Sherwin-Williams Company (The)

Good morning. Thank you for joining the Sherwin-Williams Company's review of second quarter 2024 results and our outlook for the third quarter and full year of 2024. With us on today's call are Heidi Petz, President and CEO, Al Mestician, Chief Financial Officer, Jane Cronin, Senior Vice President, Enterprise Finance, and Jim Jay, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode by issue or direct via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.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 up this session to questions. I will now turn the call over to Jim Jay.

Thank you and good morning. Sherwin-Williams delivered a strong quarter driven by continued execution of our strategy and with little help from what continues to be an uneven global macroeconomic environment. Led by Payne Stores Group, consolidated sales were within our guided range, gross margin expanded, and diluted earnings per share and EBITDA grew by double-digit percentages. Margin improved sequentially and year-over-year in all three reportable segments. We continue to make progress on our enterprise priorities, and we are clearly seeing returns from the heightened investments made in the back half of last year and which have now annualized. We also maintained our disciplined capital allocation approach during the quarter, returning $613 million to our shareholders through dividends and share repurchases. an increase of 57 percent year-over-year. Our second quarter performance ends our first half on a strong note, and coupled with our current visibility into the back half of the year, we are increasing our full-year earnings outlook. We remain highly focused on executing our strategy, demonstrating our value proposition to win new accounts and increase share of wallet, and taking advantage of disruptions in the market. We are well positioned to deliver in the current environment and highly confident that our actions and investments will result in even stronger performance when end market demand eventually becomes more robust. Let me now turn it over to Heidi, who will comment on our second quarter results by segment before moving on to our outlook and your questions.

Thank you, Jim. First, I want to thank all 65,000 of our employees around the world for their efforts in the quarter and for their ongoing passion for our company and for our customers. I continue to be humbled and inspired by all that you do. I believe our second quarter results demonstrate three things. One, we have the right strategy. Two, our team continues to execute and adapt. And three, we continue to see returns from our ongoing investments in the business. At the same time, we're not content with where we are by any means, and our team understands that we must continue to operate with determination and urgency. We're delivering strong results in a choppy demand environment while executing on initiatives that will put our customers and our company in position for even greater sustained success. As far as specifics on the second quarter, I'll begin with the paint stores group. where sales increased by mid-single digits against a double-digit comparison. Volume and price were both up low single digits. As we expected, price realization improved as the quarter progressed. Segment margin increased to 25.1%, driven by higher sales and moderating raw material costs. Pro sales were led by residential repaint, which was up by a mid-single-digit percentage. strong evidence that we are continuing to take share in a down market. We're clearly seeing a return here from the investments in dedicated sales reps we made in the back half of last year. New residential returned to growth in the quarter as we are seeing improving single family starts turn to completion. Commercial grew by a low single digits against a double digit comparison. Property management was down less than a percent with continued delays in CapEx projects. Protective and Marine was up mid-single digits against a low 20s comparison. And while we acknowledge that there have been project delays, we feel very good about the pipeline. DIY increased low single digits compared to a high teens comp. From a product perspective, interior paint sales grew faster than exterior paint sales. We have opened 26 net new stores year to date and expect to open 80 to 100 for the full year. Moving on to our consumer brands group, sales underperformed our expectations in a market that was softer than we anticipated. Lower volume, the impact of the China architectural divestiture, and unfavorable currency translation were partially offset by selling price increases, primarily in Latin America. Sales in North America decreased by a high single-digit percentage, where weakness in existing home sales remains a headwind. Inflation, depleted savings, and household debt also continue to pressure consumers who currently appear to be spending their modest available discretionary dollars elsewhere. We understand where we are in this cycle and eventually expect to see an upturn in DIY demand. We're confident that we are well positioned with our growing partnerships over the long term. Outside of North America, sales decreased by a high single digit percentage in Latin America and a double digit percentage in Europe. Adjusted segment margin expanded to 26.1%. This was primarily driven by improvements in manufacturing and distribution fixed cost absorption within the segment and moderating raw material costs partially offset by net sales that were below expectations and higher employee-related costs. In the performance codings group, modest sales growth was driven by an acquisition which was partially offset by unfavorable currency translation. Adjusted segment margin improved to 19.4%. This continued strong margin performance reflects our ability to drive our customer success in end markets that value differentiation. It also reflects the ongoing hard work of our teams to optimize this business. We continued to see choppy demand by division and region. Industrial wood led the growth, including the impact of an acquisition. COIL also delivered solid growth driven by share gains. Auto refinish was up low single digits in North America and down less than a percent overall. Share gains are offsetting softness in our core business, where consumer reluctance to pay deductibles is resulting in lower insurance claims. Packaging was down less than expected, and we have a good line of sight to improvement in the back half of the year. General industrial demand was lower in all regions. Heavy equipment and transportation were down most significantly, while energy infrastructure was a bright spot. Regionally, sales in the group were down low single digits in North America but positive in other regions. Moving on to our guidance for the third quarter and full year. It's clear that the macroeconomic environment has been softer for longer than many economists anticipated at the start of the year. We don't expect to get material help from the market in our back half. We are unwilling to simply accept these conditions. And you can count on us to continue being very aggressive in our pursuit of new business and share of wallet gains. Sherwin-Williams is incredibly well positioned in each of our targeted end markets. Comparisons ease in our second half, competitive dynamics are a tailwind, and we're confident share gains will become more apparent over time as market conditions improve. As for our specific outlook, the slide deck issued with this morning's press release includes our expectations for consolidated and segment sales for the third quarter of 2024. For the full year 2024, consolidated sales are expected to be up a low single digit percentage compared to our previous guide of up low to mid single digits. Full year sales guidance for the paint stores group and the performance coatings group remain unchanged. We have reduced our consumer brands group guidance meaningfully following the softer than expected first half and continued weak demand in the North American DIY market. We are increasing our full year earnings guidance given our better than expected results in the second quarter. The midpoint of our previous guidance now becomes the low end of our revised guidance. On an adjusted basis, we are now guiding diluted EPS in the range of $11.10 to $11.40 a share, an increase of 8.7% at the midpoint over the prior year. As we have often said, should our sales prove to be better than we are currently anticipating, we would expect EPS to be better. Our slide deck also provides guidance on our expectations for raw material costs and other items helpful for modeling purposes. As we enter our second half, we know that we are not immune from choppy market conditions. This leads us to focus even more intensely on our strategy. In periods of uncertainty and competitive disarray, customers are looking to Sherwin-Williams for consistency, reliability, dependability, and differentiated solutions that will drive their productivity and their profitability. We have a deep and experienced team that knows how to do just that. We believe in success by design and we do expect to win. This concludes our prepared remarks. With that, I'd like to thank you for joining us this morning, and we'd be happy to take your questions.

Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate 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. We also ask to please limit yourself to one question. If you have any additional questions, you may re-enter the queue by pressing star 1. One moment please while we poll for questions. Your first question for today is from Vincent Andrews at Morgan Stanley.

Thank you. Good morning, everyone. Heidi, could you talk to us a little bit about the quarter in pain stores? It seems like 2Q, not unlike 1Q, had at least a month where there were some challenging weather conditions that probably pushed some volume out. So could you talk a little bit about whether the quarter progressed, you started to make up a little bit of 1Q, and then maybe May hit and got a little challenging? And what are your customers saying in terms of where their backlogs are as a result of this, and what are you baking in in terms of being able to make up some of this push-out in the back half of the year?

Yeah, good morning, Vincent. You know, I'll start here and then hand it over to Al to give a little bit of commentary as well, but I think you characterized it well. I think if you look across segments here, certainly there was some challenge. We don't hide behind weather. We're also obviously not immune to having to make sure that we've got the right paint and application conditions for our contractors, which ultimately benefits our customers and our shareholders in the long run. But let me be really clear about the controllables and where we are laser focused here. If you look by segment, starting with residential repaint, we mentioned this in the prepared remarks, but I'm very confident that we're going to continue to take market share as you've seen over the last few quarters, especially to your point in Q2, where we're posting up mid-single digits in a down market. I would expect to continue to see us doing that. I think it's also a clear signal that we're getting a return on the investments that you'll remember we laid in last year. So by design, we often talk success by design is a great example of how that's playing out in stores. And it's worth repeating, this segment, there's an incredible upside as it relates to market share opportunity. My time out in the field with our team and our customers gives me a lot of confidence that what we're doing is working, and we're getting a lot of positive feedback from even our new customers, ultimately helping them make more money. That is the reason we're in this. If I then take you over to new residential, again, Q1 to Q2, I'm going to let Al kind of come in and give a little bit of color commentary, but You know, we are encouraged by the growth that we're seeing here. Single-family starts are turning to completions. I've been personally spending a lot of time with our builders and the team here, and they're ultimately after optimizing cycle time and profitability. So our opportunity, not only do we see momentum here in the back half, we look at that as some solid tailwind, but I'm very confident that that we are, I would say, best positioned in our industry, specifically within this segment as the market recovers. If I move on to property management, I think we all have seen this. Interest rates certainly have put this segment on pause, both in new construction and renovation. But we're not waiting here. And, Vincent, I think this is an area where, much like new residential, the teams are hard at work. demonstrating our value, and securing additional exclusive agreements with plenty of opportunity ahead for us. So we're going to be continuing to focus on helping our customers manage through this pause. You've got a lot of discipline in these management companies as they're really taking a look at understanding how to prioritize their investments and helping them try to upgrade older properties, competing with new properties, and the like.

Vincent, the only thing I would add is just to take a quick look at the second quarter, up 3.5% compared to a strong low double-digit comparison last year. Volume was up low single digits. Price was up low single digits. And I would say it was probably slightly below where our expectations were as we were coming into the second quarter. But we exited the second quarter at our targeted run rate, which leads to the second half, third quarter, second half guidance to be similar, up low to mid single digits, and that'd be really just broken out between price up low single digits and volume up low single digits with, as a reminder, we talked about res repaint being up at the high end of that range in our second quarter that happened, and we expect the same in our second half.

Thank you, Vincent.

Your next question is from Chris Parkinson with Wolf Research.

Great. Thank you so much for taking my question. When we take a step back and think about your longer-term gross margin opportunity, there's still a lot of moving parts and perhaps some things in the housing market which are out of your control. But when we break down, you know, volume, price raws versus labor, and just kind of all the other things that could affect that outlook, you know, how should the investment community be thinking about that, not even for the second half of 24, but, you know, 25, 26 onwards, based on all the initiatives, including investments you've already been doing? Thank you.

Yeah, Chris, this is Al again. I appreciate the question, but, you know, we're not going to talk to that specifically, that long-term target today. I think FCP gives us, within the next 30 days, gives us a really good opportunity to talk about each of the financial metrics and the targets longer term. And today, I think we want to focus on the strong second quarter that we delivered in a tough market environment, and also with our second half, our full year beat and raise for the EPS, adjusted EPS.

Thank you, Chris.

Your next question for today is from Arun Viswanathan with RBC Capital Markets.

Great. Thanks for taking my question. Congrats on the strong results. Maybe if I could just get your thoughts on how to frame the share gain opportunity as you look into 25 and 26. Obviously, there's a couple competitors who are going through some of their own changes, and maybe that could benefit you guys. I think there's a perception that that's on the several hundred million dollars of potential gains for PSG. Is that correct? And when you do onboard those customers, you talked about new customers earlier. What's the margin profile look like? I know that there's been traditionally kind of get them up and get them going and get them further up the mix line mentality. Does that still prevail? Maybe you can just kind of frame some of those thoughts for us. Thanks.

Yeah, Arun, good morning. Let me start with your last question in terms of new customers coming in. Yeah, this is certainly a positive mix for us. So new customers, existing customers in this segment tend to value more of the premium product, premium experience that we provide. So I would say that that's a fair characterization across the segment. Obviously, we won't get into any 25, certainly not any 26 outlook, but what I would tell you is the confidence and the momentum that we have here relative to the run-up we're already experiencing in a few segments. And again, I'll go back to this idea of success by design, the luxury of a very tenured management team that is very astute when it comes to reading market indicators and signals. So the timing in which we're laying these investments in at the right point in the cycle so that we are best positioned for the run-up. Res repaint's a great example. I point to automotive refinish as another really good example where you can see, I know you asked specifically about stores, but that same discipline holds across the portfolio. So where we're seeing some positive signals from a market share standpoint, very proud of that team and that organization is, as you well know, that automotive refinish model, very similar to our stores model and our ability to have direct relationships with these customers and end users puts us in a really unique position. So while we're still putting in the investments here, we've got record high installs. And candidly, I would say that not everyone's getting the penetration and the acceleration that we're seeing. But that's another example outside of stores. But Al, I'll let you pick up anywhere else you want to jump in here.

Yeah, Ruan, I think some of the things you're seeing in the market, and I think we've talked Kelly-Moore is a more immediate opportunity, basically because of the type of customers that they were supporting in res repay and they're out of business. And I think we've talked about taking more than our fair share, and we see that in our districts out on the West Coast and in California. I think PPG, we'll see what happens, but longer, maybe more mid-term, longer-term opportunities. And it all goes back to this consistent investment thesis that we've talked about. We're very confident in our strategy. We know that the investments that we're making are paying off, and I point to res repainting of mid-single digits each of the last three quarters in a down market. And then, you know, Chris alluded to this on the previous question about mix shifts, and it really is about getting customers in, understanding how the services and products we offer that allow them to make more money, the products and services that get them to be more efficient, to get on and off jobs faster. It grows their top line and their bottom line. It really drives that customer loyalty.

Thank you, Arun.

Your next question is from Jeff Tsiklauskas with J.P. Morgan.

Thanks very much. Could you talk about your regional performance in paint stores? And once you're done with your R&D capital expenditures and some plant expansions, should your normal capital expenditures be under $500 million?

Yeah, Jeff, I'll take the second one on CapEx. And as you know, we are very consistent in our capital allocation philosophy. After you get past the building our future projects, which, as a reminder, will help us attract and retain world-class talent to allow us to continue to drive above-market growth, ROS and RONA improvements, and drive strong cash flow. And then we'll take that cash flow and we'll target CapEx below 2%. So depending on where the growth rates are, we may have years where we have to add capacity. And I'll point specifically to the packaging capacity that we've come online with and to our new France with the idea we have a lot of confidence in our market share opportunities there. We continue to build out our Statesville architectural plant and add capacity, again, with our confidence in our growth opportunities both in the southeast on the architectural paint stores, and I would argue in consumer brands group that's facing some short-term headwinds, but certainly a lot of confidence in the outlook. And then we'll keep the dividend at approximately 30% of prior EPS, and then absent acquisitions, we'll buy our stock back.

And Jeff, this is Jim. From a regional perspective on stores, we don't typically give too much commentary, but I would tell you that in this current quarter, our Southwest Division was the leader in the clubhouse, and I'd point out too that that was an area where we've seen one of our competitors close their doors, and so you can read that a little bit as some of the share gains that we've been talking about. And thanks for the question.

Your next question is from John McNulty with BMO Capital Markets.

Yeah, good morning. Thanks for taking my question. So on the gross margin front, you know, you put up this 48.8 number, you know, really high despite some soft volumes. I guess, was the bulk of this price versus raws in terms of the improvement? And if not, how should we be thinking about some of the efficiency and some of the simplicity measures that you've been making? Because, you know, obviously volumes really didn't drive this one entirely. So I guess, how should we be thinking about the big drivers there?

Yeah, John, you know, we had a couple things driving our better gross margin performance in the quarter. Moderating raw materials certainly is part of that. The price realization that we saw in the second quarter being better than what we saw in the first quarter along with mix. We did have some global supply chain efficiencies. outside of the higher fixed cost absorption that we've talked about in the first quarter, again, was really the entire driver of the consumer brand improvement in the second quarter. But you also have our paint stores group growing faster than the other segments. We've talked about that. As that happens, a higher gross margin, it'll drive our mix better and continue to drive our gross margin. And really to carry that momentum into the second half, and I do expect to see gross margin expansion in the second half, maybe not as much as we saw in the first half, driven by higher paint stores group sales, res repaint being at the high end of that range. We're going to see moderating raw material costs, but we also should see better price effectiveness in our second half versus our first half. continuation of what we've seen in the first half, just not as heavy because of the raw material tailwind won't be as high.

And then, John, I would add to that, you lay in additional volume when we're not in such a choppy environment, and that's only going to help continue to stretch us. Thank you, John.

Your next question for today is from Mike Sison with Wells Fargo.

Hey, good morning. Heidi, just curious, I think your outlook for the stores was market demand not getting better in the second half. What do you think happens if demand gets worse, or do you see that as a possibility? I mean, would your share gains actually accelerate in that environment? And then, more importantly, how are the colors for the Guardian selling these days? I would hope really well.

Well, I'll start with the first question. Good morning, Mike. You know what? I think first and foremost, we have to be prepared for any environment, which is why we're taking a very realistic approach within a choppy environment. But I think as you look by segment is where some of those answers lie. So in terms of res repaint, again, we've continued to talk about this because by design, this is an area of incredible market share gain opportunity for us. And I think we've demonstrated that in a down market, we've continued to take shares. I think that's a really good litmus test of how we will operate in a down market. Having said that, you know, without repeating what we did cover in the prepared remarks, we're going to be very thoughtful where we see, you know, the indicators that are driving growth by segment and make sure that we're, you know, pacing our investments accordingly. to what that growth looks like.

Yeah, Mike, the only thing I'd add to that is if you look at our second half guide for paint stores, it's in line with what we expected coming into the year with res, repaint, outperforming, commercial, property maintenance, about where we thought new res certainly improving in the second half. And then PNM with the delayed projects was maybe a little bit softer, but certainly not – too far outside our guide or our expectations coming into the year. I missed the Guardian question other than they're not hitting the baseball and they're not going to win. Still in first place though, Mike.

Thanks for the question.

Your next question is from Adam Baumgarten with Zelman.

Hey, good morning, everyone. Just curious if you could give some color on how the Pros Who Paint business performs relative to the overall segment in the quarter.

Good morning, Adam. Yeah, certainly we're continuing to be a bit under pressure here just in North America. Pros Who Paint continues to be a really important segment for us. As you know, this is a segment that we've also continued to talk about making sure that we're investing at the right point to continue to partner with our retailer customers relative to reps and all the other things that we think are really important in this segment. Al, I know we had talked about a little bit on the ProPaints and you were going to jump in on some color commentary relative to Outlook. I think there's a balance here in terms of making sure that we're working in lockstep with our strategic partners.

Yeah, I just think that when you look at some of the leading indicators that we're following, We expect a bottom out here in the third quarter and improve in the fourth quarter. And that's made up of the higher ticket projects and the lower ticket projects. And I think what we've seen in the past is if you're not remodeling a kitchen, you still have to feed your family. So you revert to maybe some smaller ticket projects to fill in those gaps. And that's what we expect to see going through the second half. Clearly, DIY is where we're seeing the most pressure through the first half and into their second half. And this is why I think the investment, we're confident in that propane strategy, the investments being made, and our ability to get a return on that. And we're looking longer term. We're not looking just to run for the second half of this year. We're looking at 25 and 26 and be in best position to gain share as that channel and piece of the segment of the channel comes back.

Adam, one piece I want to add in here, and Al said this, I think, really well, but the Pro Who Paints strategy is a critical part of our strategy. We are very confident this is going to create not just a nice financial but a strategic win for our shareholders. This is a segment that we are just not set up to serve in our stores organization. It is a segment that has high growth. high margin opportunity, and it's strategically very important that in our strategic partnerships that we also have access to this important and growing segment.

Thank you, Adam.

Your next question is from Mike Lighthead with Barclays.

Great. Thanks. Good morning, guys. On your income statement, you recorded a $32 million other income net in the quarter, which is a bit large versus prior year or last quarter. What is that, and is that allocated to the administrative segment or one of the businesses?

Yeah, when you look at that line specifically, it's really the move and FX goes through there. You know what? Mike, what I'll just address is all the other general other income. We did see credits in the quarter, environmental effects, and then gain on sales. If you look at it net year over year versus about a 12-cent tailwind, we did have a higher effective tax rate, which was a headwind of about net 7 cents. So if you net those out, we're still up a low double-digit percentage, not expecting that size of credits going through our second half, even though as expected coming into the year, a beat on non-operating costs year over year in our second half was expected. I still expect that because we had some higher environmental and some other charges in our second half last year that I'd expect environmental and other income lines to get back in line as it typically has been in the past.

Thank you, Mike.

Your next question for today is from Patrick Cunningham with Citi.

Hi, good morning. I'm curious on your outlook for the key performance codings verticals. Where do you see underlying markets trending in the back half, and where do you see the most upside from share gain opportunities?

Yeah, Patrick, I'll start with that. Let me first start at the portfolio level. I think if you look across PCG, In total, our margin performance is demonstrating the value that we're delivering. And those that value what we do, which is helping them make more money, are certainly rewarding us for some of these share gains. So if I look at by division here, packaging, I'll start here. We're gaining share outside of the US. And per our second half guide, we do expect the progress to continue relative to the United States. If you look within packaging, we know that the technology that we bring to the market is unique. We know it's solving a lot of issues for our customers and our brand owners. We're putting some investment, as you know, into new capacity, preparing for this growth, and we're confident that we're going to continue to see a run-up here. Coil is a really good example of our strategy at work. We're winning, we're taking share, and I would attribute that to the team and their excellent execution. We've got the fastest response time, delivering customizable solutions, very consistent quality, and we've got our tech service team there to support production. I hit on auto-refinish, so I won't repeat that. And we did mention industrial wood. As you look, certainly with new residential improvements, we would expect that to be a potential tailwind for us in the back half. Still choppy. But we're building on a good foundation as we've been up last quarter in all regions.

Thank you, Patrick.

Your next question is from Kevin McCarthy with Vertical Research Partners.

Yes, good morning. A two-part question for you on DIY demand. First, could you just speak in general terms about how you would expect your professional contractor sales versus DIY sales to trend in the stores moving forward? And then the second part would be, you know, if I look at your DIY flowing through company-owned stores, it's comfortably positive year to date. And in the consumer segment, of course, DIY has been you know, quite challenged well into the red. Can you talk about that disparity and what are the, I don't know, two or three most important reasons behind that?

Yeah, it's a good observation, Kevin, and I think you've characterized that well. You know, we often talk about this segment as having slightly two different segments. If you think about the DIY consumer in our stores, You know, they're looking for that specialty paint store experience and candidly expect the service that goes along with that. A little bit less sensitive in the current macro, the DIY that prefers a home center environment tends to be more value conscious and is certainly feeling the pressure, as we talked about in our prepared remarks early relative to inflation, depleted savings, and household debt. So those pressures are very real for for that consumer. Having said that, I do want to kind of run right at this question because this is an area that I would tell you we absolutely do not have our heads in the sand relative to our performance in DIY and certainly relative to our expectations in this segment. This is a very important segment for us over the long term. I'll reference that earlier as part of our overall architectural strategy. And when you look at the importance of making sure that we are well positioned here, we understand that there are cycles, certainly in a DIY consumer space, fundamental belief that we're in a log jam in housing that is going to free up. And so our focus on ensuring we are best positioned with the best strategic partners, including our exclusive and growing partnership with Lowe's, among others, So as the market begins to recover, we're very confident in our ability that we will continue to deliver above-market growth. But again, our heads are not in the sand right now, and we're going to be laser-focused on making sure that we're in lockstep with our partners.

Kevin, the comment on DIY through our paint stores group, a part of that is the price increase that we took in our stores. That is certainly impacting the DIY customer as well as the pro.

Thank you, Kevin.

Your next question is from Greg Melick with Evercore ISI.

Hi, thanks. I'd love to follow up on two things. First, just understanding volume, price, mix, and FX, both in the second quarter and what's implied from your back half guide.

Yeah, Greg, if you look at our second quarter, you know, with our sales up, half a percent, volume and price were up slightly, acquisitions at less than a percent, and we also had the headwind of the divestitures and FX. But really the driver in the quarter was our paint storage group, up three and a half, both That segment of PCG segment was where we expected, and we talked about the miss on consumer. If I look at the second half, kind of a little bit up low single digits guide compared to a low single digit comparison last year, I think price is expected to be up a low single digit percentage. When you look at, that would tell you that volume is expected to be up or down low single digits, and then all the other impacts are, I'd say, immaterial, less than 1%. FX is unfavorable. A little bit of tailwind in acquisitions, and again, a little bit of a headwind on the divestitures, but not material. I'd call out Paint Stores Group, just to be clear, and I said this before. Second half, we expect volume and price to be up low single digits. consumer down, high single to low double digits, really the continued softness in DIY. We do expect the price to be flat, and that's primarily increases we see in Latin America. FX would be a headwind, about one and a half, and then the remainder is volume down, high single digits. And then within PCG for the second half, I expect up low single digits. Acquisitions will be a tailwind of low single digits. And then FX, about a 1% headwind, then price, because of the small number of accounts we have on index, will actually be a small headwind.

Thanks, Greg.

Your next question is from Gunsham Panjabi with Baird.

Thank you. Good morning. Heidi, you know, in the slide deck and also in your prepared comments, you alluded to consumer affordability impacting portions of your business such as consumer brands and also parts of performance coding that you cited auto-refinish as relates to deductibles. Switching to the paint store segment, are your customers citing incremental issues as it relates to the same consumer affordability dynamic relative to the baseline of what you've already seen over the last 18 months or so?

Gautam, I would characterize it maybe a little bit differently, that they're always going to be value conscious, I would say, more so than focused on maybe the true of the price affordability piece. And so it's incumbent upon us that every day we are doing what we say we will do is delivering a consistent, reliable service to these more discerning and very habitual contractors that candidly just expect that from us. And so making sure that we're delivering that value every day I think is clearly on display for us and it changes their understanding. We're not having price conversations with them. We're talking about helping them grow their business and helping them make more money. Thank you, Gautam.

Your next question is from Steve Burns with Bank of America.

Thank you. Can you help me understand what led to the higher fixed cost absorption in consumer? Your volumes were down year over year and Al, you mentioned improved efficiencies. Was there an operating rate improvement in spite of lower volumes that led to that lower cost structure? Can you quantify that for us?

Yes. Steve, as I talked about on our first quarter call, this is consistent with our first quarter. We talked about the choppiness in production volumes that we experienced over the last four or five years and updating our costs and our standards to match those higher costs. On the conversion side, I talked about this at SCP last year, that that's really been a drag on our consumer brands group. And we thought we could get efficiencies out to offset those costs so we wouldn't have to do a reset to our standard costs like we did coming into this year. It's really not an impact on our overall gross margin because it is offset between paint storage group and performance coatings group, both of which I said on our first quarter call. We're not going to detail that out. We don't think it's material. And you can certainly see that with our performance coatings group, performance up to 19.4%, which is an all-time high. First half, 18.3% is an all-time high. And then certainly, We see the improvement in our paint stores group. So you're going to see that phenomenon continue through the second half. I did call out that the entire improvement in consumer brands group operating profit is due to those higher fixed cost absorption, really partially offset. by a decline in profits when you look at it related to the volume, sales volume, North America DIY sales volume shortfall that we experienced in the second quarter. So, like I said, we're going to continue down this path. My expectation is we'll get more consistent. Think of it as the base to build off into the future on consumer operating margin.

Thank you, Steve.

Your next question for today is from Josh Spector with UBS.

Yeah, hi, good morning. So I wanted to ask on Resi Repaint, it's obviously been a source of strength for you this year. In the event that you don't really get any improvement in housing turnover next year, or maybe it ticks down, I'd be curious if you characterize, if you want to think about either your backlog or your opportunity to win in that scenario, basically meaning have we been perhaps still over-earning from a slew of projects coming completion with lower turnover? Or is that a zero or low risk in your view relative to the market?

I think it's zero. I mean, I think, Josh, it's a good question. I think the health of the backlog is real. And certainly, you know, we're making the right investments at the right time to ensure that we're well positioned. When you talk about kind of the source of strength here, There's certainly opportunity to take share across the market. This has been an area of strength for us because we understand how to do something I truly believe that no one can do with this segment, and I take it back to the controlled distribution model that we have. So not only are we investing and laying in reps at the right pace and the right geographies, but we're arming these reps with the world's largest database of painting contractors. We're laser-focused on, from day one, ensuring they have the tools, the understanding, what they need to go in and help our contractors to grow their business, to travel, to be more successful. When I think about success in this space and the upside, I don't think that there's a finish line here. We're early innings, in my opinion, here, and we've got a lot of upsides.

Thanks, Josh.

Your next question is from Mike Harrison with Seaport Research Partners.

Hi, good morning. Another question on the performance coatings group. You said that in the general industrial portion of that business, demand was lower across all regions. Can you kind of walk us through those regions and comment on how things are trending, your expectations for the second half. I guess, are there some signs of improvement in any regions, or at least lapping some prior year weakness in general industrial? Thank you.

Yeah, Mike, I would say on the positive side, starting with that, you do see less of a slowdown in North America. And let me take a step back. It all starts with share gains in this type environment, share gain, share wallet, and differentiation. I think North America will be less of a headwind. I think Europe, again, we don't expect a lot coming out of Europe in the second half. We do expect Latin America and Asia Pacific to be positive, more so in Asia against a really soft comp, but Latin America holding up. So I think across the regions, North America, as you know, is our largest region across all of PCG and do expect it to moderate as we get through the second half.

And, Mike, I think to the team's credit, I would say our focus here, given the fundamentals of the core, has been laser focused on new account growth. And I would tell you that that's holding up better than the market. So the team is focused on the right activities here to offset some of the pressure.

Thank you, Mike.

Your next question is from Duffy Fisher with Goldman Sachs.

Yeah, good morning. If I could, just a clarification. Al, I thought you said that pricing didn't do as well in the second quarter as you had hoped. Can you just kind of walk us through off the 5% that you announced earlier this year? You kind of usually talk to about 60% being realized within a year. You know, how do we trend from where we're at now to getting to that, let's say, 3% of your 5?

Yeah, Duffy, we mentioned that the – price increase effectiveness improved as the quarter went on and we exited the quarter at our targeted effectiveness rate. So I would expect to see that kind of realization. We have built into our forecast that kind of realization, low single digit and then volume low single digit in the second half.

Thank you, Duffy.

Your next question is from David Begleiter. with Deutsche Bank.

Thank you. Heidi, can you talk to the cadence of earnings in the back half of the year, and specifically on CPG margins? Are we implying that they would be up in Q3 versus Q2? Thank you.

No, David. I didn't mean to imply that if that's the way it was taken. It really, where we're at, From an operating margin standpoint within CVG, it will be dependent on where we're at in the sales range and what volume does through the quarter and really through the second half. As you know, we still will expect to see a seasonal architectural slowdown in our fourth quarter, but whether we see sequential improvement in our operating margin is really going to depend on sales, North America DIY sales volumes.

Thank you, David.

Your next question is from Alexey Yefermov with KeyBank Capital Markets.

Al, I wanted to follow up on your CPG comment that you made earlier that this is the margin level you can build on. So if we think about 2025 or say 2026, can we think of this low 20s operating margin plus some Volume leverage perhaps in the case of recovery. So this could be maybe mid to high 20s margins with volume leverage. Are there any offsets? And perhaps some part of this margin story is not sustainable longer term.

No, like I say, we have talked in the past. Our expectation for consumer brands operating margin is high teens, low 20s. And certainly, we challenge our groups and divisions to continue to raise that bar. Volume is the number one driver of operating margin performance in all our segments, as you well know. And that clearly showed itself in 2020 during the pandemic when we had really strong volumes in consumer out-the-door sales. That drove the operating margins higher. And I would expect that as we see a turn in the market and we start seeing volume to grow, we'll get leverage on that volume. Thank you, Alexi.

Your next question is from John Roberts with Mizuho.

Thank you. DIY is mostly interior, I think. So was it unusual for interior to outgrow exterior this quarter, or was that... the weather effect and painters switch to interior when the weather's unfavorable?

Yeah, John, I think that's the case. They'll work on jobs where they have the opportunity and they have jobs lined up. I'll use Resri Painters six, eight weeks backlogs in advance so they can take advantage of really good weather and do exterior projects. Then again, if it's a wet, rainy week, they can pivot and move to interior projects.

Thank you, John.

Your next question is from Chuck Surinkoski with North Coast Research.

Good morning, everyone. Nice quarter. You explained the price sensitivity of customers purchasing architectural in the CBG group. Why does that not extend to residential projects in the paint stores group? I know some of those projects are bigger and maybe higher end, but you seem to clearly buck that trend in the paint stores group.

Yeah, I think You know, Chuck, within consumer, we've talked about a different kind of DIY customer and that's where the bulk of the volume is. They are more sensitive to inflation, the amount of debt they have. You look at some of those headwinds that Heidi talked about in her opening remarks. It's less so on the DIY side in our stores. And like we talked about, there is a price impact on DIY in our stores. And I think if you look at our pro, specifically in res repaint, and we've mentioned this, I think the teams have done a really good job about driving new business through our stores to drive that mid-single-digit growth over the last three quarters in a down market. So it's not that the res repainters are immune or those –

consumers are immune to higher costs it's just we continue to take share because of the investments we've continually made and being very consistent about that I think it also points to the value of a specialty paint store model which is you know certainly in the DIY side an expectation of premium product but it is an equally high expectation of that premium service and the willingness to pay for for that service and the homeowner color selection, all of the things that go along with us being innovating in and out of the can. This is a great example of a consumer that values that type of solution.

Thank you, Chuck.

Your next question is from Garrick Schmoys with MOVE Capital.

Oh, hi. Thank you. I wanted to ask about raw materials. How much were raws down in 2Q? And is flat in the back half of the year still a good assumption? I think that was yellow previously.

Yeah, Garrick. So raws, the basket was down mid-single digits year over year in the second quarter. And for the full year, we're still picking or saying that the full year will be down low singles. So that tells you the back half is flattish year over year. And thanks for the question.

Your next question is from Eric Bosshard with Cleveland Research Company.

Thanks. A question on revenue in two different areas, if I could. The consumer myths, just curious versus 90 days ago, what is so different that is driving the magnitude of the shortfall there? And then on the store side, I'm curious, on res repaint, the market down and you up mid-single-digit, I'm just curious to dive into both of those a little bit, if you would, in terms of the momentum of the market into the back half, and then the ability to sustain the magnitude of the share gains of up five and a down market. Thanks.

Yeah. Good morning, Eric. So let me start with your first question on the revenue, the CBG myth for kind of what's changed in 90 days. And I would simply put it as, again, we said this in the prepared remarks, but Characterizing this is it's just simply been softer longer, if you look at just the DIY North America market being under pressure. So the fundamentals have not recovered at the pace that we'd like to see. As it relates to stores and res repaint and sustainability of our performance there, being up mid-single digits in a down market, I would point to a few things, again, on the fundamentals. First and foremost, it's the segment where we have the greatest upside. So the market share gain runway is material. I would also point to, again, going back to the investments that we have made. And as our team is watching the market very closely, and we know the indicators to watch, we'll get as aggressive as we need to be and as realistic as we need to be based on what we see in the market. So Our ability to ramp that up, I think we've proven that we can respond pretty quickly to be best positioned for that upside.

Thank you, Erin.

Your next question is from Aaron Siccarelli with Berenberg.

Hello, good morning. I have a question on Resi Repaint. Can you talk a little bit about the profitability of new accounts as you continue to gain market share? If I understood correctly before, you mentioned that usually new accounts come at a premium, so the higher margin. I was a little bit surprised. So I would like to ask if you can maybe dig a little bit more into that and how this should pan out as your market share gains continue. Thank you.

Yep. Let me start with that just based on my earlier comment. If you kind of picture a bell curve of a new res repaint contractor coming in new versus kind of a more mature res repaint contractor where we've earned over time more share of wallet, my comment is relative to kind of first and foremost making sure that we're getting them in and getting them set up on the right product. So when we talk about making sure our customers are making more money, Oftentimes, Aaron, that is a conversation of getting them in the right premium product that's helping them get their crews on and off the job site faster, less touch-up required. So when you look at the total cost of a project, they're making more money. So making sure that we're helping our teams to help set our customers up for success at the very beginning. And then, again, along that bell curve, where there's more maturity of this particular contractor. They could be bigger in size. They may be traveling. Our teams are meeting them exactly where they are and helping them if they're looking to travel and grow work from store to store. Our reps are playing the role to proactively help set them up again, and then we're able to leverage our data and our database to put our reps in position to help these contractors kind of optimize what it is they're how they're leaning in on us for products, services, all of our digital tools, et cetera.

Thank you, Erin.

Your next question is from Lawrence Alexander with Jefferies.

Good morning. Just very quickly, will your raw materials in your base case, will your raw material costs be up year over year in Q4?

Gladish.

Thank you.

You're welcome. Thanks, Lawrence.

We have reached the end of the question and answer session, and I will now turn the call over to Jim Jay for closing remarks.

Thank you, Holly, and thank you, everybody, for joining us today. I think you heard today that while the macro is certainly very choppy, we're very confident in our strategy, we're very well positioned, and we're expecting to continue outperforming the markets. The global team's aligned. And we're focused on our strategy of driving that profitable growth by providing solutions for our customers. Today, you heard we've increased our full-year guidance. And as Heidi mentioned, and we've often said, if our sales do prove to be better than what we've outlined today, we would expect our bottom-line performance to be better as well. I'll close with, I just want to remind everyone, we have our financial community presentation, which is scheduled for August 29th in Boston. starting at 1.30. You'll hear from Heidi, Al, and other members of our management team, along with our typical Q&A sessions. So you can register for that on our IR website, or feel free to email our investor relations team. They'll also be webcast, and that date, again, is August 29th. So with that, I will thank you again for your interest in Sherwin, and have a great rest of your day.

This concludes today's conference. you may disconnect your lines at this time. Thank you for your participation.