Sherwin-Williams Company (The)

Good morning. Thank you for joining the Sherwin-Williams Company's review of first quarter 2020 results and our outlook for the second quarter and full fiscal year of 2020. With us on today's call are John Marikis, Chairman and CEO, David Sewell, President and COO, Alma Fishen, CFO, James Cronin, Senior Vice President, Corporate Controller, and Jim Jay, Senior Vice President, Investor Relations. This conference call is being webcast simultaneously in listen-only mode by issue or direct view of the Internet at www.sherwin.com. An archived replay of this webcast will be available at sherwin.com beginning approximately two hours after this conference call concludes and will be available until Wednesday, May 13, 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 has prepared remarks, we will open the session to questions. I will now turn the call over to John Maricas.

Thanks, Jessie. Good morning, everyone. I hope you and your families are remaining safe and healthy during the pandemic. Given the extraordinary circumstances over the last quarter, we've changed our typical format a bit today to provide you with some additional perspective. After my opening remarks, I'll turn the call over to Jim Jay, our Senior Vice President of Investor Relations, for some short comments on our first quarter results. David Sewell, our President and Chief Operating Officer, will follow Jim and provide you with details on how we're responding to the pandemic. After David's remarks, I'll share some color on what we're seeing across our various end markets before turning it over to our Chief Financial Officer, Al Mastician, who will provide you with our revised outlook for the year. Let me begin today by thanking the more than 60,000 employees of Sherwin-Williams for their courage, determination, and resilience in the face of the COVID-19 pandemic. Their extraordinary efforts to serve each other, our customers, our company, and our communities during this challenging time truly has been inspiring. This wonderful team has my deepest appreciation and my deepest respect, and I'm confident in their ability to meet the challenges ahead of us. Clearly, we're in a much different economic environment than anyone could have imagined when we provided our 2020 outlook back in January. More than 26 million have filed for unemployment benefits in the U.S. alone since mid-March, and other geographies also remain under significant pressure. Sherwin-Williams is not immune from these realities. We are seeing major near-term impacts to demand in most of our end markets. We have a long-tenured and experienced management team that has successfully managed the company through a number of challenging times. Recession in the early 2000s, the 2008-2009 financial collapse, and the integration of ALSPAR, the largest acquisition in the company's long history. Our entire global team remains undaunted and has taken actions to navigate this crisis. We remain very confident in our ability to manage the near-term impacts we are seeing while positioning ourselves for continued long-term success. We've developed and are executing a comprehensive response to the pandemic focused on the safety and well-being of our employees, our customers, our company, and our communities. We are implementing multi-phased contingency plans across our businesses to adjust to the near-term business environment. We are well positioned from a balance sheet and liquidity perspective. We've adapted in order to stay connected to our customers through this crisis, including modified operations in our stores and increased use of e-commerce and other technologies. We believe we're seeing a pause in demand in many of our end markets rather than destruction of demand. We believe the long-term fundamentals remain intact. We intend to continue strategic investments that support profitable growth. These include continued investments in our stores, our products, our e-commerce platform, and other initiatives as we look for opportunities to expand our business. But before moving ahead, I'd like to thank our team again for remaining focused and delivering on our first quarter plan, even as the COVID pandemic began to impact us. Let me now turn the call to Jim Jay for some additional comments on the quarter.

Thank you, John, and good morning, everyone. In addition to this morning's press release and our commentary on today's call, we've provided a slide deck on our website with additional information. All comparisons in my remarks are to the first quarter of 2019, unless otherwise stated. Overall, Sherwin-Williams delivered a strong first quarter that was in line with our expectation, with year-over-year improvement in sales, gross margin, profit before tax, EBITDA, diluted net income per share, and net operating cash. First quarter 2020 consolidated sales increased 2.6%, to $4.15 billion and consolidated gross margin increased to 45.6% from 42.9%. Consolidated profit before tax increased $93.4 million to $392.3 million. Diluted net income per share for the first quarter 2020 increased to $3.46 per share from $2.62 per share. The first quarter of 2020 includes acquisition-related amortization expense of $0.62 per share. And the first quarter of 2019 includes acquisition-related costs and other adjustments of $0.98 per share, as described in the Regulation G reconciliation table included in our press release. Excluding these items, first quarter adjusted diluted earnings per share increased 13.3% to $4.08 from $3.60. Adjusted EBITDA increased $48 million to $623.1 million, or 15% of sales. Cash from operations was $54.9 million, an increase of $91 million year over year in the quarter. As is typical for us in the first quarter, We use cash to build inventory levels in advance of the busier spring and summer selling season. We continue to monitor the demand environment closely. From a segment perspective, the Americas Group grew same-store sales by 7.4% and improved segment margin by 140 basis points. Consumer Brands Group and Performance Coatings Group also delivered improved segment margin performance. Additional details on our segment performance are included in the slide deck I referenced previously. Let me now turn the call over to David Sewell for some specific comments on how we are responding to the pandemic. David?

Thank you, Jim, and good morning, everyone. Let me also add my sincere thanks to our entire global team. Without a doubt, our incredibly talented and dedicated employees remain our most important asset, and we have implemented a wide range of temporary policies and protocols over the last two months to protect their health and safety. These actions include enhanced paid sick and or family leave, alternate flexible and remote work arrangements, visitor and employee screening protocols, social distancing best practices, additional PPE and sanitary procedures, and we have established a global crisis response team among many other measures. We also took the unprecedented step of temporarily closing our paint stores, sales floors to further protect employees as we move to serving customers with curbside pickup and delivery options. As for our customers, we provide essential products and services that are helping painters create and maintain clean and healthy living environments at healthcare facilities, manufacturing plants, residences, and for other vital infrastructure. Many of these contractors have expressed their gratitude to us for keeping our stores open and enabling them to keep their businesses running, doing their jobs, generating income, and supporting their families. We're also supporting industrial customers in mission-critical areas, such as food and beverage packaging, healthcare equipment, food manufacturing, water treatment, and energy infrastructure. During the crisis, we have delivered critical coatings products to producers of ventilators, oxygen tanks, and hospital bed frames. At this time, all major architectural and industrial plants and distribution service centers are in operation. Utilization rates vary based on manufacturing site and customers served. We have had no significant issues with raw material availability or supply. We've had a very small number of North American stores closed intermittently during the crisis related to varying government orders. The vast majority of stores remain open. All of our businesses have developed and are executing on multi-phased contingency plans to adjust to the near-term business environment. We have taken targeted action to reduce costs, pause or eliminate certain programs, cut general expenses, and delayed filling open positions. We've also made adjustments to a small percentage of our workforce through involuntary leaves and reductions in force. We have additional levers we can pull if necessary. Through all of this, our employees continue to support the communities where they live and work. To date, we have donated hundreds of thousands of masks, gloves, and lab coats to those on the front lines fighting the virus. We have also manufactured and donated hand sanitizers to many hospitals throughout the country. Our entire team remains focused and determined as we manage through this crisis, and we're confident we will emerge from this as a stronger company.

Thank you, David. As I mentioned in my opening remarks, we believe we are seeing a pause in demand rather than destruction of demand, and we continue to feel confident in the long-term trajectory of our end markets. While some economies cautiously begin taking steps to reopen, The pace and scale at which this will happen is far from clear. We believe April will be the most challenging month of our second quarter from a comparison perspective, with some gradual improvement as the quarter progresses. Whether the recovery gains momentum in the second half of 2020 or not until 2021 remains to be seen. We believe providing additional granularity on our end markets and how they might begin to emerge from the current environment may be helpful to investors. Let me begin in the Americas group with our North American stores. Again, first quarter trends were very strong, with same-store sales up 7.4%, reflecting robust underlying demand. We've seen a dramatic near-term pause brought on by the pandemic, with all end markets except DIY being significantly impacted. In residential repaint, customers are delaying interior work related to social distancing concerns. and having paying contractors in their homes. We expect this demand to return gradually as the pandemic subsides, and customers and contractors implement appropriate protective measures. We expect exterior repaint work to gain momentum near term, which will help to offset some of the interior softness. The new residential starts were up strong double digits to begin the year. As workers return from stay at home orders, work on these homes should resume. Our national home building customers remain positive long-term, though cancellations have increased and order rates have softened near-term. Activity should eventually improve as mortgage rates are low and the supply of homes is limited. As a reminder, there's about a 90- to 120-day lag from the time construction begins to the painting phase. In new commercial, many of our customers were reporting strong backlocks, and our first quarter sales were up mid-single digits. Construction has been deemed as essential in most locations, and jobs in progress will be completed. Work is largely continuing, albeit at a slower pace, due to increased job site restrictions and labor challenges. We expect starts to be delayed in the second quarter, but we're optimistic that they will pick back up as the economy begins to reopen more broadly. In property maintenance, Overall, renters' demographics are favorable, though apartment turns have slowed dramatically near term. Management companies remain positive and expect renter movement to begin quickly once the economy reopens. Maintenance related to hotels and restaurants is likely to return more slowly. Some CapEx projects have been put on hold in some areas due to local mandates. Our DIY business is strong as consumers are nesting. and using stay-at-home time to work on affordable home improvement projects such as painting. We expect our DIY business to remain solid in the second quarter before returning to more normal low single-digit rates as stay-at-home orders are lifted. In protective and marine, approximately 40% of our sales are tied to oil and gas, which has fallen sharply over the last quarter. Major oil and gas companies have suspended or delayed capital expenditure projects. which have and will continue to impact our results. Conversely, our sales in other end markets, such as water and wastewater treatment, pharmaceutical, flooring, rail and marine, remain as planned, which will help to offset the softness from weaker oil and gas business. While we're seeing short-term disruptions and headwinds, the long-term drivers we've cited in the past remain intact, including household formations and demographic trends. Given these long-term drivers, we intend to continue to invest in our business. We anticipate opening approximately 50 new stores this year, while continuing to focus on sales reps, management trainees, innovative new products, and productivity-enhancing services. Moving on to an update for Consumer Brands Group. DIY demand in North America continues to be strong, as stay-at-home mandates have increased home improvement demand. Sales to home centers and other retail channel partners continue to perform well, and we are encouraged by growth prospects with multiple customers in this channel. Looking at our international businesses, we expect our sales to be under considerable pressure through the second quarter. Our expectation is for these businesses to slowly return to more normal activity in the third quarter as the economies of the world begin to open. Lastly, let me comment on trends in performance codings groups. Overall, we anticipate industrial demand recovering more slowly than architectural demand. From a geographic perspective, North America remains the largest region in performance coatings and was our strongest performer prior to the pandemic. We would expect it to be true going forward. We have started to see some recovery in China, but at a slower pace than anticipated. We expect continued pressure in Europe and Latin America. In packaging, Demand for food and beverage cans remains robust. We anticipate strong continued demand and additional business wins driven by sustainability trends and our non-BPA Valpure V70 coatings. In coil coatings, we're seeing a temporary pause and slower pace of some commercial construction projects. Jobs in progress will eventually resume. And coupled with the continued capture of new business, we expect this business to remain one of our best performers. In general industrial, we're seeing substantial demand weakness in various end markets, including heavy equipment, agriculture, transportation, and general finishing. We expect this recovery will be slow, and we'll see continued pressure throughout the rest of 2020. In industrial wood, softness across various end markets, including furniture, kitchen cabinetry, and flooring, has continued. It is difficult to forecast the timing of improvement, though many of the same drivers influencing new housing could benefit this business. In automotive refinish, the business has been impacted by the various stay-at-home mandates that have been instituted across the country. The decrease in miles driven has led to a decrease in collisions. The pace of recovery in this business will depend on how quickly stay-at-home orders are lifted and people begin to return to their normal routines. Let me reiterate that while we are seeing near-term pressure across most end markets we serve, we're confident in the long-term trajectory. Now, I'll turn the call over to Al Mastician, our Chief Financial Officer, to talk more specifically about our revised 2020 guidance, our cash and liquidity position, and our approach to capital allocation.

Al? Thank you, John, and good morning, everyone. we anticipate the negative impact of COVID-19 on the U.S. and global economies will most likely continue through the second quarter. We do not expect immediate meaningful improvement ahead in most end markets we serve, and we are unable to predict when any noticeable improvement in those end markets will occur. Given the near-term trends and indicators we see at this time, we anticipate second quarter 2020 consolidated net sales will decrease by a low to mid-teens percentage versus the second quarter of 2019. Looking at our operating segments for the second quarter, we anticipate the Americas Group to be down by a low double-digit to mid-teens percentage, Consumer Brands Group to be up by a high single-digit to low double-digit percentage, and Performance Codings Group to be down a high teens percentage. For the full year 2020, we are revising our sales guidance to reflect uncertainties in the timing and pace of improvement in the U.S. and global operating environment. If economic conditions begin returning to normal in the third quarter 2020 and continue improving through the fourth quarter, we anticipate full year consolidated net sales to be flat to down a low single digit percentage. If economic conditions do not materially improve until the first quarter 2021, we anticipate full year 2020 consolidated net sale to decrease by a mid to high single digit percentage. This revised full year 2020 consolidated sales guidance is compared to our previous full year guidance of an increase of 2% to 4%. On an operating segment basis for the full year, We anticipate the Americas Group to be flat to down by a mid single-digit percentage, Consumer Brands Group to be up or down by a low single-digit percentage, and Performance Codings Group to be down by a high single-digit to low double-digit percentage. Considering our revised range of potential sales, we are revising our diluted net income for common share for 2020 to be in the range of $16.46 to $18.46 per share compared to our previous guidance of $19.91 to $20.71 per share and compared to $16.49 per share earned in 2019. Full-year 2020 earnings per share guidance includes acquisition-related amortization expense of approximately $2.54 per share. On an adjusted basis, we expect full year 2020 earnings per share of $19 to $21. One key assumption embedded in our outlook is the raw material deflation we expect to realize for full year 2020. We expect the raw material basket to be lower year over year by a low single digit percentage. Switching to our balance sheet, which along with our liquidity position remains strength of the company. At March 31st, 2020, we had $239 million in cash and $2.5 billion of unused capacity under our revolving credit facility. At the end of the first quarter, our leverage ratio improved 3.1 times on net debt to adjusted EBITDA compared to 3.5 times a year ago. As Jim noted earlier, during the first quarter, we used cash to build architectural inventory levels in advance of the spring and summer selling season. However, our teams reacted quickly to slowing demand in various businesses and regions where it occurred an aggressively reduced inventory, which helped reduce our year-over-year working capital, $151 million. We have completed a number of actions over the past year to reduce our risk and improve our financial flexibility. We recently completed a bond issuance in March for $500 million of 10-year notes at 2.3% and $500 million of 30-year notes at 3.3%. These are the lowest coupon rates in the history of the company. The proceeds of these issuances were used to complete a tender offer for $500 million a 2.75% note due in 2022, and will also be used to pay off the $429 million, two and a quarter notes that are coming due in May. Our next long-term debt maturity in 2021 is $25 million. In the first quarter, we repurchased 1.7 million shares of our company stock and increased our quarterly dividend by 18.6%, to $1.34 per share. We are committed to maintaining this dividend increase through the rest of 2020. As David mentioned, we are executing contingency plans to reduce spending and conserve cash. As part of those plans, we are lowering our full year 2020 capital expenditure forecast from $320 million to $180 million. and temporarily delaying our share repurchases until we see improvement in the end markets we serve. Finally, we have put a pause on spending related to our new headquarters and R&D facility projects, but continue to work through various planning processes. That concludes our prepared remarks. 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 symbol indicates 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 Chris Parkinson with Credit Suisse. Please proceed with your question.

Great. Thank you. Good to know everybody's doing well. So I'll leave this fairly open-ended, but can you speak to some of the key trends in the Americas group, such as the sustainability of the DIY booths, any color on the magnitude of the divergence between exterior and interior paint trends, and just how to think about things on a sub-regional basis for what you're seeing in April? Are there any differences between, for instance, the southeast versus the northeast? Thank you very much.

Thanks, Chris. First, I would say regarding the DIY business, as we mentioned in our prepared remarks, the nesting phenomenon, if you will, of our customers, largely the result of their spending more time at home. And we believe that that will continue largely through the stay at home orders. Historically, historically, if you look at the underlying principles that have us believing that this gradually shifts back to the do it for me as opposed to DIY primarily because we think those are still intact. Those are the aging demographics, the home appreciation, the aging housing stock. And as well, I would say that if you look at the last recession in DIY, it grew not in huge amounts, but it was not – protracted either. Here, we have a much more significant jump in DIY business, and we're experiencing that DIY business in our stores for those customers that are still preferring a more specialty store experience and through many of our customers in our consumer brands business, and we're working hard to serve them as well. As it relates to your next question regarding the interior versus exterior, both were up double digits in the first quarter. And we expect that as the season starts to turn a little bit here that we'll start to see more lift in the exterior business as a result of more contractors getting the go ahead from homeowners who, in some cases right now, are preferring not to have, or many cases right now, are preferring not to have painting contractors enter their home. And regionally, you asked a question, what we're seeing, what we see regionally, I'd say that we are starting to see more estimating, and I would say the close rates in those estimates are growing largely in southeast and southwest right now. They're lagging in the northeast and in the midwest, which you would expect, heavily influenced by what's happening in New York, what's happening in Illinois and Michigan. So I'd say, you know, going back to the point that we referenced a few times in the prepared remarks, you know, we feel structurally there's not been much shift. So we expect this do it yourself to continue short-term, gradually shift back to do it for me, and we love our position with those customers to be able to capitalize on that.

Great. Thank you. That's a great caller. Also, just as a corollary of that, can you just very quickly just break out the trends in P&M across the Americas Group and PC, just, you know, if you go through the oil and gas protective anti-corrosion and then just the small and marine, just anything changing there in terms of your thought process? Thank you very much.

Yes, I'd say in P&M, we mentioned that that represents about 40%. I'm sorry, oil and gas represents about 40% of our P&M business to our stores. And we have a very strong position there. I'd say that the oil price has had an impact primarily in the upstream business where You know, you're offshore, shale, et cetera, midstream with storage. Downstream, I'd say in refining and cracking, there's still quite a bit of investment going on. What I'm really pleased with is the shift that our teams are putting into place, the pivot to where the business is, not necessarily where we are. We have a very strong position in those areas that are under pressure, but we've got wonderful talent. wonderful products, and we're doing a very good job, I believe, in moving into some of those areas that are underserved by Sherwin right now in the oil and gas, as well as other areas that we mentioned. Those are the water, wastewater, food and beverage, even pharmaceutical, fluorine. So this is a pretty experienced team we have here, and we're taking advantage of those experiences, the scar tissue, if you will, from some of the past experiences. We're not waiting for things to happen. We're trying to capitalize and drive things and make them happen.

Thank you.

Yep.

Thank you. Our next question comes from Ganshan Punjabi with Baird. Please proceed with your question.

Hey, guys. Good morning. I hope everyone's doing well. Morning. Hey, morning. Hey, John, just kind of picking up on the last few comments, right? Okay. You know, your comments, you're viewing this as sort of a pause in demand versus necessarily a destruction in demand. But, you know, some of the metrics in terms of U.S. unemployment and credit markets have changed dramatically over the past couple of months. I guess what gives you confidence that apart from the dislocation that you and others will see, too, that this is, in fact, a pause versus something that's going to have a scale with this?

Yeah, so I think in each market, when we look at, the drivers of those segments, we look through and understand, we think, with a pretty good line of sight on what's going to happen. I think if you look at, for example, a new residential, we feel there's a pause, that there's a fundamental need for housing in the country, and that while the short-term traffic in in models and the feedback that we're getting from our large new residential customers clearly indicates some concern with the shorter term. We're not running the quarter. I mean, running the company to have a great second quarter here, and that's it. We're doing the best we can with the cards that we were dealt with in the second quarter, but we're looking at the fundamentals, and we believe that if you go by segment through our business, that there are some very sound fundamentals. in areas where there is some softness, we're not waiting. We're moving into those areas that offer opportunity. And so segment by segment, we're dissecting our business, understand we have the right people doing the right things to capitalize on those opportunities.

Gosh, I might just add to that. And that's partly why, you know, the unpredictability about how our segments come out of this and the timing of that. And that's why we, you know, if you will, bifurcated the the guidance to say, okay, if we see things start improving in the third quarter and then continue to improve in the fourth quarter, you know, we think, you know, flatten down those single digits. But if the true recovery doesn't start until the first quarter of 2021, You know, we're looking at that mid to high single-digit down estimate. So, you know, we perfectly understand the uncertainty, but that's why we're giving a range of the timing of when we expect the businesses to come back.

Understood. And then, you know, just on the DIY piece that you're benefiting from in the source group, How are consumers engaging with your associates? I mean, generally, your stores offer a very high-cut experience for, you know, consumers. How are your associates pivoting towards this new reality of social distancing? And then just sort of related to that, are you seeing any, from a high-level standpoint, are you seeing any specific trends that are visible in terms of maybe CYPs being a bit more price-sensitive in terms of the choices? Thanks.

Thank you for that question because it gives me a terrific opportunity to recognize a wonderful team. We've got a terrific leadership team and Peter Pulido and Bill DeSantis and all our division presidents there. But more importantly, as strong as those leaders are, we've got just a wonderful team in our stores and are close to our customers and sales reps that are doing a terrific job. And your question gives me just that, the opportunity to thank this wonderful team for everything they're doing. You're right. It's changed things tremendously. We are curbside only, so it's given us an opportunity to leverage some of the investments that we've made in our digital platform. We have orders coming in via the digital platform that we've been investing in with much greater utilization, so we're excited about that. And I would tell you, we've been inundated with e-mails and notes and even phone calls from customers that have gone out of their way to to comment and recognize our employees and their willingness to work with people. We've begun utilizing a color fulfillment, so customers can go online, order colors, and have them into their homes in a relatively short period of time. And our people in the stores are eager to help these people over the phone to make sure that they're taken care of. And then the transaction takes place. It's a contactless transaction when these customers pull up into our stores and the product is ordered to the back of their car. I don't know. I couldn't count how many points of contact I've had with people recognizing the wonderful service and approach that we're taking. And that's on our stores. I would say that we're blessed with a number of really, really strong and good customers on our consumer brands team. And Heidi Petz and Keith Allure, the two leaders running that business, have really helped us to try to be as responsive as we can to that important segment and channel to our customers. And we're trying to instill as much as we can in our learnings from our store side into those customers and vice versa and just really providing solutions to our customers. So we're really excited about this. I'd say that the trend that we're seeing in our DIY business is exciting on the consumer side as well as our stores. And the pricing sensitivity piece? Yeah, you know, I'd say that on pricing, we continue to see a positive mix in our business. I'd say that much like contractors who recognize that 90% of their Projects are labor costs. Many homeowners, particularly those that are shopping at a Sherwin-Williams store, are typically willing to pay a little more to get the finish that they're looking for and to have it be as productive as possible. So we are seeing a positive mix shift in both the contractor business that we see as well as the do-it-yourself.

Perfect. Thanks, John.

Thank you.

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

Yeah, thanks for taking my question. I guess two points. So on the raw material side, down low single digits, just given what we've seen in oil prices and propylene, it seems a little bit on the low side. Can you give us a little bit of color into what you're seeing in the various baskets for raw materials and how you're thinking about how they turn throughout the year?

Sure. And good morning, John. And what I would say is given the significant decline in crude, as you point out, we do expect to realize lower year over year raw material costs throughout the remainder of 2020. The full year will be down by low single digit percentages we talked about compared to our prior estimate of being flat for the year. I think the rate in the second half of the year will depend largely on how the downstream derivatives like propylene and ethylene, react to the declines in crude. And I would say also, if demand does not improve through the second half of the year, then we could potentially see a more meaningful benefit. The majority of the benefit year-over-year is going to be on that resins and solvent side. If you take a look at the TiO2 side, I think we've seen strong demand there in the first quarter and the second quarter, but it's probably too soon to fully understand the supply-demand impact and the effect on pricing there. I would say at this point, we do anticipate stable to potentially lower prices for TiO2 in the back half. Historically, weaker global demand has resulted in lower pricing. But again, I think the decline that we're expecting to see in the basket is tied more on that petrochemical side, and it's really going to depend on how propylene and ethylene respond.

Got it. That's helpful. And then I guess in the stores business, so if I understand it correctly, you shut down the front part of the store kind of in late March. Is there a way to think about how much sales dipped when you went just to curbside pickup and just so that we can kind of think about when, you know, these required closures and that type of thing and how to think about the snapback? Can you give us a little bit of color or anecdotes on that?

Yeah, John, you know, it's hard to say exactly how much of a decline we're seeing, or we saw. But, you know, in our second quarter guidance, we're talking about the America's Group down low double digits to mid-teen. I think just commentary, as we've seen April progress, the weekly sales on architectural have improved week to week from a dollar volume standpoint. As a reminder, April was our toughest comp a year ago. If you think about how North America paint stores progressed through the second quarter last year, April was the strongest quarter, and then it ticked down in May and it ticked down in June. We were fully expecting April to be our toughest comparison. That's what makes it a little bit harder to gauge how much is related to the shelter in place. and the changes to our sales floor.

You know, John, I would add this, though. You know, David Sewell here, our COO, has got all our businesses leaning forward in a very positive way. So I'm a bit more optimistic, I might say, in the sense that, you know, we've come into this business with a pretty strong performance, a strong top store sale number. And David has our teams, every one of them, including our stores, taking the activities right now that will help us grow even faster coming out of it. And so, you know, the activity that we have in new accounts and product demos and information, this is probably some of the most aggressive time we've had because we have had some customers on the professional side that have had interior projects that have been delayed. They're not able to get on the exterior projects, and so it's provided our teams more accessibility to some of these customers. And our new account activity is actually up as a result of this. Our demos of new products are up. So hats off to David and our team, not only in our stores, in all of them, for what we're doing during these times. And so I get what you're asking. You know, as these stores close, you know, how quickly do they rebound? Our desire, I mean, really strong desires to come out of this much stronger than even what we were before.

Great. Thanks very much for the call, Jeff.

Thank you.

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

Hi, guys. Good morning. Good morning. Thanks for taking my question. I wanted to go back to the comments you made earlier. I guess you referenced potential for opening 50 new stores this year. Maybe you can just discuss how you see that playing out. Are there particular regions that you're targeting? And if you could relate that to some of the performance that you saw in Q1 or Q2 that you're seeing right now. Are you targeting areas where maybe you're seeing some weaker performance regionally or Is it just under penetrated areas? Thanks.

It varies by division. We are looking at in some areas what we call fill-in markets where we have underserved markets in areas that we might have more penetration but we're missing some gaps and there's a lot of areas, quite frankly, that we're just not happy with our performance yet in the area of market share and our position and we've got a long way to go and So I'd say it's kind of a balance between the two. We'd like to take advantage of, you know, our position in the market while providing more accessibility to our customers, and at the same time, we have to get after some of these markets that are underserved.

Okay, thanks. And then just as a follow-up, I just wanted to ask about the refinished business as well. You know, we all have seen miles driven sales. um, dropped significantly. Um, and just give us your thoughts. Um, you've had some growth recently in the last couple of years, um, a little bit bigger business for you now. So, um, could you, uh, yeah, just comment on that business and what you see, uh, for the outlook there. Thanks.

Sure. You're right. We've seen a mile driven down considerably. Um, and we expected that, that impact, uh, could be for another 30 to 45 days following the end of stay-at-home orders. So it's a little bumpy right now, if you will, in that business, no pun intended. But our teams are really doing a nice job there. I think, you know, I mentioned last quarter was a bold statement, and I stand by it. I think our position in this auto refinish business is as strong as it's been since I've been on the this floor of the building here. I've got a lot of confidence in our leadership in automotive, a lot of confidence in our performance coding team and what we're doing. I think we've got a lot of determination in this business to outperform. We're going to have to get some cars on the road to be able to see some of that, though. I'd say here, though, as well, if I could, the effort that we have in the connectivity and virtual learning and the virtual demos that our teams are initiating here. It's another area that, you know, out of adversity sometimes comes the best. You know, we've had a lot of things that we've been working on that we've been able to accelerate, and we believe it's helping to convert some of these customers. Some of them were on the fence before. Some of them had just come online before the pandemic. And, again, we expect to be able to capitalize on this as we come out.

And just lastly, I know you talked about evaluating your business in Australia. Could you just comment on where you stand there and the progress that's been made there?

Sure. Yeah, the virus impact on Australia has been severe as well. We're 100% contactless there. But, you know, I'd say that we started to address to your question our SG&A and our position long before the pandemic. And I'd say that our adjustments, not only in Australia, but I'd say in Europe, even in Asia. If you look at Europe, we had a 70% flow-through on our business there. Australia, we've taken, we think, the appropriate SG&A steps there, as well as in Asia. You know, prior to the pandemic, we've, I believe, right-sized some of the business there, and we've made some very difficult decisions in some areas and We've invested in some other areas to be able to capitalize on our growth. So I wouldn't limit it to just Australia. I think we're taking what we believe to be the appropriate aggressive steps for these businesses to drive the operating margins. We've said time and time again, we're constantly looking at programs. We're looking at brands. We're looking at businesses, even stores, every element of our business. If it's helping us reach our goals, we want to put our foot on the gas. If not, we're making difficult decisions.

Great. Thanks. Thank you. Thank you. Our next question comes from Steve Fern with Bank of America. Please proceed with your question.

Yes. Thank you for taking my question. I was curious about your North American consumer business. Your guidance for second quarter is quite robust. Is the trend that you're seeing in April representative of your outlook for the second quarter, i.e., are you seeing, you know, that strong of a volume growth during the month of April?

I would say unprecedented growth in April.

I'd agree with that. And we really started seeing a kick in about mid March. And that trend has not only continued but accelerated in April.

And David Sewell made some comments about trimming the sales force or the personnel in the tag group in in his remarks, can you just comment on what you expect SG&A to be in the second quarter versus the first?

Yeah, we are not trimming, just to be clear, we're not trimming personnel in our tag organization. In fact, we'll continue to invest, as John talked about, in new stores. We will see the trend in SG&A decline in our second quarter. because of the sales shortfall, we probably won't see the percent of sales improve, but the steps that David talked about in our contingency planning, they're material. And as he talked about, as we see demand and the trends in demand develop, we have other levers ready to go to pull if we need to, but we are not going to be cutting our stores organization.

Steve, maybe just to make sure – I'm not sure what you may have picked up or the way we may have said it, but, you know, we're always looking at our investments. And there are times in our normal business that we might be skinning down in an area and investing in other areas. But I think the idea that is important to hear is, you know, our stores' business is – A very sound, fundamental business that we expect to put more gas in that tank every chance we can.

And if I could just squeeze one more in about housing starts. Are your contractors indicating to you that it's a slowdown driven by, you know, a delayed permitting? Or are they also seeing any problems with labor halving?

You know, I don't know that the labor issue is coming up right now. I think the – let me go back to the very first part of your question. We don't think that the fundamentals have changed, and neither is our position in that market. We feel the gap in the Sherwin-Williams value proposition is wide, and I'd say it's growing wider. If you look at rates, and this may go back to the question, gosh, I'm as to why we have confidence. If you look at rates are low, housing supply is limited, and while there's some short-term impact to the business, we feel as though the fundamentals are still there. I remind you that we have an exclusive relationship with 18 of the top 20 nationals, and from the regionals where we have the opportunity there, we have an exclusive with 73 of the top 100. So there's more opportunity there for us to leverage And I would tell you that the value that we bring in distribution, our reps, the products, even the design tools and local training are really areas that we're focusing on. And so I'd say our customers right now, for the most part, are dealing with the short term. But I would tell you the discussions that we're having with them – All top ten builders have reached out to us wanting to ensure of our supply chain and our capability to serve them. And I can assure you we're ready, more than ready, to serve them. That's part of what gives us confidence. Yeah, there's going to be some bumps in the road in this quarter, no question. And maybe rolling a little bit into the Q3, who knows. But we've got terrific relationships. We're going to be right there with them. And no one has the responsiveness yet. to serve our customers like Sherwin-Williams.

Thank you.

Thank you, Steve.

Thank you. Our next question comes from Bob Thornton with Goldman Sachs. Please participate with your question.

Thanks very much. I want to say thanks to Al or Jim, whoever's idea was to give the sub-segment data in the slide deck. I think it's very helpful and appreciated.

I give Eric Swann a lot of credit for that. Eric, sorry.

I wanted to ask about the CapEx reduction. That's a pretty dramatic decline. I know you mentioned, John, only 50 new store openings, which maybe is about half of what is typical. Is that the bulk of that decline, or where else are we seeing the CapEx reduction?

Yeah, Bob, you know, within our global supply chain, you know, we – are paring back some of the capacity projects that we have scheduled to start this year going into next year. You know, I would tell you that that decrease of $140 million, you know, what we'll do throughout the year is monitor, again, how the demand trends are developing. And as we see, for instance, our stores architectural start building back up, we'll turn – some of those back on. You know, it's the timing that causes the delay. But I think 140 would be kind of your max case. And then, you know, as we see things turn around, we'll start investing back in our plants and our distribution centers and the automation to help with our continuous improvement projects and operating efficiencies and things like that.

And I'm sorry if I missed it, Al, but, you know, you gave some guidance on second quarter tag sales. Did you comment on what the daily receipts in April suggested? You know, we were thinking down 30% or something pretty acute and then moderating. Is that reasonable?

Actually, our receipts have held up pretty well. I think, you know, maybe as you get into early May, we're going to see a gap, but then start improving as we get towards the second half of May and into June. Because as I mentioned, you know, as we – look at the progress in our weekly sales, that keeps improving. As we are staying close to our customers, we're not getting a lot of concern about bad debt or solvency of our customers. So right now, as we look at it, I do expect a little bit of slowdown here in early May and maybe mid-May, but then start picking up again.

Great. Thanks for the help. Bye-bye.

Thank you. Our next question comes from P.J. Juhakar with Citigroup. Please continue with your question.

Yes. Hi, John, Al, and the team. Good to hear from you. You too, P.J. How much is your online ordering up in the quarter from contractors or DIY? And how much of these orders are curbside pickup versus delivery? And longer term, Do you think that's a new trend that will remain in place post-COVID?

So you're probably not going to like these answers other than online is significant. Curbside versus delivery, I'd say the largest part of our – I'd say it's probably on the contractor side pretty evenly split. Obviously, the do-it-yourself curbside is delivered right outside of our stores. And I would say regarding the future, yeah, we want our customers using this system. We believe it helps in our customers' efficiency. We think it helps our efficiency. It allows us to be a better partner to them. and allows our customers to move seamlessly through our business and really begin utilizing the tools and resources that we have much better.

Yeah, PJ, it remains to be seen if Curbside has staying power. I think by and large, you know, when you look at our residential repaint contractors, they like the interaction with our stores. They like the interaction with our reps. On the DIY side, I think there's some color counseling that they like to get while coming into our stores, and currently they're really not getting that interaction. So, you know, we'll see. They may have some staying power, but I do think there's a lot of interaction and support they get from our stores on making recommendations on colors and different things like that.

I might add, though, PJ, that The curbside aspect of it, we think that has legs and that that will continue. It's one of the outtakes that customers enjoy in some cases, the ability to, you know, get in and get out. The majority of the customers that, you know, come in in the morning, start their business, you know, have their crews at our stores can still do that. And those that want to come in and zip out, We'll offer the best of both.

Okay, and just related to that, let's say in the future it's an online order followed by delivery. Does that lower barriers to entry in the business, or is it an advantage for you because you have a local store and you can get there faster?

Yeah, I'd say it's a huge advantage to us. It's really no different when you think about it. The customer picking up the phone and requesting an order and having – us deliver that product to them it's really no different from that aspect but I would say that we really enjoy this store platform that we have in the ability to do both the multi-point distribution capability you know we're 30 minutes from you anywhere and our ability to deliver in quick turnaround or you know quick responsiveness we think is important, but it's also a foundation, we believe, because those customers that are in every morning, they're building a partnership with our employees. There's a loyalty that grows, and I'd say that loyalty grows both ways. It grows with the customer to Sherwin and the Sherwin to the customer, and we think that distribution is is one, and albeit one very important aspect of the stores. We really value our role in our customer success, and I'd say we may value it more than others because we have a terrific relationship with these customers. But I'd say these are valuable, important in building the partnership, and that partnership includes problem solving for the customers, training, job management, helping them really run their business. And it evolved. It evolved from just a transaction to a strong relationship. And I would tell you, 35 years ago when I was in a store, I built some of those strong relationships. And, you know, unfortunately, about a year and a half ago, I lost my mom. And I would tell you, I was shocked when I went back home and found – A few contractors that I served when I was a store manager that came back and spent time with me there. I think I share that story because I think it captures the essence of what we do in our stores. We build strong relationships, and they last. And delivery is important, but we do a lot more than just deliver.

Great. Thanks for the color. Thank you, P.J.

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

Thanks. And hi, everyone. Glad everyone's now as well. I just want to ask on the Americas Group guidance for the second quarter and the rest of the year. You know, we've talked about this on prior calls, but you've clearly been gaining a lot of market share. And by my estimation, you know, in the second quarter, you kind of lapped that step-up in share game that really started to take hold in the second quarter last year in that really bad weather period. So when you think about what you're telling us about 2Q and what you're telling us about the balance of the year, is that reflective of sort of how you think the overall do it for me or just general pain industry is going to do, or are you still baking in that you're going to continue to gain share even though the comps are maybe getting a little harder?

We're going to gain share. Let me be very clear on that. We're going to gain share, and we're just getting started. I look at what's happening and what we're doing during this time, and the work that that leadership team and what they're delivering. And I tell you, we've got the best people in the field, the best store managers, best reps, they've got great resources. And we're making investments, Vincent, during these times that we expect to come out as pretty strong.

Yeah, and Vincent, you know, when you look at those, you know, we look at it at the long term, and then we got an SG&A question earlier, but you know, as we keep adding reps, we keep adding stores, we invest in a product innovation and e-commerce platform, you know, this gives us the confidence that we'll exit the environment and position better to grow multiple in the end market. And to highlight that point, this is similar to what we saw coming out of the 2008 and 2009 recession. And I'll highlight for you the three – five, and 10-year compounded average growth rate of architectural sales in our North America stores grew at a high single-digit rate in each of those three categories, which we believe was a multiple of the in-market, and we believe the same dynamics are in this situation.

Yeah, no, that makes sense. Glad to hear you guys are leaning into it. As a follow-up, One of the other things we've talked a lot about over the last few years, when we had a low unemployment environment, it was a bit challenging in periods where there was pent-up demand from bad weather to prosecute that demand. Obviously, if we go through the summer, we're unfortunately going to have some pretty unattractive unemployment numbers. I'm just wondering, have your customers talked to you about they're actually able to go out and hire more painters now, and so maybe we will see a benefit from that, at least for some period of time over the next two quarters?

We might. I think it's a little bit early for that, but we might. And, you know, again, that's where I don't want to feel like I'm preaching on this store platform, but I mean, if our customers are hiring people that might be less skilled or less experienced, that's where we can shine for them. We work with those customers. It's the products that we provide and, you know, the the, the, the geology that we use in our products to make sure that they flow and level better than others or the touch up, the fact that we own our own colorant to allow that, that, you know, the touch up is easier and better. All of that allows maybe a less experienced or less skilled or growing in skill, maybe painter to be a producer for our painting contractors. So we, we like, we like this type of environment where we can shine and, and, That's what we'll continue to really try to leverage as we move through this process.

Thanks very much, guys. Appreciate it.

Thank you. Our next question comes from Mike Harrison with Keyport Global Securities. Please proceed with your question.

Hi. Good morning here in Central Time Zone, but good afternoon, guys. Wondering, John, if you can quantify how many of your stores are closed in North America right now, and are those all situations where you've been restricted by the government, or are there situations where you have a handful of stores and you've decided to consolidate business from that handful into one or two locations?

Yeah, Mike, let me have David still answer that one.

Hi, Mike. Right now we probably have close to 30 stores in North America that are closed. Those are all those stores are due to government mandate. The team's doing a really nice job and trying to fulfill orders and deliveries from other locations that are open. And then as that continues to hopefully open up those doors will immediately open up when when the government allows.

And also was wondering a little bit about the cadence of demand from contractors as we're probably going to see some slowing in existing home sales and some of these commercial projects may get deferred. Your competitor yesterday talked of a coming air pocket in some of that commercial business in particular. Is that something that you see as well or do you think it's going to be steadier?

I think there's... there's structures coming out of the ground right now. And while there's some delay in getting on those, one, because of the stay in place or stay home, and the other, in some of those areas where they're allowing workers to come in, it's with restrictions. So there will be likely some delay in those. But, you know, our customers are still feeling good about those. You know, the other thing I would mention is, You know, we track very closely requests for specs, for colors, for data sheets, all things that we look at as data points in helping us to understand kind of the trend. And they're very strong. And so we think short-term there's going to be some bumpiness in this quarter. We get that. Again, you know, second quarter is going to be a challenge. We're going to get through that. And as our contractors and our specifiers and our architects are working on projects, we're going to be the ones right there with them helping them.

All right. And then just quickly, you guys introduced this microbicidal paint a couple years ago, PaintShield. Has that been tested for effectiveness against this coronavirus, and are you getting increased interest? in that product for either commercial or residential applications right now?

We do, but it's not a virus. It's not a coating that kills virus. That is a microbial, very easy to say. So, it'll kill some bacteria, but it will not kill the virus. Now, that said, we've had an interest as overall health and well-being the concern of ensuring that you have as safe an environment as possible has helped us in this area, and we do have more interest on that product.

All right. Thanks very much.

Thank you. Thanks, Mike.

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

Good afternoon.

I was wondering if you could speak to the price contribution embedded in your same store sales growth I think you had an increase of 3% to 4% on January 1. Perhaps you can enlighten us as to how much of that has been realized at this point. Yes. Kevin, that price increase is gone as expected, and we've realized that just under 2% of effectiveness in the quarter. We do expect that to get a little bit better into the second quarter, but progressing as planned. Very good. And then secondly, Al, with regard to capital allocation, I see paused share repurchase activity. Is it safe to say that M&A activity is likewise paused for some period of time, or how would you characterize a level of interest for bolt-on or larger acquisitions at this point? Well, we have a lot of interest in the acquisitions. I think what we're continue to do is work with the teams on generating the targets and filling our pipeline. Obviously, in this environment, it is challenging. That being said, I feel very good about our liquidity, the amount of cash we generate. We have $2.5 billion in available liquidity sources. We've done a lot of work pushing our near-term maturities out. You know, I feel very good about our balance sheet and our capacity to make M&A. As we come out of this and we see some of these targets maybe coming to the market. So I feel very good about our position.

Okay. Thank you very much.

Kevin.

Thank you. Our next question comes from David Beglader with Deutsche Bank. Please proceed with your question.

Thank you, John. Good afternoon. John, Al, how should we think about decremental margins in your various businesses in Q2 here?

Yeah, you know, when you say decremental margin with all the businesses except for our consumer brands being down, what I think you see is all the actions that these groups have taken in continuous improvement I point to our performance coatings group who, as we saw demand through the second half of last year slowing, they really have done a nice job controlling costs, improving even how their operations are. And you saw a nice pickup in their first quarter operating margin was up. So I think the way I look at it is all the actions that we've taken coming into this and all the actions we're taking now, I would not expect to see, you know, it's not a dollar-for-dollar decrement, if you will. I think you're going to see us do better than that. How much, obviously, it depends on volume. But I think we've done and taken the right action.

Yeah, I think if you look at that business, particularly the performance codings group that strong leader Aaron Erter and Ed Thompson there that are for the last over a year period have been really driving and have a wonderful leadership team beneath them that are really driving expense reductions down to be in a position to leverage everything that we can here. So I think there's been a lot of good work and it'll only continue.

And John, just in consumer brands, very strong results. Are you gaining share in this business or is it just the underlying growth of the of the market as we see it right now?

I think it's early to tell. I think right now we're working very hard to be the best supplier we can, and, you know, as data comes out, we'll know better. But right now we're trying to build the brands, the products, and make sure that we're servicing our customers better than anyone else could. Thank you very much. Thank you.

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

Hi. Good morning, everybody, and thanks for taking my questions. Glad to hear you all are safe and healthy. So, John and Al, you all have touched on this quite a bit, but I'm hoping to ask it a little bit differently. In the Americas group, you're expecting the second quarter sales to be down low double digits to mid-teens. And then for the full year, you know, flat to down mid-single digits. You know, at the low end of that full year guidance, I think it implies that revenues improve to kind of a mid-single digit decline in 3Q and 4Q. Could you just walk us through how you all are getting there and maybe some of the assumptions that you're making, you know, that even at the low end we're going to kind of improve versus the second quarter? Sure.

Yeah, Truman, you know, as we start seeing – and where this is really going to come in is as we start seeing states start opening up and the shelter-in-place executive orders are removed and job sites start opening up more and we can get back to work, I think, you know, as that progresses through the quarter – You know, I expect to see improvement in the trends and the weekly sales rates. And then when you get to the third quarter and the fourth quarter, you know, I expect that to continue. Exterior, even, you know, in the second quarter coming into the third quarter on res repaint, there's opportunities, as John talked about. I mean, there are – commercial projects that are in place today that need to get painted. There are housing units in place today that need to get painted, and we expect those to happen here. It's just timing. And as we carry the additional stores and reps that we put in last year that we're putting in this year, you would expect the ramp-up as we get through the third and fourth quarter.

Okay, thank you for that. And then on the performance coatings demand, you're expecting it down, you know, high single digits to low double digits in 2020. Could you just give us an idea whether you're seeing any of the pricing contracts start to soften, especially in, you know, in the face of a lower raw material environment?

Yeah, Truman, let me just jump on the pricing. You know, the amount of sales we have indexed or pegged to an index is probably less than 10% within – performance codings, it's less than 3% overall. I just think you're historically, and I'll even go back to my experience in 2000 and 2001, industrial just seems to be a slower recovery than the architectural side of our business. Asia Pacific, which is by and large back to work, is slowly coming, growing, but I think you'll see China in particular pick up a lot faster as the U.S. and European economies start getting back on their feet. Our business has a significant component that's export-related, and then it's just, you know, what do you think Europe and Asia, or I'm sorry, Europe and North America, how we come out of that. So, you know, it's going to be a little choppy across businesses, across geographies, But like we talked about, I mean, packaging is going strong. We expect that to continue. As we get back to work and people driving their cars, you know, we'll start seeing auto refinish pick up, as John mentioned. So I just think the cadence is a little bit slower than architectural.

Okay. Thank you all.

Thank you, Truman.

Thank you. Our next question comes from John Roberts with EBS. Please proceed with your questions.

Thank you and glad you're all well. You gave us some June quarter sales guidance, but not earnings guidance. Where in your cost structure is the most uncertainty that you can't flow that through? Is it in labor costs or the stores cost or raw materials? But what are you most uncertain about there in your cost structure?

You know, John, you know, we haven't. We've given sales guidance only in 18 through 18 and 19. I saw no reason to start giving EPS quarterly guidance now. I don't think there's uncertainty around our cost structure. I think the plans and the actions we've taken to reduce our costs, reduce our discretionary spending, hold open items, all are going to impact the second quarter. But we're not managing the company for the second quarter. We're managing it for the long term. And we're really looking at the recovery coming out of the third and fourth quarter and really driving momentum into 2021. That's what we're looking at.

And then the comment earlier on the raw material basket being down low single digit percent, I assume that's a price index for the raw materials. Do you have significant inventory of raw materials to work down that your dollar purchases of raws will be down more than that low single percent?

You know, John, really the vast majority of our dollars are in bulk tanks at our factories. We're not buying ahead of any material nature. We're staying close to our suppliers and making sure they're able to service us. And in particular, you know, I would say the team has done a very good job of managing this rapidly growing increasing unprecedented DIY demand. I think they're, you know, re-retrofitting plants. They're moving products around to build capacity. And our suppliers have done a terrific job making sure we have the raw materials needed to keep up with that demand. And I think our procurement teams and our global supply chain team need to get a lot of credit for that. But No reason that we would be buying ahead on raw material.

Okay. Thanks. Stay well.

Thank you.

Thank you. Our next question comes from the line of Derek Schmoy with Loop Capital. Please proceed with your question.

Oh, hi, thanks. I just wanted to be clear, just on the TQ consumer brands guidance, does that include the ACE exit and, I guess, software Asian fundamentals? Because if it does, it does seem that the retail piece is running mid-teens, if I'm not mistaken.

Yes, it does include both of those. Just one comment on the ACE business that we exited. Because we're You know, getting towards the end of that agreement, I mean, we are shipping the final, I would say, inventories of the private label in this quarter. It will be all done. So I would say that from a quarterly standpoint, the second quarter is probably the least impacted, and then third quarter will get back a little heavier, and then fourth quarter will moderate a little bit just because it's a small quarter. And it does include Asia as well.

great thanks um i just want to also follow up just had a comment earlier around uh exterior here in america's gaining momentum just wanted to see is this just seasonal uh or are you seeing an increase in contractor backlogs um as kind of driving some of that momentum that you identified earlier i think it's a number of drivers i think certainly seasonal

When you look at sequential improvement, there's a piece of that. I'd say that our teams are doing a very nice job of really focusing on this business through contractor relationships and as well through product technology. In fact, you may recall last quarter I talked about a product, this FlexTemp. We're having really good sales. feedback and interest from residential customers as well as new residential. This is a product that can be applied down to 35 degrees or up to 120 degrees without sacrificing performance or application. And so it's that type of innovation along with the service and the relationships that we're building in our stores that has us believing that we're going to grow here and outpace the market.

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

Hey, good afternoon. Thanks for taking my questions. Hope everyone's staying safe. So comparable sales, again, very strong here. When you talk about what you were seeing early in the quarter from an underlying demand perspective, it seems overall housing metrics were improving at a pretty good pace. And regarding the early trends of the Q2, how long do you think that DIY's performance the outperformance there can hold up. Is there some potential pull forward and demand out of the back half of the year?

I'll take a first run at this and let Al jump in. When you asked about our run early, I would say life was really, really good. We thought this was the year. We still, again, feel the fundamentals are there, but we were smoking. On DIY, and now you can come back if you want to add anything on that. DIY, I'd say that it's hard to say if you're pulling forward. There might be some of that. We'll have to see how it unfolds. When you think about the professionals that are going in and doing homes, oftentimes what you'll find is DIY customers more willing to take on projects like – small room, bedroom, living room, whatever, not typically two-story foyers, oftentimes exteriors, off-limits, just because the scope of the work there was scaffolding and the work that goes there. And you want to try to complete a project. Those projects typically take a longer time. So DIY consumers are typically more focused on smaller, more manageable projects. And what you see is – a lot of activity right now. And quite frankly, we like it. We think that the idea that not just the short-term benefits of having customers purchasing products, but the idea that customers are enjoying the benefits of a repaint, we think is a positive longer term. These customers can get an idea of the impact that a relatively low-cost investment can have on their home and certainly their mental well-being in a time like this when a lot of people have a lot of anxiety and stress. It's relatively inexpensive. Some of them, they'll tackle themselves, and, you know, if some of them down the road say, you know what, I've got to go back to work, but, you know, this room would look nice painted as well, then, you know, that might carry over as well. But we'll have to see if it's a pull forward or not. We've mortgaged some of that or not.

I think it will slow as people get back to work. If unemployment ticks up, we don't expect to see a continued surge in DIY. We're also monitoring on the res repaint side. We believe, and again, we'll see how this plays out, but by and large that the people that want to do a DIY project aren't going to hire a contract. The people that tend to hire painting contractors to do the work are going to continue to hire painting contractors. You know, we're not expecting a big hit in our res repaint due to the surge of DIY. And certainly on exterior, as we talked before, typically those are going to be done by painting contractors.

Got it. That's all very, very helpful. If you tie your comments there into what, you know, the pricing increases planned throughout the year, has there been any data to suggest customer pushback on higher pricing in this environment? And how is that shaping your thinking towards, you know, further pricing opportunities from here? Thank you very much.

It's not impacted, as we can see right now, the choice of products. In fact, as I mentioned earlier, we are experiencing a positive mix shift in quality. And just like we have in the past, we get together monthly as a management team, review our total cost basket, and we make decisions on a monthly basis. When we do that, we talk to our employees, our customers, and then we share with the financial community. Jesse, I think we're ready for the next question.

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

Thank you. Good afternoon, everyone, and thank you for hanging on for me. I was wondering if one area we didn't talk about really is Latin America. Could you give us a feel for what is happening there in terms of the demand, the shutdown, if any, or the lack of shutdown, actually, which may create more issues going forward?

Sure, Rosemary. I'd say Chile is likely maybe best described as the closest to having normal operations. I'd say Argentina and Ecuador, for the most part, are closed for most intent. In Mexico, about 60% of our stores are operating normally and roughly the balance are running on curbside or got a small very small percentage closed but for the most part it's between the normal and curbside and then Brazil I'd say roughly about 34 of our stores are closed and the remaining open about which is about 53%. Those 53% represent over 70% of our gallon. And so that's through our own stores there. If you look at our business through our dealers, about half of our dealers are closed, and about 60% of the home centers are closed but offering delivery only. So a little bit of a mix in Brazil.

And, Rosemary, I would just add, you know, in the first quarter, you look at the impact of FX on our Latin America team. It was in the mid-team. And better than our Q2 guidance is that it will accelerate because we continue to see the devaluation and the REI, the Argentinian peso, the Mexican peso, so forth. that's going to be an additional drag on those businesses in the second quarter.

So in the past you used to give us a number of stores in Latin America and in North America. You have now put them both together. Are you still closing down stores in that region?

Last quarter we did close eight in Latin America and I think this goes back, Rosemary, to the point that I made earlier about our ongoing – I call it a pretty rigorous review of businesses, brands, customer programs, other investments. And we've closed eight, and those were in areas that were persistently soft markets. We've got a terrific leadership team down here as well, and David and that team are working closely together to – evaluate every one of these operations. They're going to stand on their own or make tough decisions, and we've made some tough decisions. We'll continue to look at that business. We want to continue to grow that business. There are some dynamics in that market that make it a little more challenging, but we've got a lot of upside potential we should be gaining as well.

Thank you. And then lastly, if I may, can you talk a little bit about any changes in the competitive environment Everyone is trying to gain share. Everyone is trying to offset, you know, the impact of the pandemic. Can you give us a feel for what is going on in the marketplace?

Are you talking about just holistic in general?

Yes, in general, but if you can look at the different, you know, areas you are doing business in.

Yeah, it would be hard to do that for every part of the company in every region. Maybe I could make this statement. We have a lot of respect for our competitors. Yeah. very good global competitors and we've got a lot of really good regional competitors. Everyone's business is different. These are really challenging times. We're going to do what's right strategically for us and our customers through our strategic vision and model that works for us. Other companies may be taking a different path, but we have a lot of respect for them. It keeps us motivated and driven. It's a healthy paranoia, if you will, because good competition makes you better. We've got a lot of really good competitors.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from Greg Nailish with Evercore ISI. Please proceed with your question.

Hi. Thanks, guys, and thanks for getting through all these questions. It's really helpful now. Two, one is on pricing. You mentioned architectural. Could you talk about performance, coatings group, the pricing environment there, given everything that's gone on? And then I had a follow-up on stores. Yeah, Greg, you know, as you know, we've kind of been chasing the price in raw material through 18 and 19. So we did go out with selective price increases in the first early in 2020. You know, we talked about the small number of contracts we have on indexing. But, you know, I think the dynamics within our performance codings group are similar to the dynamics that we talk about in our architectural. And that is, you know, we continue to invest in innovation that helps our customers be more effective, more efficient, drive faster line speeds on their manufacturing lines to drive their – total cost of application down, and it's really what we're looking at to move off of just price kind of cost metrics. And I think that's important to continue to focus on, and we'll continue to do that and continue to expand our services to our customers to drive, you know, growth for the both of us.

Yeah, help them make more money, help them achieve their goals, help solve their problems, everything we can do.

Great. And then second, on the stores business, what percentage of the orders are you now taking via e-commerce, whether it be the app or website as opposed to just, I guess, a phone or a walk-in order? And are there any products that your customers, especially new accounts, are asking that you add to the assortment in this environment where you can really leverage the stores network?

Regarding the online, I would say this, Greg. It's a growing. It's a high percentage growth, but it's relatively low overall. So while we're excited with the percentage, it's off of a relatively low base as we're really now getting behind this. We expect that to continue, and we're going to come out of this better as a result of it. As far as products that our customers are asking for, yeah, there's some, and we're looking into them. We'd like for you to find them on our shelf before we talk about them.

All right. Sounds good. Good luck, guys. Thanks.

Thank you, Greg. Appreciate it.

Thank you. Our next question is from Jeff Sikowskis with J.T. Morgan. Please proceed with your question.

Thanks very much. Are the social distancing practices of Sherwin-Williams uniform across its store network, or are they different in different states, and how do you expect them to evolve from now to the end of the year? Will the states set your guidelines, or will you set them?

Hi, this is David. Thanks for the question. We have some standard protocols that we follow for social distancing. As our stores come back, the team has done a phenomenal job. There'll be details on floors. We'll be guiding walkways. So, you know, it's a little different dynamic than, say, at our manufacturing plant, where Joe Baxter and his team have done a great job ensuring strong social distancing practices. We follow CDC guidelines at a minimum. We have some health care professionals that we consult with as well. So we take that very seriously, and we try to go above and beyond everywhere we can.

Okay. When you think about the next year or two in terms of the value of paint, we're going to go through a period where raw materials are going to come down quite a lot. The consumer is going to be distressed. The contractor market is going to be much looser. Now, Sherwin really likes to price for value, as do many coatings companies. Do you think we're going to go through more of a deflationary period in terms of product pricing in paint, with raw materials coming down and the margins being good? Or do you think we're going to have more of a continuation period of the pattern before the recession where there would be intermittent general price increases as a base case.

Jeff, I think an important element to keep in mind is the cost structure of a contractor. When you mentioned the Sherwin stores, 90% of the cost of goods for a painting contractor is labor. And so our focus is on driving the efficiency and productivity and profitability of that customer through innovative products and services. And we'll continue to invest in areas that will help them to do that. And we believe, in turn, our position with that customer improves, and improves from a loyalty, usage, and acceptance standpoint. And so... not our intent. We know we have to be competitive in the marketplace. At the price of entry, if you will, into the market, we'll continue to ensure that we're competitive, but we'll also be making those investments we think that will help justify the price that we're charging our customers.

Yeah, and Jeff, I think that's a very important point. By continuing to invest in that innovation and making the painting contractor more effective where they can get more jobs done, the same number of people, you know, makes it paint such a small portion of their cost. But I would point to, you know, 10, 11, and 12, when we saw the big run-up in costs, raw material costs, and they rolled over, and we, by and large, held our price 13 through 16, and we saw a nice improvement in our gross margin. But you can only do that if you're continuing to invest in products and services that that are going to continue to help the painting contractors make more money.

Yeah, you can't offer commodity products and services and ask for specialty store margins or pricing.

Okay, thank you so much.

Thank you, Jim. Stay safe.

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

Hi, good afternoon. Quick question on inventory levels with the rapid drop in demand and actually you guys building into the spring for robust business. I think I'll touch on this a little bit. Where are your raw materials standing and what to the best of your estimate is the working capital impact in second quarter?

Yeah, so Chris, you know, You know, we, I think, did a very good job of managing our inventory. And I would just say that the raw material inventory is a much smaller part of our overall inventory. But we did a much better job, a very good job of managing inventory down where we saw weakness in demand. And that helped contribute to the $151 million improvement we saw in working capital in our first quarter. I think you're going to – and we do – and did build architectural inventory to what we had planned coming into the season. As we're seeing a little bit softer or we're seeing softer sales in our tag group, we're still seeing, like we talked about, that unprecedented increase in the DIY through the home center channel. So you've seen a switch. And I talked about it earlier about our global supply chain. I mean, we're building and producing every gallon we can and we're continuing to look and work with our customers on getting the right products made, getting the right products and inventory into the store shelves, both in our stores and with our retail partners. So it definitely varies. Packaging, you know, we're building inventory as much as we can across all the regions because we continue to see strong demand. But I can assure you, We'll continue to manage our inventories lower. And we've done a lot of different things. We have more communication between the selling organization and our supply chain. We've cut batch sizes. We've cut safety stock. We've gone to more of a make-and-ship model in some cases versus make-to-stock. So there are a lot of levers that we've pulled and will continue to pull as the demand environment unfolds.

All right, and one quick one. With the sales guidance for 2Q, is there any implied channel drawdown in your performance business, or is that all basically straight volume out of your factory to the customer?

It's all volume out of the factory. Again, I think in those markets in particular, the team has done a nice job driving inventory down, so it's just more out of the factories.

All right, thank you very much.

Thank you. It appears we have no additional questions at this time, so I'd like to pass the floor back over to management for any additional concluding comments.

Thank you, Jessie. This is Jim Jay. I just wanted to thank everyone for their questions and interest today, and I hope it came through very clearly on our confidence and determination to manage through this right near term as we go forward. Before we sign off today, I did want to do a housekeeping note to all of you, we will be postponing our annual financial community presentation, which was scheduled for June 3 in New York City this year. It's our intent to reschedule that event. Hopefully later this year don't have that date yet. But as we have details, we'll let you know whether that's going to be a virtual presentation or not. So Thank you. As always, I, along with my colleague Eric Swanson, will be available for follow-ups. And please contact Natalie Darr in our office to be added to the queue. And thank you. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation, and you may disconnect your lines at this time.