Sherwin-Williams Company (The)

Good morning. Thank you for joining the Sherwin-Williams Company's review of fourth quarter and full year 2019 results and the outlook for the full fiscal year of 2020. With us on today's call are John Marikas, Chairman and CEO, Alma Fission, CFO, Jane Cronin, Senior Vice President Corporate Controller, and Jim Jay, Senior Vice President Investor Relations. This conference call is being webcast simultaneously and listen only mode by issuer direct via the Internet at .sherwin.com. An archive replay of this webcast will be available at sherwin.com beginning approximately two hours after this conference call concludes and will be available until Thursday, February 20, 2020 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.

Thank you, Jessie, and good morning, everyone. All comparisons in my remarks are to the fourth quarter 2018 or full year 2018 results respectively unless otherwise stated. Beginning with the fourth quarter of 2019, consolidated sales increased $50.2 million or .2% to $4.11 billion. For the full year 2019, consolidated sales increased $366.3 million or .1% to $17.9 million. Currency translation rate changes reduced sales in the quarter and the year by .9% and .4% respectively. Consolidated gross profit dollars in the fourth quarter increased $211.3 million or .6% to $1.89 billion. Gross profit for the year increased $617.5 million or .3% to $8 billion. Consolidated gross margin in the fourth quarter increased to 46% from 41.4%. Excluding impacts from acquisition-related amortization expense and integration costs, consolidated gross margin in the quarter increased to .5% from 42.4%. Consolidated gross margin in the year increased to .9% from 42.3%. Excluding impacts from acquisition-related amortization expense and integration costs, consolidated gross margin for the year increased to .1% from 42.8%. Selling, general and administrative expense in the fourth quarter increased $116.2 million to $1.35 billion and increased as a percent of sales to .9% from 30.5%. SG&A expense for the year increased $241.1 million to $5.27 billion and increased as a percent of sales to .5% from 28.7%. Selling, general and administrative expense for the year increased to $3.5 million. Interest expense for the quarter decreased $5.6 million to $83.8 million. For the year, interest expense decreased $17.4 million to $349.3 million. The decrease was primarily due to lower -over-year debt levels. As described in our press release, we recognized non-cash pre-tax impairment charges in the fourth quarter, totaling $122.1 million, related to recently acquired trademarks. Additionally, the company recognized pre-tax gains in other income and interest income of $34 million and $19 million, respectively, related to a Brazil indirect tax matter. Consolidated profit before tax in the fourth quarter increased $195.4 million to $297.4 million. This includes $71.3 million of other adjustments and $119.3 million of acquisition related costs. Fourth quarter of 2018 includes $173.2 million of other adjustments and $137.4 million of acquisition related costs. Consolidated profit before tax for the full year increased $622.1 million to $1.98 billion. This includes $69 million of other adjustments and $389.3 million of acquisition related costs. 2018 includes $341.5 million of other adjustments and $484.4 million of acquisition related costs. We have summarized fourth quarter and full year adjustments to consolidated and segment profit in a slide deck on our website under January 30, 2019, year end and fourth quarter financial results. Currency translation rate changes decreased consolidated profit before tax by $22 million in the year. Excluding acquisition related costs and other adjustments, our effective tax rate on adjusted income for the quarter was .1% and .1% for the full year. Deluded net income per share for the fourth quarter 2019 increased to $2.66 per share from $1.07 per share. The fourth quarter of 2019 includes per share charges of $0.97 for acquisition related costs and other adjustments totaling $0.64 per share. The fourth quarter of 2018 includes charges of $1.10 per share for acquisition related costs and other adjustments totaling $1.37 per share. Excluding these items, fourth quarter adjusted diluted earnings per share increased .6% to $4.27 from $3.54. Deluded net income per share for the full year increased to $16.49 per share from $11.67 per share. Full year 2019, diluted net income per share includes acquisition related costs of $3.21 per share and other adjustments totaling $1.42 per share. Full year 2018, diluted net income per share includes acquisition related costs of $4.15 per share and other adjustments totaling $2.71 per share. Excluding these items, full year adjusted diluted earnings per share increased 14% to $21.12 from $18.53. We have summarized fourth quarter and full year comparisons including the acquisition costs and other adjustments in a Regulation G reconciliation table in our fourth quarter 2019 press release. Let me take a few minutes to break down our performance by segment. Sales for the Americas group in the fourth quarter increased $108.8 million or .8% to $2.36 billion. For the year, net sales increased $546.8 million or .7% to $2.36 billion. Comparable store sales in the U.S., Canada, and the Caribbean, that is, sales by stores open more than 12 calendar months, increased .6% in the quarter and .3% in the year. Regionally in the fourth quarter, our Southeast division led all divisions, followed by Southwest, Canada, Midwest, and Eastern. Sales were positive in every division in the quarter. Fourth quarter segment profit increased $36.1 million or .7% to $449.4 million. Currency translation rate changes decreased segment profit $4 million in the quarter. Full year segment profit increased $158.1 million or .3% to $2.1 billion. Currency translation rate changes decreased segment profit by $15.5 million in the year. Fourth quarter segment margin increased 70 basis points to 19%. Full year segment margin increased 50 basis points to 20.2%. Turning now to the consumer brands group, fourth quarter sales increased $5 million or .9% to $539.4 million. Full year sales decreased $62.3 million or .3% to $2.68 billion. Currency translation rate changes and segmental profit in the guardsmen divestiture reduced sales by .2% and approximately .8% in the year respectively. Fourth quarter segment profit increased $17.7 million to $29.7 million. Currency translation rate changes increased segment profit $3.9 million in the quarter. Acquisition related amortization expense decreased fourth quarter segment profit by $23.2 million in 2019 compared to $24.5 million in 2018. In addition, trademark impairment charges decreased segment profit by $5.1 million in the fourth quarter of 2019. Full year segment profit increased $112.1 million to $373.2 million. Acquisition related amortization expense decreased full year segment profit by $91.2 million in 2019 compared to $110.9 million in 2018. In addition, trademark impairment charges decreased segment profit by $5.1 million in 2019. Fourth quarter segment margin increased to .5% from 2.2%. Excluding acquisition related amortization expense and the trademark impairment charge, fourth quarter segment margin increased to .8% from 6.8%. Full year consumer group segment margin increased to .9% from 9.5%. Excluding acquisition related amortization expense and the trademark impairment charge, full year segment margin increased to .5% from 13.6%. For our performance coding group, fourth quarter sales decreased $63.5 million or 5% to $1.21 million. Full year sales decreased $117.2 million or .3% to $5 billion. Currency translation rate changes reduced fourth quarter and full year sales by .1% and .3% respectively. Fourth quarter segment profit was negative $7.4 million, including a charge of $117 million related to trademark impairment compared to segment profit of $112.3 million in the fourth quarter of 2018. Currency translation rate changes increased segment profit by $3.4 million in the fourth quarter of 2019. Acquisition related amortization expense decreased fourth quarter segment profit by $53.1 million in 2019 compared to $55.2 million in 2018. Full year segment profit was $379.1 million, including a charge of $117 million related to trademark impairment compared to full year segment profit of $452.1 million in 2018. Currency translation rate changes decreased segment profit by $7.1 million in the year. Acquisition related amortization expense decreased full year segment profit by $215.5 million in 2019 compared to $215.8 million in 2018. Fourth quarter performance coding group segment margin was negative .6% or 9% excluding the $117 million trademark impairment charge compared to .7% last year. Excluding acquisition related amortization expense and the trademark impairment charge, fourth quarter segment margin increased to .4% from 13.1%. Full year segment margin was .5% or .8% excluding the trademark impairment charge compared to .8% last year. Excluding acquisition related amortization expense and the trademark impairment charge, full year segment margin increased to .1% from 12.9%. That concludes our review of our operating results for the fourth quarter and the full year. So let me turn the call over to John Marikas who will make some general comments and provide our outlook for fiscal year 2020.

John? John Marikas Thank you, Jim. Good morning, everyone. Thanks for joining us. I'd like to make just a few additional comments on our fourth quarter and full year 2019 before moving on to our outlook for 2020. We ended the year on a strong note growing adjusted diluted earnings per share by 21% compared to last year's fourth quarter. In terms of the full year, we delivered another year of excellent results for our shareholders. Sales grew by .1% to a record $17.9 billion. Adjusted gross margin improved to .1% reflecting our pricing efforts and moderation of raw material inflation. Adjusted diluted earnings per share increased 14% to a record $21.12 per share. Adjusted EBITDA increased $235 million to a record $3.1 billion or .1% of sales. Net operating cash increased at $378 million to a record $2.32 billion or 13% of sales. Return on net assets employed increased to .1% on core profit before tax. Total shareholder return for the year was .7% and we returned approximately $1.2 billion to our shareholders in the form of dividends and share buybacks, an increase of 28% over the prior year. We reduced our debt by $660 million and we ended the year with net debt to EBITDA below three times. Before moving on to my comments on our segments, I'd like to take a moment to provide an update on the integration of Valspar. While there's still much to be accomplished, particularly outside the US, I wanted to thank our teams for their tremendous hard work to date in bringing our two businesses together and for increasing the value we are and will be able to deliver to our customers and to our shareholders. Since the beginning of 2017, Sir Williams has generated $6.1 billion in net operating cash or .2% of sales. We've used that cash to invest approximately $800 million back into the business, reduce debt by nearly $3 billion and return approximately $2.5 billion to shareholders, including $1.1 billion in dividends and $1.4 billion in share buybacks. We will no longer be calling out synergies related to the Valspar acquisition as it becomes more difficult to distinguish between acquisition synergies and our ongoing continuous improvements initiatives. We exit 2019 having a benefit of about $315 million from synergies in the P&L, including about $75 million that was realized in 2019. We've identified approximately another $100 million in opportunity, largely related to our supply chain optimization efforts in Europe and Asia. As previously communicated, we expect to realize a small portion of this benefit in 2020, with the majority being realized in 2021 and 2022 as projects are completed. Let me now turn to just a few comments on our operating segments, all of which contributed to our record performance in 2019. Within the Americas group, full year sales increased .7% against a prior year comparison of 5.6%. Residential repaint remained our strongest customer segment, up by a double digit percentage year over year. This is the sixth year in a row we've grown residential repaint at a double digit level. All other segments grew in the mid single digit range for the year. Full year segment profit dollars and margin also improved year over year. We continue to invest in innovation and service, introducing 27 new products, our ninth consecutive year of double digit product introductions. We opened 94 new paint stores in the Americas group this year and closed 32. To be clear, we opened 84 net new stores and added 150 new sales territories in the US and Canada. Of the 32 stores we closed, 26 were in Latin America and were related to changing market dynamics. In the consumer segment, we generated growth with our largest retail partners in North America. Though full year, segment sales decreased due to lower than expected sales in Asia and Australia and the impact of the guardsman divestiture. Adjusted segment margin improved to .5% driven by synergies, operating efficiencies, pricing, moderating raw material costs and lower acquisition related amortization expense. Performance coatings group sales for the year were variable by geography and end market and were impacted by unfavorable currency translation rate changes. Growth in North America and Latin America was more than offset by softness in Europe and Asia. Mid single digit growth in our packaging and coil lines was offset by softness in other product lines, most notably industrial wood. Adjusted segment margin increased to .1% from .9% in the prior year. Pricing, synergies and good cost control drove the improvement. Turning to our 2020 outlook, we currently see a similar environment to last year with North America architectural demand remaining solid and industrial demand remaining variable by geography and end market. We have many opportunities to grow share in all of our businesses and I remain highly confident in our ability to provide customers with solutions based on innovation, value added service and differentiated distribution. We enter 2020 well positioned and focused on what we can control. For the first quarter of 2020 we anticipate our consolidated net sales will increase by 2% to 5% compared to the first quarter of 2019. We expect the Americas group to be at or above the high end of that range. We expect consumer brands to be flat or slightly up excluding the impact of the H business we exited in 2019 and we expect performance coatings to be up by low single digits. For the full year of 2020 we expect net sales to increase by 2% to 4% with segment performance similar to what I described for the first quarter. On an earnings per share basis we believe the most meaningful way to provide guidance is to exclude balance bar acquisition costs and one time items. On this basis and given our sales outlook we expect adjusted 2020 full year diluted net income per common share to be in the range of $22.70 to $23.50 per share an increase of approximately .4% at the midpoint compared to the 2112 reported in 2019 on a comparable basis. This adjusted 2020 guidance excludes approximately $2.79 per share for acquisition related expense. The regulation G reconciliation table in our press release illustrates these moving parts. We expect our 2020 effective tax rate to be in the low 20% range. One key assumption embedded in our outlook is that the market rate of inflation for our raw material basket in 2020 will be flat compared to 2019 assuming stable petrochemical feedstocks and no supply disruptions. We expect the basket to be lower year over year in the first quarter and to a lesser extent in the second quarter with year over year costs flattening out or slightly increasing in the back half of the year. A few additional data points may be helpful for modeling purposes. We'll continue to make investments across the enterprise that will enhance our ability to provide differentiated solutions to our customers. These investments include new stores and reps, capacity and productivity improvements, systems and product innovation in both our architectural and industrial businesses. We also plan additional incremental investments in our digital platform and the R&D Center channel. These investments are embedded in our full year guidance. We expect capital expenditures to be approximately $320 million which is about .7% of anticipated sales. Note that this estimate does not include any expenditure related to our previously announced headquarters and R&D Center project. We expect to provide you with an update on this project in the near future. Depreciation should be $275 million and amortization will be about $310 million. Historically we have targeted dividends of about 30% of prior year gap earnings. Next month at our board of directors meetings we'll recommend a quarterly dividend increase of .6% to $1.34 per share up from $1.13 last year. We expect to continue making opportunistic share repurchases. We'll also continue to evaluate acquisitions that fit our strategy. Before moving on to your questions let me wrap up today by asking you to save the date of Wednesday, June 3rd on your calendars. That will be the day we'll host our annual financial community presentation at the Marriott Marquis Hotel in New York. The program will include presentations by several members of our leadership team. We'll host our customary Q&A session followed by a reception and lunch. Again that date is Wednesday, June 3rd. We'll be sending out invitations and related information and a link to our registration site in April. With that I'd like to thank you for joining us this morning and we'll be happy to take your questions.

Thank you. We will now 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 tone will indicate that your line is on 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. One moment please while we poll for questions. Thank you. Our first question comes from Christopher Parkinson with Credit Suisse. Please proceed with your question.

Thank you. Can you just talk a little bit more about your expectations for US housing in the consequent architectural volumes outlook just given some more constructive data. Just in terms of what you're hearing from the Americans group heads and their customers do you expect broader volume participation this year or where do you put some things? Thank you.

Sure Chris. Good morning. It's Jim. What we always talk about when we have this question is we look at our sentiment from our 4500 store managers and our 3000 sales reps and they continue to be very optimistic about what they're seeing as we end the year and as we head into 2020. As we've talked about this in the past from a big picture perspective certainly we believe that the continuing household formations and that 1.3 million range annually will support what's going on as we go forward. But as you point out Chris the more recent data is encouraging. We're seeing strengthening in single and multi-family permits, starts and completions at the year end and really the three month trailing average for all of those is up double digits. We were at the builder show that just happened and I would tell you optimism at that builder show among our customers was very positive. And you have other things out there that are supportive as well. The mortgage rate remains very reasonable and some of the recent reports by some of the national home builders are also talking about strong orders. So I think we feel very good about where housing is headed from a macro perspective.

Hey Chris this is Al. I'd just like to add on to that comment by saying as you look at how our North America painting stores group unfolded throughout the year our second half was stronger than our first half. And even as you look at what TAG performed or at 4.8 if you look at our same store sales up 4.6 to put that in perspective architectural gallons were high single digits in the quarter. As a reminder we did not go out with price in our fourth quarter. And historically as we've seen momentum in our second half and in our fourth quarter that translates to growth in our first half. So that's what makes us feel pretty good about the paint stores in architectural in North America.

Just a quick follow up. You previously discussed potentially getting your margins and consumer performance back up to towards let's say 20% in this target. But can you just simply update us on your conviction and your ability to do this and just also highlight to the investment community any key non-raw material levers you can continue to pull to potentially make this happen in each segment. Thank you.

Yeah, yeah Chris. We're not coming off our numbers. I am confident in our ability to hit those financial targets we laid out for 2020. As I talked about on the June investor day I confirm that we'll hit those targets but on a lag. And I think that throughout 2019 we made significant progress and are on the right path to attaining those goals. And we've even attained some of those goals already. If you look at our core gross margin at 45.1 for the year that's the low end of the targeted range that I had laid out at 45 to 48. And you look at our strong net operating cash. If I looked at net operating cash at 13% less capbacks you get a little over 11% net operating cash less capbacks which is the target that we had laid out. So I am very confident in our ability on performance coatings and consumer brands to expand their margins to the high teens, low 20s and they made good progress this year.

Thank you.

Thank you. Our next question comes from Stephen Byrne with Bank of America, Merrill Lynch. Please proceed with your question.

Hey Al, you just mentioned that the same store sales metric in the fourth quarter was most likely volume in TAG just because you lapped the year ago price. And Jim you mentioned the strongest region was the southeast where in October they were really under water in that region. So can you just comment on where you think backlog is in architectural paint contractors and where do you think this could drive same store sales in 2020?

Well Steve I think we are feeling really good about the market and the feedback that we are getting from our customers as you just mentioned. There is a backlog. Part of it I think has to do with labor. We continue to believe that that backlog if you will and labor supports our model and helps build loyalty to what it is that we are trying to do for our customers which is driving the technology and services that help them to be more successful. We have a lot of new products that we are launching going into this year. A lot of services that we are introducing all directly pointed at trying to help those customers to attack those. So to your question we think geographically it is pretty solid. There is no pockets that I have been in yet or nor that we have heard from our teams where people are feeling softness. There is a general consensus that contractors are feeling very good and could do more if they had more labor and we want to be there to help support them accomplish their goals.

And John did you anticipate that changing some of the acquired brands to the Sherwin brand would impact the outlook for sales for those products?

Yes I would like Al to talk to it from a financial perspective but absolutely. In fact I would say we are feeling really good about the fact that we have gotten here as fast as we have. You know as we entered into the integration we are always listening to our customers and always listening to our employees and the fact that our customers, the retention of both our customers and our employees is so high in allowing us to move aggressively in this brand consolidation gives us really a great sense of pride of the speed and execution that we are moving in.

Yes Steve I would just add this is not indicative of the underlying businesses. If you look at healthy businesses operating margins are expanding and we saw that in consumer brands and in our performance coatings groups this year. And as John talked about in his opening remarks I mean we generated strong cash flow over the period and the 17 through 19 and we will continue to do that with strong cash flow in 2019. So as a reminder we looked at this Valspar acquisition over the long term. It is hard when you are going into an acquisition to predict timing of when certain events happen but as John said improving our operating efficiencies by consolidating brands that is only going to help us going forward. Thank you.

Thanks Steve.

Thank you. Our next question comes from Jeff Tsikowskas with JPMorgan. Pleased to see with your question.

Thanks very much. Can you talk about business conditions in China and in Europe and maybe your offshore operations generally in 2019. How much did they grow in revenue terms or how much did they shrink and whether business conditions in China in the first quarter of 2020 are very different than what they were in the fourth quarter of 2019?

Well I think specifically to China I would say that the environment that we find ourselves in some of our business has been a challenge. If you look at our industrial wood for example with the tariffs and generally a weaker economy it has had an impact on our business. We have had pockets of strength in Southeast Asia particularly in the cabinet area of wood. So I would say from a wood perspective it has been the most challenging. That said if you look at our packaging business as an example we had a terrific run there in Asia actually across the globe in packaging. Our coil business in Asia was positive. We had some pressure in our general industrial business there. Our automotive business is pretty small Jeff in Asia but it was positive. So I would say a mixed bag there, clearly some pressure but our market share there is such that gives us terrific opportunity for growth and that is where we are headed.

Okay and then just a small question. You talked about most of the growth in the stores business in the fourth quarter coming from volume but in previous quarters it seemed that price was a larger element. Did you simply annualize your price increases or was there some competitive activity that led to a lower price benefit or was there a mix effect? Why was price a lower component in the fourth quarter?

Yes there was virtually no price in the quarter and it was because last year 2018 the price increase went in the first of October Jeff and this year we rolled it in January 1 so the fourth quarter was exposed from a pricing perspective.

Okay good thank you so much.

And I just point out as Al mentioned when we look at the architectural gallons in that fourth quarter up the high single digits that was a really good quarter for our team in our tag business.

Thanks Jeff.

Thank you our next question comes from Gantram Punjabi with Baird. Please proceed with your question.

Hey guys good morning. Can you help us with the margins on the Americans Group segment? Did that play out the way you thought it would during the fourth quarter? You know during the third quarter you had a nice year over year acceleration of margins. I think it was up 120 basis points. 4Q was closer to 70 basis points and that was also a very healthy increase in sales. What were the offsets there?

Yes so Gantram the way I look at I start with the flow through and you look at flow through in tag in the fourth quarter and it was over 33 percent. So we saw nice leverage on our gallon increase. You know as John talked about in his opening remarks about investments and additional opportunities and you know we have taken a long term strategic view of the market and aside from just new stores and new reps that we talked about John talked about expanding our digital platform that I think and we believe will give us a competitive advantage in the marketplace and we're expanding and investing in that tool to get better aligned with our customers to offer better services to make them more efficient ultimately as we've talked about. We want to drive higher top line growth for them and profitability. So we started that really coming in third quarter and fourth quarter and you'll see us continue investing at next year.

Yes Gantram I think when we were together actually we talked a little bit about some of the investments we were making on that digital and we're really proud to be announcing that we'll be rolling this out nationally at the end of the first quarter. We think this is the start of a we have a number of products in the pipeline here but the start of a process that we've been really investing in and to Al's point we're cranking that up and the idea here is increasing that loyalty and the contractors leaning on us to be more efficient in what it is that they're trying to do. We talked earlier about labor and the launch of this digital platform will help them run a more efficient business. It's not just external though. We're also investing internally. We didn't talk about this last year. We've made it through one year now with our sales reps now having had iPads for one year. We think that's improving the productivity of our sales organization to be more responsive to our customers. This year we've just announced to our team we're rolling out the iPads into our stores to make them more productive and more efficient and more responsive to the needs of our customers. So we are investing. We're investing in this business. We have great confidence of our position right now and quite frankly we see some competitive opportunities that we want to take advantage of so we're putting our foot on the gas here.

Okay thanks for clarifying and then just for my second question on the performance coding segment. Even with the industrial markets having been weaker for everybody including you, the margins were still up year over year. Was there any residual price catch up or any significant mixed benefit from businesses like packaging that drove the margin expansion apart from just synergy flow through?

Yes, that's a very astute point. As packaging and coil sales have expanded faster than the rest of the businesses, we do see some lift in the margin on that. As we've talked about in the past, our industrial business took the brunt of the run up in raw materials in 17 and 18. We've been chasing that for the last few years. It doesn't come in uniformly like our paint stores group. So yeah we saw some pricing flow through in our fourth quarter. And then the other thing I would say is as we are investing in growth opportunities, we are also laser focused on controlling and managing our costs where our businesses and our regions aren't performing to where we expect them to perform or seeing a path to a set target. So we're controlling our costs and consolidating operations as well. So you can expect that to continue as we go forward as we continue to invest in other areas.

Got it. Thanks so much.

Thank you. Thank you again.

Thank you. Our next question is from John McNulty with BMO Capital Markets. Please proceed with your question.

Yeah, thanks for taking my question. With regard to in the release, you had laid out some acquisition related costs still in 2020 kind of to the tune of what looks to be $300, $350 million or so. I guess what is that still being spent on and I guess how much should we be thinking about is actually a cash hit and then I guess tied to that, how are you thinking about cash conversion as we look to 2020 because it obviously took a big step up in 2019 but curious how or where we go from here.

Yeah John, I'm glad you brought that up because it's important that for an apples to apples comparison we wanted to call out acquisition related costs and the amortization depreciation year over year is very similar. Infited in that number is about $30 million in additional integration costs and we wanted to include that in our guidance in the Reg G table but we're not going to be laying that out going forward. That breaks out just so you, for example, back half versus front half loaded but this gets us into the next phase. Like John talked about, synergies is part of our continuous improvement process. We're going to get back to integration activities as just part of our normal operating process. As far as cash flow, John you followed us for a very long time. 13%, that's always the new high water mark and as I talked about in our investor day and earlier, net operating cash plus capex, we're targeting 11% and we expect to continue to hit that target as we go forward. Got it.

And then just a quick follow up. With regard to the pipeline that you're seeing from your customers, it sounds like the residential side is pretty solid. Can you speak to the non-resi side and what you're seeing there?

Yeah, it's very good. If you look at the commercial side, property management, I'd say, John, trying not to get ahead of myself here but we're feeling really good. We just came back from our national sales meeting. We had 8,500 of our closest friends together talking about just that and a very bullish environment, very positive and if you go from the commercial side, property management into healthcare, I mean there's a general feeling that our customers are really excited about what's ahead for 2020. So we're really looking forward to this year.

Great. Thanks very much for the call, guys.

Yep. Thank you,

John.

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

Good morning. Just curious on the paint store side, was there any change in the quarter? I know that you put up an 8 comp in Q3 and that would imply like a 6 volume and you did a 5.3 here so it doesn't appear that way. I'm just curious if you noticed an improvement in Q4 or deceleration and do you expect kind of similar kind of mid single digit volume growth in 2020? Thanks.

Yeah, Arun, I'd say the largest impact that we had was our protective and marine business that runs through our TAG business. The architectural business, as we mentioned, was up high single digits. We talked about the fact that we've had another double digit increase in residential repaint and just talked about some of the other segments and the confidence that we have there. If you look at those indicators that we often cite, you know, spray equipment, non-paint items, you know, everything points in the right direction. So high single digit architectural gallons going through impacted by the P&M business and the P&M business through our stores was largely impacted by oil and gas which was under pressure and we had some timing of some big projects, likely not going to be starting now until the beginning of the second quarter. So we saw a little bit of softness in P&M in the fourth quarter, probably going to see a little bit in the first quarter but again, you know, the pipeline that we're looking at here is really solid.

Yeah, Arun, I would just add to that. The price increase that we went out with in our P&M stores on January 1st was 3 to 4 percent. We expect an effective rate of just below 2 percent and as John laid out in the opening remarks, we expect our TAG organization to be at the high end of our 2 to 4 so you think 4 to 6 percent if there's less than 2 and price, the rest is volume.

Great, that's very helpful, Al. Thanks for that. And then just as a quick follow up on PCG, you know, obviously there's macro pressures and regional variability as you said. Do you think that is kind of tilted to the downside just given the coronavirus or maybe you can just offer your thoughts on where we are potentially destocking wise or especially in Europe and Asia? Is there any potential for stability there as we move through 2020? Thanks.

Yeah, I think we look at the comparisons of 2019 to 2020 and we have higher expectations moving forward. It might be helpful. Maybe I could just talk about each of the segments just briefly. If we look at our auto and maybe I'll just do it for a number of the regions rather than just the two because I'm sure there's some more questions there. On auto, we'd say North America, we feel really good, probably the best I've felt in the time I've been CEO or COO. Collision shop business here is very strong. I think we're in a really strong position and we're going to take advantage of that going forward. Europe, I'd say we have a little bit of softness in our auto business in Europe. Asia, as I mentioned earlier, it's a small business up mid single digits. In Latin America, we have a leadership position. It was impacted primarily by currency. We had a good quarter in auto in Latin America. Packaging, clearly the non-BPA is giving us a terrific opportunity. We believe that's an ongoing transition with plenty of opportunity for us ahead. We're investing in this business. We're investing in technology and in capacity and really trying to stay aligned with our customers. We've got great partners that we're trying to support. If you look at this, this was a double digit quarter for them. North America was strong double digits. To your question about Europe and Asia, Europe was up but Asia was up really, really strong double digits. There, our business and packaging is growing both in beverage and in food. In coil, new business really across the region, North America throughout everyone. We did have a little bit of softness in comparison in Europe, but this is a team that's really hitting on off cylinders and we're working hard. Those are the ones that are really performing quite well. GI, Asia, we felt some impact there in our general industrial, largely in the heavy equipment and ag equipment. We have a good pipeline of projects and really good people there. We expect to really see some improvement in our performance in this business. Industrial wood, I talked about earlier. China, a lot of pressure, feeling good about Southeast Asia. Europe was another area of pressure as well. Amongst all the businesses, I would say the one we're feeling the most pressure in would be the industrial wood. Then protective and marine, I talked about largely running through our North American business through our TAG. If I look at our smaller businesses, albeit Asia is a very small business, it was up strong double digits for us. Europe down slightly as we had some pressure and some comparisons to some business there. Latin America was up slightly as well. That captures all the businesses. Hopefully, satisfy some other questions with that response.

Great. Thanks.

Take the room.

Thank you. Our next question is from Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Yes. Good morning. I was wondering if you could comment a little bit further on capital deployment. You've made some nice progress again on the balance sheet. John, just wondering if you would foresee any material change in the balance of acquisition activity versus repurchases as you look ahead into 2020?

I think the M&A activity is something that we're really focused on. We think it's an important part of our future, although we don't feel as though we have a gun to our head. The challenge for us right now, quite frankly, internally is prioritization of the opportunities. We're very active. I would say to answer your question, you should see us deploying more cash into M&A. I don't think you're going to see the transformational type of acquisition that Valspar was, but we're working business by business to understand region by region where it is there are opportunities. I want to clearly point out that we are not trying to be everything to everyone everywhere. We are absolutely determined to invest where we can generate a return for our shareholders. Each of our businesses have developed a really good strategy that they're executing. Any of those M&A opportunities include the right to win in those markets, or we're not going to be there. We're not deploying cash in commodity areas, and we're not deploying cash for the sake of saying that we can be somewhere. We're there to make money.

Understood. That's helpful. My second question relates to raw materials. It sounds like you anticipate some relief to start the year. I was wondering if you could provide a little bit more color as to the individual categories like pigments and petrochemicals, et cetera. With regard to resins in particular, I was wondering if you could comment on your degree of internal integration versus external purchases of resins and how that's evolved in recent years if it has. Thank you.

Sure, Kevin. Glad to answer that. As John said in his comments, and you're right, our outlook for this year is that the overall basket will be flat compared to 2019. That's assuming stable petrochemical feedstocks, no supply disruptions. It'll be lower year over year in the first quarter. It'll be a lesser extent in the second quarter, and then sort of flatten out, and maybe increase in the back half. If you remember, we had our highest rate of inflation in 2019 was in the first quarter, which moderated through the year. Our full year outlook, that's our best estimate at this time. The visibility once you get a couple of quarters out is a little bit murkier. When you get to the specific categories, Kevin, we expect the petrochemical basket to be in line with our overall raw material outlook. Probably a tailwind in the first quarter, maybe into the second quarter before flattening, and again, increasing in the back half. We're seeing right now key feedstocks, propylene, ethylene, are down year over year as we enter 2020. Other key materials, like epoxy, for example, more on our industrial side, are also down year over year. From a TIO2 perspective, right now what we're seeing is relatively stable moving into 2020, based on the current demand environment that we're in. That's kind of a big picture to look at it from a resin internalization standpoint. I'll let Al take that one.

Yeah, Kevin. I don't think that our strategy has changed. We've picked up a nice business with EPS as part of the Balspar acquisition. We've had to even invest in more assets to internalize resins, but it's a balance. We look at where we can make the most from not a cost necessarily, but from a differentiation standpoint. We have, as we've talked about, a number of projects in the pipeline across each of the segments continue to drive what I'd call continuous improvement opportunities. You saw some of that benefit in our consumer brands group this year in helping their margin expansion. You should expect that going forward.

Yeah, Kevin. If I could, I'd just like to add just one other component that was just slightly touched on by Al on the proprietary development of technology. We're looking at this opportunity to serve our customers, particularly the painting contractor who's looking to maximize productivity. We're combining the assets that you're asking about in a way I think that's really unique for Sherwin. We're trying to position ourselves to provide solutions and technology to help those customers to be more productive. I mentioned earlier a number of products that we are introducing, and here I'd just like to take the opportunity to talk about three of those because I think it highlights what Al just talked about from a resin capability standpoint. I'll be very brief in this, but this gives us the opportunity to develop products that really help our customers in a unique way. We're introducing a product this year called FlexTemp that provides a contractor the ability to get out earlier, colder temperatures, and stay out longer and hotter temperatures. It actually has a spread of ability to be applied from 35 degrees Fahrenheit up to 120 degrees Fahrenheit with no change in viscosity, terrific uniform application. It extends the ability of these painting contractors to be more productive. When we talk about labor and the challenges of getting caught up, we're looking at ways to make them more productive. We're introducing a new product called Emerald Rain Refresh that, again, same platform of technology, proprietary, we'll hold onto this, no one else will have it. This is a product that not only optimizes applications so that you have more productivity from painters with less experience, this is a product that when it rains or is hosed down, it looks like it was just painted. After every rain, the home or commercial building will look as if it was just painted, brand new, clean. These painters that have applied this in the commercialization process have just been really raving about it. The last one, just to be brief again, we're introducing an extension on our Emerald Line which is our top of the line product. This will be the finest paint that we've produced yet, outstanding hiding, great application. Again, painters with limited experience, we're making limited experience painters better painters, best application, better touch up, all with this idea that if we're developing resins and products for them, the loyalty to show-in increases.

Thank you so much.

Thanks, Kevin.

Thank you. Our next question comes from Bob Cord with Goldman Sachs. Please proceed with your question.

Hi, guys. This is Anthony Walker on for Bob. May I get two quick ones? Can you talk about the performance of the international businesses within the consumer segment which you acquired through the Valspar transaction? In the past, you've talked about potential strategic or rationalization opportunities there assuming the businesses continue to underperform. How should we think about the timing and the opportunity there?

I think, let me just walk through the three areas there just briefly. First, Asia, I'd say the business is certainly going through a transition. We've talked about the fact that this La Rune brand is predominantly focused on interior wood. We're shifting that strategy as much of that business internally in region is now shifting to a shop or factory applied application. The teams are developing a strategy and executing pieces of it to pursue and reposition the brand there. Again, a small piece of the business, but we think this is an important one. Future opportunity here is terrific. We're gaining. We're making some progress in the quarter. We started to see a positive trend in Asia. I'd say that one is trending the right way. Europe, we made significant progress this past year. Sales were positive in mid-single digits. Operating profit improved to a low double digit percentage. Feeling that we are pointing in the right direction there. Australia is a bird of another color. We've got some challenges there and quite frankly, we're not performing as needed. We have plans and teams executing on this. This is one that you should expect us to get closer to and see some improvement or making some tough changes.

Great. Thanks. Then just one on the price increase and two announced for the paint stores group. How should we think about that flowing through the results in the year? Will we start to see that show up in the first quarter in full? Then how should we also think about the magnitude of what I assume are labor freight and distribution expenses that are attempting to offset? Thanks.

The pricing will roll out on a similar cadence to past price increases. You'll see some of that for sure in the first quarter and then as it takes hold over the next six months, we'll get full effectiveness as it flows through all of our customers. When you look at our cost basket that we've talked about, merit increases are higher than what they've been in the past. Health care benefits continue to rise and we've absorbed those over the past number of years. This price increase is not unprecedented to cover costs other than raw materials. If you go back in the first quarter of 2014, we went out a price increase to cover those costs because as you can imagine, it's a compounding. If you don't get it in the first year and it compounds over three or four years, it gets to be pretty steep. That's kind of why the justification with this price increase.

We're not getting thank you notes from our customers obviously, but many of them are facing similar situations. The fact that we waited until January 1 gave our customers an opportunity to kind of recalibrate as they're bidding going forward in the new year. Secondly, the fact that they're experiencing the same thing I think has helped in the execution as

well. Hello?

Thank you. We'll move on to our next question which comes to the line of Mike Harrison with Seaport Global Securities. Pleased to see you with your question.

Hi. Good afternoon. Hey, Mike. I'm wondering if you could give us an update on the progress at Lowe's and maybe just more broadly speaking, your expectations for DIY in the first half of 2019. It seems like with refinancing activity having picked up and the easy weather comps and the store resets and the training that's been going on at Lowe's, that maybe that business could be stronger yet you guys provided guidance that suggests that consumers more flattish for the full year.

Yeah. A piece of that reminder is we have the ACE business that's coming out. That's a piece of the go forward forecast, Mike. I would describe our opportunity at Lowe's quite simply as we think we're moving the ball in the right direction, but we're never satisfied. We're investing. I mentioned earlier in my remarks that we're stepping up our investments in the home center channel. Obviously, they would be a big part of that. We see that there are opportunities in both the consumer side and the professional side. Those pros that paint, we think it's a terrific opportunity for us to help our customer. On the consumer side, we have a lot of opportunities to help convert shoppers into customers. We made a big commitment to this relationship and we want to see this thing through. The opportunity here is to help execute and that's on all fronts. I don't think you should ever expect us to say that we're done. This is a business that we're looking at just aggressively as we do our own stores business. We think there's opportunities and we're committed to helping our customer win. Hey

Mike, I would just add to that that we have talked about this in the past that embedded in our consumer brand segment is our retail channel that has been under pressure consistently. As Lowe's has performed better, they certainly are taking share from that segment. Then we're trying to be realistic. When we look outside the US, we're trying not to build a, although optimistic, trying not to build a hockey stick to our sales guidance. Rest assured, we expect more out of those teams outside the US.

All right. Then I wanted to also ask about the ColorSnap consultation program and how that's contributing to paint store sales growth. How much of North America do you have covered with the ColorSnap offering at this point? I'm just trying to get a sense of what stage we're in with that rollout and how much more it could contribute. Thanks.

Yeah, we're pretty early in it. There's an opportunity. Again, this goes back to helping our customers. Mike, you really hit on something here because this has worked out quite well for us. Not so much just for the consumer, but our residential repaint contractors are leaning on us to help accelerate the selling process for them. As we employ this, as well as the digital ColorSnap, which is an AI application that's new and we continue to enhance the previous platform, it allows our customers to accelerate through their process of closing business. This is a professional painting contractor to a homeowner. I would suspect that you're going to see that as a component, one of many items that we're going to continue to leverage and add service and productivity that helps build loyalty to the painting contractor.

It's

still got a lot of opportunity

across the country, a lot. Thank you, Mike.

Thank you. We'll move on to our next question, which comes from the line of David Baglider with Deutsche Bank. Please proceed with your question.

Thank you. Good morning. John, can you discuss your plans for store openings and any closings in 2020 and any impacts on the cadence of store openings from either your digital strategy or how you're trying to service some of your customers going forward?

Well, we expect to continue in that range of 80 to 100 stores. I don't know that it's changed in any way from a store cadence. We'd like to see a smoother rollout of the stores rolling in. I've been trying to fix that since I ran that business 15 years ago, but I'd say that we feel really good about it. I also want to thank our teams because I think we're continuing to get better at it. The stores that we're opening, we're cranking up faster and the impact is better. Some of that has to do with the quality of people in the stores as well as the systems that we're adding to those. I'd say you should expect us to continue to add in those stores at a similar rate to what we've had.

Yes, David. I'd just add when you look at the tag and we closed 32 stores in the year, 26 of those stores were in Latin America. We have talked about the pressure we've been under in Latin America. As you know, we take a rigorous and consistent view of our portfolio of businesses, brands, customer programs and other investments. As we've not been able to see a line of sight to above average growth either in sales, operating margins, cash, we've had to take action. We're not exiting those markets, but pushing those sales through what I would call more of a dealer network, which is a little less asset intensive. I think you'll see some of that continue here on our first half.

Very good. John, just lastly, what's your sense on the pool of available painters, both the quantity as well as the quality in 2020?

It's under pressure. Our customers, as I mentioned earlier, would like to move faster. There are a number of wonderful painters and many people entering in the industry that are learning as they go. As I mentioned as I ran through those products briefly, we're taking that into consideration as we're building products and helping our customers to improve their efficiency. I'd say they're both under pressure. People that typically enter into the trades, we're working with those professionals to help train those employees, but there's a pressure in finding them.

Thank you.

Thank you.

Thank you. Our next question comes from PJ from Juva Carwood City. Please proceed with your question.

Yes. Hi. Good morning or good afternoon. Hey PJ. Hi. You know, plastic, single-use plastics are coming under pressure, so it's bags and bottles. I was wondering if as bottles come under pressure, would some of the food and beverage stuff move to cans and would that become an opportunity for you on interior or exterior coatings of the cans?

Yes. The answer is yes. We would welcome that transition and we want to work to support our customers to do that. As I mentioned earlier, the progress that we're making in our packaging business in both food and beverage has been fantastic and more of that transitioning into our packaging customers business is terrific. That's why we talk a lot about this in our stores business, but even on the packaging side, we're really determined to help our customers through technology to help speed up lines, to help minimize, not damage, but imperfections in the coatings. The idea here is we help them become more efficient and driving efficiencies into their plants the better supplier we are. We're really focused on making them better.

Okay. Then my second question is now that your leverage is below your target of three times, what is your willingness to look at M&A, what size, and will 2020 be the year that you come back into the market for M&A?

You know, P.J., we consistently are looking for acquisitions of any size. I think you're right as you look at our debt to EBITDA ratio under three, in 2020 I don't expect to pay down debt and as our EBITDA grows, you'll see us drive that target down towards the two to two and a half long term target that I have. But yeah, we are actively looking for acquisitions. But as John mentioned earlier, we're taking a disciplined approach to that. I'd say we've raised the dividend 18%. We'll keep capex below 2%, but absent those M&A, absent any acquisitions, we're going to buy back our stock this year.

Yeah, but I think to your point though, our COO David Stull has got his teams really leaning forward in this area, looking for those opportunities, not only just simply from the opportunity, but from the strategic value that can be gained from it.

Thank

you.

Thank you, P.J.

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

Thank you. All I've got left on my list is, Al, can you just, the tax rate stepping up this year, is that just sort of your starting point? And then you'll see how the year plays out and what things your team comes up with? Or do you, you know, how should we be thinking about the higher tax rate?

Yeah, so that's, you know, I'm always, you know, looking at the tax rate, it's a function of how many options and how our legal entity consolidations flow through to help that tax rate. So yeah, I started at the low 20% range and then, you know, I expect our tax guys to develop plans and continue with the programs that are going to continue to drive that down.

Thanks very much. Thank

you.

Thank you. Our next question comes from Duffy Fisher with Barclays. Please proceed with your question.

Yeah, good morning. Just one for me. Volumetrically, how fast did the North American architectural market grow last year, do you guys think?

We haven't seen official data yet on that Duffy. You know, if I go back to probably the most recent data we have is 2018 gallon growth was a little over two. I want to say it's probably similar in 2019 and probably at a similar level in 2020, sort of that low single digit level, I would guess. Great. Thanks guys. You bet.

Thank you. The next question comes from Justin Spear with Zellman and Associates. Please proceed with your question.

Thank you guys. I just wanted to unpack that, if you could help maybe further unpack the nature of those SG&A investments and how you think they'll unfold from a percentage of revenue standpoint.

Yeah, you know, Justin, we're not going to go down the piano by line on the guidance. You know, I think what we've consistently done is grow our store count, grow our rep count, and then these additional investments are going to come through pretty evenly throughout the year. And, you know, we're not going to quantify them because, you know, it's like any other review that we do. We want to see how the first half unfolds, how volumes look, and it may give us an opportunity to accelerate in the back half of the year like we did this year. So I think it depends, but they're in our guidance and we'll continue to manage those accordingly.

I would say, Justin, we are planning on sharing a number of these with you during our financial community presentation on that June 3rd date where we'll give you some idea from, in some of these areas, the digital I think you'll be really impressed with. And to the extent that we're comfortable in sharing, you know, obviously we don't want to point specifically for competitive reasons to what we're doing, but as much as we can, as things roll out, we'll share what we've done but not what we're going to do.

Okay. I guess maybe, because I'm sure you pilot, I know you piloted a number of these different programs, but just curious, you know, how the, if there's like a response rate in terms of growth improvement to the model, or is it just the stickiness and this widening of the mode, bringing the customer closer, you know, the relationship's good, but does it change the growth algorithm or the amount of gallons that flow through all else equal?

Yes, we're doing this for growth. We absolutely believe it improves the stickiness, the mode, any metaphor we want to use, but we are growing our business and we're going to do it profitably, and we think that the more solutions that we bring to our customers to help make them more profitable, the more likely we're going to continue to be their supplier. And so we're really focused on not just one lever, one silver bullet, but a number of these that will enhance their ability to be successful, and as a result, we become a better supplier to them.

Okay, my last question is just on the consumer business, just how much mix benefit from that transition at ACE, are you thinking or estimating for your 2020 targets there?

Yeah, you know, what we talked about is the ACE business, that private label business, you know, was about $100 million a year, considerably below the average of our consumer operating margin. We didn't lay that out and we're not going to, but you know, you should expect margin improvement because of that.

Thank you, gentlemen.

Thanks, Justin.

Thank you. Our next question comes from the line of Gerard Shmoy with Luke Capital. Please proceed with your question.

Derek, your line is live. You may proceed with your question. We'll move

on to our next question, which comes from the line of Truman Patterson with Wells Fargo. Please proceed with your question.

Hi, good afternoon, guys. Thanks for taking my questions. First, just wanted to make sure I'm understanding this clearly on your tag in paint stores demand outlook for 2020. You know, your guide, I think it implies that volumes grow pretty much in line with 2019, maybe at a bit of a slower pace even. When I'm listening to you all, you're very optimistic on the architectural volume side. It seems like that market is even accelerating, which would imply that, you know, protective and marine and that non-res market might even be decelerating versus 2019. Just trying to understand how you all are thinking about that and if you can walk me through the parts.

Yeah, Truman, I'd say you're right in sensing our confidence in the architectural side. You know, having just finished a quarter in the mid single, or I'm sorry, high single digits gives us confidence moving forward. On the protective and marine side that runs through there, we've got the fourth quarter and likely the first quarter right now that we're staying, you know, is likely a little softer than we would have liked to see, but feeling pretty good about it going forward. So I think we're trying to be just in line with what our customers are telling us and we feel pretty good about the number that we put out

here. Yeah, Truman, the other comment I would make is, as I mentioned earlier, if you look at the way the year unfolded for paint stores in North America, you know, we had a strong second half versus the first half, you know, even a 9 percent, 8-7 percent tag increase in the third quarter, which is a large quarter and a very good result in a large quarter like that. So, you know, I think when we get through our second quarter and see how the year's unfolding, we can give you an update then.

Okay, okay. And then final question for me, just on the raw materials basket, can you just discuss what kind of tailwinds you actually saw in the fourth quarter from an overall basket perspective and then just remind us what you ended up seeing in 2019 as a whole?

Yeah, Truman, you know, costs for the broad basket that we buy, I would say, moderated slightly in the fourth quarter 19 from third quarter of 19. So, it kind of played out as we thought. Fourth quarter 2019 was also lower year over year. The year over year decrease in the fourth quarter was driven primarily by lower cost for resins, solvents, and we don't provide specific dollars on the savings of the raw materials, but you can see the positive trend, I think, reflected in our year over year gross margin improvement. Okay, thank you. Sure.

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

Thank you. Good afternoon, everyone.

Hi.

John, I was wondering if you could give us a little more on the impairment charges. I know there are a lot of good scotings in China, but you also mentioned one impairment taken in the consumer brand category. Is that ace or a little color on which for the clients you are more or less eliminating as there is no growth and those for which you are going to change the brand name?

Yeah, Rosemary, I would not classify it as no growth. I would characterize it in terms of a G-I and an automotive. As we've put in, implemented our systems, our legacy systems, we've gotten customers to move to a new label, and that has helped us optimize or streamline our operations, and that's the biggest impact. Another example would be in Australia, we're under pressure that we talked about earlier about driving operating margin and cash flow improvement, and one way to do that is reduce the number of brands you're trying to support. In that area, we also move from focus, remove focus, if you will, on one brand and driving it more to the Wado brand. Again, that's going to help us in the midterm here to reduce our costs on keep investing in labels and merchandising and different things like that. The Wado brand in China has been under pressure. John talked about that transition, certainly from factory applied coatings. That is an impact, and as that transition continues to move and expand, we're not expecting or anticipating any other impairments going forward.

And then, the call was very optimistic. Your projections of 2 to 4 percent on the revenue line is stronger or higher than it was 2019 versus 2018, and yet if I look at your EPS projections at the midpoint, it is at 9 percent versus at 14 percent in 19 of the 14, if I have those numbers right. So I am wondering what are the offsets?

Yeah, Rosemary, I'd say that if you're comparing last year to the go-forward, I talk about the price increase that we went out with in being effective under 2 percent. That's below what we really realized through the first three quarters of last year. Raw material moderation isn't as strong as what we saw in 2019. And these investments that we talked about, even though we're seeing slower in our second half of 19 on performance coatings, we continue to invest back in our businesses that we think are going to provide growth opportunities in the future. Not only the new stores and the new reps that we even accelerated in the back half, but this digital program that John laid out and then some other, our home channel that, so yeah, we're continuing those investments in 2020.

That may not have an immediate feedback or a payback, but we're running this company longer term than just one quarter, and we absolutely believe these are the right investments to make. And so we're moving forward aggressively, taking advantage, as I said, of not only the market, but we really think there's some competitive opportunities out here that we want to take advantage of.

Okay, so nothing really special, just going forward and investing where you need to?

Investing where we need to, skinning back where we can, but leaning forward, we think that we've described it internally, Rosemary, as a coil. We feel we're cranking this coil down and we expect it to respond given the investments that we have in a very positive way.

And Rosemary, we don't expect the market to be this way, but if you go back to 2007, 2008 and 2009, when we added 260 new stores, we came out of that, you look at our market share growth, not only on the three year, but the five year and the ten year compounded average growth rates, we think we're well above market growth, and that's the attitude we're taking. We look at it long term and expect, as John mentioned, that that coil to grow market share faster than what we've done in the past.

All right, looking forward to that coil deploying. Thanks.

Thank

you.

Thank you. Our next question comes from Christopher Perella with Bloomberg Intelligence. Please proceed with your question.

Hi, guys. Quick ones on LATAM volume. Has that flattened out for you at this point and you're looking for inflection in 2020? And then just a little color on consumer pricing. You expect to get about half of what you get in the TAC group for 2020?

Yeah, Chris, I would say for Latin America, our volumes have, I would say, improved as the year has gone on. But where you're seeing it is as we continue to see the devaluation, that team is continually having to go out with price. 60% of our raw materials are dollar nominated. So every deflation we see in Brazil, as an example, we're constantly chasing with price. So the biggest portion of our impact right now is price. But some of the things that we're doing on streamlining sales organizations and focused on the right segments and customer segments will help drive growth in the future. Yeah,

we're just not waiting for the market. We're not waiting for currency. We're trying to do, we mentioned earlier, control the things we can control. And our Mexico sales were up high single digits, clearly offset by Argentina and Brazil and some of the other regions. As Al mentioned, we're trying to be very aggressive in Brazil. The store reduction is an example of that. But we're looking to drive more profitable sales to the most efficient channels down there. Chris,

the second question on price. Yes, in performance coatings, we do still have opportunities for pricing certain businesses and regions. And as you remember, 17 and 18, we saw the big run up in raw materials. Our industrial businesses were impacted the most. Although raws have moderated and our expectation is in 2020, they're not back to where they were at the beginning of 2017. So we're continuing to need price. We've expanded our margins, but we expect and I feel confident that we'll get to the high teens and low 20s. And recovering those raw material costs plus the incremental freight costs plus the merit increases and healthcare that I talked about on time, those are affecting our performance coatings group and we're having to offset those. So yeah, we're going to continue with price. All right, thank you. Thanks, Chris.

Thank you. Our next question comes from the line of Chris Bodiglieri with Wolf Research. Please proceed with your question.

Hey guys, thanks for taking the question. First of all, I want to kind of follow up on your comment earlier on the auto business looking at the best that it's been in your tenure. A little surprising to hear. Are you starting to see accident frequency inflect or total loss rates come down or is it more so just competitive dynamics where you feel like you're taking share from the channel?

Competitive dynamics, we're taking share. I think the market, there's been some compression we think and we've talked about that openly with safer cars and safer attributes that are going into these vehicles, which are absolutely critical. So we're doing it by the technology that we're bringing and the services that we're bringing. The combination of Valspar and Sherwin together, we have a new improved system that we think has been very well received by the marketplace and we're really working hard to serve those customers in a way to help their throughput through those facilities.

That's helpful. And then one other question on coronavirus, I just want to think through potential impacts, maybe a more indirect impact. Right guys, you don't have high exposure to Chinese TO2, but are there any impacts to that market that could manifest in the global supply chain if the work stock continues or any other feed stock or inputs that, again, if we continue to see more business shutdowns and extended holiday, that could maybe have an impact on your business. I'm not sure if you can think of all that.

Yeah, Chris, you know, let me start just by saying, you know, first when we look at this, the health and safety of our employees is number one, obviously. And so we're monitoring that very carefully and the recommendations that are out there. We've suspended travel to and from China in the short term and we're limiting some travel inside the country to business critical. So we're doing that. But I think we're working closely with our teams there, our customers, our suppliers haven't seen, you know, to this point any any negative impact and we'll continue to monitor that closely. I think it's just too early to see.

We've got some very good leadership on the ground there. Jason Wu and his team are keeping us fully abreast. And I'd say right now from a procurement standpoint, we're staying close. So there's a couple of dynamics. There's a raw material piece of it. And there's also the point that Jim just mentioned about, you know, our trying to make sure we're doing everything we can to protect our employees and work with our customers. There's a whole lot of people trying to do everything possible to do that. But there's a lot of uncertainty and we'll react as it unfolds.

Gotcha. Really helpful. Thank you. Beth.

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the floor back over to Mr. J for any additional concluding comments.

Thank you, Jesse. And thanks, everybody, for joining us on the call today. Myself and Eric Swanson will be available, as we always are, for your questions today, tomorrow and into next week. And again, I appreciate your interest in Sherwin and we'll talk to you very soon. Have a good day. Bye bye.

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.