Sherwin Williams Co Q3 FY2024 Earnings Call

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 Mistysyn, Chief Financial Officer; Jane Cronin, Senior Vice President, Enterprise Finance; and Jim Jaye, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode by Issuer Direct via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com, beginning approximately two hours after this conference call concludes. This conference call will include certain forward-looking statements as defined under US Federal Securities laws with respect to sales, earnings and other matters. Any forward-looking statements speaks only as of the date on which such statement is made and the company undertakes no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the company’s earnings release, transmitted earlier this morning. After the company’s prepared remarks, we will open the session to questions. I will now turn the call over to Jim Jaye.

Thank you, and good morning. In our third quarter, characterized by ongoing choppy demand, Sherwin-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 continued 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 the 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, we'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 the quarter. Protective & 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 remains 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 FX. 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 FX. 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.

Yes, Vincent, this is Al Mistysyn. 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 reaffirm 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 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're 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 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 all of a sudden, you 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?

Yes. Let me start. Vincent, appreciate the question. I'm going to hand it to Al here to talk a bit about cadence and timing. But a few things, I think, that that are really important playing out and as you heard in my prepared remarks, I would tell you 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. We will tell you amount 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 mirror what we're doing at Sherwin-Williams. But because we are confident we've got the best assets at the absolute best people in 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.

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 selling a lot of share is holding back from perhaps better realization 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.

Yes, Chris. As Jim mentioned, we announced a 5% price increase in stores effective January 6th. This decision stems from the pressure of rising feedstock costs and wage inflation, which we typically expect to see as we approach 2025. Additionally, healthcare costs are anticipated to rise significantly year-over-year. You are correct that the price increase aligns with our expectations. It is influenced by the product mix, with performance in P&M being stronger and DIY being weaker, which affects the overall average selling price. Looking ahead to 2025, I believe we will enter the historical range of 50% to 60%, largely due to the timing of several of our national account contracts. We anticipate receiving increases, but the competitive landscape in the North American architectural market will also be a factor we need to monitor. We are committed to maintaining discipline in pricing when necessary, and we believe that need will arise.

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

No, John, the allocation I mentioned for the first and second quarters remains the same. The global supply chain saw improved volume, which contributed positively to the overall increase and our segment profit was influenced by this. On the commercial side, our North America business actually declined in profit before tax due to volume, which has been a consistent trend over the last three quarters and even going back to last year. So there hasn't been any real change in the allocation; they simply performed better. I give the team a lot of credit for managing their costs effectively and operating more efficiently in a stable demand environment with regard to inventory and production.

And John, I would add to that as well. I give the team a lot of credit for a continued focus on refining that portfolio. I'll take you back to some of the key decisions that were made over the last few quarters and years relative to the China divestiture some non-strategic aerosol business. There's a handful of categories and businesses that the team 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 built for speed and profit. So a leaner, meaner or fighting machine, if you will. So excited for the volume to come back so we can realize that opportunity.

Good morning, and thank you for taking my question. When you consider the competitive landscape and the recent changes within it, it's clear that the situations with Kelly Moore and PPG are now well understood regarding potential opportunities. However, there seem to be additional shifts in the industry, such as BASF divesting some of its assets and AXO possibly following suit. Could you discuss the other competitive aspects of your environment related to the store's business, specifically in the consumer sector and the PCG group, and whether you see any opportunities there? Additionally, could you address the current state of the consumer landscape, particularly concerning destocking and inventory levels?

Yes, good morning, John. I'll start with your first question relative to some of the competitive moves and then I'll hand this over to Al to talk about your question on PCG. I think you nailed it. And I think, 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 and take you back to some of our focus on 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, we're always open to those reviews.

Yes, John, I believe that inventory levels in the consumer sector have remained fairly stable. We do not think that our sales decline this quarter for consumer products was due to destocking. It appears to be a continued weak DIY market. You mentioned potential opportunities, and if there are chances for mergers and acquisitions, we approach those opportunities with discipline as we have in the past. We evaluate how different assets can enhance our strategy, and if they align with the right segments and regions, we will certainly consider them.

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 by saying that we are primarily focused on the quality of our sales, which have remained very consistent across our entire portfolio. We are not interested in commodities; our aim is to concentrate on the premium segments that align with our values and what we deliver daily. A way to frame this question is to describe Kelly-Moore as more of a short-term opportunity for market share, while I would view PPG as a more long-term prospect. There’s a lot of respect for that company, and we need to engage with customers to earn their business every day. It’s crucial that they know when they come to Sherwin-Williams, we are dedicated to servicing them and building a lifelong relationship. As for quantifying the exact potential sales, our focus is more on ensuring that we secure quality sales that we can maintain over time.

Hi. Good morning. I was hoping you could share your perspective on remodeling demand and its potential trends. I'm curious about how the decrease in interest rates and the possibility of more homeowners accessing their home equity, given the rise in home prices, might influence this. Do you anticipate this to be a significant driver next year? What are your internal indicators indicating about the remodeling segment of the market? Thank you.

Yeah, good morning, Mike, this is 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 resurgence. So I think that fits in with our longer-term view where that market is 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 and expect our res repaint business to be very solid, and that will also help our DIY piece as well.

Mike, this is a great question and a strong example of success by design. I want to acknowledge Justin Binns and his team for their outstanding work. There has been a lot of change in the landscape, and the team has been focused on what sets us apart and the value we can create. We aren't waiting for the market to shift. As Jim mentioned, when we do experience a moderate recovery, we'll be well-positioned to take advantage of it. The team is proactively addressing the needs of contractors and building loyalty with many new contractors entering the residential repaint market. We're set up for a positive trajectory as the market recovers.

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 in industrial, is this something customers are hinting at? And is it broader? Or is it more concentrated in equipment and transportation?

Yes, Patrick. I'll begin with the impact of the third quarter, as experiencing two major hurricanes is challenging—one in the third quarter and another in the fourth quarter complicates our recovery timeline and creates uncertainty for our outlook in the fourth quarter, which is why we have a higher range. The issue isn't just about our stores being operational; it also involves how quickly customers can return to work, assess the damage, and file insurance claims. The nature of the damage, whether it's from flooding or structural issues, will influence the recovery speed. Historically, it takes about four weeks before we see an uptick in primers, followed by sundries and then paint. Given the condensed nature of our fourth quarter and the dynamics brought on by the two hurricanes, it's tough to predict when things will start to return to normal. The impact from Hurricane Helene in the third quarter affected us by a little less than one point, mainly related to our stores. If we disregard this impact, our performance aligns closely with our guidance, which likely cost us around $0.05 for the quarter. We didn't highlight this earlier, but we anticipate regaining those sales in the fourth quarter; it will just take time for that to happen as the quarter moves along.

And I'll touch briefly on the customer shutdown piece. The way that we're looking at this, and 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 seeing really close with our customers. Karl Jorgenrud 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.

Hi, 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 not the mix? Is that a fair way to think about it?

Yes, Greg, when we examine pricing, we're observing its effectiveness. However, due to the variety of segments, some of which are performing better than others, this can affect the overall price mix, which we consider as a single entity. Therefore, it won't reach the 3% mark this quarter. As we've mentioned, both volume and price are increasing in low single digits for the third quarter. Looking ahead to next year, as new residential projects improve like we witnessed in our third quarter, the changing mix compared to residential repaint and DIY will impact the price effect.

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

Yes. Sure, Aleksey. I think if you look at the backlogs I'd say, beginning maybe with Res Repaint, 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 fabs 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 new Res, we're cautiously optimistic, seeing some pick up there. Commercial would be the one where I would say we've hung in there pretty well this year despite there being 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, that backlog will start to start to diminish as we get into next year.

Hey good morning. For the fourth quarter, can you hear me?

Yes.

Yes, for the fourth quarter, you have done a good job with store growth this year. Will segment profit begin to improve and grow? For 2025, while I understand you want to keep specifics under wraps, what kind of store growth do you need to return to positive segment profit growth? Also, do you have any insights on SG&A for next year? Do you believe the increases are finished?

Yes, regarding the fourth quarter, while we usually don't provide detailed guidance, I can say that we anticipate all our operating segments will experience margin improvement compared to last year. However, we do expect a seasonal slowdown in architectural sales during the fourth quarter, similar to what we have seen historically. As such, I do not anticipate operating margin growth in our two architectural businesses. Looking ahead to 2025, our plan will remain consistent with prior years. This year, we experienced significant growth in the first half due to investments made in the latter half of last year. We plan to moderate SG&A costs, but I won’t provide full guidance today; we will offer clearer guidance in January. Our expectations will remain the same. If we experience stronger volume and/or gross margin in the second half of the year, we will leverage those opportunities like we did this quarter. We will increase our investments to accelerate growth once some of the headwinds mentioned by Jim and Heidi subside, aiming to capture a greater share of the market as conditions improve.

And I just want to add one piece to that. 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 had a heightened level by design, 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.

Yes, good morning guys. Just a question on raw materials. I think, Al, you mentioned that see increased cost for feedstocks. So I was wondering if you kind of break it into different buckets. So one, just being inorganics and pigments and the other kind of the oil derivatives? Oil is 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?

Sure, Duffy, I'll address that. To start, in the third quarter, our raw materials costs remained relatively stable compared to last year, and we expect this trend to continue into the fourth quarter, aligning with our earlier projections of low single-digit declines. Looking at TiO2 for the future, supply remains abundant in the market, and currently, pricing seems steady with minimal impact from tariffs. However, producers are assessing their production capacities, which could influence the market. Ultimately, demand will be the key factor for TiO2, and we'll monitor how that evolves. Regarding oil derivatives, we have noticed a recent decline in oil prices. For propylene, which is our main feedstock, we saw nearly a 50% year-over-year increase in the third quarter, primarily due to both planned and unplanned outages. Epoxy resins also increased during the quarter, and potential additional tariffs could affect this area. So far, we haven't seen significant impacts on our feedstock costs related to propylene or epoxy. We're closely monitoring these factors and will see how they develop as we move into the next year. We have some visibility for the upcoming quarters, and it's important to note that demand will ultimately guide our decisions. We will provide our formal outlook in January while continuing to assess the overall cost structure, including other expenses like healthcare, which remains a significant challenge for us. That's our current perspective, with more updates to follow in January.

Thanks. Good morning guys. Actually, Al, I did want to follow-up or circle back on sort of the Paint Stores 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 Paint Stores 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 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. Heidi, just in terms of your engagement with major customers specific to PSG, how would you characterize sentiment at their level? It's just more optimism for 2025 as it relates to aggregate activity? I'm just asking because there's been so much noise on 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?

Yes, Ghansham, I would say it's definitely relevant by segment. Jim mentioned some of this earlier. If we look at the overall picture, everyone is aware of the same macroeconomic conditions and is hopeful that the rate cuts will have a quicker and more significant effect. However, everyone is also being realistic about planning for next year, and generally speaking, the sentiment suggests a more modest potential for the latter half. If we break it down by segment, as Jim hinted at earlier, we are seeing more optimistic signals regarding existing home sales and similar indicators. We've been increasingly positive about Res Repaint. However, the Commercial segment seems to face the biggest challenges throughout the year due to issues like capital expenditures and labor constraints. This is a reality we all have to deal with, and it is reflected in how our customers feel.

Yes, thank you and good morning. I was wondering if you could comment on the outlook for 2 businesses within the Performance Coatings 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 a structural or transitory? And would you expect it to reverse at some point in 2025? And on the packaging side, it looks like you had nice acceleration there. Do you expect that to continue in coming quarters?

Yes, I'll begin with the Refinish segment. One significant reason I wanted to emphasize this at our recent financial presentation is exactly what you mentioned. There are some mass factors at play, and I’m pleased with our positioning in this area. In Q3, our sales were affected by unfavorable exchange rates and our higher exposure in Latin America compared to some peers, which was expected. When taking a broader view, you can expect fluctuations from quarter to quarter. Year-to-date, our sales are down low single digits against a high single-digit comparison from last year. Excluding FX impacts, sales remain flat, aligning with our competitors' recent performances. We are not satisfied with the current year-to-date figures; however, it’s essential to note that claims in North America, our primary market, have decreased significantly. Looking ahead, we anticipate improved claims and market share gains as positive drivers for next year. Our team has excelled in advancing our collision core program, which is gaining both momentum and acceptance. It’s crucial that we continue to strengthen our efforts. In early November, we plan to implement a high single-digit price increase for our direct customers and will make further adjustments as needed, ensuring we get compensated for our contributions. The team is dedicated to acquiring new accounts and capturing market share, which we believe is sustainable. Regarding your second question about Packaging, “acceleration” is indeed the right term. I am pleased with our positioning in this segment. In Q3, our sales grew in the high single digits, driven entirely by volume. We saw positive results across all regions, with volume increasing in the low double digits, slightly offset by some index pricing agreements. The team has generated substantial momentum. Although we are flat year-to-date, I anticipate strong performance in the fourth quarter as we move into next year. We have regained some temporary market share lost due to the Garland, Texas plant incident, and the team remains focused on driving this business forward every day. We have a strong outlook for further recovery over the next year. Many customers I've met with are eager to return to Sherwin-Williams, reflecting a better appreciation for our technology and world-class service. We continue to invest in our model, with recent wins in North America, Latin America, and APAC. I was recently at our France plant for a ribbon-cutting ceremony and am thrilled about the expansion, which will be vital for serving our customers, especially as the ban on BPA comes into effect in Q2 of 2026. Some customers are already preparing for that transition beginning in 2025. We are well-positioned for the future in this category. Lastly, I’m excited that we have recently increased our capacity by acquiring Henkel's metal packaging business on October 1. We welcome about 130 new employees at our production facilities in Germany and Mexico and have high expectations for the growth of this business.

Thank you for taking my question. It seems that the impact of the hurricane in Q4 won't be significant, considering it was around $0.05 for Q3, which is good to hear. My main question is about the opportunities for the Paint Stores Group in 2025. It sounds promising, especially with the market share gains you've made from Kelly Moore, who previously had about $300 million in sales. If you can capture a significant portion of that, perhaps similar gains from PPG can be expected as well, along with a potential 3% price increase. This suggests that the stores group may see high single-digit growth next year. Is that your perspective? Additionally, could there be further benefits from lower interest rates influencing the second half of next year? Is that how we should consider PSG's outlook for 2025? Thank you.

I would be cautious about that. We've been discussing the need for more time for factors like interest rate reductions to take effect. I'm not making any predictions for 2025, and I realize that isn't your question. However, considering the challenges we've faced over the past year and a half and how long it has taken to gain momentum on certain issues, I would advise managing that expectation. We have also mentioned that we anticipate some volatility in the first half, and we will see how things unfold. Given the current environment, having visibility three quarters ahead is quite challenging. Let us reach January first, as we are finalizing our operating plans with the teams, which will provide us with clearer insight, and we will definitely keep you updated.

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, what you said is that in the fourth quarter, the spending will come down, 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 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 sort of 800 or 900 basis point improvement in Consumer Brands, with sales being lower?

In the second half of the year, we are making investments while closely managing our G&A costs, although the timing may not always match perfectly within a quarter. For the second half, we expect our SG&A to remain consistent as we approach the third quarter. We are taking a disciplined approach to our SG&A, focusing on investing in sales and enhancing productivity for our customers through the convenience of our stores, the expertise of our representatives, and maintaining low turnover to ensure customers see familiar faces. Our efforts include delivery and innovation. Additionally, on the digital front and modernization, we aim to empower our employees with more effective and consistent data, alongside improved systems for better field performance. We are also carefully controlling other G&A expenses to help accommodate these investments while we wait for market conditions to positively impact overall demand. Despite these challenges, I am optimistic about our returns, as indicated by a consistent 5% mid single-digit growth in repaint. Regarding Consumer Brands, we face higher fixed cost absorption, which we've been managing as we see improvements in our global supply chain. Although we have adjusted our standards, the GSE allocation has not significantly affected our overall margin. We are witnessing an annual improvement in the global supply chain, which is benefiting Consumer Brands with increased allocations to stores and to PCG, along with operational enhancements.

Jeff, regarding your initial question about the increased SG&A aimed at achieving long-term market share gains, that is indeed our intention. I want to address your mention of maintaining constrained margins in stores differently. Referring back to Al's earlier point, when we experience expanded margins, we aim to leverage that as an opportunity. This led us to accelerate certain investments in the third and fourth quarters. Remember the six priorities I outlined during our Financial Community presentation, all designed to drive above-market growth. These digital initiatives will surely yield positive results, along with the simplification efforts Al highlighted, which are meant to equip our teams to operate more efficiently and enhance customer value. This approach was intentional and represents an opportunistic strategy on our part.

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 mentioned better quality sales, can you talk about that given what market share opportunities are available and whether it's DIY sales or contractor sales, res versus commercial? Thank you.

Certainly. I'll begin with the value of Do It Best. While we won't discuss our customer strategies, I believe this is a pivotal moment for our industry. There has been significant pressure across the category for the past few years. We will continue to collaborate closely with our customers as they adapt and make decisions regarding brands and banners. Regarding your question about quality sales, there are two aspects to consider. First, I want to reiterate that it's part of our core identity. We're not aiming to cater to everyone, so we won't engage in commodity markets where we aren't seeing a return for our shareholders. We are interested in quality sales, particularly within the premium sub-segments we serve, ensuring we help make our customers more successful. This includes premium products and opportunities for upgrades that allow them to get on and off job sites more efficiently, saving time and labor costs with products that are easier to use and require less touch-up. When we assess quality sales, we focus on our target audience and how we can provide them with the right mix of products.

Hi. Good morning. Two quick ones, if I may. Just CapEx, can you just explain what's going on with the year-to-date already being at your target versus your full year guide? And just within performance where you talked about customer slowdowns and really 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, year-to-date CapEx was $7 billion, 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 guided to the $700 million less $180 million, gets you into that $520 million, around 2% of sales, which is where we want to be at. That's just the noise in our new buildings.

Regarding your question about PCG and the temporary shutdowns, it is indeed widespread, particularly in the general industrial sector, more so in heavy equipment with some slowdown in agriculture. We see this as a temporary situation, typical for the end of the season, and there are currently no indications that this will become widespread or prolonged.

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 what were volumes in the top line, does 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?

So Steve, our cost of goods sold decreased mainly due to supply chain efficiencies in our Consumer Brands Group, with global production volumes up slightly and the team effectively managing costs. Another factor was foreign exchange, which contributed to the lower cost of goods sold this quarter. These were the two primary reasons for the decline. In terms of volume, stores saw a slight increase, while Performance Coatings remained relatively stable, but the decline in our consumer segment offset the gains.

On the store side regarding competitive pricing, we generally view our industry as quite disciplined, which gives us confidence in our pricing strategies. We aim to lead in pricing, ensuring transparency for our customers and setting them up for success during the bidding season, coaching them on how to effectively pass along pricing information. Typically, the cost of the product ranges from 10% to 15%, with the remaining costs attributed to labor. We are focused on managing crews efficiently on job sites, which aids in upselling our customers, especially in the current market conditions. Activity has been limited due to the unique situation in our industry, but we are closely monitoring it and staying in tune with our customers to remain competitive. We are confident in maintaining the recent pricing we announced and expect to revert to our historic run rate of 50 to 60, with no plans to alter that.

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 2024 at this point?

Yes. That's exactly what we're seeing.

And if I could, and 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.

Hi, thanks. Just on the SG&A and the potential increase in the back half of next year, it sales ramp. Just maybe bigger picture, just how you're thinking about SG&A leverage? Is there a kind of investment of sales you'd be managing to over time? Or is it may be a situation right now?

I believe it's dependent on the situation because our focus is on driving operating margin. In some years, that means expanding gross margin, while in others, like 2021 and 2022, it hinges on SG&A leverage. As Heidi mentioned, we are being opportunistic to prepare for when demand returns. Our gross margin has been stronger due to a more normal production and inventory cycle in our global supply chain this year, with inventory building ahead of the summer selling season. We observed a drop in our inventory through the third quarter and plan to build architectural inventory in the fourth quarter. This standardization helps us schedule our factories effectively and produce the right products at the right time, leading to efficiencies that we are realizing. We are taking some of those benefits and investing them in long-term initiatives.

Thanks. If I could follow up. Al your comment, I think you just talked about the focus is driving operating margin earlier. How do you talk 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?

No. We are definitely aiming to moderate on the general and administrative side. I believe this will help fund our selling investments because we have confidence in our strategy, our consistent investments, and our potential returns. As the macro demand environment improves, we expect to achieve leverage on SG&A in the future. It’s not a matter of if, but when. As our volumes grow and our mix improves, we can invest significantly without immediately achieving leverage on SG&A. We are fully committed to managing gross margin expansion and appropriately timing SG&A leverage to accelerate our operating margin growth.

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

Thank you, Matthew, and thanks, everybody, for joining us this morning. 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.