentages respectively. From a business perspective, our packaging and coil businesses remained our strongest performers, delivering growth in every region as our customers continue to value our technology and service solutions. Our automotive refinish business delivered modest growth in the quarter, led by solid performance in the Americas. Sales in the general industrial and industrial wood businesses decreased -over-year, primarily due to softness in Asia and Europe. Despite the sales decline, adjusted segment margin increased 250 basis points to 14.9%, due primarily to moderating raw material costs and good cost control. Adjusted EBITDA in the quarter was $919 million, or .9% to sales, excluding integration costs and the lower California litigation expense. Adjusted EBITDA -to-date was $2.4 billion, or .5% of sales. -to-date, we returned over $892 million to shareholders through cash dividends and share repurchases, an increase of 46% -over-year. At the end of the quarter, we had approximately $8.9 billion of debt on the balance sheet. We've reduced debt by approximately $435 million -to-date. We intend to retire a total of approximately $600 million this year, which will result in a net -to-EBITDA ratio below 3 to 1 by the end of 2019. During the quarter, Moody's raised our revenue outlook to positive from stable, noting our strong business profile and meaningful deleveraging since the acquisition of Dousbar. We paid $105 million in cash dividends and purchased 250,000 shares of common stock for $127 million in the third quarter. At quarter end, our share repurchase authorization stood at 8.8 million shares. Capital expenditures were $97 million in the quarter, depreciation was $65 million, and average amortization was $78 million. Moving on to our outlook for the fourth quarter of 2019, we expect consolidated net sales to increase by a low single-digit percentage compared to the fourth quarter of 2018. Given that our North American professional paying contracts for customers continue to report solid backlogs and a positive demand outlook, we expect growth in the Americas group to be in the -to-high single-digit range. We expect consumer brands group sales will be flat to up slightly in the fourth quarter. We expect performance coatings group sales to be down low single digits as industrial demand remains highly variable by region and end markets. Against this backdrop and given our strong performance in the third quarter, we are increasing our adjusted 2019 full-year diluted net income per common share guidance to be in the range of $20.90 to $21.30 per share, which excludes Dousbar acquisition-related costs and non-operating items. This is an increase of approximately 14% at the midpoint compared to the 1853 reported last year on a comparable basis. We've included a regulation gene 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. As planned, we expect raw material costs in the fourth quarter to further moderate from the levels we saw in the third quarter, assuming stable petrochemical feedstocks and no supply disruptions. We expect our 2019 adjusted effective tax rate to be approximately 19%. We expect full-year capital expenditures to be approximately $320 million, depreciation to be about $257 million, and amortization to be $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. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone 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 Christopher Parkeson with Credit Suisse. Please proceed with your question.

Great, thank you. Now that you're done with the Velspar integration, it still appears you have long-term opportunities to expand margins across all three segments, but specifically consumer brands and performance coatings. Can you give us a quick update on any non-raw material levers you have left to pull to drive margins higher? Thank you.

Yeah, Chris. First, let me just take a bit of acceptance of your comment about now that we're done with the Velspar acquisition integration. There's still quite a bit of work to be done there, and we're working hard to fully integrate not only the domestic beast here, but we've got quite a bit of work to do in the non-domestic and a whole lot of work to do on the sales side. So a lot of opportunity there to leverage going forward. And Chris, this is the Alma Station. Just as a reminder, we're going to be working with the Velspar this year at a $415 million run rate through the P&L, $315 million, and that $100 million is going to be by and large facilities and manufacturing and other consolidations as well as formulation adjustments. So there are other levers to pull along with our continued focus on market share opportunities and delivering new technologies, innovative solutions and services to our customers to drive growth organically, and that's where we think we're going to see the benefits.

Got it. And you did it on this a little in your prepared remarks, but can you just walk us through the rest of the PC sub-segments, the packaging, general industrial, coil, ward, and refinish. Can you just kind of hit on the key highlights that you're looking into over the next 12 months or so, and then also give us a quick comment on whether or not you're fully content with your competitive positioning in each of those sub-segments. Thank you.

Well, we're certainly not satisfied with our competitive position. We want to continue to grow in our competitiveness, and we believe that our teams are doing a terrific job in aligning our services and our technology to help our customers meet the solution and deliver the solutions that they need to be successful. To your first part of your question, as we talked about overall, North America and Latin America for the quarter were positive. We expect that kind of momentum to continue. I'd say, as I highlighted earlier, that the European and Asian markets, we saw some softness there, and I would expect that's going to be bumpy going forward here for a little while. But if I look at it from a business perspective, we're really excited about the momentum in our coil business, as I mentioned. That is our strongest growing business right now. It's been a race, if you will, between our packaging and our coil business. This quarter, the coil business was the strongest performer, and it was double digits in every region, and we've got some really good momentum there going forward and feel really good about that business. Our packaging, we talked a lot about our unique technology there. We expect that business to continue to grow. That was up single digits, and it also was up in every region. So again, two terrific teams really hitting all cylinders, and we're really excited about that and expect continued momentum. We don't talk a lot about our protective and marine business. That business was up single digits and mid-single digits, and a lot of good momentum there. Another good leadership team, and we're really gaining some ground in some very key focus areas. In the past, we talked about our heavier weight in the petrol cam and our focus on some of those other adjacent markets. We're getting good penetration there, so we're excited about that. Our automotive business was up in three of their four divisions. Overall, they were up low single digits, and we feel as though they grew some share here in North America, so we're pleased with that. Our GI business was up in the Americas, North America and South America. Again, terrific leadership here. We are experiencing some softness in Asia and Europe, and when you look at our industrial wood business, that's the area of softness that we've had really around the world. The industrial wood business has been soft, and we expect that to be bumpy for some time. Very

helpful.

Thank you.

You're

welcome. Thank you.

Thank you. Our next question comes from the line of Jeff DeCostis with JPMorgan. Please proceed with your question.

Thanks very much. You spoke about your raw material comparisons improving in the fourth quarter. Is that a -over-year

comparison, or does that have to do with the -over-year comparison?

Yeah, Jeff, we do expect raws to get sequentially better, not to the magnitude that we saw in our third quarter. As you remember, the second and third quarter last year, we really saw a ramp up in our raw material costs, and then it kind of moderated a little bit in the fourth quarter. So we do see a little bit of sequential improvement, and we believe the I would answer that, as Al said, the broad basket was down slightly -over-year in the third quarter, but I think you have to look at it a little bit by architectural and industrial. So the decrease was really driven more, Jeff, on the petrochemical side of the basket, where certain parts of the basket were down, not all, but certain parts were down -over-year. And what I would remind you is certainly we don't buy or sell propylene or ethylene, and each of those different feed stocks have their own market dynamics associated with them. But as Al said, we're still expecting the baskets to be down modestly -over-year in the fourth quarter, but the highest level of inflation was in our third quarter of 2018 last year. All right. And then for my follow-up, are there any plans to increase prices and stores

business in the North American paint market in 2019, or is that not on your agenda?

Well, we have work to do, Jeff. We're still facing the significant raw material cost inflation we experienced in 2017 and 18. And with our consolidated gross margin improvement, we are making progress towards our goal of the 45 to 48, as I mentioned earlier. But as to the specifics of your question, we're still reviewing our options and our pricing strategy at this time, and I'd say that we do that on a regular basis. With great frequency, we're sitting down and talking about where we are and where we need to be. And I'd say that, as has been our best practice, we'll first communicate that to our customers and then to the financial community. And Jeff, I would just add, since we have not announced any price increases at this point, when John talked about tagging up mid to high single digits, that implies it's the vast majority volume.

Great. Thank you so much. Yep. Thank you, Jeff. Thank

you. Thank you. Our next question comes from the line of Mike Harrison with Seabler Global Securities. Please proceed with your question.

Hi. Good morning. Morning, Mike. The same store sales number in Q3, can you just talk about whether part of what we saw there was some pent-up demand after dealing with some poor weather during Q2, and I think even maybe into July, can you just talk about whether that was unusually strong, in your opinion, that 8% number?

Well, Mike, I would say there are a few issues here. Certainly, I'd say coming out of the quarter, we did speak to the fact that we felt our customers were going to be in a sprint to catch up on some of the work that was out there and that they were really working hard to capture. But I'd also say that our customers continue to be very bullish about the pipeline, both in the fourth quarter and in just 2020. We're growing share. We feel good about the execution of this team on their efforts. We've got a lot of plans that they're implementing in growing share of wallet and new account activity that we've been talking about for some time, and I want to thank this team because they're executing at a very high level. You have to go back, I think it was the third quarter of 2014, to find this level of performance. But I'd say that when we look at this team's drive and execution, combined with the outlook that our customers are giving us, we're feeling pretty good and we're feeling really good about the share that we're gaining right now.

All right. And then I wanted to ask about the independent dealer channel as well. It sounds like your competitors are working to kind of integrate their store network with some of the dealer network. Is that something that Sherwin does as well? And can you maybe just talk about what you saw this quarter in your sales through independent dealers?

I'd say overall, the independent dealer market has not been a very strong portion of the market. We do not integrate our independent dealers with our stores. We operate those as separate businesses. And our goal as we work with our independent dealer customers is clearly to help them in their approach to growing their business and through our stores, obviously, we have a direct relationship with those end users as well. Typically, those might be customers with some different expectations. Some of those customers that are going into a dealer might have different expectations than those that are coming into our stores. But our store people are out building those relationships, driving them into our stores with regularity.

Thanks

very much.

Thank you, Mike.

Thank you. The next question is from the line of John McNulty with DMO Capital Markets. Please proceed with your question.

Yeah, thanks for taking my question. Morning,

John.

Morning. With regard to the contract that you have, can you give us some color as to how much visibility they have into their backlog as they look out? I know it's going to vary a little bit from residential to non-residential, but can you give us a little bit of color on that and how much you see in terms of that -single-digit type growth that you're seeing in the fourth quarter, how we should be thinking about that rolling into 2020? Well, you hit on a number of really good points. First is that the residential repaint contractor's vision versus the non-residential or commercial be on opposite ends of the spectrum. So a commercial contractor might be bidding a project that's not even out of the ground yet, where a residential contractor might be bidding something that could be painted in the next couple of weeks. And then we're blessed. So we have a number of stores and a number of reps that are out there working with those customers, and we try to capture and understand as much as we can about what's happening in the market through those contacts. So a better line of sight and quicker on the residential, a little more distant on the commercial side. Great. Thanks for the call. And then maybe just one follow-up on the S&A as a percent of sales. It ticked up, I guess, marginally. What was driving that? Was that just the rapid pace of what you saw in the same store sales side and trying to keep up with it, or was there something else we should be thinking about? No, John, I think you hit it right on the head. It's keeping up with the increased sales. But also we have 75 additional stores -over-year, a commiserate number of reps. So we continue to invest in our growth opportunities, specifically in North American stores. Regardless of, you know, we saw a little softness in consumer because of the -over-year dynamics there. We saw a little bit of softness in industrial. You can be rest assured we'll continue to invest in these growth opportunities, specifically in North American stores. Great. Thanks very much for the call. Thank you.

Thank you. The next question is from the line of Vinson Andrews with Morgan Stanley. Please proceed with your question.

Thanks very much, and good morning, everyone. You know, this is the second quarter in a row where we really had what appears to be just outside same-store sales performance versus the data that's out there and the other commas that are out there. And I know we talked about this a bit last quarter, but I want to ask a question a little bit differently this time around and just understand, you know, is there anything you're doing as you're prospecting new business, whether it's, you know, a greater part of the wallet, an existing wallet or a part of a wallet that you don't have, is there anything you're doing with data or other technology that's sort of allowing you to find more leads? And we've also in the past talked about how, you know, when you open new stores, you know, sometimes other stores close. Has there been an acceleration in that trend? I'm really just trying to understand sort of what's driving this big sort of what appears to be a step change in share gain and how sustainable we think it is looking into next year. Yeah, so, Vinson, the answer is yes. We're trying to use as many tools and improve the tools, as many new tools as valuable and improve the tools that we've currently or consistently used in the past. And I would say that a big part of that also comes down to, you know, the execution, you know, always trying to, you know, we're hiring 1,400 college students a year. We're bringing them in. We're spending more time training them in the different aspects of the business that will help them. And I think we're getting better at that. And I think, you know, when you're wondering, you know, what's happening, I think it's using the tools. It's really good programs. It's really good products. And it's a lot of determination. You know, we don't unlock our doors and wait for something to happen. We're out there aggressively trying to grow this business and build relationships. And, you know, to your point, we talked about it last quarter. We hope we talk about it again next quarter because, you know, our focus is on making that happen. If you look at our residential repaint business, this is, we've had five years of compounded growth, double-digit growth in this business. And, you know, we expect that there's a lot of momentum there to continue as well as in these other segments in the commercial and in property management as well. But we're not waiting for it to happen. We're very deliberate in what it is we're trying to execute. Thanks. And as a follow-up, Alex, I could ask you about the four-quarter guidance. I mean, by our estimate, you aid about 31 cents of what I call nonrecurring costs, hopefully, the FX hit and the debt distinguishments. And if you take those out, you really have phenomenal leverage, you know, all the way through the income statement. So, you know, it just seems to me that maybe the fourth quarter looks a little conservative. Is that a fair statement or not? You know, Vince, we try to be as realistic as we can when we put our guidance together. You know, I look at FX as just part of our ongoing business. I know it's hard to say, hey, you know, we're going to back out if I take a hit in one country or another. We choose to be there. We choose to operate our businesses there because we think there's opportunities. We also did have the benefit in the quarter on supply chain improvements in our consumer brands group that helps operating margin growth. As you recall, last year we talked about the load-in to the new customer program that causes some challenges in that quarter. So that benefit won't be there and going forward. But if you look at our fourth quarter, you know, at the midpoint, our full year guidance is to be up almost 14%, like John talked about. That tells you we've got to be up almost 21% in the fourth quarter on top of a 12% increase a year ago. So I think those are pretty strong results for our fourth quarter and we feel very good about that. Fair enough. Appreciate the color. Thank you.

Thank you. The next question is from Steve Fern with Bank of America Maryland. Please continue with your question.

Yes, I'd like to just continue with Vincent's question about your aggressiveness going after new projects that seem to be driving your market share gains. Just one question for you with respect to your dedicated sales force. What fraction of their compensation is variable and has that changed? It's not changed and I want to say it's about 60-40, 65-40 variable, Steve. It might vary just slightly, but it's about 60-40. And John, you mentioned this 85 million -over-year profit gain in America's group. If we take this split in same store sales between volume and price and you mentioned 37% incremental operating margin on that volume, you had lower raws. There was something that was a drag. Was it LATAM and can you quantify that? Well, our LATAM business was up low single digits in sales. We did have a profit improvement in the quarter. I'm trying to frame it in the way that you've asked the question, Steve. I'd say you look at the flow through and as Jim was alluding to, we're not seeing as much of the benefit on the raw material moderation in our architectural side of the business. So the stores, when you get up into the mid-30s on flow through, we feel very good about that. So we continue to add the stores that I talked about and we have 75 additional -over-year and we continue to have a commiserate number of reps. So I think we feel good about that flow through incremental operating margin and if the store could do that all the time, we'd be happy with that.

Very good. Thank you. Thanks, Steve.

Thank you. Our next question comes from Kevin McCarthy with Vertical Research Partners. Pleased to see you with your question.

Yes, good morning.

With regard to your same store sales growth of 8.1%, how would you characterize

the

relative

contributions from volume versus price in the quarter?

Yeah, I would say that the price was in an impact of about .5% and then the remainder would be volume.

Excellent. And then I wanted to ask about your non-raw material costs. What we sometimes hear from other companies is that, yes,

raw material costs are ebbing, but companies are experiencing inflation in other categories like labor, freight, warehousing, et cetera. Is that the case at Sherwin and if so, how does that enter into your thinking about potential optionality for seeking additional price in the future?

Yeah, Kevin, clearly we're seeing wage inflation and if you look at it year over year, it has ticked up a little bit as unemployment has continued to decline and we have seen freight increases and distribution increases. And we look at, as well as healthcare, and when we look at our costs, we look at it as a total cost basket and try to determine where that's headed, what the impacts are. We obviously try to push back on that and get efficiencies offset at the absent of getting those offsets. We have to go to

the market with price. Thank you. Thank you, Kevin.

Thank you. Our next question comes from the line of Arun Vikanathan with RBC Capital Markets. Thanks to see with your question.

Great. Thanks. Good morning. How are you,

Arun? I've just beaten a dead horse here. Just going back to the same short sales number, presumably you did that with new construction, also relatively weak. So just trying to understand the step change from say Q2, which is maybe 2% or so volume going up to 6 now. Would you attribute all of that to share gains or was it certain reasons that will weaken it in the prior quarter doing a little bit better? And then what are your thoughts on the new side going from here? It seems like there's been some improvement in affordability. Does that give you a little bit more optimism for that market actually returning into your business in 2020? Thanks.

Yeah, Arun. So we, let me just start with the last piece that you spoke about as far as the new residential. We do enjoy a wonderful position with a largest percentage of the larger home builders in the country. And we work really hard every day at trying to help those important customers deliver on time and homes that their homeowners really enjoy. And that includes the services and products that help them to deliver. And so as that business picks up your right, we will be working hard to grow those relationships. I believe this is either 17 or 18 of the top 20 national home builders. We have an exclusive relationship with and we're working really hard on the regional and the smaller home builders to leverage those existing services and products that are within our company already. As it relates back to the growth that we've had in the core stores and the momentum that we have there, you know, a good portion of it is share gain. You're right. Our teams are, as I mentioned, and again, I don't want to sound like a broken record here, but this is a team that's executing very well on the programs that they have and the services that they provide. And, you know, we don't know what's going to happen going forward, you know, with weather or labor, but we can tell you that we're working really hard to position our company favorably with these customers. We had that leadership team in about two weeks ago walking through segment by segment and across the country there's a lot of optimism about not only where we are but where we're going. So we're feeling really good about this, but there's no complacency here. There's a lot of work to be done, a lot of customers out there that we're working on and focused on to continue to grow. And that's what we're going to be doing this afternoon and moving forward.

And just wanted to get your thoughts on the priorities for your cash flow going forward. You know, you've talked about buybacks in the past. You know, I guess if we go back 10 years, you know, both on M&A wasn't a huge part of your strategy. Maybe it wasn't the service business, but not so much in coding. So maybe you can just reiterate what you're looking at as far as, you know, opportunities to deploy that cash flow and maybe rank order your preferences between, you know, buybacks, debt reduction and M&A.

Thanks. Yeah, let me start with M&A and then I'll talk to Al to talk about the remaining capital deployment opportunities. But I would say this, we're really pleased with the progress that we're making. We're actively involved in a number of projects. We do feel we're blessed that we're not desperate for growth. We don't feel as though we have to have acquisitions for growth. Although we have a number of opportunities that we're pursuing, we have a number of organic growth opportunities as well. And so we look across all of the businesses and we're identifying those areas, if it's geographic or from a technology standpoint that will allow us to further create shareholder value. And those are the discussions that we're pursuing and still quite frankly have quite a pipeline to get to. So we're working it. We feel good about the progress we're making on a couple of really good projects. But there's more for cash deployment and all that. Al, would you touch on that? Yes, you know, we are generating a lot of cash. We had two nine months over a billion, almost six billion seven almost with 12.1 percent of sales. And, you know, we manage our capex below two percent, as you know, and we've gotten back to our historical capital allocation policy. We've raised a dividend over 31 percent. And with the dividend and share buybacks, we've returned over $893 million to our shareholders, a 46 percent increase, and we're going to be very consistent on that going forward. So, as you know, we're not going to hold cash. And absent a more robust M&A pipeline,

we're going to buy back our stock. Thanks. Thank you, Arun. Thank you. The next question

comes from Duffy Fisher with Barclays. Please proceed with your question.

Yes, good morning. Morning, Duffy. Question just around kind of the new strategy in the home center for you. This is your first full year going through the paint season,

you know, going to that, you know, fewer or more people, salespeople in the stores. When you look back this year, how would you grade yourself, you know, with the new project? And again, should we expect a bigger step forward next year again?

Yeah, I'd say, Duffy, that we're pleased but not anywhere near satisfied. Next year we'll be better than we were this year. There's a lot of elements to this program that rolled out this year for the first time in our largest customer, and we're determined to get better there. And there's a lot of opportunity on both the -it-yourself side, and as I mentioned earlier, there's a professional side here that enjoys the home center experience, that's purchasing a number of different products that are available through the home center channel, that we want to help our customers in that home center space to be better in pursuing. And so this first year as the program rolled out, we were learning and improving, but we're not happy with where we are. We want to continue to grow. Now, we've spoken that overall for the entire business on a global basis, we expect this to be a low single-digit growth business, so there's going to be some work ahead. We also know there'll be some bumps and some choppiness if you will. It's not as smooth as some of our other businesses, but I don't want to at all give the impression that we're satisfied or complacent here. There's a lot of learning that we've done, and we're going to try to learn and apply and be better at this going forward.

Okay.

And

then one for Al. Alan, the California settlement, what's the size of the cash

outflow and what's the timing of that relative to the book numbers you gave us in the release? Yeah, definitely. The Santa Clara California case was resolved for $305 million, with each co-defendant paying $101.7 million over six years. We made the initial payment of about $25 million on September 23rd of this year. We'll make annual payments of approximately $12 million on or about September 23rd next year and all the way through 2024, and then we'll make a final payment of approximately $16.7 million in September of 2025. Great. Thanks, guys. Thank you,

Gutsy.

Thank you. The next question is from Don Carson with the Susquehanna Financial. Please proceed with your question.

Thank you. A question on consumer, you know, your revenues were down 12% -over-year. You said half that was due to loans, load-in, and guardsmen in the year ago number. What was driving the other half? Is that all international softness? And can you comment on how you see that unfolding as you get into fourth quarter? You talked about being down slightly in that business in the fourth quarter. Is that all going to be international, or is there still a tough comp against the loans and guardsmen?

Yeah, Don, I'd say the sales missed, you're right, by a point or two from our forecast, and the myth is, as you mentioned, largely attributed to our international business. There's some work here to be done. We are certainly focused on this largest piece of our business here in North America. We do think longer term there are some opportunities as we reposition our brand in China to be a better competitor there. We do have a very small business, a small, in a smaller market in Australia that we didn't perform very well in.

There's

no hiding about that. But overall, if you look at the international business, it was a drag, and we have a goal of driving those better, and we think we can. And Don, I would just add to that, your last statement. The guardman is behind us, who was the best in September of last year, and we are not going to be going up against any significant load in the fourth quarter.

Then now a follow-up on plant consolidation. I know you had kept a couple of U.S. plants going for longer than originally planned in order to service the new Lowe's business. What's the status of those plants? Have they been closed yet, or what is the current plan? Yeah,

we're continuing to put in capacity, expand capacity in other sites to make sure we're going to service, first our stores strong volume growth that we see had them in the third quarter, and the outlook, plus the Lowe's volume growth that we've seen. So, you know, we haven't made those calls yet, but as you know, our normal practice, we'll tell our employees first, and then we'll talk about it going forward. Thank you,

Don.

Thank you. Our next question is from PJ Juvacar with Citi. Please proceed with your question.

Yeah, hi. Good morning. Good morning,

PJ.

Can you talk about the DIY paint growth versus contractor-applied paint growth? The reason I'm asking is we're getting different signals from you and your competitor. I think your competitors are declining same-store sales growth in their own stores. So, where is the split between the two? Is it 60-40 contractor DIY, and how fast are these markets growing?

Our business through our stores is about 85% professional, painting contractor or property management. And that's the piece that is obviously growing the fastest. We did have some growth in our DIY business. The DIY business is a relatively small piece, and it's really focused on a specialty high-end consumer that's looking for a specialty store experience. So, you know, we clearly are really focused on the professional side.

What is the overall industry in terms of DIY and contractor? Not just your own stores, but the overall industry?

The DIY piece would be the largest piece overall. Yeah, if you look at the overall industry, DIY is about 38% of the gallons. So, it's a bigger slice in the industry obviously than it is in our stores. Right. But if you, yeah, 38 overall, the segment larger than any one particular professional segment. PJ, what I would add to that though is we still continue to see the trend from -it-yourself to -it-forman, as the population ages. That leads into the res repaint that we talked about being high single digits in the quarter. You know, we grew high single digits compounded for the previous five years. So, as the demographic trends continue, and we are probably skewed more heavily to new construction, as John mentioned earlier, than the overall market, you know, we'll continue to grow faster in the market with those trends.

Okay. A quick question for Al. You know, your goal was to get the leverage below three times by end of this year. Now, once you get there, would you be willing to look at a bigger acquisition? And, you know, is Europe still an attractive market for you, given that, you know, the recent slowdown in the European overall economies?

Yeah, I think, PJ, you're right. We are going to be below three to one by the end of this year. Our target is two to two and a half. And, you know, as John talked about earlier about M&A, we're going to be very disciplined about our approach to M&A. You know, we look at it for the long term, not, as I understand, you know, Europe's a little bit slower, Asia's probably slower than what we had expected, specifically on the industrial side, but we look at it for the long term. So, if the right opportunity were to present itself at the right price, we absolutely would go after it.

Thank

you. Thank you,

PJ.

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

Hi, thanks. I'd love to follow up on the performance coatings group. I think John, you mentioned a few times still chasing some of the cost increases from a few years ago. Could you put that in context of where we are now? I guess if you back out FX performance coatings is up 1.3%. Was that all price? And what do we think

we can still get there now that raw materials appear to be moderated?

Yeah, Greg, you know, a good portion of that was price volume was down. We talked about softness in certain markets and in certain regions of the globe. I would say, you know, we're not done. You know, we are our year to date operating margin is 14%, just over 14%. We talked about targeting the high teens to low 20s. And you look at the significant ramp up in raw materials that we saw in 17 and 18. We talked about Valspar specifically on industrial not getting a price early in 17. So we're still chasing that. So, you know, as you know, I'm happy with the progress we're making. The team has done a great job at cost control and the synergies that I talked about that are to come. But we've got more work to do. Yeah, I'd add to that, Greg, that, you know, as we've been going through this process, we've made a conscious decision of trying to work with our customers. While the raws increased rapidly, we tried to work with our customers in allowing them to work through the pricing to their customers ultimately. And we accepted some compression there as the new owners of a business that hadn't had the price increases in the market that it really needed and had quite frankly demonstrated over the last few decades because of the cost of cogs and the overall cost, the relative cost of raw materials and the overall cost of goods. You need to get the pricing through when it rises. Here we made a decision that we'd work with our customers. But to Al's point, you know, we're working with them in a way the path goes through because we need to recover that as well. And just to make sure, in this quarter, the .3% sales growth, XFX, that was volume not price or was price not volume? It'd be more

price than volume. It'd be more price. And there was one thing, and John, I just wanted to, you had an announcement through the

quarter about looking at a new R&D facility and headquarters.

I know it'll

take a few years. Can you just take us through the thought process of why now and what you're really looking at when you think about that? Sure. Well, as you mentioned, we're going through a pretty robust process. And it's to find a solution to meet our needs. And Greg, I know you've been here and many on the call have been to our building here to know that we operate in a building that's nearly 100 years old. And as we look at our ability to recruit and retain the highest caliber people in a productive and efficient environment, the technology and innovation that we need to drive to continue to drive results that we know we can continue to drive on top of the factoring in the maintenance costs and just overall issues that we face in this building, we feel it's necessary to move towards a solution. We're in the midst of that process. We hope to make an announcement on the location by year end or early 2020. But realistically, Greg, I would say that this is not something that we prefer to do, quite frankly. It's not something that we think is any type of, you know, we deserve or reward. This is our necessity to be able to hire and retain the best people in this industry. And we owe it to our employees, quite frankly, to put them in a better environment than they're working in right now. And we look at the retention of these terrific people. We need to make this move. Got it. And is having, is bringing facilities together,

given you still have, you

know, in Minneapolis and in Cleveland, you know, different areas, is important to get those people together or

does it actually make sense to have sort of two towers of power?

You know, I'd say that we're really looking at this to your point of where does it make sense? I don't, I'm not a believer. I mean, you can talk about the people in Minneapolis and then you could say, well, what about the people in Shanghai or in the UK or, you know, so where we believe that there are opportunities and synergies, we'll bring those together. But we're not at all, we don't believe that every technical team needs to be here in Cleveland. That said, we like the idea as possible of getting our marketing people and our R&D people closer together and more consistency where there are synergies and efficiencies amongst the R&D teams. And that's what we're working toward.

That's great. Well, good luck, guys.

Yep, thank you. Thank you.

Thank you. The next question is from David Begleuter with Blaker Bank. Please proceed with your question.

Thank you. Johnny mentioned strengths this quarter in coil.

Let me finish maybe getting some share. What's your game and is there

more going forward in both those proclam?

I think, you know, what's nice about the growth that's coming is in every region, double digits in every region. So there's a lot of growth in a number of different segments. And quite frankly, there's still some drag, some pressure that we're feeling in the ag business where it's been more influenced by summer dynamics impacted by tariffs. The sales of the products on farms or the equipment that they're storing, some of those delays are impacting coil. So we see upside there. But overall, I'd say that this is a team that's really executing very well in bringing the products and technologies to customers in a very efficient way. And we've long talked about the efficiencies to be gained by the combined Sherwin and Valpar teams coming together and the assets and technologies. And we're just starting to see some of that. So we think there's a lot of really good opportunities ahead for this business despite where it's performing right now.

Very good. Now, just on a debt-free side, what's the benefit to interest and expense going forward?

Yeah,

you know, obviously with the low interest rates that we refinanced, the 2.25, 275, 2022, with the – we did the – if you recall, in the second quarter, we did the 400 million US euro currency swap. So net-net is going to be pretty neutral

going

forward,

maybe down a little bit depending on what we do next year.

Thank

you. Thank you, David.

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

Thank you. Good afternoon. Good afternoon, John. Back on that project, will that be cost-neutral to your operating costs, the new headquarters and the new R&D facility? Yeah, John, you know, we're still crunching those numbers, and, you know, it's hard to fully get a feel for that and see the permanent location and design and things like that, but, you know, we're in multiple buildings around Cleveland, Ohio, all pretty old. My expectation is we're going to see some benefits for the ongoing operating costs.

Okay,

and then on the next earnings call, you're going to give 2020 guidance. Will that still continue to be on a digested EPF basis excluding amortization? Yeah, you know, we're going to certainly call out amortization. We'll see what we do with integration, but we're working through the plans down and how best to communicate. The goal here is to make sure our shareholders have a clean line of sight to our ongoing operating results.

Thank you. Thank you,

John. Thank you. The next question is from the line of Derek Schmoyer with Mongo Research. Please proceed with your question.

Hi, thanks. I'm wondering if you can comment on any tors and performance codings, if you saw some of the volume decline related to additional drawdowns.

In performance codings, I'd say there's probably not too much of that. You know, I'd say what we might see is maybe a few more orders of lesser size, so greater frequency of smaller orders, but I don't know if we'd point to a significant reduction in inventory as having much impact on our numbers.

Okay, and my follow-up is just switching to the America's Group. I was wondering if you can make a comment on interior versus exterior, same store sales.

Exterior was up double digits, and that would include paint stains and primers. Interior sales were up high single digits.

Great, thanks

a lot.

Thank you. Our next question comes from Justin Spear with Zalman & Associates. Please proceed with your question.

Good morning. Thank you, or good afternoon. Justin, in regards to the performance coding business, the ambitions that you're driving towards, I guess the primary reason for being behind trends was target price and cost, but now that looks to be on a little bit better footing, but then you have that counterbalance against underlying emerging market or international markets that are a little slower or weaker than maybe you were expecting maybe a year or plus ago.

But yes,

my question is what are the incremental steps you need to take to drive towards that optimized scale in this business, and when do you think you get there?

Yeah, Justin, I know the comment about slowing in some of the region we're in and macroeconomic discussions that are had, we still have great market share opportunities across each of these businesses and each of these regions, and you see that in coil and packaging as examples where the teams have done a great job tying together technology and services to provide those solutions to those specific customers in those regions, and they're making progress there. There's no shortage of other opportunities across each of the other businesses. And then, you know, specifically on the synergies, the $415 million run rate versus the $315 million we'll have through the P&L acquisition to date, that would be by and large on performance coatings. It's just, and by design, you know, the industrial integration was coming after the architectural integration, and we're on path, we have a plan, and rest assured, as we implement those synergies, we'll see those through the P&L. That being said, coming out of this year, and we've talked about this, we're not going to be talking about synergies any longer. This is just going to be part of our normal culture of continuous improvement.

So that makes sense. I don't want to follow up on the questions I actually had on that subject on the synergies. I just want to make sure I understand the mechanics of this. You have $315 million in the P&L. Are you saying that you've already done the work to drive that incremental $100 million of synergies, such that that's going to be realized in 2020, or is that something that carries into, you know, beyond 2020? Yeah, no.

$100 million. Yeah, we, you know, if you recall, at our investor day, we talked about that $100 million being spread out over the next few years. You know, I would say the $100 million has projects in the pipeline to support it, but we got to get to execution and really dial into what we think we're going to save. So, you know, there might be a little bit of variability in there, but we definitely have the projects identified. Now

it's about

all

about

execution.

Perfect. And the last question is more near-term focus. It's been thinking about the implied margins for

fourth quarter. Given that right now it's tough for us to draw a real good beat on typical seasonality,

as it pertains to specific consumer brands and performance coatings, but just maybe some indications of where the margin destinations go in mapping towards your fourth quarter implied guidance.

Yeah, as you would expect with our stores, our North America paint stores, in PAG in particular being up mid to high single digits at higher growth margin, that's going to help, but you definitely see a seasonal tick down. So I would expect our sequential growth margin to be lower, but certainly,

and this is a low bar, but certainly hot butter year over year.

Yeah, I guess in terms of our consumer brands in particular, the last year you saw a sequential degradation that was almost 800 basis points. Is that the typical sequential degradation you should think about in consumer brands?

You're going to see a little, you know, think about because we had the load in the third quarter and then didn't have any in the fourth quarter. It should

be less than that this year. Perfect.

Thank you very

much, guys. Thank you, Justin.

Thank you. Our next question comes from Truman Patterson with Wells Fargo. Please proceed with your question.

Hi. Good afternoon, guys.

Nice quarter. Yeah, hoping we can touch on the raw material outlook a little bit more, just break out between your resins and titanium dioxide. You know, it looks

like propylene is down pretty significantly here. You're starting to see that, you know, low 30-year resins. How should we think about that going forward, you know, over the next

few

quarters? And then, you know, on the

titanium dioxide part, it seems like there are some moving parts there. You have your old U.S. business seems fairly robust, but some of your competitors don't seem quite as healthy, while at the same time you have, you know, some slowing international markets, Europe in particular.

Sure, Truman. Yeah, I'll part that out maybe in a couple different pieces. Maybe I'll start with the TiO2 piece. I mean, what we're seeing, the industry pricing for high-grade chloride TiO2 has been pretty stable over the past year, and we're not seeing anything necessarily overly favorable or unfavorable that's going to change that in the fourth quarter. I think, as one of the earlier questions said, we will talk about our view on TiO2 for next year when we give our outlook in 2020. I think on the petrochemical side of the basket, you know, that's where we're seeing some of the benefit right now in certain parts of the basket. You know, again, we don't sell propylene or ethylene directly. Those are key parts of what we make, and there's other market dynamics there as well. But I think that if things were to stay flat where they are right now heading into 2020, we did say that the first quarter of 2019 was the highest inflation that we had this year. So if things were to stay flat from here, it's very reasonable to think that, you know, 20 could, we could see some

tailwind there. But beyond that, pretty hard to tell what's going to happen.

Okay. Okay. Thanks for that. And then just wanted to dig into your gross margin a little bit more, you know, nice performance up over, you know, 300 desks or so. Is there any way you all could just rank order the buckets, the major buckets of what's really driving this, you know, pricing, raw materials, volume, leverage, energies, you know, et cetera? And then, you know, piggybacking off of the prior question, you know, going forward, is there anything near term, you know, why we wouldn't expect this to reoccur over the next, you know, quarter or two quarters?

Yeah, Truman, you know, I always start with volume, and especially when it's, you know, our North America pace towards volume, that's always going to be the best leverage we have. It is our highest margin business, and as it grows faster than a company, it's our growth engine, it's such a big portion of our business that drives our margins. Excuse me. You know, the, we did have the -over-year comparison with the run-up in raw materials that we saw in the second and third quarters of last year, so probably a little easier comp than what you'll see going forward. We did have synergies in the quarter, and we did have the benefit of the -over-year supply chain improvement. So with moderating raw material costs, as we've talked about, the teams have done a nice job with pricing discipline, but again, there's more to go there. We have been chasing that significant increase in raw materials the past, you know, three years now, and here today, our operating, our gross margin adjusted is 44.7, so we feel good about the progress we're making, but we've got a ways to go to get to the long-term targets of 45

to 48. Okay, thanks, guys. Thanks, Truman.

Thank you. Our next question comes from Bob Cord with Goldman Sachs. Pleased to see with your questions.

Thanks, guys. Appreciate your patience. Two quick ones, if I could, about North America architectural. First, I'm wondering if you've seen, you know, with the interest rate reductions, we've seen some of your customers in the housing, new residential housing markets, certainly seeing their stock prices catapult higher. Are you starting to see some visibility there from order trends that gives you some confidence there is going to be some improvement in that market?

Yeah, what I would say, you know, our third quarter, we felt good about the third quarter. It was up mid-single digits in our new res space. If you look at some of the reports that are out there, Bob, you know, home builder confidence is at the highest level in about two years right now, and mortgage rates are certainly helping drive that, the solid job growth. There's lower new home inventory out there. If you look kind of at the second half of 2019, it's been pretty steady gains in the single-family construction. It's the regular litany that we always talk about though that's on the other side, you know, the higher cost for land, labor, materials, and the regulatory piece too. So those are some of the headwinds. But I'd say overall, what our customers are telling us, we feel pretty good about. The most recent data talks about is a little bit mixed, you know, single-family permits and starts were positive, sequentially and year over year, multifamily was a little bit more mixed. So overall though, I think we feel pretty good about where new res is heading right now.

I think you may be staying in that vein of looking at some of these indicators. I noticed the Harvard Lyron numbers looked awfully darn ominous for next year, and certainly contradicted by your results in the stores group. Do you have any sense of what might be driving that or any views on the correlation of sort of their perspective forecast versus your business to give us some comfort that maybe it's not as dire as we're suggesting?

Yeah, I would say there's a number of things we look at there, Bob. So Lyra, the leading indicator of remodeling activity, certainly they are forecasting sort of a modest decline in the back half of next year. But what I'd remind you is they measure that in dollars. And so a lot of it is driven by big ticket, big remodeling projects. Some of the smaller projects like a painting of your kitchen or a painting of a bathroom, those tend to hold up maybe a little bit better in an environment like that. I'd say, you know, existing home sales are another driver. Those have been pretty choppy over the last year. Today there was some new data out that said they were down sequentially, but that followed two months where they were up. Year over year, existing home sales are still up, you know, low single digits. So that'll be a driver. And I think when you look at all of that, you look at the aging housing stock that's out there, home value appreciation is still continuing, the employment backdrop is good. And to John's earlier point about share of wallet and new appellate activation, I think we still feel pretty good about the repaying opportunity for us.

Great. Thanks for the help. Be back.

Thank you. The next question

comes from the line of Dmitri Silvestein with Buckingham Research Group. Please proceed with your question. Morning, Dmitri. Afternoon. Dmitri,

your line is live. You may be on mute.

Oh, good morning. Good afternoon. Thank you for being patient and taking my call. Really quick, on the DIY, I guess on the consumer side of your business, what was the price realization in North America similar to sort of the 2.5 percent level that you saw in your company on store? And what was the pricing like in Australia and China and Europe for you in that business? Yeah, Dmitri, I'd say it was a little bit less than what you would see in the stores. You know, I would say, Dmitri, outside the U.S. in those smaller

consumer segments, it's not material.

Okay. So most of it, okay, so it was less than 2.5 percent for the division overall. But if the international was slattish, let's say, then domestic was less than 2.5 percent, is what you're telling me? Yes. International, right. Okay, gotcha. And then secondly, just to follow up on the strength that you guys are seeing in Coil, I know business has changed a lot in the specialist since you guys bought it from Valstar, but were bought it when you bought Valstar. But, you know, historically it's been a business with a large North American exposure to the commercial construction market. So is there anything that we can sort of extrapolate from your strength in that business to what it implies about the commercial construction market in North America, or were the share gains really the main driver more so than the market performance? I'd say it was a little bit of both, Dmitri. You know, there clearly were some share gains and we also are the benefactor of some of the commercial business. I'd also mention that we, as I mentioned earlier, we did experience some pressure on the edge side that drew that back down a little bit. But you're right. We benefited from some of the commercial, we grew share, and we're determined to continue to drive it. Okay. Thank you. That's all I have. Thank you very much for taking my call. Thank you. Thank you, Dmitri.

Thank you. Our next question is from Rosemary Morbelli with G-Research. Please proceed with your question.

Thank you. Good afternoon, everyone, and I will join my thanks as well for hanging in there. Good

afternoon.

I was wondering if you have a better idea as to the sale synergies you are anticipating. I think that you did not really give us any specific numbers when you bought Valspar and were waiting to see, you know, how this was going to unfold. Do you have a better feel as to how much growth you could see from that?

We do, but we're not going to share it today. We feel good about it, Rosemary. There are a lot of efforts and a lot of projects that have been identified that we feel really comfortable about pursuing. But those are going to be things we think we're going to talk about as we are implementing them, not before.

Okay. That's fair enough. Looking at packaging, there is, I am assuming that at this point, most of the non-BPA coating has been replaced, so to speak, or rather the BPA has been replaced. So what kind of a growth rate are you looking at going forward? And is the fact that some beverage companies are going from plastic, or at least they are saying they will, going from plastic containers to aluminum cans, is that going to help?

It is going to help, but again, I might take just a bit of exception to your assumption that we have moved through the non-BPA to, or the BPA to non-BPA. There's quite a bit of road ahead there. I'd say we're in the very early innings of that conversion. So we're excited about this opportunity going forward as there's a lot of one way ahead in that conversion.

Okay. That's good to hear. And then lastly, if I may, on the automotive, is that mostly refinished? And can you talk about the trend there?

It's all refinished, and the trend for us, particularly in North America, we're gaining some traction. Over the last couple quarters, we've spoken about the fact that the combined technologies, the Legacy Valspar and Sherwin technologies coming together, provide an overall better system with greater speed for the VR shops to push vehicles through with greater efficiency. And we're out demonstrating that to customers right now with some very good traction. So we're really good about the team's efforts there, and we have some expectations for them as we go forward.

Are you seeing this new technology and share gain offsetting, or more than offsetting, the decline in the level of collisions?

Yeah, that's a good point, because if you do look at the overall market, it was a relatively flat market due to the decline in collisions. So it's a very good observation on your part. That's what leads us to believe that the low single digit gain that we achieved here in North America gives us some modest share gain.

All right. Thank you very much.

Thank you. Thank you.

Our next question comes from the line of Christopher Perella with Bloomberg Intelligence. Please proceed with your question.

Good afternoon, everybody. Two quick ones. You touched on it for the Americas, but for performance coatings and for the consumer segment, what is your visibility into your order book? How far out can you see into your customer's order patterns? Well, it varies by segment. We take great pride in that, though, Chris. You know, when you talk about, as we do, solution selling and consultative selling, it really takes a very good understanding of what your customers are trying to accomplish so that you can be there when they need you, if it's with product or service. Again, varying degrees. So when you look at a VR shop, vision might be a little bit shorter. And if you look at, so Protective and Marine is an example where they're pricing and coating projects that could be out a year in advance. I mean, there's a wide spectrum of projects. When you look at various OEM customers, I mean, there's, depending on the industry, varying degrees of line of sight. I think the important point is, though, that we work closely with our customers to understand that. We want to be the ones that are helping them avoid excess inventory, avoid obsolescence, avoid having, you know, products, but it being the wrong product. And you do that by getting close to their needs and understanding what they're working on. So we've got a pretty good line of sight in most of the segments. We're always working to make that better. All right. Thank you very much. Appreciate the time. Thank you. Thank you, Chris.

Thank you. The next question comes from Gajram Punjabi with Baird. Please conclude your question.

Hey, guys. Sorry to interrupt your lunch break, but just sort of go back to the

share game question for the storage group. You know, John, just from a high-level standpoint, is this what you would consider to be a normal evolution given where we are on price-cost curve for the industry,

you being the market leader, having led the industry with price increases initially, and perhaps, you know, willing to

keep some share as a consequence and now you're a burden on share, or is it broader than that?

I'd say our approach, Gajram, is pretty consistent, and I know you've been following us for some time. You know, our view, and I touched on this a bit earlier as it relates to price-cost. You know, our first effort is always to try to offset, not just in our storage business, but in all our businesses. Try to drive efficiency into the equation to offset the raw material cost. We don't feel as though that that's a share question because, you know, when we don't have to go out with a price increase, our customers reward us with their loyalty, but the simple fact that we're open and honest with them about what's happening, that said, as costs go up, and I use cost not to just point to raw material costs, but, you know, if it's labor or freight or others that we are unable to offset, then we're in front of our customers talking about that. The key part of the equation there is, as we're helping them to be successful, so as we're having these discussions and helping them to be successful, we're then introducing whatever it is that we're facing. Hopefully we're able to offset raw material costs with efficiencies, but if the costs are going up, we have to be open with them and we have those discussions.

Okay, that's

helpful. And just finally,

your 2020 financial targets were pushed out by roughly your given increase in raw material costs, and I think FX as well. Just given the obvious momentum you're now seeing in storage group, which is a very profitable segment for you, how does that timeline

change at

this point?

Yeah, gotcha. And still, it's still looking, you know, a couple years out. We're in the middle of putting together our 2020 plans. Obviously we'll share those with you at our year-end call. I mean, you know, you look at some of those metrics and we're making progress, whether it's on EBITDA with an 80 basis point growth -to-date with net operating cash, over 12% of sales. So we're making progress on different fronts. The, you know, the factor there with raw material costs and it's also top-line growth. And if you go back two years, I think we were expecting a little bit better top-line growth than what we're seeing across

the different segments.

Okay, thanks so much,

Al. Yep.

Thank you. Our next question comes from Kevin Hosubar with Nourish Growth Research. Please proceed with your question.

Nourish. Good afternoon, Kevin. Your guy in the mid to high single digit space for sales growth in the fourth quarter in your paint stores sounds like most of that will come from volume. How big

of a factor can weather play here and where that ultimately shakes out? Because it sounds like the backlogs are there, but obviously weather's got to get a little funky here as we head into the winter. So if the winter turns out to be harsh, do your customers have enough flexibility to do indoor jobs on bad weather days and outdoor jobs on

sunny days? Or does a harsh winter make it difficult to hit that type of growth?

Well, Kevin, there's a number of points to that. And the first I might say is it's a smaller quarter, so it can be influenced a bit easier than the larger third and second, third quarter. And oftentimes what it might impact is the progress on a project. So, yeah, if it's nice or whether they might be outdoor paint, there might be outdoor painting taking place. There might be issues if it's really a harsh winter, as we saw last year with all trades and their ability to get on a project and move a project through the cycle. So it's all dependent upon what kind of weather and to what extent we deal with it. And we really don't know. And then each one of these can be different and unique in their own, and we're going to just respond in the best way we know, given whatever we face. That's great.

And then in the performance coatings, you talked about your team being focused on controlling selling expenses given the softer end markets. Could you elaborate on that? And what levers are you pulling to dial back costs

there and if things get worse, you know, deteriorate from here, are there more levers that can be pulled? There's always more levers to be pulled. I mean, and you try to, you know, as I say, you know, we're controlling our costs. You know, industrial wood is an example where, you know, as John talked about, it's been soft, and we think it'll be soft going forward. But there's other areas that we're still investing in for growth opportunities. So, you know, I think the teams have

responded to the slower sales and we'll continue to manage that. Okay, great. Thank you very much. Thank you, Kevin.

Thank you. It appears we have no further questions at this time, 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 joining us on the call today. I appreciate your interest in everything we're doing and your support. I will be around and Eric Swanson will be around for your questions over the remainder of the week, and we look forward to talking with you. Thanks so much. Have a great afternoon and the rest of your week.

Thank you. Ladies and gentlemen, this does conclude today's public conference. Again, we thank you for your participation, and you may disconnect your lines at this time.