Sherwin-Williams Company (The)

Good morning. Thank you for joining the Sherwin-Williams Company review of the third quarter 2024 results and our outlook for the fourth quarter and full year of 2024. With us on today's call are Heidi Petz, President and CEO, Al Misteson, 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 redirect 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 the U.S. Federal Securities Laws with respect to sales, earnings, and other matters. Any forward-looking statements speak only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statements, 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, and good morning. In a third quarter characterized by ongoing choppy demand, Irwin Williams grew consolidated sales, expanded gross margin, and grew diluted earnings per share and EBITDA. Sales in all three segments were within our guidance range. We also returned $631 million to our shareholders in the quarter through dividends and share repurchases. We remain highly confident in our strategy, and importantly, our team's ability to execute consistently. We continue to invest in the quarter to capitalize on what we see as unprecedented long-term share gain opportunity. We expect these continued near-term investments in stores, sales and technical reps, incremental services, and digital capabilities to drive sustained and profitable above market growth. We also expect the pace of investment to moderate in the fourth quarter, resulting in second half SG&A growth in the more normalized low to mid single digit level we have previously described. As far as our outlook, we are maintaining our full year EPS guidance. We recognize the current range is wider than typical entering a fourth quarter. This range accounts for several variables that are hard to forecast precisely over the next two months, including timing of demand related to recovery from hurricanes Helene and Milton, and the potential for extended holiday shutdowns among our industrial customers. Our team continues to navigate these and other near-term challenges while executing on multiple initiatives to drive our long-term success. Let me now turn it over to Heidi, who will comment on our third quarter results by segment before moving on to our outlook and your questions.

Thank you, Jim. And thank you all for joining us this morning. Before I begin my comments on the quarter and our outlook, please know that our thoughts and sympathies go out to all those that have been impacted by the recent hurricanes in the Southeast US. Our priority has been the safety of our employees, our customers and their families. We've been working hard to provide our people with appropriate support, and I'm amazed at how our teams on the ground have come together to help each other. Approximately 200 of our stores were closed for some period in the third quarter following Hurricane Helene, and nearly all were back online by the end of the quarter. Similarly, approximately 225 stores were closed for some period following Hurricane Milton at the start of the fourth quarter. And most of those stores are also now back online. The perseverance and resiliency of our people are inspiring. I could not be prouder of the personal and professional support they are providing our customers as recovery and rebuild efforts begin. At our recent financial community presentation, I described our success by design approach. We deliberately make the right choices and the right investments at the right time to drive sustained above-market growth and returns over the long term. It's an approach that has worked for us for decades and is exactly what we are doing right now. The current opportunity to gain market share is nearly unprecedented, and we will continue to take full advantage of it. While competitors are distracted or inconsistent in their execution, we offer consistency, stability, and reliability. We are a predictable partner. We're doubling down on our strategy because we know it works. Our team is focused, determined, and aggressive. We continue to provide our customers with solutions to make them more productive and profitable. We have great confidence in what we are doing, and we believe our results will continue to demonstrate outperformance over time. As far as specifics on the third quarter, I'll begin with the paint stores group, where sales increased by low single digits. Volume and price were both up low single digits. Pro-architectural pricing realization was in the range we anticipated, but was partially offset by unfavorable mix. Segment margin decreased to 24.5% due primarily to higher investments in long-term growth opportunities and mix in the quarter. Protective and Marine was up high single digits against a low double-digit comparison and has a solid pipeline of projects extending into next year. In residential repaint, our prior investments continued to pay off as we delivered the fifth consecutive quarter of mid-single-digit growth in a flat to down market. New residential also grew at a mid single digit rate in a choppy but improving market. Commercial grew by low single digits against a high single digit comparison. Property management was flat with continued delays in CapEx projects. DIY remained soft. From a product perspective, interior paint sales grew faster than exterior paint sales where outdoor conditions caused delays in some of our largest regions. We have opened 45 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 decreased by high single digits, inclusive of an approximate 4% impact from unfavorable effects. Sales in North America decreased by a high single digit percentage, where weakness in existing home sales and inflation continue to pressure the DIY market. In Europe, sales increased by a mid-single-digit percentage. In Latin America, volume and price were positive, but were more than offset by unfavorable effects. Adjusted segment margin expanded to 22.9%. This was primarily driven by higher fixed cost absorption in the manufacturing and distribution operations within the segment and effective cost control, partially offset by lower net sales. In the performance codings group, net sales were effectively flat as volume was offset by unfavorable FX. Adjusted segment margin decreased to 18%, primarily due to lower sales in North America and unfavorable FX. This high team's margin level demonstrates a continued strong performance that reflects our differentiated customer solutions and business optimization efforts. We continue to see choppy demand by division and region. Packaging delivered high single-digit growth with sales up in every region. Coil also delivered solid growth driven by share gains. Industrial wood grew low single digits driven by an acquisition. New account wins and auto refinish have been masked by softness in our core business, where consumer reluctance to pay deductibles is resulting in lower insurance claims. General Industrial continued to face headwinds in heavy equipment and transportation markets. Regionally, sales in the group were positive in all regions except North America, which decreased by a low single-digit percentage. Moving on to our guidance. The slide deck issued with this morning's press release includes our expectations for consolidated and segment sales for the fourth quarter of 2024. The deck also includes our updated guidance for consolidated and segment sales for the full year 2024. Our full year diluted net income per share guidance is unchanged. Our adjusted diluted net income per share growth remains at 8.7% over the prior year at the midpoint of our guidance. We are absolutely focused on executing our plan in the fourth quarter and delivering full-year EPS results in the range we provided in July. I also recognize that many of you are beginning to formulate your views for 2025. While we're not providing any specific guidance until January, I can share some high-level commentary that may be useful as a preliminary framework. The single largest variable heading in the next year is the timing and pacing of a true inflection in the demand environment. We stand by our FCP commentary, but it's only a question of when, not if. However, trying to peg this to a specific quarter, let alone a specific month or week, is not something we can do with precision. Our forecasting models incorporate a wide variety of indicators. including Lira, existing home sales, housing starts, housing affordability, interest rates, consumer spending, and industrial production, among many others. Direct input from our customers is a critical data point that also informs our outlook. While several signals are beginning to move from red to yellow and some from yellow to green, our initial view is that demand is likely to remain choppy in the first half of the year. What is certain is our strategy. We deliver differentiated solutions that make our customers more productive and more profitable. The good news is that in a macro and a competitive environment like the current one, the approach becomes even more valuable to our current customers while also attracting many new ones. We will continue being very aggressive in pursuit of new business and share of wallet gains. Sherwin-Williams is incredibly well positioned in each of our targeted end markets. We are confident we will outperform the market in all environments, and significantly so when demand becomes more robust. We are committed to driving success by design for our customers, our employees, and our shareholders. This concludes our prepared remarks. With that, I'd like to thank you for joining us this morning, and we'll be happy to take your questions.

Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. We do ask that participants please limit to one question. Your first question is coming from Vincent Andrews from Morgan Stanley. Your line is live.

Thank you and good morning, everyone. If I could just ask on the SG&A spend, it seems like there was a tactical decision made in the third quarter just based on the cadence of the spend that you anticipated for the back half. It seems like it all of a sudden got pulled more into 3Q than in 4Q. Could you talk about what precipitated that and exactly what you did just to give us a sense of what's going on there?

Yeah, let me start. Good morning, Vincent. I appreciate the question. I'm going to hand this to Al here to talk a bit about cadence and timing. But a few things I think that are really important playing out, and as you heard in my prepared remarks, I would tell you that we see this as the ideal time to invest in our long-term strategy and candidly an opportunity to widen the competitive moat. We're going to continue to capitalize on this, making sure that we are best positioned in areas where our competitors aren't even seeing some of these opportunities. So we're not waiting for the market to recover fully or to tell us it's time to invest. We're going to continue to keep our head down and make sure we're getting rewarded for these efforts. I will tell you, I'm out in front of customers often, and they're sharing with us that competitors are out promising some of these investments and making all types of commitments to try to mirror what we're doing at Sherwin-Williams. But because we are confident we've got the best assets, got the absolute best people in the industry and best technology, We're going to continue to lay in these investments now well ahead of the cycle, well ahead of what's coming into next year. And one more comment before I hand this over to Al. I would very much tell you that I would do this 10 out of 10 times. I think there's no doubt about it. We're confident in our strategy, but we are absolutely going to invest. We're going to win, and we're going to continue to deliver for our customers.

Yeah, Vincent, this is Al Mastician. You know, as we have typically done, we're managing growth and operating margin, and We expect a higher gross margin in the second half of the year than we forecasted coming into the quarter. So as we normally do, and I reaffirmed this at our investor day, we take some of that improvement invested in the long-term growth opportunities, particularly in paint stores group that Heidi mentioned. And, you know, just to reaffirm what I said on our second quarter call, we are Confident in our strategy. We have a consistent investment thesis, and I'm confident we'll get a return for those investments that we are making. And we can point to that, like in res repaint up mid-single digits over the last five quarters, showing the returns that we're getting for the investments we made in the second half. I think your comment is right. If I look at our second half forecast, it's in line. SG&A is in line with where I thought coming into the quarter. So there's a little bit of timing. in that. So, right in line with what we were expecting for the second half. And then the only other piece on that is the continued investments in our digital initiatives and our system modernizations that we've been undertaking.

Thank you. Your next question is coming from Chris Parkinson from Wolf Research. Your line is live.

Great. Good morning. Could you hit a little bit more on the pricing dynamics for 2024 and then 2025 on a preliminary basis in terms of how we're thinking about realizations, whether or not just the current sluggish environment, even though you're stealing a lot of share, is holding back from perhaps a better realization in 2024, and whether or not we could potentially see a bit of a constructive or positive pendulum in terms of those realizations as the market further improves in 2025. Thank you.

Yeah, Chris, you know, as Jim talked about, we announced the 5% price increase in stores effective January 6th. You know, and the reason behind that is, you know, we're feeling pressure in increased feedstocks. We have wage inflation, which is more of a typical increase that we're expecting in 25, but we're also expecting healthcare to be significantly higher year over year. And I think you're right. The price increase is about where we expect it to be. It's offset by mix, and we talk about PNM being stronger, DIY being weaker, which weighs on that overall average selling price. I think when you look into 2025, I think we're going to get into this historical range of 50% to 60%, I'd say. And that's really driven by timing of a number of our national account contracts. We fully expect to get increases, but there's also a new competitive dynamics in the North America architectural market, and we have to see how that plays out. But we're committed, and you know us, we have discipline in getting price when we need it, and our expectation is we need it.

Thank you. Your next question is coming from John Roberts from Mizzouho. Your line is live.

Thank you. In consumer, there was an interesting divergence between the sales change and the earnings change there. Did the change in intersegment transfers, was that significantly different than the change in the externally reported sales?

No, John. We The allocation that I talked about in the first quarter and second quarter is the same. Global supply chain with a little bit better volume did perform better in the entire increase, and our segment profit was due to that dynamic. If you look at on the commercial side or North America, business actually went backwards in PBT because of volume, and that's been a consistent theme over the last – three quarters and even into going back to last year. So no real change to the allocation. It's just they perform better. I give the team a lot of credit. They're managing their costs tightly and operating more efficiently in a more stable demand dynamic with inventory and production.

And John, I would add to that as well. I give that team a lot of credit for a continued focus on refining that portfolio. I'll take you back to you know, some of the key decisions that were made over the last few, you know, quarters and years relative to the China divestiture, kind of some non-strategic aerosol business. There's a handful of categories and businesses that the team, you know, absolutely was focused on where we can get strong organic core growth. And we walked away from some of those. So a new and improved baseline going forward. This business we talked about at our analyst day has really been by design, you know, built for speed and profit. So a leaner, meaner fighting machine, if you will. So excited for the volume to come back so we can realize that and take advantage of it.

Thank you. Your next question is coming from John McNulty from BMO. Your line is live. Yeah, good morning. Thanks for taking my question.

So when you think about the competitive landscape and some of the changes that have taken place, I think Kelly Moore and PPG are pretty well understood, I think, at this point in terms of where the opportunities are. But it does look like there are other changes throughout the industry. I mean, you've got, you know, BASF kind of unloading some assets and Axo potentially doing the same. So I guess, can you speak to the other competitive parts of your environment in terms of the stores business, or excuse me, in terms of the consumer business and the PCG group? And if you see opportunities there, and then I guess also maybe tied to that,

on on the consumer side can you speak to how that that customer landscape is looking right now in terms of destocking and where inventories may be at this point as well yeah good morning john i'll start with your your first question relative to some of the the competitive moves and then i'll i'll hand this over to al to talk about your question on cbg i think you nailed it and i think um first of all let me be really clear there are always opportunities there's certainly been a lot of shift. In fact, the way that we look at this, I take you back to some of our focus on, you know, believing in our long-term strategy, our differentiation, investing ahead of the curve. We do see this as a unique moment in our industry where we are being laser focused on simply doing what we say we will do. It's amazing. I'm out with customers. The feedback I hear is you guys are consistent, reliable, dependable. It's amazing what a differentiator that is. So we're holding very firm there and making sure that in a down market, in an environment where there is a moment in our industry, we're going to invest. It's a hallmark of Sherwin-Williams. I think you're seeing that playing out in real time. But we're always going to continue to look and assess. And if there are opportunities for us to strengthen or accelerate Our strategy, you know, we're always open to those reviews.

Yeah, John, I think in particular to consumer, you know, I think inventory levels have been pretty stable. We certainly did not or don't believe that the impact on our sales in the quarter for consumer was due to destocking. I think it's just been a soft, continued soft DIY market. And I think you alluded to maybe some of the other opportunities. You know, if there's opportunities for M&A, we certainly take a disciplined approach to that, as we always have. And we look at how different assets accelerate our strategy. And if they're in the right segments in the right regions, then, yeah, we'll take a look at them.

Thank you. Your next question is coming from David Begleiter from Deutsche Bank. Your line is live.

Thank you. Good morning. Heidi, now on the PPG business, it's roughly $2 billion in sales in North America. How much of that business do you think is potentially up for grabs, or are you targeting going forward?

Well, I'll start with, you know, we're focused first and foremost on the quality sales there and very consistent as we've talked about relative to all of our portfolio. We're not interested in commodities. We want to simply focus on the premium segments at value, what it is that we do and what we deliver every day. I will tell you maybe a better way, I don't know if it's a better way or the way that we're framing that same question, David, would be, you know, Kelly Moore I would characterize as more of a short-term investor. share, grab opportunity. PPGO, it characterizes more of a long-term where with a lot of respect for that company, and we've got to get out in front of these customers and earn every gallon every day and make sure that they understand when we bring them into Sherwin-Williams that we want to work hard to service them and build a lifelong customer. So in terms of quantifying the exact number, I can tell you it's more about making sure it's the quality sales that we want to earn and keep over time.

Thank you. Your next question is coming from Mike Harrison from Seaport Research Partners. Your line is live.

Hi, good morning. I was hoping that you could speak to your view on remodeling demand and how that could trend. I'm just curious, you know, with interest rates coming down and maybe more homeowners potentially tapping into that home equity market, that they have as we've seen home prices go up. Do you see that as something that's going to be an important driver next year? What are your, I guess, internal indicators suggesting about the remodeling side of the market? Thank you.

Yeah, good morning, Mike. It's Jim. Yeah, I think your question is very timely. I mean, if you look just this morning in the Wall Street Journal, there was an article about America being primed for a home renovation project. So I think that fits in with our longer-term view of where that market's going. We've often talked about some of the indicators that we look at, Lira being one of them, and that's going to start to tick up sometime probably second, third quarter next year. I do think there is some pent-up demand on the existing home sales. Those numbers, as you know, have been down year over year for a long period of time. But as the economy improves, inflation wanes a little bit, people feeling good about the equity in their homes, I think there is a great opportunity for us. Al mentioned and Heidi mentioned the investments that we've laid in ahead of that, right? And you're already seeing it in our res repaint numbers being up mid-single digits in a period where the market is flat at best. So once we start to get some help there, we feel very good about where we're headed. I expect, you know, our res repaint business to be very solid, and that will also help our DIY piece as well.

Mike, I think this is a great question. It's a really good example of this idea of success by design. I give Justin Benz and his organization incredible credit here. I mean, you've got a lot of, you know, changing in the landscape, and the team has been head down at the right point, you know, focused on our differentiation, focused on the value that we can create here. So we're not waiting for the market. To Jim's point, you know, when we do see more moderate recovery, we'll absolutely be best positioned and take advantage of that. But the team's not waiting and making sure that we're out solving some of these needs for these contractors and building loyalty with a lot of new contractors coming into this res repaint space. We're primed for a nice run up here to follow as the market does come back.

Thank you. Your next question is coming from Patrick Cunningham from Citi. Your line is live.

Hi, good morning. You mentioned a couple of variables on the wider range for the guide implied for 4Q. I guess first, can you help size the hurricane impact in 3Q and sensitivity for 4Q? And then on the holiday shutdowns and industrial, is this something customers are hinting at? And is it broader or is it more concentrated in equipment and transportation?

Yeah, Patrick, if you look at I'll start with the third quarter impact because having two, it's bad enough having one major hurricane, having two major hurricanes and one in the third quarter, one in the fourth quarter, really adds to the speed of the recovery. And that's what makes it a more uncertain outlook in our fourth quarter and why the higher range. And it's not necessarily just our stores being able to be open. You know, it's the time it takes for customers to get back to work, to assess the damage, homeowners reviewing insurance claims, and the type of damage to dictate the speed of recovery if it's flooding versus really structural. And I'd say historically, we've taken about four weeks before you start seeing You know, primers start to pick up, sundries start to pick up, and then paint that follows. I just think in this environment with the small quarter that we have in our fourth quarter and the dynamics that we're talking about with two major hurricanes, it's hard to predict the timing of it actually coming back online. The impact for Helene in our third quarter was a little less than a point. It's primarily in stores. If you exclude the impact of that, stores would be pretty right in line with guidance. And then, you know, it probably cost us about a nickel in the quarter. We didn't call it out. I think we expect to get those sales back in our fourth quarter. It's just going to ramp up as the quarter progresses.

And I'll touch briefly on the customer shutdown piece. The way that we're looking at this, and it There have been a few examples of more of a temporary shutdown over the holidays and not a lot of noise outside of that. Could that extend potentially? But we're obviously staying really close with our customers. Carl Jorgenberg and his organization are making sure to stay in lockstep relative to the true demand environment so that we can be the best partners on the other side.

Thank you. Your next question is coming from Meg Mellick from Evercore ISI. Your line is live.

Thanks. I want to circle back on two things. One is the price increase, the 5%. It sounds like you're getting what you expect, which I would imagine is probably, what, 3% in paint stores group? And then should we think it's a little less net than mix? Is that a fair way to think about it?

Yeah, Craig, I think when you, you know, we look at price we're getting the effectiveness it's just because you have a lot of different segments and some are performing better than others it dilute it could dilute you know that price mix because we look at it as price mix in one bucket and so it's not going to be quite three percent in the quarter but as we talked about volume and price are both up low single digits on the third quarter and you know as we roll out next year as an example as new res starts to improve like we saw in our third quarter, you know, that mixed change versus res repaint and DIY is going to dilute some of that price impact.

Thank you. Your next question is coming from Alexey Yefremov from KeyBank Capital Part Markets. Your line is live.

Thank you. Good morning. Could you comment on the backlog transfer for contractors, please?

Yeah, sure, Alexi. I think if you look at the backlogs, I'd say beginning maybe with res repaint, you know, a little bit choppy here because of what we've seen with the hurricanes coming in. But overall, I'd say fairly normalized. I mean, they're seeing jobs out there. I think the bigger thing for us is the share gain opportunities that we're aggressively pursuing. You look at some of the other verticals that we're in. You know, new res, we're cautiously optimistic seeing some pickup there. Commercial would be the one where I would say, you know, we've hung in there pretty well this year, despite there being an extended period of slower starts. But our completions, that backlog is being worked through, and we're still up in our commercial business. But our expectation is that commercial, you know, that backlog will start to diminish as we get into, into next year.

Thanks a lot.

Thank you. Your next question is coming from Michael Sisson from Wells Fargo. Your line is live.

Hey, good morning. So for the fourth quarter, yeah, can you hear me? Yes. Yeah, sorry about that. Yeah, so for the fourth quarter, with the growth you're going to see in stores. You've done a nice job there this year. Will segment profit start to turn the corner and grow? And then for 2025, I know you don't want to get into specifics, but if you generate, what type of, I guess, store growth do you need to sort of get back to positive segment profit growth? And any thoughts on SG&A next year? Do you think you're done in terms of increases?

Yeah, Mike, concerning the fourth quarter, and we typically don't give detailed guidance, but I would say this. We expect all our operating segments to show margin improvement year over year. Obviously, we still expect to see a seasonal slowdown in architectural sales in the fourth quarter that we have historically seen, so I don't expect to see operating margin expansion in our two architectural businesses. I think as you get into 2025, I think, you know, the plan will be very similar to other years. I realize this year because our first half had an outsized growth because of the investments we made in the second half of last year. I think we'll moderate SG&A growth. giving full guidance today. We'll give a better guidance in our first in January, but the expectations are going to be the same. If we believe volume in the second half of the year and or gross margin is going to be stronger in the second half of the year, we take advantage of those situations just like we did in the quarter, and we'll put more investments in to accelerate our growth when some of these headwinds that Jim and Heidi have talked about, ease up and we'll take more of a market share than a higher percent of market share as the market turns.

And I just want to add one piece to that. You know, Al said this really well as we think about more of a moderated SG&A profile next year. I also want to articulate and be very clear that no one's head is in the sand here. While we have you know, had a heightened level by design, you know, we absolutely want to get that return. We owe that to our shareholders, and we expect outsized volume growth. We're going to be relentless until we deliver that.

Thank you. Your next question is coming from Duffy Fisher from Goldman Sachs. Your line is live.

Yeah, good morning, guys. Just a question on raw materials. I think, Al, you mentioned that you see increased costs for feedstocks. So I was wondering, you kind of break it into different buckets. So one, just being in organics and pigments and the other kind of the oil derivatives, oil's down 20% from the first half into the third quarter. Why aren't you seeing some relief actually on that front? And what is it that's driving the increased feedstock costs that you're seeing going forward?

Yeah, Duffy, I'll take that one. So let me just start maybe with, What we saw in the third quarter where our raws were flattish year over year. We're also looking for them to be flattish year over year in the fourth quarter and come in right around that down low singles that we talked about in our forecast. I think if you look at TIO2 kind of going forward, you know, supply is readily available in the market. And I'd say pricing right now is stable, not seeing a whole lot of impact from tariffs. right now, but you also have producers who are evaluating their production levels, etc. Ultimately, what's going to drive TIO2 is demand, and we'll see how that plays out. On the oil derivatives, yes, we have seen oil kind of come down here recently, but if you look at propylene, which I know, Duffy, that you know that's the key feedstock for us, if you look in the third quarter, propylene was up year over year, almost 50% in the third quarter. And that was really driven, I think, by planned and unplanned outages. Epoxy resins were also up in the quarter, and there's some additional tariffs that might come in that might impact that. So we're looking at, you know, we haven't seen that propylene or epoxy necessarily impact our basket meaningfully yet, but we're watching it very closely and We'll see where it goes as we get into the next year. You know we have maybe a quarter or two of visibility. So we're watching those things. That propylene move is meaningful. Ultimately, it's going to be demand, though, which is the big driver. We'll give you our official view in January. We'll continue to watch it. And we look at the entire basket, as you know, not just our raws. We look at our other costs. Our health care continues to be a major factor. had wind for us, et cetera. So that's kind of our view right now with more to come in January.

Thank you. Your next question is coming from Michael Lighthead from Barclays. Your line is live.

Hey, yeah. Thanks. Good morning, guys. I actually, Al, I did want to follow up or circle back on sort of the paint store's price increase. It seems like you said raws are again, uncertain, but readily available demand is fairly choppy right now. So curious how you're positioning this price increase to your customers. And relatedly, I know a lot of the paid store is tailored towards say the larger contractor national accounts, but just given some of the ongoing DIY weakness, retail promo activity, are you seeing any customer swing activity over to the big box or not really an impact that you've seen thus far?

Not an impact we've seen thus far. As we've talked about, we continue to invest in products and services that help our customers be more effective, grow their top line, and grow their bottom line because of the efficiencies they gain by moving up in quality. And when I talk price, I typically include mix in that, and we're consistently working with our customers to provide better service, to provide supply chain resilience so that we can be their supplier of choice, second supplier of choice on down. So, you know, there are other input costs that we're taking into account, as Jim just mentioned, on why we need the price increase and the discipline we have to go out with price when we need it.

Thank you. Your next question is coming from Gansham Panjabi from Baird. Your line is live.

Thank you. You know, Heidi, just in terms of your engagement with major customers specific to PSG, how would you characterize sentiment at their level? You know, is there just more optimism for 2025 as it relates to aggregate activity? I'm just asking because there's been so much noise and volatility with interest rates, including the most recent increase in mortgage rates post the Fed cut. So just curious as to where sentiment stands for 2025.

Yeah, Gautam, I would say it definitely – starts and ends by segment, you know, and Jim covered some of that just a few moments ago. I think if you look broadly across an aggregate, there is, everyone's reading the same macros, you know, everyone's hoping that, you know, these rate cuts are going to have a faster, more material impact. But I think is, you know, everyone's pragmatic here and trying to plan for what the reality is in the next year. Broadly speaking, it is more of a modest back half potential, I would say, is the broad sentiment. You do cut that by segment, and Jim alluded to this a bit earlier, where some of these other signals, you know, relative to their existing home sales and the like, we're obviously getting a lot more bullish as we have been on res repaint. And I would say the commercial is probably, the commercial segment is probably the area where we know that we've got the biggest challenge even throughout the year as some of these projects based on all the reasons we said before, CapEx, you know, labor constraints, kind of live on. I think that's a reality that we're all navigating, and I would say it's reflective in our customer sentiment.

Thank you. Your next question is coming from Kevin McCarthy from Vertical Research Partners. Your line is live.

Thank you, and good morning. I was wondering if you could comment on the outlook for two businesses within the performance codings group, namely Refinish and packaging. On the refinish side, it looks like you've gained some share, but if I understood your commentary correctly, it sounds like that's being masked by lower insurance claims and diminished reluctance to pay deductibles. So my question would be, do you view that as more structural or transitory? And, you know, would you expect it to reverse at some point in 2025? On the packaging side, looks like you had nice acceleration there. Do you expect that to continue in coming quarters?

Yeah, Kevin, I'll start with the refinish piece. And I think one of the reasons, one of the big reasons that I wanted to highlight this at our recent financial community presentation is exactly what you said. I think some of that is masked. I love how we're positioned here in this business. If you look at Q3, our sales were impacted by negative low mid-single digit FX. And Latin America, we have more exposure there just given our mix relative to some of our peers. So you would expect that weight to play out. But if we just take the big approach to your point, is it structural and more kind of transitional? We look at this business over time. You're going to see swings quarter to quarter. Our sales year to date, they are down low single digit against a high single digit comp. So if you exclude FX from that, our sales are flat, which is in line with where our competitors are at in their recent call. So I want to be really clear that we are not satisfied with this year to date number. But it is an environment where, you know, claims are down double digits in North America, again, which is our largest region. And having said that, as you look at what is working, and we do expect, you know, improving claims, share gains to be a tailwind in next year. The team's done some fantastic work on our Collision Core program. We're gaining both momentum and adoption here. And I think it's really important that we continue to look at strengthening what we're doing here. We're out early November of this year with a high single digit price increase for our direct customers. And, you know, we'll be out with others as necessary, but continue to get paid for what we're doing. But confident that the team is laser focused on new accounts and share gains, which I think is absolutely sustainable and systemic. I go to your second question on packaging. You mentioned the word acceleration. I think that is a perfect word. Again, this is a business. I love how we're positioned. You know, our sales in our third quarter were up high single digits, all of which was volume. So we're positive in all regions. And our volume was actually up low double digits, which was a bit offset by some of our index pricing agreements. Got some great momentum. Team's done a fantastic job. So while we're flat year to date, If you look at the balance of the year, I would expect to see very strong performance in the fourth quarter leading into next year. We've recaptured some of the temporary share loss that we saw from our Garland, Texas plant event. Work's not done. The team's heads are down. They're out earning this business every single day. But strong, when I say strong, very strong line of sight to additional recovery over the next 12 months. Many of these customers that, again, I'm out spending time with, they're eager to return back to Sherwin-Williams. And, you know, I would characterize that as just a better appreciation, not only of our technology, but the service that we're providing to these customers is world-class. We continue to invest. We believe in our model here. had some recent new wins across other regions, including North America, Latin America, and APAC, and was just over in our Tour New France plant a few weeks ago for our ribbon-cutting ceremony and just couldn't be more pleased with the expansion here. This is going to be the backbone, you know, of serving our customers as EFSA, you know, as their ban on BPA rolls over into Q2 of 26, and There's already some customers that are looking at pacing to that beginning in 2025. So I think we're very well positioned where certainly where the category and the market's going here. And last but not least, really excited that we've just added to our capacity. We just closed on our Henkel metal packaging business October 1st. So, of course, we're very excited to welcome about 130 employees at our production sites. across both Germany and Mexico and the Sherwin family, but big expectations of where this business goes.

Thank you. Your next question is coming from from RBC Capital Markets. Your line is live.

Great. Thanks. Thanks for taking my question. So, it sounds like, you know, Q4, the hurricane impact is not going to be that large. since it was about a nickel for Q3. So I'm glad to hear that. I guess my main question is just around 25. When I think about the opportunity for paint stores group, it does sound pretty encouraging when you think about the share gains that you already achieved from Kelly Moore. Maybe I think you sized that in the past when they exited about $300 million in sales. Assuming a good portion of that potentially that you were able to achieve Maybe you can get a similar amount from PPG, and then if you factor in maybe a 3% price increase as well. Looks like the stores group has line of sight to high single-digit growth next year. Is that how you're thinking about it? Maybe there could be some further gains from lower interest rates, maybe benefiting the second half of next year as well. Is that kind of how we should think about framing up PSG in 25? Thanks.

Yeah, Rowan, I'd temper that. We've been talking about it taking a longer period of time for things to filter, like interest rate reductions and things of that nature. I mean, I'm not guiding for 2025, and I know you're not asking that, but I temper with all the things we've gone through over the last year and a half and how long it's taken to get certain things moving. I would just temper that expectation. And again, we talked about, we expect choppiness in our first half and then we'll see, you know, in this environment, a line of sight of three quarters out is pretty far. So let us get to January. Let's we're going through our operating plans here, coming up with the teams and, and we'll get a better line of sight to that, and then we'll certainly share that with you.

Thank you. Your next question is coming from Jeff Zygoskis from JP Morgan. Your line is live.

Thanks very much. A two-part question. In your discussion of elevated SG&A costs in the quarter leading to long-term market share gains, perhaps, You know, what you said is that in the fourth quarter, the spending will come down, you know, maybe to 0% year over year and your direction is to lower your SG&A spending. So what exactly happened in the third quarter where spending was elevated by 50 million and then it's going to go down in the fourth quarter? And then secondly, in consumer brands, like order of magnitude, your margins are up. maybe 900 basis points in the quarter and your margins in the stores business are, you know, sort of flattish. Can you talk about what's keeping the margins constrained in the stores and what is it this year that really opened up this, you know, sort of eight or 900 basis point improvement in consumer brands with sales being lower?

Yeah, Jeff, I think when you look at um, our second half there there's, there's investments going in as much as well as we're, we're controlling GNA tightly. And sometimes the timing doesn't align exactly in a quarter. So when I, that's why I point to the second half and say, our expectations of SG&A are in line, uh, for the second half at, as it, as it, as it was coming into the third quarter. Um, And, you know, I would just say we take a disciplined approach to our SG&A. We want to invest in the selling side and driving productivity for our customers by convenience of our stores, expertise in our reps, low turnover in our stores so they have the same face that they encounter, delivery, innovation. all goes into the investments we're making. On the other side of that, on digital and modernization, we want to allow our employees to be more effective in more consistent data, better systems that allow them to be more effective when they get to the field. And so the there's other G and a that we're trying to control very tightly and, and manage that down so we can help pay for those while we're waiting for market dynamics to help with the overall demand environment. That being said, I go back to res repaint and the 5% of mid single digit growth that we're getting. So the confidence is there and getting the returns on consumer growth. Again, it goes back to higher fixed cost absorption. We're passing that through because global supply chain sits in consumer brands and has been a headwind for a number of years, and we thought we can get our efficiencies back up to offset it. We chose to readjust our standards and When I look at the GSC allocation, it's really no impact on our overall margin. But what you're also seeing is global supply chain has improved year over year. So Sumer Brands is getting a big increase from the allocation to stores and to PCG. But on top of that, they're also getting a tailwind from better operations within our global supply chain.

And, Jeff, if I go back to your first question on the elevated SG&A leading towards long-term share gains, which is absolutely the intent, I just want to revisit. I think you used the language around keeping margins constrained in stores. I would take a different approach there. I think back to Al's earlier comment, you know, when we see these expanded margins We absolutely want to take advantage of that as an opportunity. So it did give us an opportunity, Q3, Q4, to accelerate some of these investments. And I'll take you back to the six priorities that I laid out at our financial community presentation, all designed to deliver this above-market growth. So some of the digital priorities that will absolutely pay off those six priorities, simplification that Al mentioned, helping to make sure that our teams have what they need to go faster and add more value to our customers. So it absolutely was by design and I think an important opportunity, it was opportunistic on our part.

Thank you. Your next question is coming from Chuck Sarenkoski from North Coast Research. Your line is live.

Good morning, everyone. In looking at the market share opportunities out there, I'd like you to maybe talk about what's going on at True Value and Do It Best, as well as, Heidi, you mentioned better quality sales. Can you talk about that, given what market share opportunities are available, whether it's DIY sales or contractor sales, res versus commercial? Thank you.

Yeah, you bet. I'll start with the true value, do it best. Certainly we won't comment on, you know, our customer strategies. But I think, again, as I go back to the point earlier, this is a bit of a moment in our industry. I think there's been a lot of pressure across, you know, the category broadly for the last few years. So we'll continue to work in lockstep, you know, with our customers as they make, you know, shifts and decisions relative to the brands and the banners. I move on to your quality sales question. Within that, there's kind of two prongs to that. One, and I'll go back to my earlier comment, where we want to, you know, it's in our core DNA. We're not interested in being all things to all people there. So we're not going to play in the commodity spaces where we're not, you know, getting paid. We're not returning, delivering return to our shareholders. What is of interest in those quality sales certainly is by the premium sub-segments that we serve and making sure that we are focused back to Al's point, how do we help make them more successful? So premium products, opportunities to upgrade them so they're getting on and off of job sites faster. They're saving time and money on labor with some of these premium products that are easier to apply, less touch-up. So when we look at the quality sales, it's who we're targeting and how we're trying to service those with the right mix of products.

Thank you. Your next question is coming from Josh Spector from UBS. Your line is live.

Yeah, hi. Good morning. Two quick ones, if I may. Just CapEx, can you just explain what's going on with the year-to-date kind of already being at your target versus your full-year guide? And just within performance, where you talked about customer slowdowns, I really thought that's a watch point for you. Can you just be specific on which submarkets you're seeing that as a bigger risk?

Thanks. On the CapEx, Josh, you know, year-to-date CapEx was 7, including about $415 million of BOF CapEx. And what happens is we get reimbursed because of our financing arrangement. for our new headquarters. So we've really, net is about 200 million. So core CapEx is 355 million. So we got it to the 700 million less, 180, you know, get you into that 520, around 2% of sales, which is kind of where we want to be at. But it's just the noise in the big B, our building, new buildings.

And then, Josh, on the question relative to PCD and some of those temporary shutdowns, it's broad-based for sure in the general industrial point, more to heavy equipment with some of the ag slowing down. Again, we see this is very much transitory point in time, end of season, and there's no signals yet that that would be widespread or any signals yet that that would be extended at this point.

Thank you. Your next question is coming from Steve Byrne from Bank of America. Your line is live.

Yes, thank you. Can you comment on what drove the 2% decline in COGS? Jim, you mentioned raws were flattish. Was that a general comment? And, you know, what were volumes in the top line? Did that contribute to the lower COGS? And maybe just secondly, in your outlook for your stores business. Are you seeing any aggressive pricing from any of your competitors as you're gaining share? PPG indicated they actually picked up share in the third quarter. So where are you gaining share and do you see risk that they could get aggressive on price?

Yeah, so Steve, on our cost of goods sold decrease, the decrease was primarily due to supply chain efficiencies on our consumer brands group with global production volumes up below single digit with the team doing a nice job of controlling costs. The other impact was FX lowered cost of goods sold on the quarter. Those are the two main drivers. On the volume side, stores was up low single digit. performance coatings was flattish, and then ECG was more than offset with lower volume in our consumer.

Steve, on the store side relative to any competitive, aggressive pricing, I would say that we typically look at our industry as, by and large, a very disciplined industry, which was why we have A lot of confidence when we do come out. We generally take a leadership position as it relates to price. We want to be out first. We want to be transparent with our customers. We want to deliver this in a way to our customer that helps to set them up for success. And a key part in the bidding season, helping to, you know, where needed, if needed, you know, coach them through how best to pass that along so that they understand that how to best kind of pass that through. Typically, the cost of the actual, you know, cost of the product itself is somewhere between 10%, 12%, 15%, and then the balance would be the cost of labor. And so if we're able to do what we've continually focused on, which is get these crews on and off of job sites, it ultimately is a positive to make sure that we continue to focus on, you know, upselling customers, especially in some of these environments. I've not seen, we've not seen a lot of activity. I would tell you because this is a unprecedented moment in our industry. We're certainly paying very close attention. We're staying extremely close to our customers to be competitive in a mix of environments, but we're confident that we're going to hold on to this recent, this price that we just announced, and we'll be back in our, you know, 50 to 60 kind of historic run rate, and we don't plan to come off of that.

Thank you. Your next question is coming from Adam Baumgarten from Zellman. Your line is live.

Hey, good morning, everyone. Just on your kind of initial thoughts on the first half of next year remaining choppy from a high level, is the way to kind of interpret that, that it's a continuation of the trends you're seeing here in the back half of 24 at this point?

Yes, that's exactly what we're seeing.

And if I could, and you know, Adam, Al just nailed it, but I had to jump in here because I go back to this idea of it's not if, it's when. And so this kind of slower, longer is playing out in real time, and we are absolutely prepared to manage that situation.

Thank you. Your next question is coming from Garrick Schmoys from Loop Capital Markets. Your line is live.

Oh, hi, thanks. Just on the SG&A and the potential increase in the back half of next year, its sales ramp, just maybe bigger picture, just how you're thinking about SG&A leverage. Is there an investment of sales you'd be managing to over time, or is it situational right now?

I think, Derek, it's situational with, as we've talked about, our focus is on driving operating margins. And, you know, some years that's gross margin expansion, and other years, like 21 and 22, it's on SG&A leverage. As Heidi mentioned, I mean, we're really being opportunistic to set ourselves up for when demand returns because our gross margin has been stronger, because our global supply chain, with a more normal production and inventory cycle this year, building inventory leading into the summer selling season. We saw our inventory drop through the third quarter, and we expect to build inventory, architectural inventory, in our fourth quarter. That bell curve and being more standard helps us with how we schedule our factories, how we're able to produce the right products at the right time, and we get efficiencies out of that, and we're realizing those and taking it taking some of the benefit and putting it into these long-term investments.

Thank you. Your next question is coming from Eric Bossard from Cleveland Research Company. Your line is live.

Thanks. If I could follow up. Al, your comment, I think you just talked about the focus is driving operating margin. Earlier, Heidi talked about achieving above-market growth. I guess what I'm trying to figure out is where does the curve of investment moderate? the market share growth sustains, and operating margin expands, or is that not the target that you're aiming for?

We absolutely are aiming to – we'll moderate on the G&A side. I think to help pay for the selling investments, because we're confident in our strategy, because we've been consistent – in our investments and because we know we can get a return on those investments. I think, you know, as SG&A, I'm sorry, as the macro demand environment improves, you will see us get leverage on SG&A going out in the future. It's just not going back to it's not if, it's when, because as your volumes start growing and mix improves, you can't invest heavy enough to not get leverage on SG&A. So, we absolutely are focused on managing gross margin expansion and SG&A leverage at the appropriate time to get our operating margin to grow at a faster pace.

Thank you. That concludes our Q&A session. I will now hand the conference back to Jim Jay for closing remarks. Please go ahead.

Thank you, Matthew, and thanks, everybody, for joining us this morning. You know, as we've often said, we don't run the business for the perfect quarter. But what we do do is run the business to drive that long-term above-market growth and the returns. And that's exactly what we're doing right now. We believe in our strategy. We're investing in it. Heidi mentioned a couple of times we're at a very unique place in our industry right now. The current opportunity to gain market share is nearly unprecedented, and we're going to take full advantage of that. We're very confident in our approach and our people. The trends favor us long term, and our team is very motivated to get after it. So thank you again. As always, myself, Eric Swanson, will be available for your calls over the remaining week and coming days. Thank you so much.

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.