Sherwin-Williams Company (The)

Good morning. Thank you for joining the Sherwin-Williams Company's review of second quarter 2020 results and our outlook for the third quarter and full fiscal year of 2020. With us on today's call are John Marikis, Chairman and CEO, Al Mystician, CFO, Jane 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 issuer direct via 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. 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. Good morning, everyone. I hope you and your families are remaining safe and healthy during the pandemic. Let me begin with some high-level summary comments on the quarter. All comparisons are to the second quarter of 2019 unless otherwise stated. Overall, Sherwin-Williams delivered a very good second quarter given the environment. Total company consolidated sales were in line with the updated guidance we provided on June 22nd, with sequential improvement in each month of the quarter. Despite sales being down for the quarter, we delivered year-over-year improvement in gross margin, profit before tax, EBITDA, diluted net income per share, and net operating cash. Second quarter 2020 consolidated sales decreased 5.6% to $4.6 billion, inclusive of negative currency impact of negative 1.5%. The estimated negative impact from COVID-19 on consolidated sales was approximately 8%. Consolidated gross margin increased 330 basis points to 48% from 44.7%. Consolidated profit before tax increased $71.7 million or 10.6% to $747.4 million. Diluted net income per share increased 28.8% to $6.48 per share from $5.03 per share. The second quarter of 2020 included acquisition-related amortization expense of $0.62 per share. The second quarter of 2019 included acquisition-related amortization expense and other adjustments of $1.54 per share, as described in the Regulation G reconciliation table included in our press release. Excluding these items, second quarter adjusted diluted earnings per share increased 8.1% to $7.10 from $6.57. Adjusted EBITDA increased $57.5 million to $979 million, or 21.3% of sales. Net operating cash increased 42% year-to-date to $1.07 billion, or 12.3% of sales. Segment sales were also in line with the updated guidance we provided on June 22nd. Segment margin in the Americas group improved to 23.8% of sales, driven by favorable customer and product mix, lower input costs, and reduced spending. Adjusted segment margin in the consumer brands group increased to 26.5% of sales, resulting from operating leverage on the nearly 22% top line growth and lower input costs, as well as actions taken over the past year to improve our international operating margins. Adjusted segment margin in the performance coatings group decreased to 13.6% of sales, where lower input costs and good spending control were able to offset some, but not all, of the impact of the high teen's sales decline. Additional details on our segment performance are included in the slide deck provided with our press release and available on our website. Let me now turn the call over to John Marikis for some additional commentary on the quarter and our outlook. John?

Thank you Jim and good morning everyone. Let me begin by thanking the more than 60,000 employees of Sherwin-Williams for their continued determination and resilience under very challenging circumstances. As I mentioned on our last call, our senior leaders have persevered through several previous crises. Their experience has been a true differentiator during this time and enabled us to deliver significant improvement across many measures in the quarter. Our entire team has my appreciation and respect as they continue to serve our customers at a high level. The quarter played out better than we anticipated with the pace of year-over-year decline decreasing sequentially throughout the quarter. Consolidated sales were down by a mid-teens percentage in April but came out of the quarter with June flat to last year. The pace of recovery was faster than expected in some end markets which led us to revise our sales guidance on June 22nd. As Jim mentioned, gross margin in the quarter expanded to 48 percent, driven by favorable customer and product mix and lower input costs. The industry basket of raw materials was down by a mid-single digit percentage in the quarter compared to the prior year. In terms of cost control, Our team quickly developed and began implementing a comprehensive contingency plan in March to adjust to the pandemic. We reduced the SG&A spending in the quarter by $40 million, but also maintained strategic investments to support long-term growth. Let me talk a bit about trends we're seeing in each of our segments before moving on to our outlook. In the Americas group, we're now into the summer painting season. and no one is better positioned to serve professional painters than we are. We've safely and responsibly opened all our store sales floors in the U.S. and Canada, and customers in all segments tell us they're eager to get back to work. Last quarter, we commented that we believed we were seeing a pause in demand rather than demand destruction. We still believe this is the case based on the momentum we saw in multiple segments as the quarter progressed. While we don't typically comment on the pace of business by month, I would like to provide a few data points that may be helpful given the current extraordinary circumstances. In DIY, our business continued to grow at an unprecedented pace and was robust throughout the quarter. After DIY, New Residential and Residential Repaint were the best performers in the quarter and both recovered to deliver positive growth in June. Commercial improved in each month of the quarter and was down slightly in June. Property maintenance and protective and marine also improved sequentially, but have not yet returned to growth. From a product perspective, exterior paint is recovering faster than interior paint, as you would expect, due to social distancing requirements. Exterior paint sales increased by a mid single digit percentage in the quarter, and with June being the strongest month in the quarter. Interior paint sales decreased by a low single digit percentage in the quarter, but improved throughout the quarter, finishing June flat to last year. Additionally, spray equipment pump sales are often a good indicator of future demand, as contractors are unlikely to invest in this type of equipment unless they anticipate significant future demand. Spray equipment pump sales were down mid-single digits in the quarter, but recovered to finish strong in the month of June. Pricing came in as we expected and was approximately 2 percent in the second quarter. We expect a similar level of effectiveness in the third quarter. We still anticipate opening approximately 50 new stores this year, while continuing to focus on adding sales reps, management trainees, innovative new products, and productivity-enhancing services. We also continue to invest in our e-commerce platform, and we're pleased with the continuing uptick in usage. Moving on to our consumer brands group. DIY demand surged throughout the quarter, driven by consumers nesting and tackling home improvement projects during the pandemic. We generated strong double-digit growth by working closely with our retail customers to capture this demand, most notably Lowe's, our exclusive national home center partner. Our global supply chain organization continued to adapt and invest during the quarter, including pivoting from five-gallon pails to single-gallon cans on multiple production lines to help meet the unprecedented DIY demand. Internationally, we saw positive growth in Europe, while China and Australia remained soft. We leveraged the strong sales growth to drive significant operating margin improvement compared to the prior year. Our margin improvement also reflects the benefit of actions taken over the past year to focus our portfolio, including rationalizing SKUs, exiting the ACE private label business, streamlining our European business and reducing costs in Asia and Australia. This enhanced profitability will enable us to reinvest in the business to drive long-term growth for our retail partners, especially in the handyman remodeler, pros who paint category. Lastly, let me comment on the trends in the performance codings group. Demand improved sequentially across the group in the quarter, though the pace of improvement remained variable by geography and business unit. From a geographic perspective, Asia was the strongest performer in the quarter, down by a low single digit percentage. All other regions were down by double digit percentages, though North America was significantly better than Europe and Latin America. In packaging, Sales were positive in every region for the quarter and were up a high single-digit percentage. Demand for food and beverage cans remains robust. In coil coatings, the resumption of selected commercial construction projects drove sequential improvements during the quarter, including exiting the quarter positively in June. This improvement aligns with my earlier comments on commercial construction within the TAG segment, which improved sequentially in the quarter. In industrial wood, we saw sequential sales improvement during the quarter. Many of the end markets served by this business, including furniture, kitchen cabinetry, and flooring, are influenced by trends in new residential construction, which has gained momentum in our tag business, as I mentioned earlier. In general industrial, most end markets, including heavy equipment, agriculture, transportation, and general finishing, remain soft. though the business did improve sequentially. Encouragingly, General Industrial was up high single digits in Asia for the quarter. All other regions were down double-digit percentages in the quarter. In automotive refinish, miles driven and traffic congestion remain at reduced levels. We saw sequential improvement in the business during the quarter, though a return to growth continues to depend on the lifting of stay-at-home orders and the resumption of more normal travel routines. Certainly the pandemic is not over and numerous uncertainties in the economic environment remain. However, to the extent that economies are beginning to shift from the containment phase to the recovery phase of the pandemic, our team is energized and engaged to capture current opportunities and deliver above market growth. We anticipate third quarter demand to improve sequentially from the second quarter. but softness to continue in some end markets in the U.S. and internationally for the remainder of 2020. Against this backdrop, we anticipate third quarter 2020 consolidated net sales will be up or down by a low single digit percentage versus the third quarter of 2019. Looking at our operating segments for the third quarter, we anticipate the Americas Group to be flat to up by a low single digit percentage. consumer brands group to be up a low double digit percentage and performance codings group to be down by a low to mid single digit percentage. For the full year 2020, we're revising our sales guidance upward modestly to approximately flat with last year. This guidance reflects continued uncertainties in the timing and pace of improvement in the U.S. and global operating environments. On an operating segment basis for the full year, we anticipate the Americas group to be flat to up by a low single-digit percentage, consumer brands group to be up by a high single-digit percentage, and performance codings group to be down by a low to mid-single-digit percentage. We are revising our diluted net income per share guidance for 2020 to be in the range of $19.21 to $20.71 per share compared to our previous guidance of $16.46 to $18.46 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 $21.75 to $23.25, an increase of 6.5% at the midpoint over the $21.12 we delivered last year. Embedded within our outlook is the assumption that the industry raw material basket will be lower for the full year by a mid single digit percentage. Based on our current outlook, we expect the second quarter will be the most beneficial in terms of year-over-year deflation. We expect the second half benefit will be less than the first half benefit given comparisons to the deflation we saw in the back half of 2019. Let me close with some additional data points and an update to our capital allocation priorities. Our balance sheet and liquidity position remain strengths of the company. At June 30, 2020, we had $188 million in cash and approximately $3 billion of unused capacity under our revolving credit facilities. Our leverage ratio improved to 2.8 times on total debt to adjusted EBITDA compared to 3.3 times a year ago. Given the improving sequential demand we're seeing in several end markets, we're raising our CapEx guidance for the year from $180 million to $280 million. This is largely related to architectural and packaging capacity expansions restarting. This CapEx guidance includes a minimal amount of spending related to our new headquarters and R&D facility project. Earlier this month, the company's board of directors approved a cash dividend of $1.34 per share, an increase of 18.6% over the $1.13 per share dividend paid in the second quarter of 2019. We are committed to maintain this dividend increase throughout the rest of 2020. In May, we paid off $429 million in 2.25% notes that were due. Our next long-term debt maturity is $25 million due in 2021, followed by $660 million due in 2022. We paused open market share purchases during the second quarter. believing it inappropriate to be buying shares at a time when we were forced to adjust our workforce and pause multiple spending programs. Again, given a stabilizing environment, we would expect to return to repurchases in the second half of the year with a minimum goal of offsetting dilution from options. As I mentioned in my opening remarks, we have a long tenured and experienced management team that has successfully managed the company through many challenging times. They've demonstrated this ability once again over the last several months, and I'm confident they will continue to deliver strong results. We also believe the long-term fundamental strengths of our end markets remain intact. We have the people, the products, and the services to help our customers succeed. We remain very confident about the future and our ability to create shareholder value over the long term. That concludes our prepared remarks. And 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 will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Chris Parkinson with Credit Suisse. Please proceed with your question.

Thank you. So your team posted some pretty solid margins results, especially consumer, which I'm guessing is a testament to a few different variables, but primarily the amount of volume just moving through the system and leveraging what you've been refining as your U.S. cost base. You've long since spoken about 20% annualized margins in consumer brands from 13% level at the time of the Valspar acquisition. Can you just update us on your long-term thoughts on this target and what you've learned further about this platform in a COVID-19 environment? Thank you.

Hey, Chris. This is Al Mastician. Hope you're doing well. Yeah, I think we're pleased with the progress we're making on the operating margin within consumer brand. But I think you're right. It's too soon to come off our long-term margin target of that 20% range. As we've always talked about, volume is the single biggest driver of leverage across all our businesses. And with the unprecedented surge we're seeing in DIY across all channels, that is absolutely driving the majority of the margin improvement. And you would expect, and we expect, demand will return to more normalized levels as the year progresses. That being said, there absolutely is good cost control taking place in North America. As you recall, we exited the ACE business last year that helped improve our gross margin and our operating margin. We took action to reduce our footprint and costs around that. And we've also taken action, as John talked about in his opening remarks, on our international businesses. We've commented before the performance of those businesses haven't been up to what we expect. I think the team has done a nice job with a variety of things, pricing actions, skew rationalizations to make those operations more efficient, cost reductions, and even in We talked about the European float-through. In our first quarter, we saw a nice, similar improvement in float-through in our second quarter, and then even in Asia and Australia where we saw sales backwards, we're still positive in profit. So there's a number of factors that are allowing us to drive these margins, but volume is always first.

Yeah, and Chris, I would just add a couple of other items. One is I do think we're operating more efficiently this year versus last year. in serving our customers. I think that's tribute to our global supply chain team doing a really terrific job in better planning and execution. We're more efficient, I think, this year in serving our customers. We're optimizing our supply chain better. We're doing this, I might add, while investing capex in areas such as our filling lines and dealing with the COVID challenges that everyone is dealing with. I'd like to just call out our global supply chain team during this really challenging time with this COVID issue. That is a team that's working 24-7 throughout all of this to serve our customers and to help our customers win. But I think we're being a little more effective in utilizing and optimizing our supply chain. You also asked about the COVID-19 environment, what we're learning. And I would say, for me, what that's done is it's really reinforced the importance of our strategy. We have long spoken about this approach that we're taking on really driving value for our shareholders by focusing on what's right, where our customers value our solutions. And the other approach I'd say is we really focus on covering all the bases. And I think what's happening right now, you asked about the DIY, is a great example. We've got a terrific focus on our residential repaint, but we've also been really focused on helping our customers grow DIY. And we take that approach in each of the markets we serve. So whichever way the table tilts, we want to be first in line right there. So if it's DIY versus repaint, if it's new residential versus remodeling, If it's commercial new versus commercial repaint or whatever segment pops up, we want to be number one there.

Got it. That's very helpful. And the second question I have is just, it does appear that you have some potential emerging, I characterize them as structural tailwinds in both resi repaint and likely new resi based on what some of your customers are talking about for the second half, but probably more importantly for 2021. Can you update us on your general housing views, any comments on reverse urbanization, and just your efforts to accelerate share gains? And if you could sneak in a comment also about how that's playing into your intermediate to long-term outlook versus the non-resident protective fronts, which look a little less bullish, that would greatly be appreciated. Thank you.

Well, you pretty much covered the entire company with that question, Chris. So, yeah.

I apologize.

Oh, that's good. That's good. We love it. Let me start with the res repaint. We did see sequential improvement in the quarter. It turned positive in June, largely driven by the exteriors that we talked about. We do see customers delaying interior work. It's related to the COVID-19, as you would expect. It's very uncommon to hear of projects that have been canceled. So we expect the interior to return, albeit probably gradually. To your point about our share gains there in res repaint, it is an area of focus. We are very pleased with the performance, and we've been talking quite a while about this idea of new accounts and share of wallets. And we're really trying to drive this, and we're really trying to bring more solutions to our customers right now than ever before. And this is an environment where our solutions add value. You know, complexity and challenges that our customers face, they allow us to demonstrate our solutions. And we are, we believe, uniquely positioned to help our customers to deliver. They want high-quality projects. They want product on time. They want it efficiently. And they want to make more money. And we help them do that. And I believe when you dial it down, and there's a lot of detail into it, but if you look at it, I think it's our stores are where they're needed. Our products are where they're needed. Our innovation is where it's needed. Our people are trained. They're knowledgeable. We hire the best. We do everything we can to keep them. Our voluntary turnover is in single digits. So we build these terrific relationships with customers, and we work really hard to make them successful. And while these customers are experiencing delays or new regulations, if it's COVID or just emotions that they're dealing with customers, there's no room for errors, no room for disruptions. And our stores and our reps and those relationships help us tremendously. As it relates to commercial, I would say we – saw sequential improvement in the second quarter. The pace of recovery, I would say, has been more muted than the residential side. Projects have started to reopen, and they have some limitations to them as our contractors are learning to work with social distancing and the limits around them of how many workers can be on a project. And it's slowing efficiency for our contractors. As a reminder, I might say that new commercial starts are typically painted 12 to 18 months after the ground is broken, so we've got a little runway here. But as far as we see, this is, again, a terrific opportunity. These are contractors who – these are typically very large projects. They're bid projects, so they're competitive, and these customers – They don't want delays or problems, and they learn to lean on our teams to be able to run their projects successfully. Trend-wise, I would say that when you look at the Architectural Billing Index, it's improved sequentially. In May, it was 32. It's now in June up to 40, still below the 50 expansion threshold that shows it's growing. But we remain pretty optimistic about this, particularly in the area of new construction. While our customers are challenged, we think that it's a terrific way for us to be able to demonstrate what it is that we do and why it's special. And the last thing I would say is we're working really, really hard here in the area of specifications, both in product and color. And that's an important metric that we monitor. So we actually gauge. When we talk with you folks about why we have confidence, and we do, it's driven by the number of color requests we get, the number of data sheets and information we get. We monitor all of that. And the pipeline looks very good to us. So we're feeling good about our position, feeling good about what our customers are telling us, and we're really feeling good about the ability of our people to be able to deliver for them. What was the last one you talked about? Oh, the protective and marine or the industrial side. I'd say we've seen sequential improvement during the quarter. It's not returned back into year-over-year growth on protective and marine. About 40% of our sales are tied to oil and gas, and that's obviously fallen sharply over the last quarter. Major oil and gas companies have delayed CapEx projects. which will continue to impact our results. But these aren't decorative products that we're talking about, or projects, I mean, that we're talking about. They're most often very corrosive environments, and they require corrosion control to protect the asset, to protect safety of the employees and those around it, as well as the environment. So we're focused on that business to continue to grow. There's still penetration opportunities. We're also focused on other areas, like the water, wastewater, the flooring, rail and we're we're gaining very good ground there but given given the weight that we have in the oil and gas we expect while we're gaining in some of these other segments we would expect to see meaningful growth what most likely beginning in 2021 in protective and marine long answer long answer chris that was a long question so well i appreciate it thank you

Thank you. Our next question comes from Jeff Sikowskis with JP Morgan. Please proceed with your question.

Thanks very much. With volumes down in the quarter, did you dip into lower cost inventory layers in your cost of goods sold?

Yeah, Jeff, we're, as you know, we're a LIFO, last in, first out kind of company, so it You might see a little bit of that, but we churn our raw materials so quickly, especially in this kind of environment on the architectural side with DIY. You know, it's not meaningful in that respect because of the turns that we get, the just-in-time inventory that our suppliers do a great job keeping up with us, and this environment, you know, with the DIY surge that we talked about, a lot of impact on gallon cans and other specific raw materials related to that. So we're churning our inventories very quickly on raw materials.

So what really happened in terms of the gross margin in the second quarter in that year over year, you know, maybe your sales are, you know, your sales are down 275 million and your gross profits are flat up and your gross margin is up about 300 basis points. And even versus the first quarter, you know, maybe your incremental gross margin is 70%. What was the thing, was it really volume in the consumer brands business or like what unusual thing happened in the second quarter so you have your cost of goods sold down i don't know 10 or 11 percent year over year right um no jeff i i think there's a number of things um that are occurring in our second quarter that uh give us a tailwind

You talk about the volume through our consumer brands group that we just talked about on the previous question with Chris. When you see that kind of volume, and in our first quarter, we also talked about customer and mix change, and that's across really each of the segments in some respects. You've got TAG that we talked about with DIY and res repaint, performing better than the other segments. We talked about, from a product standpoint, exterior growing faster than interior, paint growing faster than non-paint. I talked about the exiting of the ACE business that, as you know, was a drag on our gross margin. That helps. And then You know, we did see, you know, as John talked about in the opening comments, lower raw material costs, and we expected to see that in our second quarter with the way raw materials trended last year and with our second quarter likely being our biggest year-over-year change. And then even, I would say, even within our performance codings group with the different segment growths and the different – region growths, there's a mix there that helps. And then finally, as TAG performs better than performance coding, that segment mix gives you some lift. So it's really a combination of a number of those things happening. But I would say with PCG, for example, the consumer businesses outside of the U.S., this is hard work being done over the past year to get us in line for whatever happens. And when volume comes back, I would expect to see both of those areas even improve faster.

All right, great. Thank you very much. That's a remarkable margin. Thanks, Jeff. Thank you, Jeff.

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

Hi. Good morning, everyone. Morning, Ganshan. Yeah, so on the do-it-yourself growth, you know, you saw explosive demand towards the end of the first quarter, and, you know, clearly that level was sustained throughout the second quarter. Was the 20% plus increase in consumer brands fatigue purely just sort of matching demand, or was there some level of inventory replenishment as well? And just more broadly at the company level, including at TAG, how are you kind of thinking about, you know, any sort of do-it-yourself fatigue, given that some of the demand increases potentially just a pull forward of activity as well?

Well, let me just start with, I think what you're getting at is the service to the retailers. Is that correct when you talk about service? Yeah. Well, we've seen, obviously, an unprecedented level here, and this surge has been some, invited some challenge, obviously. Our teams have adapted, I would say, gosh, decisively and quickly, but this surge was significant, and it's created some challenges. We're uniquely positioned, I think, at Sherwin-Williams to utilize assets that others might not have. And I would tell you we're pulling every lever possible. We're determined, but I would say that we're still chasing. We believe that we'll be in a position to begin building inventory again as we come out of the third quarter, going into the fourth quarter, into the first quarter. But right now, we're focused on meeting demand. Again, I'd be remiss if I didn't call out this terrific effort by the global supply chain team with everything they're doing in this environment, but also the ability to work with our customers. These are unprecedented times, not only for us, but also our customers, so the better line of sight that we have to be able to isolate in on what are the most important SKUs and working with them to deliver is really what we're after. You know, this is a new experience. We'll come out of this better, and, you know, we'll likely sit with our customers at the end of the year and talk about inventory levels as we begin next season, and if we need to step up and put more in inventory to serve our customers, we're going to take care of our customers. As it relates to DIY, I think, fatigue, as you mentioned it, We don't support that attitude by any customer, by the way. The reality is that we find that the more customers are home, more and different customers are coming in. And in our stores, it's often referred to as it's a COVID project where people have been in their home for some time and they might have a bedroom that they've never really considered repainting. And they realize that it's, very affordable and highly impactful project, and they tackle it. The beauty of it is that what we're finding is very little overlap from customers coming in. And while I'm sure there are some, but it seems to be very little where customers are talking about this was a project that I was going to have a contractor do and I'm going to tackle myself. These are what we're getting from our customers in our stores are customers that are looking at a wall that's probably not been painted, likely wouldn't have been painted, and they're painting them. And so through our stores, it's a relatively small percentage. There's a nice gain. It's only 10% sales through our stores. But through our retail partners, we're doing everything we can to make that an easy experience so that it's not just one project. We want it to be easy. You know, your question is do they have fatigue. We want to make it easy. a wonderful experience. So it's an easy, impactful experience that they went through seamlessly and they want to do more. And we're working with our retail customers to capture those customers and make them repeat customers going forward.

And Gancham, I'd just add, you know, it's not only an investment in inventory that we're doing. I think our global supply chain has come up with a number of creative solutions to expand capacity of the key product lines where where we're chasing demand. That's everything from investing in capital to retrofit five-gallon lines, which are predominantly pro, to gallon lines, as John talked about in the opening remarks. It's finding where we may have capacity in industrial sites that have the ability to make an exterior stain product line and ramping that quality process up and making sure We're providing the right quality and the right process, but doing it quickly to try to improve our filling rates across all the different channels. So it's not just investments and inventory. We're looking at all areas to expand our capacity.

Yeah, you look at those assets, those facilities that are producing stain, for example, for our industrial wood, where we've got capacity right now, and these are highly technical products. So the finished product to the consumer is every bit as good as if it had been manufactured in an existing plant because of the tight specs we operate on the industrial side. So it's really the best of asset utilizations you can get.

Okay. And then just for my second question, you know, given the recurrence of COVID in the southern states of the US, have you seen any directional shifts in demand specific to, you know, states like Florida and Texas? and do you anticipate having to make some adjustments to your sales floors being open? Thanks so much.

We don't, at this time, anticipate having to adjust sales floors. I would tell you that our customers and our employees love those sales floors open, but number one is the safety of our employees. So we'll stay close to it. As of right now, we've not. And I'm not sure if you were asking about the shift of business to... the southern states. If you were, I would say we'll take it anywhere it comes. If it's in that market and, you know, it starts moving aggressively, we'll do everything we can to serve those customers wherever they are.

Got it. Thanks so much.

Thanks, Gordon. Thank you again, Jim.

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

Thank you. Good morning. Good morning, Bob. I wanted to ask about China. One of your big competitors, I think they've got an even larger business than you on the Deco side there, talked about trends getting about back to where they were before by the end of the quarter. So I was wondering, is there anything in particular to your business, the cities you serve, the routes to market that would make it different? And sort of what are your prospects there, given that we'd hope maybe with the lockdown ending sooner,

there you would see a sooner response maybe something about the diy versus pro or do it for me or what can you how can you help us characterize the trends in china well there's very little if any diy business there typically in in china but the approach that i would take first off is that it's a relatively small percentage of our business We saw sales in Asia that were down significantly in the second quarter, largely as a result of the COVID pandemic in architectural. We think that that's a slower recovery in the architectural business there. But again, it's really a very, very small piece of our business. We're there really looking at the future. We're investing in the right people, doing a lot of branding work, doing a lot of research. We've got a couple of really good tests going on right now that have gotten a little cloudy with everything that's been going on on different aspects of our business. So I think you should expect, from our perspective, that to be a bigger part of the business down the road. I don't think it's going to be anything that's going to be material in the next quarter or even next year.

Gotcha. Let me ask you on commercial construction broadly. Obviously, you've got the coil business there, and you do see some of that activity through your stores group. Is there some angst that you're going to have a W kind of recovery there where we get some of the backlog finally gets through, but then the commercial markets just aren't as strong given all the work from home and other issues out there? What do you sort of see as the path forward into the second half and into 2021 for commercial construction-related activity?

Well, to your point, we are close to that through the commercial business, through our tag business, and through COIL. I would say in our COIL business, the resumption of select projects, it drove sequential improvement during the quarter, and I would say that so much so that we finished June positive in June. So, I mean, we've we see that momentum moving in the right direction. Not sure if there's going to be an air pocket or a gap. If it does happen or when it will happen. What we're doing, Bob, we're working really hard right now to minimize any impact. I call it a pothole. We're driving down the road here. We're doing everything we can to fill that pothole. And the beauty of our model, the direct model, is that we can control that. We're working with our customers to understand where those projects are. We're not waiting for customers to call and place an order or go online to place an order. We're attacking this. We know the specifications. We're trying to get more products specified. We know those projects. We know the painting contractors that are on those commercial projects. We're leveraging our strategy and we're capitalizing on the segments that we offer to offset whatever might be coming down the road. So I'd say no one's positioned like we are to capitalize on these opportunities. But rest assured, we're not a retailer that just simply opens a door and waits for people to come in. We're out there right now hunting. We know that there might be a hole in the road. We're not waiting. We're aggressively going after it to fill it. Depending on what it looks like, if there's a gap or not, and how much there is, we'll find out if we if we experience one. But I would say this, if we do experience one, we think it will be short-lived.

Terrific. Thanks for that. Thanks, Bob.

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

Yes, thank you. So, John, you were just talking there about your folks are out there hunting, and I I recall one of the ways you motivate that sales force within the Americas group to be aggressive and out there on the hunt was a reasonably large portion of their comp was variable. Can you remind me what that is? And while it incentivizes effort, does it also contribute to lower costs? cost of goods when there is a slowdown in sales?

For our reps, it's about a 60-40. We do not look at this as a cost-saving mechanism, Steve, at all. I'd say, like everyone, we expect that our employees are motivated by our incentive plans. That's why we have them. But I would say, you know, one of our executives this morning, I was talking speaking with mentioned a key word to me, pride. Pride in what we do, pride in who we are, pride in wanting to win. And I'd say, this team we're leading right now, I'd call them goats. These are the best. And there's an element here of incentive and we want them to be out there to provide for their families but they're driven by far more than that. There's a sense of pride in what we do, and we want to win, and we don't want to win by a little bit. We want to really, really win. I'm going to stop right there. There's a lot of really good people doing what's right there.

And so just getting back to the cost of goods decline and tag was so significant. Can you break that out? What portion of that was... you know, lower raw material costs and what were the key drivers there. I think you also had some store closures. Was that a contributor? Can you just lay that out a little bit, please?

Yeah, why don't I take the stores, and then I'll ask Al to talk about the rest there for a second. So year over year, we have 68 more stores this year versus last year, given what we laid in last year. We have 178 more reps this year versus last year. For the year, we've opened 16 new stores in North America, and that's offset by the closure of about 33 stores. 24 of those were in Latin America, nine in North America. Steve, the way I'd point to the Latin America closures were these were underperforming stores in persistently soft markets. That's the way I would characterize those. The nine in North America that were closed were mainly stores in canada that were underperforming and we did have some stores in north america with lease expirations that will plan to relocate we do expect to open 50 new stores this year down from our originally planned 80 to 100 due to the covid but you should expect us to ramp back up into that 80 to 100 going forward and steve you know the tag

Starting with their customer and product mix that I talked about earlier, the DIY and res repaint performed better than the other segments. Exterior versus interior and paint versus non-paint helped drive margin improvement. On the raw material side, we've talked about raws moderating. It's less of an impact on our architectural businesses, but it is still – helping in pricing. You know, we went out with a three to four price increase to offset other inflationary items, whether it's wages, health care, and the like, and that price increase is performing as expected, and it's effectiveness of around 2%. And the last thing I would say is the team did a really nice job pivoting and really reducing discretionary spending, cutting travel very rapidly, and our SG&A was even down year over year. So all those helped drive that operating margin higher.

Thank you.

Thank you, Steve.

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

Thank you. Good morning. John Al, just looking at TAG, looking at the margins in Q3, how should we think about incremental margins either year-over-year or quarter-over-quarter, given what you're saying on raws and volumes here?

Yeah, David, I mean, we're not going to give guidance on individual segments, you know, but You look at a couple, I'll give you a couple data points to hopefully help you out. One is we're going up against a strong third quarter in TAG last year. Same sort of sales were up in North America, a little over 8%. They had strong operating leverage on those sales. And so we're going to go up against a pretty tough quarter. We're going to start investing back in the business, as John talked about. The advertising and merchandising that we paused is going to come into our third quarter. But we also expect to see better volume. As we talked about, same-store sales were down in the second quarter, 6.9%. Our forecast right now in the third quarter for sales to be flat to up, low single digits, and as we talk about, the better volumes we can put through our North America stores and the chain, the better leverage we get. So, whether we see sequential margin improvement will depend on where that volume comes in. If it's at the higher end of our range, you know, we have a shot at getting sequential improvement. If not, it's going to be difficult to get there And then year over year, you know, the way RAS kind of have unfolded through last year and into this year, and the product mix benefit I still expect to get in the third quarter, year over year I do expect to see some modest improvement.

That's very helpful, Al. I appreciate that. And lastly, just on RAS, Al, where are you seeing raw materials decline? And specifically on TIO2, what's your expectation for pricing in the back half of the year?

Yeah, David, I'll take that one. You know, what we saw in our second quarter, the industry basket of raws was down by mid-single digits year over year. And that was really driven by resins and solvents. And we don't provide the specific dollars in the quarter, but you can see that positive trend reflected in our year over year gross margin improvement. If we look at our outlook kind of going forward, Our second quarter, we expect, will probably be the biggest benefit year over year. We still will see, and that's really because we're going to see tougher comparisons in the second half of the year. We do expect that the second half raw material basket will be down by a mid-single digit percentage overall, similar to the first half. And as Al mentioned a moment ago, it's a little more heavily weighted towards the industrial part of our business. The benefit will be a little more there than on the architectural side. So, for the full year, we're going to be down mid-single digits, or that's the expectation on RAS, and that's compared to our earlier this year, we said it would be down low single. So, we're seeing some good benefit there, again, driven by resins and solvents. If you look at the petrochem side of the basket, we're seeing lower year-over-year propylene and ethylene pricing. More recently, though, what I would say is we've seen a little bit of a sequential tick-up in ethylene and propylene contracts, and we'll see how that plays out as the year goes forward. On the TiO2 side of the basket, we're still anticipating stable pricing trends in the back half. Some of the third-party forecasts that we look at are reflecting a little bit more on economic resiliency than some of the prior forecasts sustained by the DIY demand. I would say the North American TiO2 market has been the most stable, and we have seen some indications of lower sulfate TiO2 pricing internationally, but as you know, the majority of our TiO2 buy is chloride-based TiO2, which we really haven't seen movement there. To sum that up, again, similar kind of in the back half, down mid-single digits on the ROS basket, led by the resins and solvent piece. Thank you very much. You bet.

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

Thanks, and good morning, everyone. Maybe on DIY paint packaging, we're hearing from a variety of sources that that's starting to get tight, and there's some concerns about price increases on DIY paint packaging into the back half of the year and into next year. Is that something that you're anticipating? Is this something you need to get ahead of potentially with pricing into the retail channels?

Vince, it remains to be seen if there's a gap in supply or that. We are stressing our packaging suppliers for sure with this unprecedented increase in demand, but we're working very closely with them. We do not expect an increase in price in the second half on packaging. And as far as a price increase, like we always do, we'll try to manage our costs first and we'll look at it as the second half unfolds and decide if an increase is needed based on the current environment. But we're not expecting an increase in our second half.

Okay, very good. And then just maybe you could talk a little bit about the M&A environment in both directions. Is your pipeline getting more active on the buy side? And as you've gone through the portfolio again in the COVID environment, is there anything that you might be looking to sell?

Well, on both sides, I'd say we are always active. There are a number of projects that we're engaged in, and I'd say the gap, if you will, of you know, a pretty wide margin in the midst of the COVID seems to be narrowing and good discussions are taking place. I really, really appreciate the leadership of our team here, where David Sewell and our head of strategy, Brian Young, are working with our leadership teams to really make sure that we're staying the course of our strategy. You know, in times like this, people can lose their their way a bit and just be out looking for sales or looking for opportunities, that's not us. And we've got a very deliberate strategy that we use that we stay true to, and we're working that. And there are opportunities, and we're hoping to continue to move through those aggressively. On the other side, to your point, I think we've demonstrated if it be programs or products that are not fits, that do not fit in our company that we take action. And I'd say that we've continued that same discipline of reviewing these programs, products, SKUs, stores, businesses, brands, everything. And you should expect that we continue to do that. When businesses fall short of the threshold that we have to create shareholder value, we'll take action. But we'll talk to you.

Thanks very much.

We'll talk to our teams and the businesses before we take that public.

Appreciate it. Thank you very much.

Thank you. Thank you, Vincent.

Thank you. The next question comes from Greg Malich with Evercore ISI. Please proceed with your question.

Hi, thanks. I had two follow-ups. One is on gross margins, and then the second is on e-commerce and some of the learnings you got in there. First, on the gross margins, if I heard all this and pieced it together correctly, It sounds like the 330-bit expansion was roughly split between raw material price gap versus mix. And the reason that gross margins might be up less year over year in the second half is not raw materials per se, because you have the rest of the price increase, but it could be that some of the mix that's been extreme in the last few months starts to normalize. Am I taking that too far?

No, I wouldn't. I think you're directionally accurate. I think in the third quarter you wouldn't expect to see the DIY trends that we saw in the second quarter. The raw materials, a tailwind, but not as big of a tailwind in the second quarter. I guess, you know what, Greg, the way I would kind of gauge the DIY and the product mix is if you look at our second and third quarters together, between product and customer mix, I estimate a little bit below 1% of an impact. So you're directionally right there.

Got it. So another way to think of it is the 330 was probably a little more than a point of mix, 100 bps of mix in the second quarter.

That's approximately correct.

And then on e-commerce, you mentioned in the prepared remarks, John, I think how the platform did well. I think last quarter you gave us some metrics on how many people used it, and I know there's a lot of conversion to curbside and sort of all hands on deck. Any numbers you can give to us in terms of the number of customers, whether they be DIYers or pros or contractors that have started to use the platform or how engaged they are with it to help see how that could drive loyalty and growth?

Yeah, I'd maybe characterize it this way, Greg. Our platform is certainly – we are witnessing strong utilization and increased metrics in all categories that we track. The idea here is pretty simple. It allows customers more efficiency in not only ordering products, but also in communicating with their reps and their store managers. And we want to build on this incredible relationship that we enjoy. contractors as well as now a growing number of DIY customers are learning to rely on our people. On the professional side, these contractors would tell you that those reps and those store managers are part of their team, part of the contractor's team. And this is an extra step in helping our customers through our people. So I might describe it as the last mile just got made that much easier. And we want the contractor feeling like they're part of our team and we're part of their team. And earlier I talked about the complexity and the challenges that they're facing right now and the inability to absorb delays and run profitable, efficient projects. I would tell you that this platform is helping our customers on the professional side to run much more efficiently, and we absolutely see loyalty increasing. We ask a lot of questions and the most important one that I think we ask is, who helps you make more money? And that gap is getting wider and we enjoy that. As it relates to the DIY side, we clearly have experienced a number of new customers using this platform on the DIY side. Our scores there are going up dramatically, and it's working quite well. We're investing here heavily because we believe this is another great opportunity for differentiation.

As a percentage of customers, does that more take up on the pro side or with DIY?

Pro side.

Wow. Thanks.

Good luck.

Thank you, Greg.

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

Thank you. RPM indicated that quarantining has brought out the inner DIYer in a number of people who maybe didn't think of themselves as DIYer before. I thought DIY versus pro and residential repaint was mostly demographics driven, but so if we go out a year from now or 18 months from now, do you think we renormalize that's there or do you think we structurally kind of shift up a little bit here?

I think we normalize. I think if you look in the past and compare to what's happened historically, John, we've seen these shifts temporarily during unique times, but what we also have to take into consideration is an aging demographic, home price appreciation, aging housing stocks, The last recession, to your point, the DIY grew, but not huge amounts, and it wasn't protracted. So we think that there are some shifts that occur during these times while people are home. As I mentioned earlier, it's affordable, it's impactful, and you can make a difference. But overall, every time we've seen this and we expect it going forward, and quite frankly, another stat that I didn't share earlier, I should have maybe in the comments about the the res repaint, the reason I say this with confidence, listening to our customers, they're telling us in June of 2020 they have more bids going out than they had in June of 2019. So we're feeling pretty good about the trend. Great.

Thank you.

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

Yeah, good morning. First, congrats on a bang-up quarter. I wonder, again, this is year three for the big lows switchover, and last year you had, you know, talked a little bit. You weren't quite where you wanted to be operationally. Now, obviously, this year, big year, just macro from the market side, but is that system now set up where you like, where your reps are able to go in and help them sell. And you're kind of hitting on all cylinders there, or how long do you think that takes to get, you never get to the end point, but to, you know, kind of a cruising altitude, I guess.

Yeah, you're right. There's no finish line in anything that we do Duffy. So I like the way you characterize that, you know, uh, Marvin and his team at Lowe's, uh, Bill Bolts and Joe McFarland, these are wonderful leaders. They're driving for improvement, and we want to help them. They're giving us access. They're allowing our teams to work with their teams, and we believe that there's a lot of opportunity ahead of us. We're on the runway, and we're screaming down it, but I think together there's a lot more that we can do, and we're looking forward to that. I think these are two wonderful organizations that work together, can do a lot. And we like that for two reasons, both the DIY side, but also there's a professional that prefers a home center experience that's typically, we call them the pro that paints. They might be a remodeler. They might be doing different professional projects, and they pick up paint as part of that. experience and they prefer the home center, um, uh, you know, with the width of the products, uh, choices. And so, you know, our ability to help them be more successful is a important part of our strategy and we look forward to that. So there's a lot more to be done.

Great. And then you mentioned you're increasing CapEx in the back half by a hundred million, which is a very large sum for you guys versus your historic CapEx. Is that new plants or what is that new capacity that you need to bring online? What is it that we get with that extra $100 million?

Yeah, Duffy, as I talked on our first quarter call, the reduction in CapEx was really pausing some of these architectural and packaging capacity expansions. As we saw the sales trends come through the second quarter, We restarted those expansion plans, you know, just because they take, you know, it could take 12 months to 16 months to get an expansion, a sizable expansion in place. You know, and that takes our CapEx up to $280 million, which is still about 1.5% of sales. So, you know, as long as I think we're trying to control CapEx below that 2%, we've done that pretty well. pretty much over the last few years, and we'll continue to do that. But we need the capacity, and we're going to start those projects back up.

Perfect. Thanks, guys.

Thank you, Duffy.

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

Hi. Good afternoon, guys, and great quarter. First, just wanted to follow up on a prior question. Your Resi repaint contractor, I believe you said in June, the interior got back to flat. Could you just give an update for July? I'm really trying to understand whether or not in the second wave areas of COVID that are having another flare up, whether or not we're seeing that interior contractor business on the repaint side really get impacted in Florida and Texas.

Yeah, I don't know that we want to get into too much detail here. Let me just give you maybe some insight. I'd say that in more rural areas, I would describe it as there's more likely a business as usual than in more metro areas. We are experiencing more customers penetrating the home into interior. But, you know, it's still spotty. And I would tell you that the bids that I mentioned earlier have a lot of people feeling really good on the contractor side because they're not just exterior bids that they're doing. They're doing both bidding for interior and exterior. So, you know, I think it's just a matter of time. And it's starting to roll in and our customers are feeling good. But I don't think it's just going to be a light switch. It's going to come back online.

What I'd add to that, Truman, is just that, as we said, DIY continues to be a strong performer, and the Resi Repaint and the new Res continue to be the ones that are sort of leading the recovery, while commercial and property maintenance, they're also improving. But Resi and Resi Repaint continue to be sort of the leaders in the clubhouse.

Okay, okay, thanks for that. And then next question on gross margin, you know, you all are already at, you know, 48% in the second quarter. Just hoping you can give some, you know, updated thoughts on your long-term gross margin targets because I think we're bumping up towards the high end of them.

Yeah, Truman, you know, as you know, our long-term gross margin targets at 45% to 48%, You know, I would say, you know, over time we'll continue to look at adjusting that. But I don't think we're ready to do that at this point. You know, the demand surge and the trends that we're seeing in the product mix, customer mix, you know, we talked about these being, you know, shorter term. We'll get through the, you know, we expect the positive trends through this quarter. But go back to some more normalized levels and, And then I think we've got to see how the recovery in our performance codings comes out before we're ready to say we think we should move that long-term target up. I think we've done a lot of work through our different segments, through our different divisions and regions to really drive complexity out of our supply chain and be more efficient. And those will pay off when demand and volume start to pick up again, but I'm just not ready to raise that target just yet.

Okay, thank you. Thank you, Truman.

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

Hey, Arun. Arun, are you on mute?

Arun, your line is live. You may proceed with your questions.

Sorry about that. Can you hear me now?

Yes. Hi, Arun.

Hi. Good morning. Apologies for that. Yeah, I guess my first question is just on the guidance. So the midpoint being 2250 now, I guess excluding the amortization and charges, I guess maybe you can just kind of lay out maybe some of the factors that maybe could drive you to the upper end of that range. Would it be kind of maybe a swifter recovery in performance, or would it be maybe a longer tail on consumer? Yeah, maybe just provide some details on maybe the upper end of guidance. Thanks.

Yeah, Arun, I think it starts with the sales volumes in our TAG organization. You know, we are, like I mentioned earlier, are going up against a tougher third quarter, but a tougher fourth quarter as well. But As TAG drives volume, we get a lot of operating leverage on that volume. And you mentioned it, if the DIY surge continues longer than we expect, again, we expect to get nice operating leverage there. And then our performance codings group, the trends that John talked about sequentially through the second quarter, You know, if some of those pick up faster, whether it's auto refinish, GI, industrial wood, which are probably on the farther end of the scale or where we think, let me rephrase that, auto refinish more in the middle, GI and industrial wood at the longer end of the scale of recovery, if those do pick up quicker, yeah, I think we can see ourselves to the high end of that range.

So it sounds like it's mostly volume-driven. And then I guess maybe thinking longer term, maybe you can just give us your perspective on your business. You've benefited quite heavily from the shift to do it for me over the last several years, and now we're seeing a little bit of a shift back to DIY. I guess, A, do you think that's structural, and B, And then, B, I'm just curious how you're thinking about your paid stores business longer term. You've often grown in the one and a half to two times market rate. It seems like you're poised to increase that now maybe to two or three times the market rate. So I guess maybe just address those two issues and see if I'm thinking about that the correct way. Thanks.

Yeah, on our stores, I think we're just getting started. I think there's a lot of opportunity, and we've got a wonderful team that's executing well, and we're excited about where we're going. And there's a lot of really good things in the pipeline that we're excited to talk to you about in the future. Regarding the do-it-yourself versus do-it-for-me, as I mentioned earlier, we think that we've seen this movie before. There's a shift to do-it-yourself. It gradually shifts back, and those are based on fundamentals, an aging population, dual income, the pension or market wealth that's created, home values that are improving. and quite frankly a general focus on life, quality of life. People enjoy the benefit and the impact of a newly painted room or home. Not all of them enjoy doing it themselves, but it's a relatively inexpensive but impactful experience. We don't quite frankly care how it's applied. We just want to make sure it's our product going on. It could be a do-it-yourselfer. It could be a do-it-for-me. We talked about remodel or new home. We have teams focused on every square field, every corner of the room. We just want to be there when that gallon's sold and be the one that's providing that solution.

Okay, thanks. Good luck with the quarter. Thank you, Aaron.

Thank you. Our next question comes from the line of Eric Petri with Citi. Please proceed with your question.

Yes, hi. This is PJ Juhicar. Good morning, PJ. Good morning or good afternoon. Just a couple of quick ones on DIY. You know, DIY did well across all big boxes. I was wondering if you and your partner there gained share. Do you feel you gained share? And what happened to retail prices this year?

I think it's a little early to tell if we've gained share. I would tell you we're not satisfied, and I think you'd be disappointed in us if we were. So we're still working to improve regardless of if we're gaining share or not. There's still a lot of opportunity, and we want to work with our retail partners to be able to capture that share. I'm sorry, your second question was what?

On the pricing, on the retail side, paint pricing.

Yeah, you know, I think that's a better answer coming from our customers themselves than us commenting on it.

Okay. And then just one more on DIY. Are you trying to get some DIY customers in your stores through your digital app? Any progress there or strategy there? Thank you.

Yeah, again, I mentioned earlier, it's about 10% of our store business, so it's a relatively small percentage, and there are customers that prefer a specialty store experience, and if they're going to make that decision, we'd hope that they choose ours. I know that you've been in our stores, and you've seen how we're modeled and what we do. I think There's a large percentage of that contractor business that is out there for us to gain, and that's mainly the focus of our stores.

Okay, great. Thank you so much. Yes, PJ.

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

Yeah, thanks for taking my question. Just a quick one on cash flows. Normally, your second half is always a much stronger quarter, or excuse me, half, and you tend to see about 70% of your free cash, at least in the last few years, in the back half. I guess given the strength that you saw in the second quarter, should we still be assuming that, or is it a little bit more of a wonky kind of year where maybe the front end has a little bit more than normal? How should we be thinking about that?

Yeah, John, I think you're absolutely right. It's a little bit of a wonky year with the strength in DIY. Certainly through our stores, they're not going on account. Our working capital is lower in our first half, as John talked about. We're going to start building inventory coming out of our third quarter into our fourth quarter, and that will be a little bit of a headwind in our second half as far as cash is concerned. And then the profitability aspect, that we saw in the first half. Because of the tougher comp in the second half and some of the product and customer mix and things I talked about earlier, you just aren't going to see as big of an improvement when you look at our full year guidance. But we're going to build inventory, and that's going to be a little bit of a drag on our cash in the second half. It still should be positive year over year, but not quite as positive.

Got it. Thanks very much for the caller.

Thanks, John.

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

Yes, good afternoon. I wanted to ask about your packaging coatings business. I think you mentioned it grew at a high single-digit pace. In recent weeks, we've been hearing about aluminum can shortages, and I'm curious as to whether you've observed that, and perhaps it would be

no high-class problem if it's a problem at all but can you enough cans out there for you to continue to grow rapidly in the business there's plenty of opportunity for us to grow this is the strongest performer that we have in our industrial business mention sales up high single digits to your point demand for food and beverage cans remains robust we have a terrific and unique technology in our V70 coating Coding that continues to win and convert new customers, new lines, and it's because of the flexibility, the speed, the ease of application. Our customers are running more efficiently through the plants to be able to do that. So, yes, we expect this business to continue to grow. It's another area with wonderful leadership, great technology. great customers and we're putting a lot of fuel in this tank.

Good to hear. And then secondly, I wanted to follow up on e-commerce. Are your margins through the e-commerce channel today higher, lower, or similar to the same sale through a traditional channel? And as you continue to grow rapidly from a smaller base, you know, how might that evolve? Just trying to get a sense for if and when, you know, this could become a meaningful swing factor in margin analysis moving forward.

Kevin, I think you should model it in as basically the same margins.

Easy enough. Thank you so much.

Thank you. Thanks, Kevin.

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

Hey, this is Jeff Stevenson on for Garrick. How are you?

Hey, Jeff.

Hey, my first question was just on the outlook for the auto refinish business. Are you seeing any improvement as lockdowns or ease miles driven have improved and maybe even a shift away from mass transit?

We do see the improvement. We saw it sequentially as the quarter unfolded and we expect that to continue. Again, we've spoken the last couple of calls about the technology and our play here and the performance of this business. It's moving in the right direction, obviously, but miles driven and traffic congestion would help this business. This is a business that when you look at the drivers, given what we've done with this business over the last 18 to 24 months, resumption of more normal travel routines will benefit us significantly.

Okay, great. And then a new residential, you mentioned the sequential improvement in June, but as we look at the back half, are you seeing an acceleration similar to what builders are seeing? And then two, are you seeing any problem with contractor labor as housing starts to accelerate?

We are experiencing some contractor labor issues, not only in new residential, commercial, even res repaint. And you wouldn't think that given the unemployment rate, but I've spoken with a number of contractors who have mentioned that it's difficult for them to find people qualified people that are willing to work given the unemployment rates that they're receiving. So it is an issue. I would say to your question about the trend, many of our builders, first, we do see it largely because of our position in the market. We've got a terrific position in the national home builders. We've talked about having 18 of the top 20 national home builders in exclusive relationships. We've been making very good penetration in the regional builders. And let me just take a slight detour and say our national account business outside of just the builder, but our national account business in total across all our U.S. stores platform, the activity there is fantastic. So we're really leveraging our platform and really trying to drive the differentiation between us and others. That said, back on the builder, we are clearly enjoying this partnership with our builders. They are experiencing, many of them have said June was their best month ever, and so we believe that the quarter bodes well for the future. The other point of differentiation I would make that we're hearing from our builders is that they continue to reference our ability to offer the services that we provide, both the reps and inventory, close to them as an important lever. Many of them have asked other suppliers to come visit us here in Cleveland to understand what we're doing and how we're doing it. And I think that when you look at our position, it's become more pronounced given some of the challenges that some builders have had with disruptions in other categories. For us, it's terrific business. It's five-gallon buckets, so it's easy to serve us. It doesn't have an impact on the do-it-yourself business. It allows us to serve them well, and we can execute for these national homebuilders across the country like no one else can.

Thanks, and congrats on the great quarter.

Thank you, John.

Thank you. Our final question will come from the line of Eric Bossert with Cleveland Research. Please proceed with your question.

Thank you. In terms of the interior business, John, I know that you talked briefly about it, but just curious in terms of the momentum on the interior side. I know you indicated that contractors are more bullish and that's looking at the business in total, but curious about what the trends are on in terms of interior And then also, if you could remind us of the interior-exterior mix within the stores, 2Q, 3Q, 4Q. Thank you.

Well, let me point, I think, Eric, good to hear you again. My comments, I think, on the trends, I might point back to the bidding activity that we're experiencing with our customers. The fact that in June... there were more bids this year versus last year and a growing percentage now, including the interiors. So, trying to give you some color without getting into specific numbers, to be truthful with you, but we're feeling pretty good about it. The fact is that our customers are recognizing that it's not going to be this afternoon that they're in someone's home, but they're using virtual tools to estimate. Their customers are interested in having their homes painted. There's a sense of wanting to almost get their place in line. And our customers enjoy that because it allows them to tackle the exterior, which is turning out to be an excellent exterior season for our contractors. And they're enjoying the opportunity that many of these interior projects, these customers are getting in line with the expectation that those homes are going to be painted by these same pros.

And Eric, on the interior to exterior ratio in the out quarters, first quarter, fourth quarter, it's about four to one. As you get into the two middle quarters, as the weather improves in the Midwest and Eastern, it trends to that three to one in a normal environment. It's probably a little less than that. through these next second and third quarters because of the trends we're seeing.

Okay, that's helpful. Thank you.

Thank you, Eric.

Thank you. We have reached the end of our question and answer session, so I'd like to pass the floor back over to Mr. Jay for an additional closing comments.

Yeah, thank you, Jesse, and thanks, everybody, for joining us on the call today. Just one reminder, I'd like to tell you that we'll be hosting our virtual conference financial community presentation on Tuesday, September 29th. So registration details will be coming out on that soon. Look for that. We hope you'll be able to join us for that. And as always, Eric Swanson and myself will be available for your follow-up questions the rest of this week and into next week. So thank you so much. Have a great day.

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