Good morning. Thank you for joining The Sherwin-Williams Company's review of second quarter 2022 results and our outlook for the third quarter and full year of 2022. With us on today's call are John Morikis, Chairman and CEO; Al Mistysyn, CFO; Jane Cronin, Senior Vice President, Corporate Controller; and Jim Jaye, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode 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 the session to questions. I will now turn the call over to Jim Jaye.

Thank you and good morning to everyone. Our second quarter results came in below our expectations and conclude what we knew would be a challenging first half to the year. On the top line, the quarter was characterized by strong demand in pro architectural and North American industrial end markets, partially offset by softness in the North American DIY channel, which we first described at our Investor Day on June 8; and tight supply of certain resins, particularly alkyd resins, which impacted our North American nonpaint sales, namely aerosols and stains. Internationally, demand deteriorated faster than anticipated in Europe, and we saw no real recovery in China following the lifting of COVID lockdowns, both of which meaningfully impacted Consumer Brands and Performance Coatings Group sales. Our earnings per share were impacted by multiple factors, including no meaningful improvement in raw material costs, supply chain inefficiencies incurred in serving our customers, the sales shortfall at North American DIY, slowing European and Asian demand, and higher other and interest expense. I'll go through just a few of the numbers at a high level and then turn it over to John, who will talk about the demand and cost trends we are seeing, how we're responding and our revised outlook for the year, including what we expect will be significant earnings per share growth in the second half. Comparisons in my comments are to the prior year period unless stated otherwise. Starting with the top line. Second quarter 2022 consolidated sales increased 9.2%, slightly below the low end of our guidance and driven by the shortfall in Consumer Brands Group. Pricing was in the low double-digit range. Consolidated gross margin decreased to 41.7% driven by cost inflation. On a sequential basis, gross margin improved by 60 basis points, reflecting our pricing actions. SG&A expense decreased to 25.9% of sales. Consolidated profit before tax decreased 9.7% to $739.9 million. Diluted net income per share in the quarter was $2.21 per share versus $2.42 per share a year ago. Excluding Valspar acquisition-related amortization expense, second quarter adjusted diluted net income per share was $2.41 per share versus $2.65 a share a year ago. EBITDA in the quarter was $976.1 million or 16.6% of sales. Moving on to our operating segments. Sales in The Americas Group increased 8.1% against a 22.6% comparison. High single-digit pricing and higher professional architectural sales volume was partially offset by lower volume in Protective & Marine and DIY. Segment margin decreased to 21%, resulting primarily from lower sales volume and higher raw material costs, partially offset by selling price increases and good cost control. Sales in the Consumer Brands Group increased 0.9%, inclusive of a high single-digit price increase. Demand was soft in all regions, particularly outside of North America. And tightness in alkyd resins impacted North America nonpaint sales. Adjusted segment margin decreased to 11.2% of sales, resulting primarily from lower sales volume, higher raw material costs and supply chain inefficiencies, partially offset by selling price increases. Sales in the Performance Coatings Group increased 15.2% against a 41.3% comparison and were driven by double-digit price increases and low single-digit sales from acquisitions, partially offset by a low single-digit FX impact. Adjusted segment margin increased 80 basis points to 13.8% of sales due primarily to higher selling price increases and good cost control. Additionally, I'll point out the admin segment this quarter, where we had a headwind of $45.1 million year-over-year or about $0.13 per share. This was driven primarily by investment losses and gains, higher interest expense, a gain on disposition of assets last year and higher SG&A expenses, partially offset by lower compensation expense. Let me now turn the call over to John for additional commentary on the second quarter, along with our outlook for the third quarter and full year 2022. John?

Thank you, Jim, and good morning, everyone. Let me be clear that we are not satisfied with our results in the quarter. Our job is not to just report results but to influence results. We fell short of our expectations this quarter as we continue to operate in a highly inflationary cost environment coupled with ongoing regional challenges impacting demand. Saying that, we continue to see positive trends in much of the business, and we expect to deliver a strong second half of the year. We have confidence in our strategy, we have confidence in our business model, and we have incredible confidence in our people. Let me start by describing how the quarter played out following our June 8 Investor Day event. Pro architectural demand remains strong. Encouragingly, sales have been particularly strong month to date in July, and contractors are reporting strong backlogs, which bodes very well for our second half. The lower demand for DIY that we described continued, and tight alkyd resin supply negatively impacted North America nonpaint categories. Europe has significantly softened further, and there was no meaningful recovery in China post the lifting of the COVID lockdown. This impacted Consumer Brands and portions of Performance Coatings. There was no improvement in raw material costs. While some key feedstocks have come down sequentially, the issue is timing as resins, solvents and other key inputs are taking longer to reflect this trend than anticipated. Additionally, the rest of the cost basket remained highly elevated, including labor, transportation, fuel and other costs. While the supply chain for raw materials continues to improve, it remains tight and subject to shocks. Notably, certain specialty resins crucial to several of our industrial coatings products were in short supply. With the tightness in the supply chain, we continue to have inefficiencies in our operations but have chosen to continue serving our customers, albeit at higher costs. While the cost and regional pressures we are seeing are real, there is no sense of panic amongst our team, which is deep and experienced. We continue to operate with urgency and great determination, and we're taking the following actions. We've announced and are implementing a 10% price increase in The Americas Group effective September 6. Significant pricing actions are also being taken in our other two groups. We remain highly focused on capturing demand and gaining share. We're managing our expenses tightly across all our businesses. These are focused on general and administrative spending rather than growth. Before moving on to our outlook, let me provide some additional color on our second quarter. In The Americas Group, sales growth was strong and volumes were positive in pro architectural market segments. Excluding DIY and Protective & Marine, sales were up 8.7% in North America paint stores. Against very difficult comparisons and as we expected, sales gains for the group were driven by price as total volume was down slightly. The sales growth was led by property management and New Residential, both of which increased by a double-digit percentage. Residential repaint was up high single digits, and commercial was up by a mid-single-digit percentage. DIY was down low single digits. Limited availability of certain resins impacted us in Protective & Marine, which was up by mid-single-digit percentage. We've also begun to see margin recovery in the business as segment margin expanded sequentially. From a products perspective, exterior paint sales grew faster than interior sales with interior being the larger part of the mix. We opened 19 net new stores over the first half of the year and still plan 80 to 100 for the year. We also added sales reps and territories in the quarter, along with ongoing growth investments in management trainees, innovative new products, e-commerce and productivity-enhancing services. Our Consumer Brands Group had a very difficult quarter. Sales in North America were up by a high single-digit percentage but well below our expectations given a favorable comparison. The slowing demand we cited at our Investor Day did not improve over the remainder of the month, so we experienced tight supply in certain resins, particularly alkyd resins, that significantly impacted our North America nonpaint sales. On a positive note, the Pros Who Paint segment, while small, again grew by a strong double-digit percentage. Sales in China were down by a very high double-digit percentage due to COVID-related lockdowns and a challenging comparison. Europe was also down high double digits due to the slowing macroeconomic environment and a challenging comparison. Pricing was positive in the quarter and in the high single-digit range. Segment margin decreased significantly due to lower sales volume, increased raw material costs and supply chain inefficiencies. In contrast, our Performance Coatings Group had a very nice quarter. Sales were up mid-teens, including mid-teens pricing. Low single-digit sales from acquisitions were more than offset by FX headwinds. Adjusted segment margin improved 80 basis points year-over-year and 200 basis points sequentially, indicative of executed pricing actions. Regionally, sales increased strong double digits in North America and Latin America against difficult comparisons. Sales in Europe were up low single digits. Sales were backward in Asia, largely related to COVID lockdowns. Nearly every division in the group grew, led by coil and packaging, both of which were up strong double digits against double-digit comparisons. We are clearly gaining share in these businesses. Sales in general industrial and auto refinish increased high single digits against very strong double-digit comparisons. Industrial wood sales decreased low single digits, mainly related to Asia and COVID lockdowns and a slowdown in Europe. Before moving to our outlook, let me speak to capital allocation in the quarter. We returned approximately $453 million to our shareholders in the quarter in the form of dividends and share buybacks. We invested $296 million to purchase 1.1 million shares at an average price of $269.46. We distributed $156.2 million in dividend. We also invested $129 million in our business through capital expenditures, including $89 million in core CapEx and $40 million for Building Our Future projects. Additionally, the acquisition of Gross & Perthun and Dur-A-Flex closed on July 1. We ended the quarter with a net debt-to-EBITDA ratio of 3.4x as we increased short-term borrowings to fund our recent acquisitions. We expect to end the year around 3x and will drive the ratio to our long-term target of 2 to 2.5x range in 2023. We will use cash in the second half of 2022 to manage debt, and share buybacks will be done to offset option dilution. Turning to our outlook. As we've communicated multiple times going back to January of this year, we expected 2022 would be a year of two contrasting halves with difficult first half comparisons easing in the back half. We expect to deliver a strong second half with sales up low double digits to mid-teens percentage and diluted earnings per share up by 35% at the midpoint of our guidance. Within The Americas Group, we continue to see extremely strong demand across all of our pro-architectural markets, including New Residential despite higher interest rates with customers reporting strong backlogs that will take them through the end of the year and likely longer. We also see a unique opportunity to win new business as competitors transition their pro contractor business models. Within the Consumer Brands Group, we expect more modest growth as the North American DIY consumer faces inflationary pressures and Europe and China remain challenging. Within Performance Coatings Group, demand remained strongest in North America, our largest region. European demand has slowed in the second quarter, and we do not expect meaningful improvement in the second half of the year. In Asia, the pace of recovery from prior COVID lockdowns in China and prospects for additional lockdowns make it difficult to assess demand trajectory. From an industry supply chain perspective, we're getting the raw materials we need with some exceptions such as alkyd resins, which remain choppy. At the same time, it's not optimal. In our own operations, we expect inefficiencies to continue near term as we've decided to take the necessary steps required to overcome these challenges and ensure that we are serving our customers with product where and when they need it. Exiting this era with our customers will prove beneficial to our shareholders. On the cost side of the equation, we're raising our mid-teens raw material inflation guidance to high teens as expected cost moderation did not materialize in the second quarter and appears to be pushed out a quarter or two. To be clear, while the timing is not precise, we do expect raw material costs to moderate. We do expect to hold on to our pricing based on the value we deliver and the customer-facing investments we've continued to make, and we do expect margins to expand. There's considerable short-term volatility in the market, and our visibility beyond a quarter or two is limited. Our pricing actions remain on track. Additionally, the highest rate of inflation we've seen in 40 years is affecting the other elements of our cost basket, including labor, transportation, fuel and other costs. We're combating these increases with additional selling price increases in all three segments in our second half of the year. So specifically for the third quarter of 2022, we anticipate our consolidated net sales will increase by a low to mid-teens percentage inclusive of a low double-digit price increase. We expect The Americas Group to be up by a high teens percentage. We expect Consumer Brands to be up by a low single-digit percentage. And we expect Performance Coatings to be up by a high single to low double-digit percentage. For the full year 2022, we are maintaining our consolidated net sales guidance based on the momentum we're seeing in pro architectural and North American industrial. We continue to expect consolidated net sales to increase by a high single-digit to low double-digit percentage. We expect The Americas Group to be up by a low double-digit to mid-teens percentage. We expect Consumer Brands Group to be down by a low single-digit percentage and Performance Coatings Group to be up by a low double digits to mid-teens percentage. We are decreasing our earnings guidance for the full year based primarily on the headwinds we described previously. The incremental pricing actions and general and administrative cost reductions I described earlier will not fully offset these headwinds immediately. We now expect diluted net income per share for 2022 to be in the range of $7.65 to $7.95 per share compared to $6.98 per share earned in 2021. Full year 2022 earnings per share guidance includes Valspar acquisition-related amortization expense of approximately $0.85 per share. On an adjusted basis, we expect full year 2022 earnings per share of $8.50 to $8.80, an increase of 6.1% at the midpoint, over the $8.15 we delivered in 2021. This implies a second half adjusted diluted net income per share of $4.63 per share at the midpoint, an increase of 35% over the same time last year. In addition, we provided updated guidance on several of our full year data points in our slide deck, including our expectations for FX, CapEx, interest expense, depreciation and amortization. We expect our full year tax rate will remain in the low-20% range. While we continue to operate in an uncertain macroeconomic environment, we remain confident in our strategy. We expect to deliver a strong second half of the year, and more importantly, create shareholder value over the long term through the following actions. We will continue leveraging strong pro architectural volume demand in North America paint stores while investing in future growth with incremental new stores and sales reps. We will continue implementing appropriate pricing actions across the company to offset persistently higher input costs with a focus on regaining our gross margins back to our long-term target range of 45% to 48%. We'll continue to invest in the Pros Who Paint initiative in Consumer Brands Group and in products and services that customers value in the Performance Coatings Group. We will continue investing in acquisitions that accelerate our long-term strategic plan, add top line growth and expand our operating margins as we've demonstrated recently through the Specialty Polymers, Sika, Gross & Perthun and Dur-A-Flex acquisitions. We will continue appropriately managing our general and administrative costs while investing in future growth initiatives. We will continue to review our portfolio of businesses, brands and customer programs to ensure they are adding above-market growth and long-term shareholder value. We will maintain our disciplined capital allocation philosophy. We will not hold cash while investing appropriately in CapEx, paying the dividend, targeting acquisitions that accelerate our strategy, and absent M&A, buying back our stock. Our leadership team is experienced. Our 61,000 employees are focused on the task at hand. And we expect to win. That concludes our prepared remarks. We'll be happy to take your questions at this time.

The conference is now open for questions. Your first question for today is coming from Ghansham Panjabi.

Robert W. Baird. I guess, first off, John, a lot has changed over the past few months given the increase in interest rates and concerns over construction end markets here in North America. Can you first just update us with your view, if it has changed, as it relates to the various subsegments within The Americas Group?

Well, Ghansham, I'd say our confidence in The Americas Group remains as strong as it has always been. If you look at what's happening within those segments, maybe I could just run through them briefly here. If you look at New Residential, our position there is strong and getting stronger. As a matter of fact, we've been very transparent in sharing that we've had these exclusive relationships with 18 of the top 20 national homebuilders. In fact, we've gotten a few inquiries because of some specific wording in the financial community presentation slide and if we've been able to maintain those relationships. The fact is that we've actually grown them. Proud of our team for hanging on to the 18 of the top 20, but we've actually now grown that to exclusive relationships with the top 23 of the top 25, and we're selling the majority of the remaining two in the top 25. So customers in this space are telling us they are confident in the balance of the year. Demand is strong based on just the simple supply and demand. And so as we work with our national and regional homebuilders, the creativity that they are displaying to ensure that they keep building is high. But market demand here is high. Supply is below the demand space, and we think it's pretty visible to those of us in the industry that there is a strong level of demand. If I look at residential repaint, here is an area where the job itself is growing in size and value. Part of that is a continued positive mix shift into higher-quality products. These higher-quality products help our customers with productivity, with their appearance, touchup, just the whole ease of application. Our customers here, again, are very confident through the balance of the year with demand, and our position here is growing. And I do think that it might be interesting to point out that if you go back to the 2008 period where we last really faced these significant challenges in residential, that was really the catalyst for our residential repaint business that we have now. So it is a uniquely different position and I think much more favorable position for our company right now. Because if there is a slowdown in New Residential, we have a much stronger residential repaint business now than we did during the last slowdown. So it's an area of focus that we've had strategically to offset any puts and takes in the market. And we think that the stronger position in res repaint that we have now will be a strong position going forward. The other area, if you're following New Residential with concern would be, well, what happens if people are not buying new homes. Again, we still think there's demand — strong demand there. But property maintenance would be the other area that we would expect to benefit. And here again, we've spoken about the relationships that we have. In the past, we've talked about the 18 of the top 20 that we have exclusive relationships. We now have exclusive relationships with 21 of the top 25. In fact, in the top 350, we have solid agreements with 70% of them and exclusive relationships with 45%. So at 45% exclusive of the top 350, while we're pleased with that, it still offers a terrific opportunity, and again, room for growth for us. In property management CapEx, our teams would describe that as an area that's off the charts right now. There's considerable amount of investment taking place as well as in the turns, which is very robust and almost acts as a bit of an annuity in the business in many ways. In commercial, I would describe it, Ghansham, as historic backlog. The pipeline here is strong. We're seeing a lot of activity here in tilt-up, in distribution, data centers and some might even include multifamily in the commercial space as well. We run a good part of our Protective & Marine business, as you know, through our Americas Group. This is a business where demand has been strong, particularly in petrochem, water and wastewater, also high value areas of infrastructure, as I mentioned, data centers. Also battery plants is another area. This is an area that we were impacted negatively. We talked in our prepared remarks about the alkyd resins. We felt a lot of pressure here. We could have really sold a lot more product if we could have gotten more of the alkyd resin that was in short supply. But our position here is very good and one that we believe has a tremendous runway ahead of us.

Ghansham, this is Al Mistysyn. And building on that confidence in the strong demand, this is what gives us confidence in our second half adjusted EPS guidance to be up 35% with strong volume in The Americas Group. Plus we announced, as John mentioned in his opening remarks, a 10% price increase effective September 6, along with the pricing actions we're taking across the rest of the groups. Our expectation is that we're going to see nice gross margin improvement year-over-year, starting in our third quarter and trending through our fourth quarter. And I'd like to highlight another couple of points just to reiterate that confidence. If you look at our operating margin in The Americas Group at 21% in the second quarter, yes, it was down year-over-year, but I think the strong volume and the pricing actions that we're taking are going to help us get into a strong improvement in our second half. As it is, our second quarter was sequentially better by 420 basis points and better by 90 basis points versus the fourth quarter. And I got to talk about Performance Coatings Group because, as you know, that has historically been our lowest operating margin business to date. And we have a lot of confidence in attaining our target operating margin of high teens to low 20%, and I think that will move the needle on our overall results, and we're making good progress. Our second quarter operating margin improved 80 basis points year-over-year and improved 200 basis points sequentially and improved 490 basis points compared to the fourth quarter of 2021. And this came on gross margin expansion and SG&A leverage. And even with the macro challenges that we're facing in Europe and Asia that we can expect to continue in our second half, the pricing actions, the market share gains that we're experiencing in packaging and coil, in particular, gives us great confidence that we'll be able to expand our margins in the second half in that business. And that's including the acquisitions that we made that John talked about, which are going to give us modest tailwind in our second half on operating profit. But as we integrate and realize synergies next year, and we'll talk more about this on our year-end call, we expect margin accretion with those acquisitions. And then finally, I'll talk about our Consumer Brands Group, which we absolutely understand and agree, we're under pressure in our second quarter. Still sequentially down but better than 490 basis points than our fourth quarter. Even though the volumes are down, our expectation is that business returns to 20% operating margins as we improve our operating efficiencies, as we focus on our continuous improvement initiatives and we drive shareholder value and generate cash flow, and that's going to be part of this portfolio review that we do. And we look at, as you know, profitable gallon growth, operating margin expansion, RONA and cash flow. And we're committed to driving the businesses within consumer to the targets that we set. And as you know, if we haven't and don't believe we have a path to hitting those targets, we are committed to making those changes. And that includes, as you recall, the ANZ divestiture and the Ace private label business that we walked away from.

Your next question is coming from Christopher Parkinson.

Gentlemen, just going in and so let's take a look at The Americas Group. I know there's some optimism about pent-up demand on the residential repaint side, likely commercial and even some activity in multifamily. On price-cost, we know where your pricing stands, and we're all taking a stab at where we think the raw material basket will go over the next couple of quarters. Al and John, when we take a step back from everything, where do you ultimately think The Americas Group margins can go? There's been a lot of focus on the 13 by 24 Consumer Brands and Performance Coatings targets, and it will obviously take some time to get there. But on The Americas Group side, how should we think about the business and how it comes together in the back half of the year and into 2023 and even 2024? Are there any updated thoughts?

Yes. Chris, this is going to be a little bit of a diversion from what you talked about. And let me just highlight that we're probably not going to be talking about 2024 yet. So bear with us here.

Fair enough.

But I do want to mention, and I'll ask Al to get into the details. But I do think — as maybe as a preface to your question, I think it's important to understand why we have the confidence that the margins improve the way that we're projecting. And I think highlighted is it's specifically focused on our ability to make our customers more successful is through products, is through service, is through our people. It's the adversity that's in the market right now that we feed on. This is actually when we're at our best in servicing those customers. And I think you can see that right now. As we come through this second quarter — and while The Americas Group hit the number. It was on the lower end of the sales expectations, the fact is that we probably missed by less than a couple of weeks what we were projecting because we're experiencing that now. As June went on, sales continued to grow, the momentum continued to increase. In fact, we don't normally show this level of color, but I would tell you that coming out of June with a double-digit gain in nearly every segment. Now as we enter into and finish up July, our average day in The Americas Group right now is averaging high teens, low 20s. So the momentum that we projected is in fact there, and we believe it's because of the value that we're helping create on the part of our customers to help them to be more successful in what it is that they're doing. They've got a lot of challenges in labor. They've got challenges in projects starting and stopping. And our people, our stores, our products are helping them to do that better than anyone else. And as I mentioned on numerous calls, what we evaluate the most is the research that we do who helps you make more money. And by a wide margin, we have a great distance between us and our competition here on the professional side. Let me let Al walk you through our projections on margins.

Yes. Chris, I mean we saw a nice sequential improvement in our margins. Our raw — our pricing that we put in place to date did actually — was over what the raw material cost increases were plus other input costs but just not up to the expectations we had. And with the outlook that we have on raw material costs being in the — above the high end of our range, the cost to serve our customers, as we talked about, the supply chain is not ideal. So we're moving product around this platform, if you will, to make sure we have the right products in the right place where our customers need them. And that's really what's driving this additional 10% price increase September 6, which we do believe will have a similar effectiveness to previous price increases. And as you recall and know, you go back to 2010, 2011 and 2012, and we were out with six price increases in 22 months. Our margins in The Americas Group were under pressure. And coming out of that, as raw materials moderated, our gross margins grew almost 600 basis points from 2013 to 2016. And we believe we're in a similar environment, and it's because we can hold on to that price, because we continue to make investments even though we're experiencing these headwinds. And if you go back full year 2020 to 2021, we're at 22.1, second half was 23.5. I don't believe we quite get to those levels, but we're starting on a much better base than we were in 2010. So we have a lot of confidence that as the market turns and raws start to moderate, we'll hang on to that price and we'll see a nice snapback to our gross margins and operating margins in The Americas Group going forward.

And let me just top that off with the key driver behind that, we believe and we'll always believe that it's our people. The message on our differentiation here, I think, is probably as strong or stronger, particularly given the environment that we're finding ourselves in. We're going to war with store managers that average 10 years of experience, sales reps that average 12 years, our district managers averaging 22 years, our vice presidents averaging 24 years. So there's a lot of experience that we're leading with. And the fact that we've got this training and the experience that we have allows us a customer engagement. We feel that's a clear differentiation point between us and our competitors. And the fact that we are now able to get back into in-person training as opposed to virtual training and the way we're engaging with our people, we think, is just an outstanding element to our — what we call our secret weapon, our people. And our ability to attract talent is probably as strong as ever. We have been open about our management training program, which is entering its 40th year. We're recruiting anywhere from 1,400 to 1,500 college graduates. And this high-caliber, talented employee joining our family helps us to do exactly what Al laid out as far as the financials. It's the people that set us apart.

Just a real quick follow-up as a corollary of Al's comment on the price increase. It seems as though in the past — understanding it's a small part of The Americas Group, we all thought of the price increases of the DIY crowd, once again small, short-term contractors, long-term contractors and kind of the progression to getting that. And typically, the realization was 60%, 70% plus of initial price increase. Could you just give us a real quick comment on how we should be thinking about that as it will ultimately pertain to 2023? Do you think you'll get the expeditious pace of what you're realizing recently or kind of going back in the past? And is my assumption on the actual net realization a fair one? So just pace and realization would be very helpful.

Yes. Chris, I'd say that we expect that momentum to continue, I think for all the reasons — I don't want to labor the services and everything that we believe we bring and the value creation for our customers. But I'd say that it's a market where people are probably more understanding. I mean they go to the gas pump and see what's happening. And so our execution on these prices are nothing that we — we're not arrogant with it. We're determined because we want to keep our organization healthy so that we can help our customers remain healthy. And so the balance is important there. We continue to invest in products and services, innovation, programs that will help our customers on every part of our business. And it's easy to point to The Americas Group business and might recite that roughly 85% of their cost of goods is labor, and everything that we can do to help make that labor more efficient helps their profitability. So the cost of the gallon is a lower percentage there. And they are in themselves deciding to move up in quality because they see that a higher-priced, high-quality product helps drive their success. But that logic actually carries through to every element of our business. We're driving our customers' success. That's how we gauge our success. When our customers are successful, then we know that we're going to be a better part of their programs and their success. And that's what we're focused on, and we believe we'll be able to execute on these prices accordingly.

Your next question is coming from Gregory Melich.

I'm with Evercore ISI. My question was a follow on, I think, Al, some of your points there in terms of the margin inflection. It sounds like now you are on top of raws just not as much as you would have thought. And remind us, last year of that 450 or 500 basis point margin decline at The Americas Group, how much of that was raws versus price as opposed to the volume declines that you saw?

Yes. It would be the majority of the raw material increases, but there are other input costs that are coming through, Greg. But that would be the majority. As you know, volume is always — when our volume is backward, it's always the biggest driver of operating margin. It's always the — when it's positive and as we expected to be strong in our second half, it's going to be the driver of operating margin. But even if you offset raw material cost increases with selling price increases, your margin takes a hit. And it takes a little bit of moderation on raws and increasing that last price increase effectiveness to start seeing the recovery, and we believe we're going to start seeing that in our third quarter.

And so maybe the backup question of that then is if you look at the third quarter guide, if sales are going to be up low to mid-teens and that presumably probably has price that's also low to mid-teens, are you assuming flat volume year-on-year in your third quarter guidance?

On our third quarter, I think when we look at the second — the September price increase, I probably have high single digits. You have to annualize the August price increase last year. You start annualizing the surcharge. So I have volume up high single digit, and then that would tell you volume would be up in that high single-digit range. I'm not as heavy on price as you've got in your — as what you're saying.

Greg, for the company on the back half, architectural gallons, I could give you a little color there. We're expecting low to mid-single-digit gain for the company with The Americas Group up in the high single digits.

Your next question is coming from Vincent Andrews at Morgan Stanley.

Maybe just following up a bit on the Consumer Brands piece. Obviously, we've seen what your volume was in the quarter. Can you talk about whether you think that is indicative of what the retail takeaway is, in line with it or worse? And where do you think your retail partners are in terms of their own inventories or sort of doing the destocking that seems to be going on? And I guess really what I'm asking is just sort of — you just mentioned you're expecting The Americas Group gallons to be up more than total architecture gallons, but you're obviously expecting consumer gallons to be up it would sound like then. So what gives you the confidence that the consumer gallons can actually be up in the back half of the year?

Vincent, I think it's that careful line here that we are always cautious in crossing and talking about too much of our customers' business. I will say this, as it relates to our customers' inventory, we made great progress in filling our customers' shelves in the second quarter, and there are still opportunities for additional channel fill. We're going in full speed to put everything we have behind this. We mentioned specifically some of the key areas of the oil stains, Minwax and Krylon, that have been impacted by the alkyd resins. That's going to impact the ability to fill inventory. But as it relates to our customers and their inventory levels, I think it's only appropriate that that come from them, not us.

Vincent, just to clarify what John said is our second half architectural gallons are going to be up low to mid-single digits. The Americas Group would be up high single digits. That tells you that Consumer Brands is actually going to be backwards probably by a mid-single-digit percentage, and it's driven by the continued trends we talked about with softer North America DIY. And I would say we did not see a significant destocking, and our second quarter remains to be seen going out, but we didn't see it in our second quarter. And then Europe and Asia, we expect to see continued softness in Europe and really choppiness in China as the rolling lockdowns continue.

Your next question is coming from David Begleiter at Deutsche Bank.

John, I'm just going back to Slide 7, looking at what changed since June 8. I don't see FX on the slide. Was that a headwind versus what you were expecting earlier? Or is it embedded in these numbers?

Yes. It is going to be a little bit of a bigger headwind. But David, 80% of our sales and profit are in North America. So we're not as impacted. But we do expect it to be a slightly bigger headwind than our second half.

Got it. And John, just on North American DIY. Did it — did demand soften versus your June expectation or just not get better versus that expectation?

Looking at North American DIY, you asked whether it got worse versus June 8 or just did not improve. I'd say that it did get worse, and we were expecting some improvement as we went into the holiday 4th of July season. We were expecting more improvement than we saw. And maybe it'd be good if I could — I think I'm sure there's a lot of questions here regarding this topic. And I want to just make sure that we cover this completely and openly. Again, as Jim opened his prepared remarks, we were disappointed with the way that everything came together. But I would think that it's helpful for everyone if I put it in perspective. Two of the three businesses performed within the range that we expected. And I'm going to jump to Consumer Brands in a moment, but I do think that it's worthy of just taking a couple of seconds to talk about the other two and then spend a little bit of time on Consumer Brands. I'll start very quickly with Performance Coatings. A pretty nice quarter. Sales were up mid-teens, expanded margins year-over-year, which reflects our pricing actions taking hold, as Al mentioned. And the cost environment remains a challenge. And again, we're responding with additional pricing actions accordingly. The Americas Group, we hit the guidance, albeit at the lower end. Demand here remains very strong. I mentioned very pleased with our sales trends right now, averaging in the high teens to low 20s per day. In this space, DIY is an area that remains softer. And I talked about the Protective & Marine. That remains strong, the demand. The only areas that we're feeling softness is in our ability to supply mainly in the alkyd resin area. Here again, as Al mentioned, we're putting price in through The Americas Group. But getting to the heart of your question on Consumer Brands at our Investor Day, that business was trending softer. It did further deteriorate as the quarter went on. And the deterioration mainly focused on four areas that I briefly talked about in our prepared remarks. The DIY demand was disappointing. You asked about it. We'd like to see a stronger performance there. There was no improvement in China. Al mentioned the COVID lockdowns as they were lifted. We saw virtually no improvement after those lockdowns were lifted. The European deterioration was further and faster as the quarter progressed than we expected. And again, not to overplay it, but there was virtually no improvement in the alkyd resin availability, and that had a significant impact on our ability to serve areas that are underserved right now, which is the ability to supply our stains and aerosols to the market. And as I mentioned in the other two, pricing actions in Consumer Brands is going to be an important piece as well as we're responding to the cost issues in this business just as we are in The Americas Group and the other businesses. The largest parts of our business, they deliver. We're executing on our strategy going forward. This second half of the year, we're going to drive earnings up by 35% at the midpoint of our guidance. Every business, we believe, has the leadership, the people to do it. Our group presidents are outstanding — Justin Binns in The Americas Group, Todd Rea in Consumer Brands, he's carrying a heavy load right now, but he's — we believe in delivering. Karl Jorgenrud, who's running our Performance Coatings Group; and our COO, Heidi Petz, each one of them are out there every day driving doing what's right. And while this was a softer quarter than what we expected, and we don't take it lightly, we've got a lot of conviction, a lot of determination but mostly confidence in what it is that we're doing. And we're going to deliver it. We've got it.

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

I guess I wanted to drill down into North American housing dynamics a little bit. So we have seen many of the builders start to report slowdown in sales and potential cancellations as well, permits also. Even though the housing reports are okay, the actual numbers from the builders aren't as great. So could you just elaborate on how you see The Americas Group playing out over the next little while and maybe even the DIY side? I guess my specific questions are, you noted strength in R&R and residential repaint, but it seems like architectural gallons are still kind of 80% correlated to existing home sales. So if we do see a big slowdown there, how does The Americas Group really manage through that? And is it through share gains? Or what do you expect for positive growth as we move forward just given the housing backdrop?

Let me take a run at it, and then I'll have Jim get through some of the metrics on the housing that you mentioned, but it absolutely focuses on share gains. We've got great confidence in this team. I will highlight that the majority of the homebuilders that are out there, even a few that have lowered their numbers, their numbers have been lowered, but there's still an increase over the prior year. So it may not be as robust as expected initially, but there's still good growth there. And the reason that I highlighted the fact that we're expanding our exclusivity rate, it wasn't to boast but to demonstrate exactly the fact that we know that if it's slowing down, we've got to have more customers we're doing business with to offset that demand. And so we're continuing to push hard in New Residential, in residential repaint and property management. Commercial is very strong. We've got a great position there, and the momentum is very strong behind that. But our view is that the work that we're doing right now in establishing ourselves with these customers is what's going to pay off. Let me give you a little bit of background on that. So let's just talk in our The Americas Group business. Our outreach effort right now executed by our team is as strong as it's ever been. Our face-to-face call activity was at an all-time high last quarter. We've never made more sales calls in a quarter than we did last year. So it should be no surprise that the number of active accounts in our stores also hit an all-time high. We've never had more active accounts in our stores than we do right now. Second quarter, new account activity is very strong. These are the seeds that we're planting for the future. So clearly, our people are focused on the productivity of our customers, and this is how and when we're at our best. So we're capitalizing on the choppiness in the market by offering this consistent, reliable solution through the very best team that we have. And we believe that the products, the store managers that I've mentioned, the reps, the services, the innovation that we're bringing, the whole specialty store format, we think, is very unique. And we believe that controlled distribution model allows us to respond to the variables in the market. Whichever way this market tilts, we're going to be there, and we're going to do whatever we have to do with the lead in each of those segments that are benefiting. And we'll gain share in those areas that might experience some softness. Let me turn it over to Jim to walk through his thoughts on the New Residential question that you had.

Arun, this is Jim. I'd agree with what John just said there. And what we always do, first and foremost, is be in front of our customers. And recently, Al and I were traveling and we visited with several of our national homebuilders. And while the pace may be slowing a little bit, there's still a lot of confidence out there that I think takes them through the end of the year and well into next year. The completions right now are up year-over-year. And whether you look if it's single-family or multifamily, maybe multifamily is trending a little bit stronger now, but wherever it may be, we're there and ready to capitalize on that. You talk about mortgage rates, maybe a little bit of impact there, but they're still low in comparison to other periods. And again, we're still seeing very strong demand there. And I think it's underpinned by what we've talked about for a couple of years now, this overall shortfall between houses being built and household formation. So I think that feels good. On the repaint side, as you mentioned, customers are telling us strong backlogs. Home price appreciation continues to be really strong. You look at some of the third-party metrics, the NAHB remodeling index, all those are pointing in the right direction. And I'll remind you that res repaint, while it's our largest segment, it's our biggest opportunity. So feel good about that. We made comments about property management and commercial as well. I think our teams are primed and ready and the demand is out there, and we're going after it.

Great. I appreciate all the detail, guys. And then if I could just quickly on DIY. So we've been kind of weak here, and it looks like you guys are expecting that to continue. What would it take for DIY to turn around? In the past, I guess, you guys have seen some improvement there with unemployment when it goes higher. Is that what we should be thinking about? Or what else are we expecting for either a bottoming and maybe a turnaround in DIY?

I think if your question is how do we see DIY or what would we see to make DIY turn around: first and foremost, our focus in our stores is the professional painting contractor with roughly 85% of our business focused on the contractor. We're focused on a very isolated DIY customer, those that prefer a specialty store format. Our outreach there is through various methods of advertising through social media and a few levers that we pull to drive that business. It's a good business for us, but our focus primarily is on the professional side through our stores.

No, I understand. I guess I was asking more about the Consumer Brands DIY piece. Sorry, John.

Through our Consumer Brands, I think the focus there, obviously, is on helping our customers to win. Here, you look at making sure that we have the right product, the right product assortment, ensuring that we have it at the right price. We participate in helping to drive traffic through activities, including brand advertising, the training in the store, as an example, so that we want to help our customers convert shoppers into buyers. The innovation that we're bringing there will help to do that. And the training that we have inside the company and the centers of excellence that we have, we want to share that with all of our customers. There's a great deal of effort right now in the rep activity through this Pros Who Paint initiative. We want to continue to invest in that as well. We believe that customer going through a home center is a customer that we have been really not focused on through our own stores. Those are the customers that kind of balance between DIY and Pros Who Paint. Pros Who Paint, by definition, in our world is a contractor who's doing remodeling or some element of construction that's also painting at the completion of that project. We're supporting our customers' efforts there as well as various loyalty programs that our customers are initiating. We want to support those initiatives there. So there's a lot that we want to do and to execute with our customers to drive every category in the home center store that ultimately can come back to help drive the paint department as well.

Arun, I'd just add to that. It would be helpful if we see some moderation in gas prices, some moderation in food prices that have been very hard on the consumer over the last few months. So I think you have to start seeing some moderation in those costs to help get back to some of these discretionary projects.

Your next question is coming from Michael Leithead at Barclays.

Just one for me. I guess, why do you think there's this big divergence or at least some level of divergence between DIY and pro painters right now? I guess I'm just trying to square the weak North American consumer you're calling out in Consumer Brands with a pretty strong demand outlook in your pro business.

So I think Al touched on it just now. I think right now, as the gas prices spiked up, I think many consumers who might choose to do some of those projects might be more influenced by the price of a gallon of paint and other areas of inflation than some consumers that can afford and want to have painters in their homes to do projects. And so those prices, as they moderate over time, I think will have a more positive impact on the do-it-yourself customer. And those that are now working from home that are in an environment where they're saying, have a painter come in and freshen up my home is a relatively inexpensive but very impactful change to my environment at home, and it's something that I want to invest in.

Your next question is coming from Kevin McCarthy at Vertical Research Partners.

John, can you speak to labor cost trends? How much might your labor costs be running up on a year-over-year basis? And is the trend any better, worse or stable if we think about it sequentially? And is labor having an impact on your sales internally or your customers' ability to execute at this point?

I'll take a swipe at the first piece, and I'll ask Al to talk about the specific impact. But yes, I think many of our contractors would tell you that if they could hire additional labor, they would certainly hire and they frequently are now paying more for that labor than they were in the past. In our stores and even in our distribution centers and plants, we've made some adjustments to ensure that we're in market because, as I mentioned earlier, you don't achieve the retention rates that we have purely on the culture that you have. We have a wonderful culture, but we also know in respect and want to pay our employees a competitive wage in the market. And Al, maybe you can talk a little bit about that.

So Kevin, we do expect our labor costs — we have high single digits on a consolidated basis. And I would say that's higher in our global supply chain. As you can imagine, there's less desire to work in a factory environment, a distribution environment. Drivers have been a challenge to get, although I would give the team a lot of credit in global supply chain. They've been able to attract drivers. They've been able to improve their attraction and retention rates in their plants and distribution centers and really have a well-thought-out plan for the future as it relates to automation. We have not had issues within our The Americas Group organization. We've added 3,500 management trainees over the last 2.5 years, and that pipeline is strong. So I think we're shoring up the markets we need to shore up to retain people because turnover, as you know, is very costly. So sometimes — and I think it's leveling out. That doesn't mean there's not a market here or there where we'll have to do more, but it's — we seem to be leveling out at this point.

It does seem to be leveling out. But I'd also say we'll take the appropriate steps to ensure that we keep our great people.

Okay. That's helpful. And then secondly, if I may, I wanted to ask you about raw materials and alkyd resins in particular. I'm cognizant that there was a major outage of an alkyd resin manufacturer about a year ago, but in your commentary, I'm sensing that the shortage there has become more acute recently. Is that true? And if so, maybe you can talk about allocation level, what products are affected and what sort of impact that may have had on your sales.

You're right. It does date back to the OPC fire in Columbus in 2021, and that impacted the entire industry as about 130 million pounds of resins disappeared from the market. The important piece here is that there has also been an additional fire in St. Louis at an alkyd plant that will clearly put more pressure in the market, something we don't need. And my understanding as of just this morning was that there might have been another one here in the same space that could also have a negative impact. So we're trying to work through that. We've been working hard to make monthly progress towards improvement, but it's likely going to be towards the end of the year before we're out of the woods. The solution here is going to be a combination of the internal utilization of assets. And I would say that the recently acquired SPI resins business has proven its value in many ways. This is one of them. But we'll also utilize external assets through arrangements and agreements there as well. But it is safe to say that our plans, our efforts, we were planning on better supply rates than what we experienced. And we think it's going to be a lot of work by our team to continue to gain ground, but it's going to be in small increments. But we believe that by the end of the year or as we enter into next year, we'll be in a much better situation than we are today. The issue here, I think is — and again, maybe just speaking openly and transparently, a couple of quarters or a quarter ago, we talked about that we didn't believe that the raw material issues were going to be an issue that we faced. And to the largest degree, it's not. We've built inventory in architectural inventory. We supplied our Consumer Brands customers at a growing rate of inventory. And so to the largest extent, everything we said, we stand behind. That said, we also said that it was going to be very tight and hand-to-mouth. And in times like this, any shocks or any shortages are far more impactful than they normally would be. There's no WIP. There's no inventory in the system to absorb any shocks or anything. So literally, in some cases, if one of our suppliers has something that goes down for a shift or two, where in the past we would never feel that. Now we're dispatching, in some cases, our own tanker trucks to offset those or we're producing — as Al mentioned, we might produce a batch in one plant and deliberate freight from one part of the country to the other to serve our customers. As I mentioned in my prepared remarks, all of these are very conscious decisions. We're not out just spending money here. I mean we're trying to drive it to the bottom line. But as I mentioned, we believe with our hearts that coming out of this era of challenges with our customers, many of whom understand completely what it is that we're doing to serve them, will ultimately be in the best interest of our shareholders. And so while in a quarter or two, we're going to feel this pressure there's a reason why our exclusive relationships, as an example, are increasing because our customers see what we're doing. And we'd like to drive it to the bottom line faster and better, and we will. But some of these challenges and shortages are real, and we're responding real time to them, and we're going to serve our customers. And as I said, we'll come out with these customers on the backside.

Your next question is coming from Truman Patterson at Wolfe Research.

First, John, I'm hoping you can give just a lay of the land for your supply chains in The Americas Group and inventory levels. Are you all still manufacturing as quickly as you can kind of get it out the door? In March, April time frame, you mentioned that architectural volume production was at the highest levels in history. Should we assume now that July is still the highest levels?

Truman, I would say we are absolutely utilizing the 50 million gallons of architectural production capacity. And we are, as John mentioned, we actually built inventory in our second quarter related to architectural, and that was both on The Americas Group and Consumer Brands, where historically, as you know, we build inventory in our fourth quarter and first quarter. And we see inventory reduction in our middle two quarters, our highest volume quarters. So we're keeping pace with the level of sales, and we're very confident that also tells you, to John's point, the architectural availability issues, although may not be ideal, we're getting the raw materials we need to meet demand. And we'll be able to feel confident that we can meet the second half strong high single-digit demand from The Americas Group and also build inventory in our fourth quarter this year and our first quarter next year to be ready for the next year's spring and summer selling season.

Okay. And then, look, New Residential, if you look at builder orders, it's definitely decelerated. And we'll see if that goes into the repair and remodel market as well. But if I look back at kind of 2008-2010 time period, clearly different dynamics. But you all did slow your net store openings according to our data. I'm just trying to understand if we see an economic downturn. Would you all continue to try and open up anywhere, we'll call it, 80 to 100 stores? Or would you guys maybe kind of call that back a little bit? Just trying to see how you all are thinking about the next couple of years.

Truman, it's a good observation. I think, if I recall, we lowered our store count at that time to around 60 new stores. And I would say this, that we have confidence in that model, particularly what's happening in the market right now with some of the changes. Some of our competitors choosing to change their model creates terrific opportunities for us. And so you should expect us to continue to leverage that opportunity to the fullest. Might we adjust down a little bit? Maybe. I mean we're going to take a disciplined approach. Heidi, our COO, and I, and Justin that runs our stores, have those conversations on a regular basis. I think the takeaway I'd like for you to have is that we've seen this movie before. Investing in the face of adversity is something that we've done. We've not done it without discipline. We will invest. And at the rate — if it drips down a little bit below 80, we might do that, but we see the value long term. We're actually getting continually better at opening new stores. The focus that we've given Justin in The Americas Group and all his division teams, is to continue to drive that profitability faster so that we can continue to invest and get those stores contributing faster. So I guess the quick answer is, yes, we might in some of those drift down a little bit, but it won't be by much.

Truman, the only thing I would add to that is if you think about 2008 and 2009, we were more heavily weighted to New Residential and commercial. And over that last coming out of 2010 through 2020, our residential repaint 10-year compounded average growth rate was low double digits. That was not at the expense of new residential, which was also low double digits but on a smaller base. So if you look at our mix today, our residential repaint is our number one segment, the fastest growing, which offers maybe a slightly different view of how we invest in new stores this year and going forward and maybe being even more aggressive than we were back in 2008 and 2009 just because of that mix of those segments.

Your next question is coming from Joshua Spector at UBS.

Just a follow-up on the Consumer Brands. I mean if I look at the performance in the quarter, your ex-U.S. sales were maybe down 30%. Volume's down a bit more. Obviously, China is a factor in there. But curious if you could comment on Europe. I think some of the peers' volumes were down maybe 15% mid-teens-ish. Were your volumes down similar to that in Europe or down much more? And if it's more, what would be the difference?

I'd say they were similarly impacted. And we were impacted by all the same issues as you read in the news, everything from inflation to energy costs, certainly the war. Despite that pressure, we believe we're with the right partner there. Our TiO2 program has been very well received, and we'll fight to continue to grow share. But there's clearly some pressure in the market there that we're not immune to.

Your next question is coming from Adam Baumgarten at Zelman.

So curious, in residential repaint, do you have a sense for how much of demand is related to kind of a larger remodel projects such as a kitchen renovation or an addition versus just a refresh, something like someone just painting a few rooms in their home?

I would say that in our The Americas Group business, it's a relatively small percentage tied to major remodels or big-ticket projects. Much more likely, it's going to be either an exterior or interior repaint. Certainly, we participate in those larger projects, but the larger percentages are painters doing exterior work or knocking off interior repaint jobs. Where we might see more of the kitchen remodel type work would be through our Pros Who Paint program on the consumer side, where painters doing remodeling include painting at completion. But the largest percentage of our store customers are focused primarily on painting.

Got it. And then just given the slowdown in DIY, do you expect to see promotional activity pick up going forward?

No. I think there's more in the area of branding and awareness. I think there will be some promotional activity as supply levels get back into more normalized levels. But with inflationary issues that everyone is facing, it's a pretty disciplined industry because of the percentage of cost of goods and the total cost keeps everyone pretty honest. So it's not likely something where the floor is going to fall out.

Your next question is coming from John Roberts at Credit Suisse.

Gallons in The Americas Group were down year-over-year in the quarter. So how do you square that with the record number of customers and record number of sales calls? Is the average gallon per job down? Or is there some other mix effect that's going on?

Part of it is the really strong comparisons that we had last year. If you look back, last year was a very strong comp period. But the important takeaway is that the increased call activity and the record number of active accounts indicate heightened execution and momentum that may take a short period to translate into higher gallons. We're seeing the activity and the seeds planted now turning into stronger daily sales as we move into July and beyond.

John, I would highlight last year in the second quarter, The Americas Group sales were up 22.6%. Same-store sales were up 19%. Residential repaint was up 36%. And commercial, property maintenance and new residential were all up in the high double digits. So really tough comps. And what we commented on in our press release, our pro architectural volumes were actually up low single digits. So I think that supports the calls and the activity that's happening that help drive us year-over-year on volume.

And then, John, I think you mentioned that interior was a bigger part of the The Americas Group mix in the June quarter. Is that unusual seasonally in a June quarter? I would think exterior might be bigger in that quarter. Weather, I think, was uneventful essentially. It was just hot, but we didn't have unusual rains or anything.

You're right that exterior typically ramps up during the spring and summer season, but interior remains a larger portion of total gallons overall. So while exterior does increase seasonally, interior still represents a significant part of the mix.

Your next question is coming from Garik Shmois at Loop Capital.

I'm sorry if this is done, but just on DIY. Just to be clear, did it slow sequentially late in the quarter? Or did it just not come in your initial expectations? Just wondering if there was a material weakening in the DIY demand.

It bounced around. We had been working to drive that business and expected a little more positive gallons than we actually saw. So it was bouncing around without the gain that we had projected.

Got it. Follow-up question just on the portfolio review you cited. Just to be clear, is this just normal course of business you look at your portfolio regularly? Or are you perhaps accelerating some plans given some of the macro challenges that may be popping up?

No. Garik, this is part of our normal operating process. We set market share or sales growth targets, ROS improvement targets, RONA targets and cash flow targets for each of our significant businesses, programs, regions and customer programs midterm and longer term. It's ongoing because the environment has changed. You look at even over the last 2.5 years, the differences from early 2020 to today. So we're continually looking at macroeconomic trends and how they're impacting our investments and how they're impacting different businesses and then their path forward and action plans to still meet those targets. We have tremendous opportunities for market share growth in Europe and Asia across each of the businesses. So we look at the value proposition and our path to attain those midterm and longer-term goals. If we don't believe we can hit those goals we are committed to making changes. Australia was an example, the Ace private label program was another example. Maybe those programs are better for somebody else.

Your next question is coming from Chuck Cerankosky at Northcoast Research.

John and Al, when you talk about some of these raw material shortages and transportation interruptions and all the other things that seem to be randomly getting inventories in the supply chain back on track, well, how do you deal with allocating the limited inventory between different markets? And I'm thinking mainly the professional architectural and the DIY architectural.

Oftentimes, Chuck, what we find is we're making the products that we have the raw materials for. In our Consumer Brands Group as an example, we have primarily a different resin system than we would in most of our The Americas Group products. So as those raws become available, we're converting those as quickly as possible to what's available. We also move product where it's needed, even using our own logistics in extreme cases. We've ordered additional tanker wagons and will continue to use internal and external logistics to bridge any rail or transport gaps. The focus is always to serve the customer where the demand and contractual obligations require it.

Chuck, the only thing I'd add to that would be certainly within The Americas Group as we were experiencing severe raw material shortages in our fourth quarter and into our first quarter, we clearly emphasized the Pro versus DIY segment within The Americas Group. So we can make those calls when we're in a specific business. Similar kinds of decisions had to be made in consumer. So when you're within a segment or a group, you can make those calls to get the best utilization of those precious raw materials we had.

Your next question is coming from Stephen Byrne at Bank of America.

John, this initiative of yours to grow the business in consumer with Pros Who Paint, do you feel that it's necessary to offer those pros some of the services that you provide from The Americas Group such as large volume shipments to the job site, the ability to place orders without having to call the home center? Are those functions that you're considering or do you consider not necessary?

We're in this to win it. And so we're working with Lowe's and other partners on the services and fulfillment that will help that targeted customer be more successful. Pricing and merchandising decisions are controlled by our retail partners, but we're working with them to ensure they have a complete offering, everything from the power brands that attract customers to the innovation in the can itself. We have reps that are working with their teams to drive loyalty programs and other initiatives. So yes, if we can do things to help attract those segments, it's a wonderful win for both of us. Those are customers that we're likely not penetrating through our own stores. They want a broader selection of products that are available in home centers, and we have great partners that we're trying to help to win, and we'll take the steps to do that.

And maybe one more drill into the The Americas Group expectations for the third quarter. Is the improvement in volumes that you're expecting, are those on an underlying improvement from the second quarter? Or is that a year-over-year improvement in that the comp isn't as challenging in the third as it was in the second? Is there any concern about pushback from those pro end markets for your price increase that's on the table?

Steve, it's both a sequential improvement in gallon growth, and it's also a year-over-year significant improvement in gallon growth. And no, we do not expect pushback. We expect our September price increase to have similar effectiveness as previous price increases. We've been through this process before and believe customers will accept it in the current environment.

You don't judge the effectiveness of a price increase on a single conversation. We have to earn it every day. Our reps and store teams need to demonstrate value and help customers make more money. When they see the value, they're willing to accept price adjustments. We're focused on ensuring we deliver that value every day.

Your next question is coming from Eric Bosshard at Cleveland Research.

Al, just a point of clarification. I thought earlier on this call, you talked about the pricing realization in the quarter not being up to expectations. Is that correct? Can you just talk about how pricing relative to your expectations played in the quarter?

Yes, Eric. For clarity, our pricing actions themselves were as we expected. The price-cost differential, however, was not quite where we wanted it to be relative to our expectations because raw material costs were higher and other input costs — freight, transportation, labor — were also higher. Additionally, we saw higher cost to serve as we built inventory and moved gallons around the network. So pricing performed well, but costs were higher than we expected in the quarter.

And then within that, the pricing effectiveness you commented earlier in the quarter was at least, if not better than the historic trend. That was the experience on pricing in the quarter? And is that the same expectation for this coming increase?

That's right. The pricing in our second quarter was effective and performed better than historical trends in many areas. We expect the September increase to have similar effectiveness.

Your next question is coming from Ken Zener at KeyBanc.

I think you made a comment earlier on Slide 7, the $0.50 per share reduction. I believe you said for the softer demand, you said half was Europe, and then it was equal parts North America and China. Is that correct?

Yes. That's directionally accurate. About half of the impact versus our expectations was Europe, and the remainder was roughly split between North America DIY and China.

Okay. Yes, not exact. And I raise this because it seems obviously with just 9% in line with kind of the earnings revision, it seems as though roughly half of the revision is tied to what I would consider lower-multiple non-core international businesses, which is to say, The Americas Group pricing at $0.10 hit on higher input costs is not that much. Is there something about the operating leverage that is different in Europe and China on that DIY? Because not a large piece of consumer, but it seemed to have really outsized impact on the guidance.

Yes. The Europe and Asia comment not only includes Consumer Brands but has an impact on certain businesses within our Performance Coatings Group as well. So it's a combination of both consumer and select industrial businesses in those regions, not just consumer alone.

Your next question is coming from Adrien Tamagno at Berenberg.

So it looks like you repurchased $700 million of shares in H1, and your 3x end-of-year leverage target seems to leave very little space for more M&A in H2. So are you taking the view that with the current environment, you are better off growing organically and not adding complexity to your business?

Adrien, our leverage ratio ticked up to 3.4x primarily due to the recent acquisitions. Because we only have half a year of contribution and because of amortization and inventory step-ups, it's going to take some time for the acquisitions to fully offset the increase in debt. We're committed to using excess cash in the second half to pay down debt and to offset option dilution with share buybacks. We generate a disproportionate amount of our operating cash flow in the second half, and we expect to see a strong cash flow flip in the second half this year, which will give us flexibility. We'll remain disciplined on capital allocation but will continue to invest in strategic acquisitions as the opportunities meet our criteria.

And just a second one: on the cash flow still. I've seen you reduced CapEx by around $100 million. So how are you able to find these savings without harming the future work?

That's primarily due to timing on our new headquarters and some R&D projects. We've maintained our core CapEx because we are absolutely moving forward with our architectural capacity expansion. We're also investing in packaging capacity expansions to keep up with mid-teen compounded growth in packaging volumes. And finally, given labor market pressures, we're investing in automation within our global supply chain to improve productivity.

There are no further questions in queue. I would like to turn the floor back over to Jim Jaye for closing remarks.

Thank you, and thanks, everybody, for listening to our call. Obviously, second quarter was a little bit challenging, but we're very confident about delivering a strong second half of the year. And I think that's really led by the strong demand we're seeing across our Pro architectural business in The Americas Group. We're responding to ongoing cost pressures with additional pricing in all of our segments. We're continuing to invest in growth initiatives, and we're going to continue to manage our costs tightly. We're very determined, and I hope that came across. And we expect to deliver value. So thank you for joining us, and we'll be available for your follow-up calls. Have a great day.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.