Sherwin-Williams Q3 2023 Earnings Report

Sherwin-Williams EPS Results

• Actual EPS: $3.20
• Consensus EPS: $2.77
• Beat/Miss: Beat by +$0.43
• One Year Ago EPS: N/A

Sherwin-Williams Revenue Results

• Actual Revenue: $6.12 billion
• Expected Revenue: $6.00 billion
• Beat/Miss: Beat by +$112.30 million
• YoY Revenue Growth: N/A

Sherwin-Williams Announcement Details

• Quarter: Q3 2023
• Date: 10/24/2023
• Time: N/A

Sherwin-Williams (NYSE:SHW) engages in the development, manufacture, distribution, and sale of paints, coating, and related products to professional, industrial, commercial, and retail customers. It operates through three segments: Paint Stores Group, Consumer Brands Group, and Performance Coatings Group. The Paint Stores Group segment offers architectural paints and coatings, and protective and marine products, as well as OEM product finishes and related products for architectural and industrial paint contractors, and do-it-yourself homeowners. The Consumer Brands Group segment supplies a portfolio of branded and private-label architectural paints, stains, varnishes, industrial products, wood finishes products, wood preservatives, applicators, corrosion inhibitors, aerosols, caulks, and adhesives to retailers, including home centers and hardware stores, and dedicated dealers and distributors. The Performance Coatings Group segment develops and sells industrial coatings for wood finishing and general industrial applications, automotive refinish products, protective and marine coatings, coil coatings, packaging coatings, and performance-based resins and colorants. It serves retailers, dealers, jobbers, licensees, and other third-party distributors through its branches and direct sales staff, as well as through outside sales representatives. The company has operations primarily in the North and South America, the Caribbean, Europe, Asia, and Australia. The Sherwin-Williams Company was founded in 1866 and is headquartered in Cleveland, Ohio.

Sherwin-Williams Q3 2023 Earnings Call Transcript

Presentation

[Operator]

Good morning. Thank you for joining the Sherwin-Williams Company's Review of Third Quarter 2023 Results and our Outlook for the Fourth Quarter and Full-Year of 2023.

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 the U.S. 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, Senior Vice President, Investor Relations and Communications.

[James R. Jaye, Senior Vice President of Investor Relations and Corporate Communications at Sherwin-Williams]

Thank you, and good morning to everyone. Joining me on the call today are John Morikis, Chairman and CEO; Heidi Petz, President and Chief Operating Officer; Al Mistysyn, Chief Financial Officer; and Jane Cronin, Senior Vice President of Enterprise Finance.

Sherwin-Williams delivered excellent third-quarter results compared to the same period a year ago. These results follow our strong first half and we are again increasing our full-year guidance, which John will talk about in just a few minutes. But first, let me touch on a few third quarter highlights.

Consolidated net sales were within our guidance range. Consolidated gross margin expanded significantly, sequentially and year-over-year, driven by pricing discipline and moderating raw-material costs. To reiterate, our commentary from last quarter, we are committed to investing in and profitably growing the business at the same time. The high-single-digit increase in SG&A over the prior year third quarter reflects those investments, which are deliberately being made at a higher level to take advantage of current market uncertainty, and aimed at driving the success of our customers and growth across all businesses.

Operating margin expanded year-over-year, and adjusted diluted net income per share grew by a double-digit percentage. EBITDA also grew by double-digit percentage with adjusted EBITDA margin of 20.7%, near the high-end of our current 19% to 21% target range. In addition, we returned $566 million to our shareholders through dividends and share repurchases during the quarter.

Let me now turn it over to Heidi, who will provide some commentary on our third quarter results by segment. John will follow Heidi with comments on our outlook before we move on to your questions.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Thank you, Jim.

I'll begin with the Paint Stores Group. Third quarter Paint Stores Group sales increased 3.6% against the challenging 21.5% comp. The increase was driven by continued effective pricing and higher pro architectural volume, excluding new residential. Segment margin improved sequentially and year-over-year to 25.9%, driven by pricing discipline and moderating raw material costs.

Protective and marine was the fastest-growing in the quarter, driven by strong volume, as sales increased by a double-digit percentage against mid-teens comparisons. Industrial flooring, infrastructure, and oil and gas applications remain key drivers. In our pro architectural end-markets, commercial sales were strongest, increasing by a high-single-digit percentage versus a high-teens comparison.

Residential repaint sales increased by a mid-single-digit percentage amid continued softness in existing home sales and against a 20% comparison. While this is a solid performance in the current environment, we are not satisfied, and Res Repaint continues to be our largest opportunity for growth. Property Maintenance sales grew by a low-single-digit percentage against the mid-20s comparison. New residential sales were down mid-single-digits with volume down high-single-digits against the mid-20s comparison. As we've previously noted, we anticipated new residential would be challenging near-term, given prior softness in single-family starts.

We expect our continued share gains and new account wins to become more and more apparent as starts improve. Our DIY business was down low-single digits against a very difficult low-30s comparison. From a product perspective, interior paint sales were up low-single digits and exterior paint sales were flat both against double-digit comparisons in last year's third quarter.

Sales in our Consumer Brands Group decreased by 4% in the quarter, primarily due to the divestiture of the China architectural business and software DIY demand in North America, which was partially offset by selling price increases. Sales in North America, our largest region decreased by a mid-single-digit percentage against a double-digit comparison. The Pros Who Paint category continued to grow, while DIY demand remained muted by inflationary pressures on consumers. We continue to invest here with our strategic retail partners for growth. In other regions, sales were up high-single-digits in Latin America and low-double-digits in Europe. Sales in China were down high-double digits as we completed divestiture of the business on August 1st.

Adjusted segment margin was 13.8%, which was lower than a year ago, primarily due to lower sales volume and lower fixed-cost absorption due to lower production volumes. Sales in the Performance Coatings Group decreased 1% against the low teens comparison. Volume decreased by a high-single-digit percentage but was partially offset by positive low-single-digit contribution from pricing, FX, and acquisitions. Adjusted segment margin increased to 19.1% of sales, primarily due to pricing discipline and moderating raw material costs. Sales in PCG varied significantly by region.

Sales were strongest in Europe and increased by a mid-teens percentage. Latin America sales increased by low-single digits against a mid-teens comp. North America sales decreased mid-single-digits against a 20% comp. Demand in Asia remained weak with sales down double-digits against high-single-digit growth a year ago.

From a division perspective, growth was strongest in our industrial wood business, which was up by a low-double-digit percentage against a mid-single-digit comparison. This growth reflects our ICA acquisition, share gains, and a potential bottoming of new residential construction. We expect to gain further momentum in this business as we closed October 1st on the previously announced acquisition of Germany-based specialized Industrial Coatings Holding, comprised of the Oskar Nolte and Klumpp Coatings businesses.

We are gaining share and seeing steady demand in Auto Refinish, where sales increased by a mid-single-digit percentage against a high-single-digit comparison. Sales in Coil and General Industrial both decreased by low-single-digit percentages against challenging comparisons and varied widely by region. Packaging sales were down by a mid-teens percentage against the high-single-digit comparison. We anticipated this decline, given the near-term destocking by brand owners that we described earlier this year.

Packaging sales in the quarter were also slightly impacted by the fire at our Garland, Texas plant. Our business continuity team is executing our contingency plans to minimize customer impacts from this event near term. Longer-term, we continue to feel very good about our position and growth prospects in this end-market, and we expect to bring additional capacity online at our Thouars new [Phonetic] France plant by early 2024.

With that, let me turn it to John for his comments on our outlook for the fourth quarter and the year.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Thank you, Heidi. Our team delivered another strong quarter in an environment characterized by ongoing uncertainty. My thanks go to our 64,000 employees for continuing to focus on our mission and for executing on our strategy. Their energy in serving our customers and providing them with solutions remains a true differentiator. In our July call, we described the anticipated second half demand backdrop across our businesses. The third quarter played out much as we expected, and we believe the environment remains largely unchanged in the fourth quarter.

Paint Stores Group will face another strong year-over-year comparison. Demand in commercial, property maintenance, residential repaint, and protective and marine remains stable, with new residential remaining soft as we expected. We have now annualized prior price increases. In Consumer Brands, North America DIY demand remains soft. Europe demand has stabilized and Latin America markets remain mixed.

Performance Coatings demand remains highly variable by end market and by region. We know we cannot defy gravity in terms of the macro-environment. What we can do is aggressively pursue new accounts and share of wallet opportunities to drive market share gains. We are aggressively focused on doing just that.

Moving to the cost side, we are narrowing our full-year raw-material outlook. We expect cost to be down by high single digit percentage in 2023 compared to 2022. We expect other costs including wages and other input costs to be up in the mid-to-high single-digit range. We also continue to see the current market uncertainty has an opportunity to press our advantages through greater investment in solutions for our customers, they will drive their success and ours.

Our SG&A spend in the fourth quarter will reflect these investments, leading full-year SG&A to increase in the high-single-digit to low-double-digit range compared to last year. This approach has served us well many times in the past. We are highly confident, it will again now, resulting in continued above market growth and strong returns. Now moving onto our specific guidance, we anticipate our fourth-quarter 2023 consolidated net sales will be up or down a low-single-digit percentage compared to a high-single-digit increase in the fourth quarter of 2022, with volume flat to down slightly. As a reminder, we've largely annualized previous price increases across the business. For the full year 2023, we expect consolidated net sales to be up a low-single-digit percentage with volume down a low-single-digit percentage.

Our sales expectations by segment for the fourth quarter and the full year are included in the slide deck issued with our press release this morning. We are increasing our full-year 2023 diluted net income per share to be in the range of $9.21 to $9.41 per share. We believe this increased range accurately reflects our strong third quarter performance, continued pricing discipline, and moderating raw-material costs, while also acknowledging the ongoing uncertainty in our seasonally smaller fourth quarter. This guidance includes acquisition-related amortization expense of approximately $0.80 per share and restructuring-related net expense of $0.09 per share.

On an adjusted basis, we expect full-year 2023 earnings per share in the range of $10.10 to $10.30. This is an increase of 16.8% at the midpoint compared to last year's $8.73 adjusted earnings per share. We provided a GAAP reconciliation in the Reg G table within our press release. Our slide deck includes additional information on our assumptions for the year.

As we begin the fourth quarter, we continue to expect the choppiness by region and end-market. More importantly, we continue to see opportunity amid uncertainty. We are extremely confident on how well our various businesses are positioned. Our strategy is clear. It's working, and it's not changing. We'll continue to provide our customers with differentiated solutions that drive their productivity and their profitability. Our capabilities, products, and services are unique. We remain on offense, growing new accounts and share of wallets in the right markets, with the right customers. We also remain focused on developing and retaining talent, and improving and simplifying our operations. We expect to finish the year with momentum that will carry us into 2024. We had the utmost confidence in Heidi, Al, our leadership team and our people. Together, we expect to continue outperforming our competitors in the market.

This concludes our prepared remarks. And with that, I'd like to thank you for joining us this morning, and we'll be happy to take your questions.

Questions and Answers

[Operator]

Certainly. Everyone at this time we'll be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from John McNulty from BMO. Your line is live.

[John McNulty, Analyst at BMO Capital Markets]

Yeah. Good morning. Thanks for taking my question. And first, John, congratulations on a great tenure in the CEO slot and Heidi, best of luck to you as you take on that role at the end of the year. So I guess the first thing I wanted to just touch on was the strength of the contractor market. Can you give us a little bit of color as to what you're seeing, especially in the residential repaint area? It looks like it's been, you know maybe a little bit stronger than what we would have expected. So just curious your take on how to think about that continuing going forward.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Yeah, good morning, John. I think you make a great point here. I want to take a minute before I jump right into Res Repaint which I absolutely will. I'll just put this a bit in perspective. You heard from some of our prepared remarks that when we look at our performance in general, and we're posting some stronger results up against really aggressive comps last year. I think that's an important piece that we anchor in, as I get into the Res Repaint, it's super Res Repaint, certainly, new res being up against over 20% comps here and still in this environment continuing to push. So we're really proud of the team, being able to overcome some of that. So I think, I just jump right into res repaint, I'll let you know that, yes, we are gaining share in this market.

Demand does vary, depending on a few variables, I think if you look at this and separate a bit, those contractors that are more established and well-known and are more experienced in marketing their business, they've got the scale and they're confident in their backlogs. I would say that's more so true for them than those that have less experience, being able to put that type of focus on -- in marketing their business. So, obviously, it's a bit of a variance there, but we look at this importantly you know, the adversity that these contractors are facing in this choppiness, it's also an opportunity where I believe that it makes our stores and our reps even more valuable as we're helping them navigate the rollout of this uncertainty and helping to intercept what it is that they're trying to accomplish in their business, whether it's leads or making sure that we're helping them finding ways to be more efficient in their process.

So, I think we've seen this movie before, we're ready for what's ahead, we're putting investments in, and John referenced earlier, some of the SG&A that you see. And I'll take you back, we saw this coming in 2008 and 2009 and making sure that what came out of that was our desire to be well-positioned. You know as new residential does recover, that we've got all the investments in place here to continue to drive Res Repaint. So this is an opportunity where -- where and I would say when our model stands out and when we're able to gain a lot of share.

[John McNulty, Analyst at BMO Capital Markets]

Got it. Fair enough. And I guess the second question is just around cost versus price. It looks like raws are coming down, but you highlighted in the remarks that other costs are definitely still pushing higher and you're also still investing in the business. So can you help us think about the need for further pricing? I know you've taken a little bit of a pause recently as you normally do in the paint season, but I guess how should we be thinking about the need for further pricing as you're pushing into 2024? Thank you.

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

Yeah, John, this is Al Mistysyn. And we're in that part of the year, where we are going through our operating plans, we're reviewing really demand outlook with our suppliers. I know, we've gotten a lot of questions about oil ticking up and that has to be up for a period of time before we see that flow through our raw material basket. I think what you will see is the other cost input items increasing. I think merit increases will get back to a more normal level, but you've got healthcare, freight, some of things going on with LTL carriers that are driving our overall costs up. So, as we typically do, we push back and look for offsets as much as we can. And then when we kept -- don't feel like we have an offset and we need to go out with price, we will tell this our customer first, and then we'll talk to the Street. So we're going through that process and we need a little more time to figure that out and we'll let our customers know and then we'll come back and let the Street know.

[John McNulty, Analyst at BMO Capital Markets]

Thanks very much for the color.

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

Thanks, John.

[Operator]

Thank you. Your next question is coming from Vincent Andrews from Morgan Stanley. Your line is live.

[Vincent Andrews, Analyst at Morgan Stanley]

Thank you very much, and good morning everyone. You know, wondering if I could just dig into the SG&A a bit more, understand completely. I appreciate what you're doing this year. But how do we think about that into '24, both in terms of what level of increase is realistic for next year, presumably SG&A is not going to go down. But should it grow a lot less than normal, just given the big step-up this year? And then, you know, how do we think about from the outside, over the next couple of years, measuring the return on that? Is it simply going to come through the volume line and Paint Stores Group or do you think it's going to be about margin or both? Or as we -- if we're here two years from now and we do a look back, what do you want us to see specifically in the P&L?

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Yeah Vincent, let me start with that last piece. So I think it's really important and again I want to reiterate the confidence that we have in our strategy and the fact that we've seen this movie before. The investments that we're making, you'll see in the P&L and you will see it in market share growth. Our teams are invested in executing on these areas. But I think another important area that's crucial that you won't be able to measure on our P&L is the success that we will bring with our customers as well.

So if you go back to the strategy that we employ is focused on driving the success of our customers. And these investments that we're making, will clearly help our customers in achieving what it is that they're trying to do. And so I think as you look forward, the expectations should be increased market share and outpacing the market in volume and profitability as well.

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

Yeah, Vincent. I would say, certainly, as we annualized costs or the investments in our long-term growth initiatives, you're going to see that in the first part of the year. But I'd highlight if you look at our SG&A sequentially, second-quarter to third-quarter, even though we kept investing in Paint Stores Group and reps, Performance Coatings Group's sales and tech service reps and you have investments in the Pro Who Paints, we saw those offset by reductions in our G&A costs or admin SG&A, so that we're trying to figure out ways to continue to drive G&A down to offset the incremental cost of those investments. And yes, we will absolutely measure the return. But as we get into 2024, we're going through our budgeting plan, we're going through key initiatives across each of our functional areas and we'll keep driving those costs lower to help pay for the incremental investments. Vincent?

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Thank you, Vincent.

[Vincent Andrews, Analyst at Morgan Stanley]

Sure. Thank you.

[Operator]

Thank you. Your next question is coming from Jeff Zekauskas from J.P. Morgan. Your line is live.

[Jeff Zekauskas, Analyst at J.P. Morgan]

Hi, thanks very much. I know that the year-over-year price comparisons are less positive than they've been. But when you look at sequential pricing from the second to the third quarter, were your prices down sequentially in any important product area?

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

Yeah, Jeff. If you look at our pricing, because you annualize pricing throughout each of the segments as we've gone. I know we've talked about Performance Coatings Group basically at some points run a 90-day cycle. So price was still up in the quarter in the third quarter, up low-single digit. But if you looked at that compared to our second quarter price would add at a mid-single-digit compared -- mid-single-digit percentage in the second quarter, so. And as you get into our fourth quarter you'd be at a lower-single-digit impact on our fourth quarter. So that's just annualizing the price increases we've taken throughout '22, but I would argue and say, we have not given that price back and you can see that in our gross margin performance in the second quarter of -- 440 up in the third -- for the third-quarter at 490 basis points and we expect to be up again in our fourth quarter, along with the moderating raw material cost sequentially.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Jeff, I would add to that as well. I think our effectiveness is at a record-high and it gives the team a lot of credit, because it's not just about holding it, it's about demonstrating that value every single day with our contractors.

[Jeff Zekauskas, Analyst at J.P. Morgan]

Okay, great. And your raw materials were down high-single-digits. I would imagine they would be down low-double-digits in the fourth quarter. If you're going to be down high-single-digits for the year and maybe the fourth quarter is sort of a bottoming of raw materials for the industry in general, is that fair?

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

You know, Jeff, I don't know I'd go that far. As I mentioned earlier, I think we have to look at that the market is still demand-supply driven. We're working with our suppliers to develop. What does the industry demand looks like across each of the regions? And I think that's going to be a bigger driver of raw material pricing as we get into 2024. I think as we mentioned on our second quarter call, we expected our third quarter to be our biggest year-over-year change in raw-material costs, but certainly, they're going to be down in our fourth quarter as well.

[Jeff Zekauskas, Analyst at J.P. Morgan]

Great. Thank you so much.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Thanks, Jeff.

[Operator]

Thank you. Your next question is coming from Greg Melich from Evercore ISI. Your line is live.

[Greg Melich, Analyst at Evercore ISI]

Hi. I had a couple of questions. One is, how much did the volume decline year-on-year hurt gross margins in the quarter?

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

Yeah. I think Greg, when you look at the volume declined in overall is down low-single digit. Certainly, as I've talked about, that's always typically the biggest driver of operating margin leverage. When you look at how that mix changes in the quarter. So we talked about Paint Stores Group being flat. And then the other two segments being down at more than that. So it was less of an impact than if Paint Stores was down similar, if that makes sense because Paint Stores Group has a higher gross margin profile.

[Greg Melich, Analyst at Evercore ISI]

Got it. So it may have hurt, but not as much as you think, given the mix of where the volume decline was?

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

Correct.

[Greg Melich, Analyst at Evercore ISI]

Okay. And then I guess my follow-up question is more specifically on architectural. Could you give us some update on what the backlog that you're hearing about or what it sounds like from the pros, particularly in Resi Repaint? You mentioned how new residentials are weak, but I love to hear more on the new resi, I'm sorry, the Resi Repaint side.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Yeah, Greg. I think on the Resi Repaint side, it's similar to what I mentioned earlier. I think you look at traditionally, you're going to see somewhere between 13, 15 weeks out. I would say that, that backlog has come down by two or three weeks, so a bit more limited in terms of visibility. But outside of that, again I would look at it in terms of the size of the contract or the level of experience again ability to market themselves. They've got further out straightlined into '24 versus some of the other smaller contractors that are still trying to find ways to -- to kind of build those backlog.

[Greg Melich, Analyst at Evercore ISI]

Great. Thanks, and good luck.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Thanks, Greg.

[Operator]

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

[Ghansham Panjabi, Analyst at Robert W. Baird]

Yeah. Thanks, everyone, and good morning. I guess with the reversal of higher interest rates since you last reported, and just sort of building on the last question. How do you think this dynamic will play out for your six verticals within ESG relative to what you saw with the first iteration of interest-rate increases, because it seems like some of that was dampened, some of the impact was dampened by the fact that the backlogs were actually very strong coming into this year.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Well, I think -- I describe it this way, there is some uncertainty given the challenges and interest rates can have on our market. And I think Heidi and the team are really focused on one very clear mission, we're going to outpace the market and we've got confidence in the approach that we're taking, the services that we bring and the products that we are introducing. And quite frankly, we're also taking advantage of other opportunities within the market, and we got competitors are changing models, as an example. And our simplified approach of dealing with one Sherwin store, it relates to the painting contractor, we believe adds value.

So the investments that we're making will enhance that on top of the organic growth that we expect from our stores. And so we're taking advantage of market conditions where Heidi just mentioned some Res Repaint customers that may not have had experience going through a cycle yet. They are now turning to our people for guidance and support on how do you begin advertising, in the past, they just parked their truck in front of the car -- and I'm sorry, a truck in front of the house in the neighborhood, and all the neighbors would flock in. They need help right now. And so, they're returning to our people and our people are playing an important role. And so when we look at what's happening with interest rates, there's some choppiness, but we also believe that creates opportunity. And we've talked openly about adversity creates opportunity at Sherwin and we're capitalizing on that.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Only thing if I would add to that, I think new residential specifically relative to interest, while the single family completions have been flat or negative year-over-year for eight straight months. We are starting to see that -- starting to see the starts are positive year-over-year for three straight months. So we're watching interest rates very closely. It may also signal that we're past the bottom. So knowing that this is a choppy environment, another point that I think is important here -- while others are talking, the market are talking about preparing for the slowdown, it's really important that our teams are laser-focused on preparing for taking disproportionate share. So we went into COVID, with a large majority of exclusive arrangements with multi -- with these national homebuilders and we've come out building momentum in the number of exclusive contracts that we have with some of these builders.

I think that's a testament to the team's ability to demonstrate our value in this environment. And I don't -- to take a step further here, and it just goes back to some of the discussion on working capital. We talk about managing our working capital really closely and -- but as we're having these partnerships and trying to demonstrate more of Sherwin-Williams value proposition, especially in the new residential space. And in this environment, helping to get in front of -- helping them to streamline and standardize what it is that they are doing in terms of the product that they're bringing to market. So they can be as aggressive as possible helping them look at ways to reduce cycle time and this all-in an effort to, of course help them drive increased profitability and productivity, but also to be effective as they can be with their working capital again in this environment with a lot of volatility in the interest-rate.

[Ghansham Panjabi, Analyst at Robert W. Baird]

Got it. And then in terms of free-cash flow allocation, I guess going back to the fact that interest rates are much higher. It looks like you have about a little over $2 billion of debt due for refinancing between 2024 and 2025. What -- how are you thinking about the terminal sort of balance sheet leverage for Sherwin-Williams at this point given the changing interest-rate environment?

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Yeah, Ghansham, I think, if you remember coming into the year, I said I thought we'd keep our total debt flat with year end 2022, but as you saw at the end-of-the third quarter, our net-debt to EBITDA leverage ratio is 2.2 times versus 3.1 and that was a combination of a strong, will get a trailing 12 month EBITDA growth of over almost a little over 28%. But we also reduced our total debt by almost $600 million. I would expect as we kind of forecast end-of-the year would keep that total debt lower year-over-year by about $600 million and we'll be firmly in that 2 to 2.5 times range.

[Ghansham Panjabi, Analyst at Robert W. Baird]

Okay, thanks so much and John and Heidi, best wishes for the future.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Thank you.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Thank you, Ghansham.

[Operator]

Thank you. Your next question is coming from Arun Viswanathan from RBC. Your line is live.

[Arun Viswanathan, Analyst at RBC]

Great, thanks for taking my question. I guess I just kind of maybe get your thoughts on protective and the other markets within industrial. What are you seeing, maybe from just run-through some of those verticals, apologies if I missed that earlier, but it seems like what was unusually strong, we're expecting some weakness there, but that was actually better Protective & Marine obviously strong refinish, I would imagine there is still strong packaging weak. Could you just reiterate what you're seeing in those markets? Thanks.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Yes, good morning, Arun. I think first and foremost, I think that's indicative that our strategy is working and when we look at this business in this portfolio, it's really important to share with you what we talk about internally, which is we're not trying to be all things to all people. And so when you look across these businesses, making sure that the discipline and how we're thinking about investments discipline and when we're investing is certainly a key part of those. So maybe just a little bit across some of these decisions on late, John rather jump in as well. You start with -- you mentioned industrial worthy, there has been a lot of wins here against the regional competitors. And while we mentioned earlier, US housing is continuing to soften, we think this is an opportunity for us just coming out of completing some key acquisitions that we mentioned in our prepared remarks with Oskar Nolte and Klumpp feels like we're in a really good position here to continue to drive increased value and return value to our shareholders.

Our gallons per day appear to have bottomed-out in all regions, again so as the new residential swings back, we expect Industrial Wood happily come along for the ride there. I'll comment briefly on Automotive Refinish. I think importantly, we've had some really good share gain here a year-to-date, installed in North America have been up, strong double-digits and our core users are growing. We talked a bit about our collision core technology and business that momentum and adoption is continuing. And this is a suite of digital tools and solutions that truly is helping to benefit our business here and I would also add along with our North America footprint, similar think of our paint stores group, similar to that slip and we're really able to have a better opportunity to control a more consistent customer experience beginning to end here with our Auto Refinish which we think is an incredible differentiator for us.

We talked a bit about general industrial, heavy equipment market is holding up, especially in ag and we continue that we expect to see that continue building products, general finishing is soft, but works. We've expected that the team is laser-focused on pivoting and adapting to the market.

In the coil side, North America is holding up better than the other region still soft, but the team is working really hard against some new business wins and then near-shoring in Mexico continues to create demand for us. So we're managing that across the region very carefully. One comment on coil as well. I would say that most of the China coaters are running at about 50% capacity. So we expect there to be some forward opportunity there as well.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Arun, I think you mentioned on -- your question about P&M, I think the team there is doing a terrific job of really staying focused on the value proposition that we bring into high-value project. So, EV battery plants as example, semiconductor plants, I think I were just recently added one of the largest plants I've ever been on and our floor coating teams are all over these businesses. I think the offshore wind and other alternative energy investments as well as water infrastructure, I mean these are all areas that we're focused on and I'll remind you, it wasn't long ago, we were talking about our Protective & Marine business at a time when it was under pressure and we reminded our investments, our investors that we take this long-term approach and I believe these are terrific example -- are continuing to invest even when times were little tough knowing that these projects can be delayed, but they can't be canceled. Oftentimes, you'll find highly corrosive areas that need to be coated, you might get an extra year, a year or two out of those, but they need to be coated and those types of high-value projects there are almost kind of a return repeat businesses as you maintain those that add to the attractiveness of these coating.

So we're really proud of [Indecipherable], the entire leadership team within our PCG business for what they're delivering. And importantly if you remind you of the operating margin goals that we've set for this team at 2019, it's come in at 19%, our goal of getting up into the high-teens, low 20s, so they're doing it and they're doing it by bringing value to our customers and to us.

[Arun Viswanathan, Analyst at RBC]

Great, thanks for that. And if I could just ask one follow-up on the M&A side. Given what you said and in those different verticals, do you see the need to add capacity inorganically any there in any of those areas and similarly divesting businesses or would you share on that side? Thanks.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Well, we've said certainly in our investor call recently and we say this consistently, but we don't need M&A to grow, there is a lot of confidence in every segment that we have for us to continue to take share organically. And so from a capacity standpoint, we've continued to be very strategic about where we are laying that capacity in and I'll go back to Al's point, all of that is by design as we look at our 10-year capex plans or 10-year demand plans, certainly we don't want to put anything that's net-new into the system, if its not needed. But where we need that capacity, we're going to -- we're going to do that.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

The one point I do want to add, I don't know if Heidi mentioned packaging or not, but that's an area that we continue to invest not so much-needed through acquisition or M&A, Arun, it's more through our investment of very unique technology. So, the packaging business, particularly our V70 product is very unique technology and as quickly as we can bring technology or bring capacity onboard it's sold-out. So I think that's an area that we will continue to invest in.

[Arun Viswanathan, Analyst at RBC]

Great, thanks.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

You bet.

[Operator]

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

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you, good morning. On your gross margins, they were near your long-term target in the quarter and it sounds like will be above that target in Q4. So, given how high can it go this cycle, could they approach or even exceed 50%?

[James R. Jaye, Senior Vice President of Investor Relations and Corporate Communications at Sherwin-Williams]

David, one caveat to that I would make, when you look at our fourth quarter gross margin because you typically see seasonal architectural slowdown in volumes and sales. The fourth quarter margin may or may not be sequentially improving, it's our smallest quarter, year-end adjustments and other year end adjustments that have could have a material impact on the gross margin, also just reiterate the price increases aren't going to be as big of a -- of a tailwind in our fourth quarter than what we saw in our third quarter.

On the other side of that, Paint stores group is going to grow faster in our fourth quarter that will help drive gross margin. As we talked about at our Investor Day, we are at a current range of 45% to 40%. We set aggressive goals for our teams and as we consistently achieve that current range, we'll adjust the range. I don't think we're ready sit here today and make a change to any range or talk about 2024 at this point, but we're going to be consistent in our approach going-forward.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

And David, I would just add very simply, there is no sealing.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Very good. And Heidi and John, just looking at past DIY cycle weaknesses, what does it take or what do you need to see you think to see reversal of current DIY cycle weakness here?

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

So clearly the consumer is feeling some pressure from inflation perspective and there'll be some normalization if it's in wages increases -- wage increasing or the spending patterns of consumers that, that will take effect. But the fact is this that, I'll remind you that paint is a relatively inexpensive, yet highly impactful opportunity for people that are interested in their homes, staying in their homes to make a difference. And if people decide they're not going to sell the homes or going to stay-in place, it's a very viable option. I will remind you the average home age now is over 40 years-old. So there is more-and-more investment in the structures, people aging in-place is impacting as well. And additionally I would say, not only does it help the DIY, but as the population is aging, that generally will turn into a more of a whereas repaint opportunity, which helps our position in that space as well. We don't want 70 year-old people scraping gutters and ease their homes. But inside, yeah, DIY is going to be an important part, there is a cycle and we're playing the long game here. We have several way the table tilts will be there.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Very good. Thank you very much.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

You bet.

[Operator]

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

[Josh Spector, Analyst at UBS Group]

Yeah, hi, thanks for taking my question. I guess two ones more macro around the stores group. I guess first when I look at US completion data for new res, it looks like that was kind of flat, you guys reported down mid single-digits, I assume you get some pricing, I don't know if that's a regional divergence or something else you call-out, maybe I'll start with that one first.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Well, I think what you're experiencing right now is the delay between housing starts and the nine whatever 90 days or so after maybe a little bit longer after start before homes are painted. So our view and Heidi mentioned this, when you look at, I think where your question is going is around the share our share of new residential. Our position here is very strong and getting stronger every day. Heidi mentioned the exclusive arrangements that continue to grow and count. Our relationship with the new residential builder and our commitment to helping their profitability and success is helping us grow those -- those customers, it's delayed right now because the more agreements that we are signing right now and with the pressure on starts, we're not seeing that, but can you tell you with great confidence that as the new homes continue to rise and they will, I think everyone would agree there is a higher demand than there is supply right now, family formation continues. There's a hole right now that exist in-housing availability. When that comes back, we're going to be this coiled spring that we've been in the past and it's exciting actually to see our teams winning at the rate that they are winning and it will show-up on the scoreboard.

[Josh Spector, Analyst at UBS Group]

Okay, thanks and I appreciate that. I just on the other side of it, when you think about the resi repaint side not just Sherwin but maybe the industry, so I mean we still have turnover down about a third from the peak a couple years ago, has the industry fully digested that so that contractor backlogs reflect that have orders reflected that and just I mean, how are you thinking that plays out into next year, is there another leg down in the industry to normalize to that if we don't have a step-up or have we already reflected that in the current run-rate?

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Yeah, I think it's been reflected. If you take a few quarters back, we were talking about resi repaint contractors that in many cases weren't even returning phone calls, many people were saying that they come out and give you a quote in six to nine months and then it would be about a year before they could get to the project. So there has been a more normalized reality if you will as it relates to the residential repaint contractor. Again, I'll reiterate, that this adversity creates opportunity for Sherwin-Williams. You should bet right now as we are here in this moment that our customers are getting visited with Sherwin-Williams representatives. You should also bet that our competitors customers are getting visited as well. So we're not -- we're not playing nice here, we're going after some pretty aggressive market-share gains and we expect to win aggressively.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

And I would add to that too, Josh, I think there is a a lot of confusion in the marketplace right now and our opportunity, John mentioned, adversity is our friend and I couldn't agree more with that. Our strategy is working here and I'll take you through, we're talking about our control distribution platform. We own the stores we on the rep, the store manager owns that P&L, the store manager own staffing owns the culture of that store and I think it's really important, because when we talk about that relationship and the consistent experience we can half of these raspberry paint contractors, it's critical that they know exactly what they can get from the experience, they can have a Sherwin-Williams. And so as they're coming in, as they're traveling, as they're trying to grow and take on more, our teams are prepared, trained and ready to get any tools that they need in front of them to help them to become as productive and profitable as possible. So, I'm really confident in how we are prepared to differentiate as we add value to this contractor.

[Josh Spector, Analyst at UBS Group]

Got it. Thank you, both.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Josh.

[Operator]

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

[Michael Harrison, Analyst at Seaport Global Securities]

Hi, good morning. You have opened 36 new paint store locations so far this year, is the target still 80 to 100 and are you seeing any delays neither the permitting process or the construction process?

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Mike, yes, we expect to build as we said it and no, we do not expect any delays. I think this is really important when you look at our commitment to the teams as the Street, we're opening a new-store every three days and there's puts and takes in terms of timing. You can imagine, our strategy is reflecting our desire to chase the density and the volume and some of those markets, there's unique nuances where we're timing, getting into certain markets in certain area. But our commitment to getting to the stores is critical, because we still continue to see a return on those stores at a rapid clip and we think there's a lot of opportunities to achieve a future density there.

[Michael Harrison, Analyst at Seaport Global Securities]

All right. And then within the consumer business, one of your competitors suggested that sell-in to the big-box retailers have been weaker than sell-out that suggest that maybe there is been some inventory work down this year. Do you have any thoughts on how point-of-sale with some of your key customers has compared to your volumes into those customers and I guess whether big-box inventories at this point in the year are below where you would expect them to be? Thank you.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Well, firstly, we wouldn't comment on anything specific to our customers. So, what I can share with you with our approach that we're taking partners and again, we talked openly about making sure that success is our customer success. So when we're looking at making sure that they are the right inventory levels, helping them thinking through how to manage to optimize their working capital, you can rest assured that those conversations are happening on a daily basis. So we'll let them speak to their specific strategy there.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Yeah and I think that's really important, I'd like to where that Heidi frame that, that we gauge our success by how successful our customers are. And so we're actually working with our customers, encouraging them to manage their working capital, so that they can put their cash to work and be more successful and Al maybe you want to talk a little bit about what the impact of that might be, because we're trying to drive reasonable or acceptable working capital not only for us, for our customers.

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

Yeah, I'd start with, Mike, that, as we typically do, our inventory gallons decreased sequentially as we -- we're getting back to a more typical bell -- bell curve, we grow inventory into the summer selling season. We see incremental decreases as we go through the -- through the second half. And then we'll build inventory in our fourth quarter. That consistency allows our customers to also manage their inventories better because you're back to a more normal environment. To that point, I would say, we expect our working capital trend towards our 11% to 11.5%. We were at 12% coming out-of-the third quarter, so we're well on-track for that and what it's allowing us to do is drive significant cash flow and you saw that in our third quarter and that's a combination of strong net income results and working capital management and we expect to flow that through into our fourth quarter and have a really strong cash year that's allowed us to be very flexible. Ghansham talked about, our ability to pay-down debt, but it also allowed us to return cash to our shareholders in dividends and buybacks and we've returned over $1.4 billion to our shareholders over that time. So in this high-interest rate environment, we get back to our more normal operating cadence with inventory and you'll see us manage our working capital down, which then allows that consistency to allow our customers to manage their working capital down.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

More of these, I would add to that as well, I would go back to Al's point here, we put by design very intangible capacity to work here, so that as we're partnering closely to manage and optimize working capital and inventory with our partners, that is that we've got the confidence that we have the capacity to build the inventory in time for the season ahead.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Thanks, Mike.

[Operator]

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

[Duffy Fischer, Analyst at The Goldman Sachs Group]

Yeah, good morning. John, you've often talked about things like sprayers being a good leading indicator what you're seeing in your stores with like a one to two quarter lag. What is that equipment sale telling you today about what the next couple of quarters holds for the store-sales?

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Well, Duffy, I would say that what is telling me now is that we're ending the season. So I'd say, while we talk about that typically the greatest correlation between those types of sales and confidence is usually as we go into the season, as we're coming off the season, we are continuing to see spray parts right now move and I'd say right now as we taught, there's -- there's a choppiness in the market, but we have confidence in our position in the market and we'll see how this unfolds next year as we go into the paint season. Coming out of it though, it's typically not the best -- best tool to use to gain a level of confidence of contractors.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

But what we are seeing there too, despite the spares as the backlog of projects its for our commercial contractors continues to be solid well through midpoint of next year, so getting back to more of that normal cycle. So good indicator of some growth there.

[Duffy Fischer, Analyst at The Goldman Sachs Group]

And then, Heidi, I think you made a comment that your gallons per day had bottomed in your view. I didn't know -- was that for the company as a whole or was that for paint stores group and that's even inclusive of kind of the seasonal weakness that we generally see in Q4.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

That was just in wood.

[Duffy Fischer, Analyst at The Goldman Sachs Group]

Oh, that was just in wood? Okay, thank you.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Yes, you bet.

[Duffy Fischer, Analyst at The Goldman Sachs Group]

Thank you, guys.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Thanks, Duffy.

[Operator]

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

[Kevin McCarthy, Analyst at Vertical Research Partners]

Yes, good morning. I was wondering if you could comment on your administrative costs, it looks like they jumped up a bit in the third quarter and reading the commentary you called out two items, namely environmental expense and asset disposals. So a few questions would be, where are the nature magnitude of those items? And would you expect that line-item to come back-down in the fourth quarter and beyond?

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

Yeah, Kevin, the year-over-year increase, I would say environmental is little less than half of that increase year-over-year and then cost related to our Garland plant fire is a little less than half. We also are going to go against the sale, which benefited again up and sale of our gain on-sale of assets last year that benefited our third quarter last year. I would say, I'm glad you asked that question because I think, I want to give a little color around our fourth quarter guidance, even though we don't give EPS guidance, it's implied and it's backwards, but I think a better way to look at that as our guidance at the operating margin line and we're expecting our fourth quarter operating margin to be flattish at the midpoint year-over-year compared to a strong fourth quarter last year, with operating profit up over 60% and our operating margin was up 450 basis points. So, we're not -- we are expecting gross margin expansion in our fourth quarter, not as much as we saw in our third quarter. We see raw-material moderation, we're not going to get as big of a price tailwind that we got in our third quarter and I do expect higher SG&A year-over-year because of the long-term investments. So then that gives us to these non-operating costs and we have approximately a $60 million increase in our non-operating costs that are predominantly in our admin segment and that's due to the credits that we realized last year in environmental and other income in the fourth quarter that we don't expect to repeat and really get environmental and these other expense lines to a more normal level.

[Kevin McCarthy, Analyst at Vertical Research Partners]

Okay, thank you for that, Al. And then as the second question, if your raw-material costs were to trend flat from here, would it be reasonable to estimate that you could see relief in 2024 perhaps in the negative low-single to mid-single-digit percentage range or how would you frame that outlook for next year, as it relates to raw-material cost specifically?

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

Yeah, Kevin, I think with the current environment and the volatility we're seeing both in oil, in the choppy demand environment. I know, historically we've given run-rates, a preliminary run-rate on raw materials. I think that's probably a little -- a little too soon for that in a sense that we also have to take a look at the other cost factors and the total input costs. I talked about the merit increases getting back to more normal levels, but healthcare is growing significantly. We have freight costs and there's some things going on in the LTL freight side of the market that are driving our overall cost. So, I think it's a little premature to give that level of guidance. I'd rather wait till we get more line-of-sight or a better line-of-sight and give you an update in January.

[Kevin McCarthy, Analyst at Vertical Research Partners]

Okay, fair enough. Thank you.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Thanks, Kevin.

[Operator]

Thank you. Your next question is coming from Aleksey Yefremov from KeyBanc Capital Markets. Your line is live.

[Aleksey Yefremov, Analyst at KeyBanc Capital]

Thanks and good morning. Al, I wanted to follow-up on your comments regarding fourth quarter EPS. I guess historically it's hard to find Q4 where sequential EPS fell by more than a dollar, you're looking at somewhere around $1.50, $1.55 based on your guidance, is there anything else going on sequentially besides that the year-over-year things that you just pointed out?

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

No, I think that's going to be -- when you have the bigger, a bigger driver sequentially, you have is the decrease in sales on the seasonality of that. I think what's hard, let's say, as you look at our last four years, it's been choppy, really choppy quarter-to-quarter and including third quarter to fourth quarter. So I think you got to go back pretty far to find a more normal year. I think the -- like I said, the gross margin, I do expect to be higher year-over-year, but sequentially lower because of the tailwind and price. I think SG&A growth is probably higher in this year's fourth quarter sequentially than it has in past years, because of the things Heidi talk about, about leaning in harder on investments in our paint stores in long growth long-term growth initiatives within PCG and CBG. So that, that probably is driving some of it and it is our smallest quarter. So, some of these year end adjustments have a bigger impact on our fourth quarter than they would on our third quarter.

[Aleksey Yefremov, Analyst at KeyBanc Capital]

Thanks. And then a quick follow-up on your stores. Of course, you have a large competitor who is shifting strategy, but besides that, are there any players who are either slowing investment or outright closing stores, kind of in response you gaining share?

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

So I'll take that, that's a great question, I think you're spot-on and I would say that there is -- go back to my comment earlier, great amount of confusion at the marketplace and this is an opportunity where our consistent strategy I think is on full display and I have a lot of confidence in Justin Vince and his organization and the depth of leadership that we have there. This team is well-prepared to not only execute our strategy, but to adapt to market conditions around us and I think we've got a competitive advantage in doing that. And I suppose if we didn't own 5,000 stores and 4,000 reps and how strong customer relationships and data, they can help our customers be more successful. I think we do might try to stitch together a strategy that helps to get products placed on the shelf, but this is really an opportunity for us to do what we do well and to demonstrate to our customers a very consistent experience with Sherwin-Williams. We're working with them closely to help fight through a lot of the complexity out there and make sure that they're coming out winning. So, I do think where we're seeing competitors to make different choices on-store closings or channels, we think, again, this uncertainty is our opportunity.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Thanks, Aleksey.

[Operator]

Thank you. Your next question is coming from Garik Shmois from Loop Capital. Your line is live.

[Garik Shmois, Analyst at Loop Capital]

Hi, thanks. Within Pro architectural you called out strength in commercial. I'm just wondering what drove that, it sounds a little contrary to some of the commercial data points that emerged over the course of the quarter. So just curious as to the outperformance there.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Well, I think the way to characterize that would be more back to a normal cycle where you're seeing kind of strong backlogs front-half. And then it would obviously kind of look to soften a bit in the back-half, so I would characterize it more as a normal cycle. But I do think that this is an opportunity, we talk about the strength and position in commercial for us is amongst the highest of our segment. So we're going to be hard at-work, focusing on share gains, making the right decisions, making the right investments in our people and our resources are aligned and ready to help these customers to respond through the duration of these projects. I think regardless of the demand outlook, we will take share in this environment and part of our differentiation is we are with these contractors at every step of these projects. And so, they're navigating uncertainty and/or changes that come up in every single project. Our team is right there side-by-side to make sure that they're getting those completed on-time.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Yeah, I think if you look at the commercial piece, that's where we have the longest visibility, the longest lead-time. So we feel pretty comfortable about what we're seeing in terms of completions into first half of 2024 as Heidi said. I think you might be referencing things like the architectural billing index, which are choppier now, that's why we're saying the back-half of 2024, we might start to see a little softness, but feel very comfortable again about our ability if that was to occur, our ability to fill those gaps with perhaps new res is starting to come back. We'll put our foot on the gas with the res repaint property maintenance, etc.

[Garik Shmois, Analyst at Loop Capital]

Okay. Great, that's helpful. Wanted to follow-up on Consumer Brand, just a sequential weakness in margins, third quarter versus second quarter, was it really just the decline in volumes quarter-over-quarter or is there something else that drove the change in the margins?

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

Garik, it's primarily, well, it's primarily two things, there is sequential decline in volume, but also as we've talked about we and I mentioned on our working capital, we're targeting a year and inventory level, so that when we come out into 2024, our inventory is in great shape, which means we tweak our production volumes to make sure we stay-in line with that targeted inventory level. So, with production gallons being down sequentially a low-single digit number, that does have a -- is a headwind for us in this segment.

[Garik Shmois, Analyst at Loop Capital]

Understood. Thanks for the help and best of luck.

[James R. Jaye, Senior Vice President of Investor Relations and Corporate Communications at Sherwin-Williams]

Thanks, Garik.

[Operator]

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

[Adam Baumgarten, Analyst at Zelman & Associates]

Hey, everyone. Just one for me, just thinking about Europe, it seems like it was a bit better year-over-year across multiple segments. Just curious if that's just comps serve, maybe you're seeing some kind of bottoming or improvement in-demand on-the-ground there?

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Well, I'll start and I'm sure Al something here, I'll go back to, especially in the PCG side, we're not trying to be all things, I hope I think it's a really important point and we are laser-focused on driving increased operating margins. To your point, we're proud of the work that the team has done in delivering a 19% margin in Q3. We'll get some benefit from recent acquisitions, but I'll point to you four of our six businesses are up against very strong comps last year. And the team is doing all the right things to ensure that we are taking a very disciplined approach to decision-making investment, pacing etc as we're watching the market closely and making sure that our investments are pacing with the demand in the market.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

I think four of the six, to your point had some strong comps, but four of the six had double-digit sales gains in Europe in Q3 and I think putting a bow on what Heidi just said, we're doing at the right way. We're focused on the right segments where we can bring value and that our customers appreciate that value and are willing to pay for it, we're not in this for practice. And so we're growing and bringing value to our customers and we're open about the fact that while we bring value to them, our shareholders need to be rewarded as well. That's why we work as hard as we do. So it's good performance in Europe and it's driving both the sales and bottom line as a result.

[Adam Baumgarten, Analyst at Zelman & Associates]

Thank you, good luck.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Thanks, Adam.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Thank you.

[Operator]

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

[Steve Byrne, Analyst at Bank of America]

Yes, thank you. What fraction of your resi repaint volumes would you say the Sherwin-Williams paint was selected by the contractor versus selected by the homeowner. And clearly, you've highlighted a multi-pronged approach going after that contractor for loyalty, what would you say you can perhaps do more of to drive loyalty with home order selecting Sherwin that could help you also drive share gains.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Yeah, Steve. We focus on the residential repaint contractor as the applicator and that's a very big influencer in the decision tree. Other decision influencers would include color specification, which we've been working very hard at and the homeowner. But typically what we see is that the homeowner turns to the professional contractor as the expert and while in some markets with some homeowners, they all have a specific brand in mind. But the hard work that our teams do on a daily basis in-building relationships with that residential repaint contractors, the largest driver. And its exactly why we believe we'll continue to grow share at a outpaced rate going forward. I'll finish with this that we've had terrific success with the residential repaint contractor, we've had seven years of double-digit growth. We're just getting started here and there's a long opportunity and a big opportunity and that's why we believe investing in Sherwin-Williams is the right approach.

[Steve Byrne, Analyst at Bank of America]

And how would you rank the resi repaint end-market in paint stores as an opportunity to share to gain share as compared to new commercial, property management and new-home -- new-home construction. How would you rank those in terms of potential share gains?

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

We don't, they all opportunities for us, Steve and the teams that are focused on residential repaint have the greatest opportunity. Then we guess the property, when thing get to the property management, they have the greatest opportunity, then he will get to the commercial there, which deliver on each of those segments, that's how we feed our families, each one of them offer terrific opportunities. So when you look at share gains, we've talked openly about residential repaint offering the greatest amount of share opportunity and our position in these other segments are a little bit stronger, but there's terrific opportunities there, but our approach I want to be very clear, we were boxers and we're in the center of the ring, we're not looking for to get to the end-of-the to the about stand out waiting for our hands to be raised. We want a decisive knockout as it relates to these segments. And so we're pursuing aggressively each one of these. So I'm not going to parse out which offers great opportunities, they all do and we are very determined to get-out from.

[Steve Byrne, Analyst at Bank of America]

Okay, thank you.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

You bet. Thanks, Steve.

[Operator]

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

[Eric Bosshard, Analyst at Cleveland Research]

Good morning. In terms of the investments in 2023 to grow share, I'm curious what the current thinking is about 2024 and I guess specifically I'm trying to figure out, do you sustain incremental investments or does SG&A growth go back to normal trend or perhaps below normal trend. How do you think about that?

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

Yeah, Eric, here's how I would think, here's how we think about it in. And as you know, we manage operating margin, not specifically SG&A and as last year showed our volumes held up better than what we had planned coming into the year. Our gross margin performance -- gross margin expansion was a little bit better than what we had coming into this year. So, it allowed us the opportunity to lean-in and put more investments in than we normally would. We are certainly going to have growth in investments next year, I would say back to a more normal level. And then as we see the year unfold with volumes and gross margin and what we see happening. going into 2025 that will dictate how much more investments we put into each of those segments.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Eric, I would add to that. I think going hand-in-hand, you asked a question about SG&A and I -- we talk a lot about managing operating margin. I think just talking about how we're thinking about different approach to working capital is an important element here that a very intentional focus on end-to-end supply chain, but also a broad simplification effort that goes across every business unit to make sure we're as tight as possible and we talk about our value proposition goes far beyond what's in the can and we're looking at this through the lens of our customers and our value proposition can't include idle assets or excess of working capital our customers just simply aren't willing to pay for that. So, I think it's obviously always going to be room for improvement here, but as we're looking to manage that closely, Al and I are likely to hit -- relative to SG&A, working capital to drive operating margin.

[Eric Bosshard, Analyst at Cleveland Research]

Helpful. And then, Al, if I could follow-up, in terms of managing the operating margin, is it fair to say as you solve for 2024 your managing these different levers for some degree of operating margin expansion, again, I'm not asking you to comment on 2024, I'm just curious how that thinking can play-out?

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

Absolutely, Eric, I think just color around 2024. I mean, we believe the macro-environment still going to be difficult. We're going to see choppy performance on different parts of our business, different segments, different regions. But we absolutely believe that we're going to drive operating margin growth through that whatever environment that we see unfold in 2024...

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

We'll outperform the market.

[Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer at Sherwin-Williams]

That's right.

[Eric Bosshard, Analyst at Cleveland Research]

Thank you.

[James R. Jaye, Senior Vice President of Investor Relations and Corporate Communications at Sherwin-Williams]

Thanks, Eric.

[Operator]

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

[Unidentified Participant, at Sherwin-Williams]

Hi there, this is Abigail on for Mike. I just wanted to press further into the raw-material basket. Can you speak to which materials have seen the most deflation in and where pricing might be holding up more?

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Yeah, Abigail, happy to do that. So as we said, the third quarter was likely the biggest benefit for us from a year-over-year perspective. I would say, as we've commented, the petrochemical side of the basket is where we've seen some relief. TiO2 been a little bit stickier, but I think Al said it well, earlier as you think about going forward, oil is moving around. And while it hasn't necessarily made its way into those commodities yet, I think it's to-be-determined of where that heads into next year. So -- so right now, it's again, petrochemical side has been probably the greatest relief, TiO2 a little bit stickier. We feel very good about our ability to hold-on to the pricing that we put into the marketplace given the solutions we're providing our customers. And we'll have a better update on where it goes as we get into January.

[Unidentified Participant, at Sherwin-Williams]

Okay, thanks. And then a quick question about your packaging destocking that you were referencing. Is that still persistent or has that started to tail-off a little bit?

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Well, it's a -- I would say this is similar, we talked about before, we won't get into very specific details here, but I think it really is important that we're in lockstep with the demand environment making sure that, John mentioned this earlier, that as our customers are working through some choppiness right now that we've got capacity continuing to come online through our to our new brand site and as soon as we have that capacity, we're confident not just in our ability to have a capacity to satisfy that demand, what's behind that are the technology that the market is looking for. So we are very confident that we're going to have that online here shortly.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

I think there is some destocking where our customers have spoken about some areas of excessive inventory that they are driving down and to Heidi's point as our additional capacity comes back online, we get through Arizona and Garland. We're going to take this wonderful technology and bring solutions to our customers that allow them to run their plants more efficiently.

[Unidentified Participant, at Sherwin-Williams]

Okay, thank you.

[James R. Jaye, Senior Vice President of Investor Relations and Corporate Communications at Sherwin-Williams]

[Speech Overlap].

[Operator]

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

[Unidentified Participant, at Sherwin-Williams]

Hi, this is Eric on for Patrick. Given the DIY consumer is under pressure, have you seen any relative share gains or losses within PSG or CBG? Thank you.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Well, we're clearly seeing improvement in share gain in our PSG, our stores business. Heidi mentioned the comparisons to last year in the quarter were all very strong 20, nearly 20% comparisons and we've continued to perform very well even against that backdrop and the investments that we're making are easy to point to as key drivers for future share, but I drive it back to the core business that we have and the expectations we have for organic growth. Heidi mentioned quickly in one of the M&A questions about that. We don't need acquisitions in in-stores. When you look at our business, you could arguably say that this core business in itself is going to be a fantastic show to watch and it will be, but our expectations are to accelerate growth even faster. So the investments that we're making will allow us to capture that even quicker. As it relates to our consumer business, we've got wonderful partners, we're committed to their growth. Heidi mentioned things like capacity and helping them to drive down their inventory with the reassurance that we have the ability to respond to them. So from the back side, we're clearly trying to help position them financially, but more importantly, we're introducing new products, we're bringing innovation. We're adding people in our -- on our team to help train their team members. And we do believe there is a continued opportunity to convert people that might be in our customers stores as shoppers, we can help turn them into buyers of products in our categories.

So we're excited. This is a type of market that most don't hope for. I would say arguably, we don't hope for this type of market, but we know what to do, we're going to turn it into advantage to our shareholders.

[James R. Jaye, Senior Vice President of Investor Relations and Corporate Communications at Sherwin-Williams]

Thanks, Patrick.

[Operator]

Thank you. Our next question is coming from Aron Ceccarelli from Berenberg. Your line is live.

[Aron Ceccarelli, Analyst at Berenberg Bank]

Hello, thank you for taking my question, congratulations on strong results. I have one on product simplification, you have been doing quite a lot of simplification inside and outside can reducing formulation and also right sizing the number of SKUs. Maybe can you help me understand a little bit better, where are we in this process? And if you can quantify what have been done and where can we go from here? Thank you.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Yeah, Aron, I would say we're early innings, really confident there is aggressive roadmap ahead here. And the way I would characterize this is thinking through this is truly an end-to-end effort across the enterprise that you mentioned whether it's SKU rationalization formula rationalization that really starting with raw-material and understand the basket all the way through to what it is that we're setting out to our customers. But I think an important point here is, it's a mindset that we have adopted going forward. And so it's part of how we -- John mentioned innovation as part of our new product development process. I mean, we're going to make sure that we're always looking at opportunistic complexity out-of-the business. And I take it a step further if you look at our performance coatings group, we still have a lot of opportunity as we think about even rationalization of footprint, so the team is hard at-work. This isn't going to be something that we land in the next 12 or 24 months, that's I think we're going to be constantly looking at going-forward.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Yeah, I think, Heidi's strength here is and she is a humble person, she won't say this, but I will say this, I mean at front row to this -- to this show. You've got a leader that is driving the opportunity to the bottom-line. She has got a very respectful approach to our traditions into our norms, our 157 year-old company, there's a lot of things that we do and have done and many of them are right. And we got an opportunity I think to take a look at those traditions and norms and ask if there is a better way to do that and this simplification effort is a great example of that. I think our company is going to come out much stronger, much more efficient, better responsiveness to our customers and an opportunity to pursue business in new ways. We didn't really get into our digital approach and the approach that Heidi is leading there to our team to better use the data that we have available in ways that we just haven't in the past, we've scratched around the surface. But there are some terrific opportunities that she is leading, I think will further differentiate our own lines.

[Aron Ceccarelli, Analyst at Berenberg Bank]

Thank you. And I have a follow-up on PSG. You touched earlier on the commercial verticals. Maybe can you provide some color on property management because also this vertical has been incredibly strong this year. And again Q3 was very strong against very tough comps, so, would like to understand how you think about the momentum in terms of volume growth going into next year, please.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Yeah the underlying demand is solid. I think we've seen some delayed capex and a lot of deferred maintenance that is now being addressed and will continue to see that coming into next year. So we'd say, relative to apartment turns are improving, so that influenced by the return to travel, office, school, driving some of that demand, but much like our momentum in new residential, we're demonstrating our unique ability here to really serve the property management segment with a consistent experience that I believe only Sherwin-Williams can deliver. And regardless of the size or the location of these contractors, our goal is consistently the same as -- we want to make it as convenient as possible to leverage our stores, our reps and our segment-specific tools and solutions here. So we're taking share. We're increasing our number of sold preferred or exclusive contracts, if you will. And we're confident that we're going to continue with our foot on the gas going-forward.

[Aron Ceccarelli, Analyst at Berenberg Bank]

Thank you all the best.

[John G. Morikis, Chairman and Chief Executive Officer at Sherwin-Williams]

Thank you, Aron.

[Operator]

Thank you. That concludes our Q&A session. I will now hand the conference back to President and Chief Operating Officer, Heidi Petz for closing remarks. Please go ahead.

[Heidi G. Petz, President and Chief Operating Officer at Sherwin-Williams]

Great. Thank you. So I expect to close out this year with momentum, I think you've heard that loud and clear here. We believe that we are growing share and we are -- our humility takes us to the point where we say, we recognize that there is no finish line, so we're determined to move forward here. Going-forward, as we look at 2024, here's what I can tell you. I have clear line of reality. There is going to be some choppiness that we've talked about ahead. But we have seen this movie before. And my confidence is in this team, our ability to execute on our strategy that we know is working. Our confidence that our key investments that we know will deliver shareholder value. And those combined together is what gives me confidence that we're going to outperform the market.

Any additional questions, please feel free to reach out to Jim and Eric and we'll conclude with just looking-forward to talking with all of you in January about our outlook and our plans, and have a wonderful holiday.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• James R. Jaye, Senior Vice President of Investor Relations and Corporate Communications
• Heidi G. Petz, President and Chief Operating Officer
• John G. Morikis, Chairman and Chief Executive Officer
• Al Mistysyn, Senior Vice President of Finance and Chief Financial Officer

Analysts

• John McNulty, BMO Capital Markets
• Vincent Andrews, Morgan Stanley
• Jeff Zekauskas, J.P. Morgan
• Greg Melich, Evercore ISI
• Ghansham Panjabi, Robert W. Baird
• Arun Viswanathan, RBC
• David Begleiter, Deutsche Bank Aktiengesellschaft
• Josh Spector, UBS Group AG
• Michael Harrison, Seaport Global Securities
• Duffy Fischer, The Goldman Sachs Group, Inc.
• Kevin McCarthy, Vertical Research Partners
• Aleksey Yefremov, KeyBanc Capital
• Garik Shmois, Loop Capital
• Adam Baumgarten, Zelman & Associates
• Steve Byrne, Bank of America Co.
• Eric Bosshard, Cleveland Research
• Unidentified Participant
• Aron Ceccarelli, Berenberg Bank