Sherwin-Williams Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2023

There are 23 speakers on the call.

Operator

Morning. Thank you for joining the Sherwin Williams Company's review of Q1 2023 results and our outlook for the Q2 and full year of 20 23. With us on today's call are John Moricus, Chairman and CEO Al Mestishen, CFO Heidi Petz, President and COO Jane Cronin, Senior Vice President, Enterprise Finance and Jim Jay, Senior Vice President, twenty nineteen. 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.

Operator

Com, beginning approximately 2 hours after this conference call concludes. This conference call will include certain forward looking statements as defined under U. S. Federal Securities Laws with respect to sales, earnings and other matters. 1st.

Operator

Any forward looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward looking statement, whether as a result of new information, future events or otherwise. A full declaration regarding forward looking statements is provided in the company's earnings release transmitted earlier this morning. Through the company's prepared remarks, we will open up the session to questions. I will now turn the call over to Jim Jay.

Speaker 1

Thank you, and good morning to everyone. Sherwin Williams delivered excellent Q1 results compared to the same period a year ago. Consolidated net sales 18 grew by a high single digit percentage ahead of our expectations and were led by a mid teens percentage increase in our professional architectural end markets. On the industrial side of the business, sales increased in all regions except Asia Pacific. Gross margin significantly improved sequentially and year over year, driven by strong volume in the paint stores group and effective pricing.

Speaker 1

Cost of goods sold includes higher inflation in wages and other employee related categories, which were partially offset by a slight decrease in year over year raw material costs. We expect 18 to hold the majority of the pricing we have put into the market, given the ongoing investments we have made to drive innovation, enhance services and secure the talent 2019 that provides differentiated solutions to help our customers reach their goals and drive their success. Percent. Segment margin in all three reportable segments expanded sequentially and year over year. 20.

Speaker 1

We also delivered strong double digit growth in diluted net income per share and EBITDA. Additionally, we continue to execute 18. On the portfolio realignment actions we announced late last year, including the divestiture of a non core aerosol business, which closed on April 1 and our recently announced agreement to divest our China architectural business. 2019. I'd like to highlight just a few of our consolidated Q1 numbers.

Speaker 1

Comparisons in my comments are to the prior year period unless stated otherwise. Starting with the top line, Q1 2023 consolidated net sales increased 8.9% $5,440,000,000 Consolidated gross margin increased to 44.5%, 18, an improvement of 3.40 basis points. SG and A expense as a percentage of sales 18% was 31.1%, an increase of 140 basis points, driven by investments in the Paint Stores Group's 18.5% long term growth initiatives and investments in our people across the company through year over year increases in compensation and other employee related benefits. Our people remain our key differentiator in the marketplace. 2018.

Speaker 1

Consolidated profit before tax increased $153,700,000 or 33.3 percent. Diluted net income per share in the quarter was $1.84 per share versus $1.41 per share a year ago. Excluding Valspar acquisition related amortization expense and costs related to previously announced restructuring actions, Q1 adjusted diluted net income per share increased 26.7 percent to $2.04 per share versus $1.61 per share a year ago. EBITDA in the quarter increased $185,000,000 6.7 percent and was 16.1% as a percent of sales. 18.

Speaker 1

Let me now turn it over to Heidi, who will provide some commentary on our Q1 results by segment. John will follow Heidi with comments on our outlook before we move on to your questions.

Speaker 2

Thank you, Jim. I'll begin with the Paint Stores Group, previously known as the Americas Group. 18. We described this change on our last call and in this morning's press release. There is no impact to prior year consolidated results related to this change.

Speaker 2

20. Current and prior year segment results have been restated to reflect this change. 1st quarter paint stores group sales were ahead of our expectations 18 and increased 14.8 percent driven by high single digit volume growth and continued effective pricing. Segment profit increased by $97,900,000 and segment margin improved 120 basis points 18.4%. Our pro architectural sales grew by a mid teens percentage in the quarter.

Speaker 2

20. All pro market segments increased by double digits, led by property management and followed by commercial, 18% of our revenue growth in the Q4 and full year of 2020. Sales in Protective and Marine and DIY also increased by double digit percentages. From a product perspective, interior and exterior paint sales were both strong with interior sales growing faster and representing a larger part of the mix. Moving on to results in our Consumer Brands Group, which again now reflect the addition of 18.5% in the current quarter and prior year.

Speaker 2

Sales were well ahead of our guidance and increased by 2.4% in the quarter. Performance was better than expected in North America, where sales were down less than 1% and in Europe, where sales were down low single digits. In other regions, sales were up strong double digits in Latin America and down double digits in Asia. Effective pricing led by Latin America 18 was partially offset by a mid single digit decrease in volume and low single digit FX headwinds. Eighteen.

Speaker 2

The tightness in alkyd resins impacting our ability to produce stains and aerosols improved significantly during the quarter, and we expect this issue to be behind us by the end of the second quarter. Adjusted segment margin was 13%, up 120 basis points year over year. As Jim mentioned, we divested a noncore aerosol business at the beginning of this month, 18. And we also entered into an agreement to divest our China architectural business. We expect these actions will benefit percent.

Speaker 2

Margin over time as we drive a return to our high teens, low-20s adjusted margin target. Onetime restructuring costs in the quarter were immaterial. Sales in the Performance Coatings Group increased 3.4% against the 20.4% comparison. The increase was driven by low teens pricing and mid single digit sales from acquisitions, partially offset by a low teens decrease in volume, which included the impact from discontinued operations in Russia and a low single digit unfavorable FX impact. 20.

Speaker 2

Adjusted segment margin increased 390 basis points to 15.7 percent of sales. This is the 4th straight quarter 18. This team has delivered year over year segment margin improvement, driven by execution of our strategy, including effective pricing. Sales in PCG varied significantly by region. In North America, sales increased high single digits against a nearly thirty percent comp.

Speaker 2

Latin America sales increased by double digits, also against a strong comp. Sales in Europe were up mid single digits, while sales in Asia were down double digits. From a division perspective, growth was strongest in auto refinish, 18%, which was up by a mid teens percentage, followed by coil and general industrial, which were both up mid single digits. All three of these divisions 18% grew against double digit comparisons. Industrial wood sales were down mid single digits as expected 22% due to slowing in furniture, cabinetry and flooring related to new residential softness.

Speaker 2

2019. Packaging sales also were down mid single digits against a 30 plus comp, with volume down about 1 point and the remainder due to our exit of Russia 18 months ago and unfavorable FX. We continue to feel very good about our position and growth prospects in this end market. With that, let me turn it over to John for his comments on our outlook for the Q2 and the full year.

Speaker 3

Thank you, Heidi. I want to thank our teams for working hard to deliver a strong start to the year, especially the margin recovery we're seeing 18 following the relentless cost inflation we've experienced the last 2 years. As we said in January, we expected to have a strong Q1 18. That's exactly what our team delivered. We also indicated that we would not be updating guidance after the Q1.

Speaker 3

18. We know we have work to do and we're under no illusions about the macro headwinds we're likely to face as the year progresses. 20. We'll have a much better idea of how the year might unfold as we get deeper into the painting season over the next few months. 18.

Speaker 3

As we enter the Q2, we'll remain focused on what we can control. This includes leveraging our recession resilient markets, 20. Growing new accounts and share of wallet, continuing appropriate growth investments in stores and sales representatives and managing price cost dynamics. We remain confident in our differentiated strategy capabilities and product and service solutions, and we continue to expect to outperform the market. For the Q2 of 2023, we anticipate our consolidated net sales will be up or down by a low single digit percentage compared to the Q2 of 2022, inclusive of a high single digit price increase.

Speaker 3

For the full year 2023, we expect consolidated net sales to be flat to down mid single digits, 22. Our sales expectations by segment 18. For the Q2 and the full year are included in our slide deck and reflect the move of the Latin American architectural business from Paint Stores Group to Consumer Brands Group. There is no impact on our sales guidance in the quarter or the year 18% from the divestiture of the China Architectural Business at this time as the transaction has not yet closed. 20.

Speaker 3

On the cost side, there is no change in our raw material outlook, where we continue to expect costs to be down by a low to mid single digit percentage in 2023 compared to 2022. 20. We expect to see the largest benefit occurring in the 2nd and third quarters. We expect to see decreases across many commodity categories, eighteen. Though the ranges likely will vary widely, we expect other costs, including wages and energy 18 to be up in the mid to high single digit range.

Speaker 3

The first quarter is typically our smallest 18.2% and we need to see 2nd quarter trends and performance to better understand potential impacts on our second half outlook. 18. We expect to provide an update on our full year sales and EPS guidance following our Q2. As a result, there is no change at this time to our guidance for full year 2023 diluted net income per share, 20, which we expect to be in the range of $6.79 to $7.59 per share. 20.

Speaker 3

Full year 2023 earnings per share guidance includes acquisition related amortization expense of approximately $0.81 per share and includes expense related to our previously announced targeted restructuring actions of $0.25 to $0.35 per share. On an adjusted basis, we expect full year 2023 earnings per share in the range of $7.95 $8.65 We provided a GAAP reconciliation in the Reg G table within our press release. There are also no updates to the additional data points and capital allocation priorities we provided on our January call. 18. I'll also refer you to the slide deck issued with our press release this morning, which provides guidance on our expectations for currency exchange, effective tax rate, 20, CapEx, depreciation and amortization and interest expense.

Speaker 3

All of these remain unchanged from our January call as well. Given the many variables at play, limited visibility beyond the first half and the high level of uncertainty in the global economy, 18. We continue to believe our current outlook is a realistic one. As we get through our Q2 and we see more information, 18. The assumption we laid out in January could change.

Speaker 3

If those assumptions change for the better, we would expect 18 to deliver stronger results. We've transformed our business in many ways since the last significant downturn 20. And we're now a stronger and a more resilient company. I'm highly confident in our leadership team, 20, which is deep and experienced and has been through many previous business cycles. We anticipated 2023 would be challenging.

Speaker 3

We planned accordingly. We have and will continue taking appropriate actions. We expect strong momentum coming out of this period of uncertainty similar to prior downturns. 2019. That momentum will stem from our strategy of providing innovative solutions that help our customers to be more productive and more profitable.

Speaker 3

In challenging environments like the current one, we can become an even more valuable partner to our customers, while we're also earning new ones. The bottom line is we expect to outperform the market and our competitors in 2023 and 20 years to come. That concludes our prepared remarks. With that, I'd like to thank you for joining us this morning and we'll be happy to take your questions.

Operator

At this time, we will be conducting a question and answer session. From the queue. Your first question for today is coming from Vincent Andrews at Morgan Stanley.

Speaker 4

Thank you and good morning everyone. 18. Could I ask in tag in the quarter, just was looking at the incremental margins, obviously, you had a very strong sales performance. 20. And I know there was about 5% carryover pricing in there.

Speaker 4

So it seems like the volume was quite strong. So was there just a lot of eighteen. Investment spend in the quarter ahead of store openings or just some of your initiatives and that 20. If you could sort of bridge as to what the underlying total company SG and A expense was in the quarter and whether that is a good number to run with 18 as we move through the balance of the year? Thanks.

Speaker 5

Yes. Vincent, this is Al Mustishen. And let me start with eighteen. Consolidated SG and A was up 14%. Paint Stores Group was just over 2 thirds of that increase 18.

Speaker 5

And excluding acquisitions, there's approximately 80% of the increase year over year, and this is due to the increase in new stores and additional sales reps, which probably 2019 represented about 2 thirds of the increase. And then in addition, employee related costs were higher year over year due to multiple merit increases 2019 beginning in the second half of last year and into the Q1 of this year.

Speaker 3

Yes. Let me just jump in here before you carry on there. 18. On the investments of our employees, I think it's absolutely critical to understand in a controlled distribution model, particularly, we 18. We want to build relationships with our customers.

Speaker 3

We want to make sure we have the right 2. That they're trained, that they're developed and that we retain them. And so the investments that we've made beginning actually 18. About mid year last year, we are clearly seeing the benefits of that. Now there's some benefit in the market as the 20.

Speaker 3

Economy has taken its course and clearly that's had an impact on some employees and employers. Eighteen. Our relationship with our customers or our employees has improved dramatically. And I would point to our retention. Eighteen.

Speaker 3

We've often boasted about our turnover rate down in the 7% to 9% range, and we're proud to say that we're back in that range 18. So our retention is back to a historic low and we think that's an important element and an important investment that we made 18. As we want to make sure that those employees are there when our customers are walking into our stores. So let me turn that back over to you.

Speaker 5

Yes. The only thing I would add to that is, 18. Vincent, as we discussed in January, we're going to continue to manage our G and A expenses tightly and 20. Other discretionary marketing and other spending as we get a better outlook on demand In the second half, I would say, I would expect a smaller year over year increase in our Q2 as we annualize the merit increase from last year. Eighteen.

Speaker 5

We start realizing more cost reductions from the restructuring activities. Typically, we see a eighteen. Slight uptick in SG and A in our paint stores group as it ramps up staffing to service the increased seasonal architectural demand uptick. Acquisitions will be slightly less than what we saw in our Q1, which is a low single digit impact. And 18.

Speaker 5

We'd expect those to annualize and not see much in our second half. So as the year goes on, my second quarter, I'd 18. I expect the lower percent of sales because of the seasonally higher architectural sales, but then the year over year change gets tighter as the year goes on as we annualize some of these

Speaker 4

Thanks for all the details. Very helpful.

Speaker 3

Thanks, Vincent.

Operator

Your next question is coming from Jeff Zekauskas at JPMorgan.

Speaker 6

Thanks very much. The SG and A increase of 14%, 18. I understand that it should moderate from that level. But this year with everything you're eighteen. Considering, are we going to be up more than 10% as a base case year over year?

Speaker 5

No. Jeff, I'd expect, eighteen. If you look at how Paint Stores Group, in particular, SG and A rolled out as the year went on last year, 20. It ramps up as we get into our second half because we added more stores, but the merit increases happen in our second half. So The comp gets higher, so the percent change gets lower as we go through the year.

Speaker 5

I would say the other groups have done a really nice job of managing 20. Their SG and A consumer, PCG, would have a similar impact with the merit increases, but they've been managing their SG 18. And then in admin, we'll continue to invest in system upgrades and things like that, but we're going to manage it tightly. So 18. I would not expect that high of a percentage increase for the year.

Speaker 6

Okay. And then secondly, your new residential eighteen. It seems to have held up reasonably well given market conditions. When we get to the Q4 or the Q1 of next year. As a base case, what do you think those volumes are like year over year in new residential And the paint story.

Speaker 3

So Jeff, we've said that the single family housing starts are expected to be down year over year percent. In the range of 20% to 35%. And our expectation would be that in our business, we'd be Better than the market. So our expectations would be that it would be down in the 10% to 20% range. 18.

Speaker 3

And we've also talked openly about the fact that we expect some of our more recession resilient 18 segments to pull heavier during that period of time. So as we saw the quarter unfold, we saw exactly the sequential trend that we that you just described. 13. So year over year, January, we saw high teens percentage increase in February, 20. Low double digit increase and then mid single digits in March.

Speaker 3

So we expect that type of a trend to continue through the balance of the year. If you look back 90 days, 120 days and you see the number of starts in comparison 2017. Previous quarters, you could see the downturn and then the impact on our new res sales as it unfolds.

Speaker 6

20. Great. Thank you so much.

Speaker 3

Thanks, Jeff.

Operator

Your next question for today is coming from Christopher Parkinson at Mizuho.

Speaker 7

Great. Thank you so much for taking my question. 18. John, can you just hit on a little bit more on what you're hearing from your customers and contractors in terms of backlog, specifically in the resi repaint market, property maintenance and then perhaps just hit a little bit on what you're seeing in protective? It would be greatly appreciated.

Speaker 7

Thank you.

Speaker 3

18. Yes, Chris, I'd start with the fact that our Pink Stores Group is our largest business as you know. It's a $12,000,000,000 percent portion of the company. 90% of our PING Stores Group is made up of professional sales. And 18.

Speaker 3

As Heidi mentioned, pro sales in total grew by mid teens percentage with every one of our professional 18. So these are large segments growing double digits. So we're growing real market share in absolute dollars. And I'll give 18. Justin Benz and his team a lot of credit for the new account and share of wallet initiatives that are clearly working.

Speaker 3

To your question specifically on residential repaint, we probably best would describe the bidding activity 18. As having returned to a more normalized bidding market, where in the past 20? 12 to 18, maybe 24 months, it was difficult to get a painter to even come out and give you a bid because they were So busy and so backlogged, I would say that it's likely best described as a more level 18. We're more normalized bidding activity. If you look at the LIRA or the NAHB remodel index, 18.

Speaker 3

Both are positive, but clearly some deceleration in what they're projecting. Our double digit quarter this year was on top of a mid single digit performance last year. So I'd say that we have confidence in 18. What we're doing, we have confidence in our ability to continue to grow and grow at our competitors' expense. 20.

Speaker 3

We have product back in our stores. We just talked briefly about the people in our stores. We think that's a very important element in eighteen. What it is that we do, so the retention of our people, we believe has a direct correlation to the retention of our customers. 20.

Speaker 3

And we continue to introduce new products. We can get into some of those details perhaps later if we'd like, but we're introducing new products to help keep 18%. That residential repaint customer, not only successful in what they're doing, but also growing in new segments as well. Twenty. Talk a little bit about NewRez there a moment ago after Jeff's question, but I will say that our ability to work with our builders 18.

Speaker 3

And help to drive their business and their efficiency, we believe has been an important element in our ability to eighteen. Retain the relationships that we have and in fact grow those relationships. We're introducing in the face of an adverse market here eighteen. The diversity in new residential, we're introducing new products that will help our customers, high build products that will help 25.5 imperfections and improved durability and that's helping us to grow our new residential business and we expect that to continue to grow. We expect to come out of this 18.

Speaker 3

Time here of some challenges in the market with absolute new and greater market share. 18. On the commercial side you asked about, this was one of the markets that clearly came in with stronger than expected results for the quarter. 18. Our position in this segment is very good, strong and growing.

Speaker 3

We've been long investing in reps, products, 2019. And the fact that we have local stores and local reps is important element in growing this segment. Again, we've introduced a number of innovative products here as well. When you think about labor, we often talk about eighteen. That labor represents on average about 85% to 90% of the cost of goods for a painting contractor.

Speaker 3

The cost for a commercial contractor is likely percent higher than that than the average, perhaps in the 90% to 95% as many of the commercial contractors are either union or 18. Applying paint in the metro markets, which are higher cost. Our model, therefore, is even of greater value to these customers. Our ability to collaborate with the architects, work with the designers, work with these contractors is absolutely paying dividend and we're excited about this business. The commercial side, there's a lot of work that's still coming out of the ground, and we expect to continue to grow 20.

Speaker 3

With this market and at the expense of our competitors. Property maintenance you asked about as well is another segment that grew stronger than expected. 18. Occupancy and rents are returning to more normal rates and growth here is driven by 2019. Not only our continued share gains, but capital improvement projects as well as an increase in turns.

Speaker 3

So The Pro side by segment is really going well and we're going to continue to put fuel in this tank and 18. Feel really good that while we're growing share, the only expectation we have for our team is to grow it even faster.

Speaker 7

18. Understood. And just as a quick follow-up on the raw material basket, just to keep it simple, you've 18. Got a few things that are sticky, but broadly it seems like we're moving in the right direction. Can you just hit on the 2 most pleasant surprises in terms of the basket and perhaps the 2 most frustrating substrates, as we are here today.

Speaker 7

Thank you.

Speaker 1

20. Yes. Chris, good morning. I would say that raw materials are really trending as we expected and not eighteen. Sure that I'd say there's a lot of surprises there.

Speaker 1

They were down slightly in the Q1. The moderation was led by monomers, solvents and resins. 20. To your point, TiO2 and pigments maybe a little stickier near term, but we expect to see some moderation there as the year goes on. 18.

Speaker 1

I would remind everyone as a reminder, our cost of goods also includes higher inflation in wages and other employee related costs. 20. For the Q2, we're expecting to see some further moderation as we move towards our guide for the full year, which 18. As we said in our opening is unchanged, raws down low to mid single digits.

Speaker 5

Thank you so much.

Speaker 1

Thanks, Chris.

Operator

Your next question is coming from Mike Harrison at Seaport Research Partners.

Speaker 8

18. Hi, good morning.

Speaker 3

Hi, Mike. I was hoping that

Speaker 8

you could talk a little bit about the additional architectural capacity That you brought on probably a little over a year ago. As you look at these housing challenges that seem to be ahead, 18. Is that additional capacity something that we should think about as weighing on utilization or fixed cost absorption as we're going forward? 18. And I guess in hindsight, should you maybe have pulled back or wait a little bit longer to expand some of that capacity?

Speaker 3

Absolutely not. We expect and are filling that capacity, Mike. And when you believe like we do and what's happening in the market and where we're going, eighteen. If you were sitting in my chair, you would have invested exactly as we did. I wouldn't have pulled back $0.01 of it.

Speaker 5

Yes. Mike, I'd just add to that. 18. As you remember on the January call, I talked about a potential headwind with just lower architectural volume because 20. Everybody in the industry had to build architectural inventory back up.

Speaker 5

So that's short term. Long term, we have a lot of confidence in the growth 18. Across each of the segments, Architectural Pro segments that John talked about, and we'll fill up that capacity very quickly. So 18. Even though it might be a short term headwind, as we've lived through some of these cycles before, the bounce back and the strong growth, 20.

Speaker 5

I'll go back to 2,008 and 'nine, and we grew high single digit for the 3, 5 10 year compounded average 20. And we're a much bigger architectural business today than we were back then, we'll fill that capacity. So, and I would argue or 20. Add to that, we're going forward on Statesville because of the confidence we have in the future outlook and the growth in the architectural.

Speaker 8

All right, great. And then on the Performance Coatings business, It was a little bit surprising to me that Asia was the weakest region for you. Can you comment on how you expect demand to play out and the rest of the year across the different regions and I guess with particular emphasis on are you going to be eighteen. Seeing some recovery in China and in that Asia business. Thanks.

Speaker 3

Well, Mike, we're positioned well-to-do just that. It's yet to be seen as the market or the yes, the market tries to Kind of resume back to some normalcy in Asia. We're positioned very well. Our technology, our assets, our people, 18? I think a lot of that has to do with what happens in the market and our expectations as in any situation is to grow faster than the market.

Speaker 3

Eighteen. We're in a very good position from a technology, but also relationship perspective. So, yes, I'd say that there is some uncertainty with eighteen. The market in general, as it opens up and our customers are back producing product, we expect to capitalize more than our share there.

Speaker 5

18. Thanks, Mike.

Operator

Your next question for today is coming from John McNulty at BMO Capital Markets. 18.

Speaker 9

Yes. Thanks for taking my question. Can you it sounded like in the consumer brand side, business was maybe a little bit better than you expected. Can you eighteen. Speak to the stocking patterns that are going on there.

Speaker 9

Are we seeing kind of a normal stock? It seems like the expectation was it was going to be a little bit below normal, but again, 4. You're kind of coming in better than your thoughts. Maybe a little bit of color there would be helpful.

Speaker 5

Yes, John. I would say that, 20. You're absolutely right. We have obviously saw better performance in North America and in Europe. And 20.

Speaker 5

If you remember on our January call, I said, we had not seen the destocking in our Q4 that 20. Maybe some had seen, so we anticipated maybe a slower build in inventory at the retail channel. We actually saw a slight increase 18. In the retail channel inventory. And I think thinking back, if I look at across the 20.

Speaker 5

We're back to more, I would call, historic levels of inventory. So we're well positioned 20. The service, the spring and summer selling season, that's coming up. And I'd just highlight also, Latin America was a 18. Mid single digit tailwind in the quarter.

Speaker 5

Latin America had a very strong double digit quarter and 20. That helped when you brought them into the consumer brands group.

Speaker 9

Got it. Okay. Okay. And then when you I know you guys don't tend to Do much around the weather or blame a lot or take much credit for things on the weather front. But Middle East was a much wetter start to the season, Particularly in regions where you can paint in the Q1, out west and what have you.

Speaker 9

And it looks like the Midwest also maybe started a little bit more slowly. Do you have 20. Pent up demand, is that why maybe some of the it looks like some of the data that we've at least been seeing from the contractors is maybe a little better than expected. I guess, how would you characterize that?

Speaker 3

I'd characterize it as we don't like to talk about weather. You're right. 20. I think there are areas that are going to be under pressure with weather, John, and there are going to be other areas that are a little better in weather. And 18.

Speaker 3

Does it have some impact in some of those areas? Sure. But short of significant impact on our businesses, 18. We try to stay away from that. Our expectations from our team includes the opportunity to go out and grow business.

Speaker 3

And so 18. Appreciate the question, but we're not going to follow the weather as a means for what's driving our results right now. We're Proud of what we've accomplished, we're determined to accomplish more and we're not going to let weather stand in our way.

Speaker 7

Fair enough. Thanks a lot.

Speaker 1

Thanks, John.

Operator

Percent. Your next question is coming from Ghansham Panjabi at Baird.

Speaker 5

20. Yes. Thanks, everyone. Good

Speaker 3

morning, Ghansham.

Speaker 10

Good morning. John, you've given us parameters as to how to think about new residential for 2023, Which was a reiteration of your previous view 3 months ago. Has your view changed on commercial for the year in context of the credit issues that the U. S. Banking system And also Europe went through starting in March or is it still pretty consistent with before?

Speaker 3

Ghansham, I'd say this year we see a pretty solid year. 18 months. These buildings are reaching the painting stage now. They started 12 to 18 months ago. So we'll have to see if there is in fact an impact On construction and commercial, 12 to 18 months from now.

Speaker 3

But the long line of sight that we have in this space, 18? We are growing share and there's a lot of projects coming on, which we expect to paint.

Speaker 5

Okay, got you. And then

Speaker 10

in terms of packaging, I know very tough 18 months for the Q1, but how are you thinking about the rest of the year for that specific business?

Speaker 3

Well, 18? That's an interesting one, because I think when you look at packaging, we never accept from any of our businesses softness. But this is a very unique situation with our packaging business. On top of the 30% comps, This team has continued to expand the commercialization of what we consider a very unique technology. Eighteen.

Speaker 3

So we continue to see the lines that our product is on. They grow. They're growing. We're growing share. 18.

Speaker 3

What's happened right now is there's a level of destocking that's taking place within many brands impacting our customers as they work through high inventory levels. 18. It's not often that I'm accepting to a team that's brought in softness, but in this case, given 18. The line of sight that we have and the share that we're gaining and the incremental production lines that we're going on every day, we're giving them a break. So I 18.

Speaker 3

I think the Q1 was a little tough. We'll probably have a little choppiness here in the Q2. And as the year progresses, our expectations will resume for this team to continue 2 to grow or to be able to demonstrate the share that they're growing.

Speaker 10

Perfect. Thank you.

Speaker 3

Short Short term issue for this team. We've got a lot of confidence in the technology, the team and what we're doing. We'll be fine here.

Speaker 11

Got it.

Speaker 1

Thanks, Ghansham.

Operator

Your next question is coming from Mike Sison at Wells Fargo.

Speaker 12

20. Hey, guys. Nice start to the year. John, I know you mentioned that you need to see how trends for 2Q unfolds to have a better idea for the second half. So just curious if 20.

Speaker 12

2Q unfolds as you expect today, and I think it means I think your outlook suggests that PSG 2. Volumes are going to flatten out versus a pretty strong Q1. What does that mean for your second half outlook? And if 2Q comes in better or worse, 18? What does that sort of mean?

Speaker 5

Yes, Mike. I would say, as John talked about, I mean, 20. Our Q1 is the smallest quarter. We expected a strong quarter. We delivered on that.

Speaker 5

We're closely monitoring the demand trends and 20. As you mentioned, and we said it on our year end call that new residential demand would start slowing in our mid second quarter. 18. We've experienced a lot of market uncertainty before. I just look at the last 3 years.

Speaker 5

I think it's better 18. To get a better view of demand after our seasonally higher second quarter, this gives us the best opportunity and more certainty 18% for our second half. And we'll continue to manage our SG and A, particular SG and A tightly. Eighteen. Continued investments and other discretionary items will be managed with the demand outlook.

Speaker 5

I think we believe these long term growth investments allow us 20. To grow market share in any environment and especially as we come out of this slower macro environment. But 20. That's how we're going to manage the company going forward. I mean, we believe our second half outlook is nineteen.

Speaker 5

But we also believe we'll outperform the market. And if the market is demand is better than our expectations, we'll perform better than what we currently have here. And we'll bring all those variables together and give you our best outlook after the Q2 for the year.

Speaker 12

And as a quick follow-up, given your new capacity, better cost structure and such, if you do get your volumes back to where they were Prior to this downturn, where do you think earnings or margins should be at this going forward?

Speaker 3

Well, we've talked about our I'm just speaking to margin, gross margin, we expect we'll be in the range of the 45% to 48%. We've, eighteen. I think demonstrated the incremental sequential margins in this quarter, getting close to that bottom level of the range and 20. We expect to poke through that. And the reason we do expect that is, is that we believe we're focused on the right customers with the right solutions.

Speaker 3

18. Our focus is really simple. I mean, we want to help them make more money, help them to be successful. And as a result, 20. We are in a position to be able to build that combined success.

Speaker 3

And as a result, we expect to be able 18 to provide margins for both our customers and our shareholders. And the combination of the right customers with the right solutions, we believe will lead us to that.

Speaker 5

2. The only thing I'd add to that, Mike, is when I start thinking about it by segment, we have a lot of confidence in our Performance Coatings Group 18.4, again, if you remember, we hit that mark in the Q3. It's an all time high since we've owned Valspar, 20. And we're confident in driving consumer brands group back up to that high teens and low 20s. So we get our cost structure right, that will be a tailwind.

Speaker 5

20. We hold on to price, but as we come out of this, we drive strong architectural gallon growth, market share growth on our Performance Coatings business, And that's what's going to drive those operating margins back up, to the high watermarks we experienced in 18. Different occasions on the different businesses.

Speaker 12

Thank you.

Speaker 1

Thanks, Mike.

Operator

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

Speaker 13

Yes, thank you. 18. What fraction of your consumer business is the pros that paint category versus what was it eighteen. Back when you first got that exclusivity with Lowe's, what would you say is driving that growth? 20.

Speaker 13

For example, is it the product offering or I know Lowe's has at least in some eighteen stores offering free delivery to the job site. Can you comment on how extensive that is? Is that meaningful? And are you involved in that?

Speaker 2

Yes. Go ahead, John.

Speaker 3

No, I was just going to say, I want to start and then kick it to you, Heidi. I'd say, first of all, is there's a commitment 18. By both companies to grow this. We've got terrific leaders inside our organization and they're working with terrific leaders eighteen. Inside the Lowe's organization, outstanding partner and I think we're combined looking at the right elements of the business.

Speaker 3

And so we're not going to disclose a percentage on that, Steve. But Heidi, I would like for you to maybe eighteen. Maybe we could talk a little bit about the PROS Who Paints, but also on a broader view, the importance of this relationship in the consumer brands

Speaker 7

20.

Speaker 2

Yes. Good morning, Steve. This is Heidi Pets. John covered a good bit of this. I think at the end of the day, we want to make sure that we are eighteen.

Speaker 2

Demonstrating that we're the very best partner. In fact, we want to be their number one partner. So we think of some of the engagements here and how we're activating. Certainly, there's a lot of eighteen. Support as they're working through their promotional calendars, making sure that we're investing in the right areas, not only to drive traffic, but to make sure that we're converting eighteen.

Speaker 2

Those shoppers in the aisle certainly. And we've got a lot of great brands. We've got some launches that are taking place right now. We won't get into too much detail here, but we want to make sure that we're locked step with them in terms of driving those conversions. John mentioned this, but the leadership team Certainly all the way through the organization, I would say our partnership has never been better than it is right now in terms of making sure we've got the alignment across the organization, both with 18.

Speaker 2

There are Pro 2 Paint and the DIY segments. So when you think of the structures, we've got to make sure that those are mirrored and that the metrics are aligned there. So I feel really confident in the way that we're moving forward and got big plans for the year. So we're going to keep moving.

Speaker 3

On the pro Who Paints Specifically, Steve, to your point, there are customers that prefer a home center platform. They can purchase everything from drywall to every other element 18. That they might use on a project. And so to get to your question about who supplies delivery or sales calls or anything, there eighteen. There's a team effort that goes along with that.

Speaker 3

And while we don't disclose the details of those for strategic and competitive reasons, I think Heidi hit it best. Eighteen. The collaboration and focus has never been stronger.

Speaker 13

And maybe one more for you, Heidi, and that's the Huarun brand over in China that 20. This is an old Valspar brand. I recall a few years back when the post the merger, the company was going to drill into that 16. Those Wah Run stores in China and see if that could be driven into eighteen. Paint stores type of model like as in the U.

Speaker 13

S. Was the conclusion of that effort is it really didn't have that potential and thus 2. You're not the best owner for that brand?

Speaker 2

Steve, I think you answered it perfectly. Yes, there's a better model here. I think 6. The divestiture certainly it does align with our strategy. And as we've done a lot of work in that group to optimize the portfolio of the brands, 18.

Speaker 2

Certainly making sure that we're driving a focus on where we can get a return for our shareholders. And I think you said it, sometimes they're just assets that are more valuable 2. And this is an example of just that. We had the business was about $100,000,000 in revenue with 300 employees and Frankly, it was acquired as part of the Valspar acquisition, you remember, in 2017. So as we move down the next quarter here.

Speaker 2

We'd expect to close on this second half of twenty twenty three.

Speaker 14

Thank you.

Speaker 3

Thanks, Steve.

Operator

Your next question for today is coming from Gregory Melich at Evercore ISI.

Speaker 15

18. Thanks. Thanks for the helpful volume trends through the quarter in architectural. Is it fair to say 18. Given the deceleration in top line that you expect that April is running negative volume year over year now?

Speaker 15

Or is it has the deceleration been 20. Less dramatic than that.

Speaker 5

Yes, Craig, I would just say that April is trending as we would have expected it to trend, not any 20? Better or worse. All right. Well, I have to try.

Speaker 15

But how about this? 18. In the Q1, could you break down the sales growth, 8.9% into I think volume was down slightly and just sort

Speaker 5

of what was

Speaker 15

price and FX in that to sort of help us frame 20. The sales going to flat in the second quarter, how much of it is from volume deceleration? How much of it is from price staying where it is?

Speaker 6

Sure, 2.

Speaker 5

Sure, Greg. I would say price was up high single digits. And with that being a little bit higher, eighteen. Acquisitions added a low single digit percentage, which was mostly offset by FX headwinds. And you're right, the volume was flattish.

Speaker 5

Eighteen. If you look at that in our Q2, effective price is going to be slightly lower year over year in the second quarter 20. Compared to the Q1 as we annualized the paint storage group 12% price increase February 1st 18. And some of the other price increases. As you know, the other divisions and groups are out with we're out with significant price increases as well.

Speaker 5

So 20. They're just not as uniformed as Paint Stores Group, but they will annualize as we get through our first as we've gotten through our Q1 and into our Q2. The main difference eighteen. Lower volumes, primarily due to lower new residential that we talked about, some softening in 18. North America Performance Coatings Group and then FX headwinds will mostly offset acquisitions in both quarters.

Speaker 15

18. And is it fair to say that or maybe you could help by breaking down the gross margin expansion in the Q1. Was that primarily getting price on top of raws or the fact 2. That volume sort of held in there that we were able to get some margin expansion from volume not being down so much?

Speaker 5

18. Yes. I'd say most of the impact were price increases, but the benefit we did see a nice benefit of the increased volumes in Paint Storage Group. 20. As a reminder, that is our highest gross margin segment and plus the slightly moderating raw materials that 2019 as John talked about.

Speaker 5

And we are getting on top of the raw material costs. As you know, as we get into eighteen. We see that short term contraction. As pricing starts catching up, we moderate our raw gross margins 18. Flatten out and then we see growth as raw materials moderate and we hang on to most of the price and eighteen.

Speaker 5

It's because of the investments we continue to make. And, yes, I

Speaker 3

think it's an important element. We continue to invest 18. Not only in the products, but the services and technologies as well as the other assets. Additionally, I'd say the obvious and important investment in talent that we just talked About retention of talent and as well as new talent. So it's more than what's in the can.

Speaker 3

We're investing in the success of our customers 18. With every rep, every tech rep, every store, even the trucks we're adding to our fleet, all designed to improve the profitability of our customers. 18. There's more to it than the cost of what's in the can and we're trying to drive the success of our customers with the investments that we're making.

Speaker 15

18. And with that, John, maybe I'll jump on that. Given those investments you're making in wage pressure and other costs besides raws, 20. Is this a year where you actually could have a price increase even if raws are slightly down?

Speaker 3

Greg, 20. We've talked for many years together about our approach and it's not it doesn't change. Every 30 days we sit down 18. Now, Heidi, myself with the entire leadership team and we have a discussion and the discussion isn't just on raw materials to your point, it's on every cost that we have And we do everything we can to try to drive more and more efficiency into the operations that we have. We try to percent.

Speaker 3

You'll use our leverage with purchasing. We try to drive efficiencies in the plant, everything, so that we don't have to go out with price increases. 18. So that's our first choice, but there are times when we find ourselves as you've described in situations where it may not be the lever on raw materials that drives it, it might be eighteen. Some of the others, energy, transportation, whatever it might be.

Speaker 3

So on a monthly basis, we evaluate that, we make that decision, we take it to our customers and then we talk to our investors. 18. At this point, we're not in a position to talk about any increases because we're not out with those on a broad scale inside our stores. I will say There were some customers in different parts of our businesses where we've been working to put pricing in, we're still putting pricing in. So 20.

Speaker 3

There's no finish line in this area.

Speaker 5

That's great. Well, good luck.

Speaker 1

Thank you, Greg.

Operator

Percent. Your next question is coming from Mike Leithead at Barclays.

Speaker 11

20. Great. Thanks. Good morning, guys. Just one on my end.

Speaker 11

I wanted to dig in on the Performance Coatings outlook. I guess, Revenue was up, call it, 3.5% in 1Q. You're guiding 2Q down low single digits. So call it flattish for the first half And the full year guide is down about 10% or so, which it seems to imply some pretty steep second half decline. So can you maybe just unpack that a little bit?

Speaker 5

18. Sure, Mike. Let me start and then I'll let Heidi jump in. We do expect continued strength in auto refinish 20. And positive sales in general industrial, the 2nd quarter maybe a little bit slower than what we saw in our Q1.

Speaker 5

20. We expect the continued softness in industrial wood. And then we expect coil and packaging to be down low single digit, primarily due to the strong double digit comps in the second quarter. 20. I think if you look at it by region, North America, our largest region is expected to be up or down low 18.

Speaker 5

Compared to a high single digit first quarter, both against strong double digit comps. And 20. We're not expecting a ton of improvement in Europe or Asia Pacific and even Latin America will moderate a little bit.

Speaker 2

20. Yes. And I would just hit a few highlights here on the segments. I think, obviously, a lot of this is based on our strategy of differentiation 18. I'll hit on some of the regions.

Speaker 2

Just a couple of highlights. If you look at where we've said based on being recession resilient, automotive refinish is a great example, 20. Where we were up mid teen percent. We do see strong demand in most regions, and I would also comment on the really good price realization for the value that we're able to create and demonstrate for our customers. We've been number of calls here the last few quarters, eighteen.

Speaker 2

We've been talking more about our installations and we're now seeing the momentum really building here. We would expect to continue to build that momentum and I think you could expect to see us taking some meaningful share here. A few challenges we're still working through. You'll probably hear a consistent theme 18.5% across Performance Coatings Group and some of these segments where we've largely recovered, our raw material challenges, but it is now a race to convert to finished goods as soon as possible. So you can imagine the automotive refinish space that is absolutely a priority.

Speaker 2

And also working closely with our customers where eighteen. Labor does continue to be a challenge for these customers. The shop technicians, parts shortages are impacting some of these customers that are eighteen. Working through backlogs rather in the automotive refinish. I'd highlight quickly here too, Mike, is the protective and marine, 20.

Speaker 2

Whereas you know, we're servicing this segment through our paint stores in North America and very strong double digit sales in the quarter 20. And still a strong aggressively strong outlook, I would say, through 2023. Demand is strong in North America and Latin America 18 months through most of the segments in Protective and Marine. Europe, Asia, we've talked about these, certainly seeing some pressure there, which is leading 20. Just some project delays.

Speaker 2

And as I mentioned, we're on the path here making sure that we're taking every ounce of 20. The resin as it continues to improve to raise to conversion here. So we'd expect to see growth and incremental share gains there as well. 18. I'll comment just briefly on general industrial.

Speaker 2

You mentioned it. I think this I would categorize as more of a mixed bag across the segments and the regions. 20. However, globally, heavy equipment remains our strongest. Then you've got some areas that are showing early signs of 20.

Speaker 2

Appliances would be a good example of that, just adjusting to inventory levels. So we're going to continue to ramp up production there. 18. Briefly on coil and I'll hit industrial wood and certainly come back to any additional comments. 18.

Speaker 2

Coil North America is remaining strong with very consistent demand. Our metal buildings business is performing better than expected and seeing some softness in areas like the aluminum trim business. Latin America continues to be very strong with good performance that is Built on new business and new accounts, the team's been laser focused there, but we're still seeing pressure across EMEA and Asia in coil. 18. And I'll briefly hit on Industrial Wood.

Speaker 2

We've talked about this segment where we feel the most pressure. And I would say within 18. The actual segment, the most pressure is coming from Furniture. The other segments like Kitchen Cabinets and Flooring, we mentioned in our prepared remarks, 18 months that are tied to new residential continue to be a challenge. So we're seeing the continued pressure there.

Speaker 2

But importantly, eighteen. What the leadership team there is working on is expanding aggressively through market share gains, while our competition, 18. In some cases, it's reacting to the market softness differently. So we're working on getting these gains with a focus on introducing eighteen. And I'll give you a quick example here.

Speaker 2

The example within our furniture category, this technology is going to allow our customers eighteen. Greater service, quicker turnarounds and ultimately smaller batches, which brings benefit to the customer with less working capital, 20. Less waste and less obsolescence. So I'm bringing this to you just as another example of beyond what's in the can, how we partner with our customers to bring them solutions that are meaningful to their business goals. So quick whirl around those segments, but just a little bit of color.

Operator

Question is coming from Truman Patterson at Wolfe Research.

Speaker 16

Hey, good morning, everyone. Just following up on one of Greg's questions just 18. For a little clarity, pricing trends during the quarter in each of the segments, were you actually able to realize or capture incremental pricing in each of the three segments? Or was it really just kind of carryover from what was already in place in the Q4?

Speaker 5

18. Truman, it's for Paints First Group, it's mostly carryover for consumer. 20. There's pockets where maybe we didn't have product and now we're able to better service the customer with improving alkyd percent. But in Performance Coatings Group, for sure, there is some incremental pricing across specific businesses and specific regions that John 18.

Speaker 5

We even talked about where maybe we haven't been as effective as we needed to be in the past or there's 20. Other inputs that are causing our costs to go up. I use energy in Europe is one example 20, where we've had to be out to offset some of those higher costs. So maybe some incremental, the mass majority of it though is the carryover pricing from 2022.

Speaker 16

Perfect. Thank you. And then in Performance Coatings, op margin was up Like 400 bps year over year to 15.7%. That's highest first quarter in like 8 years, Even though volumes were down like low teens, normally, you see a sequential ramp in those margins in 2Q and 3Q. Were there any one time items in the Q1 that we shouldn't think Margins will follow normal seasonality in 2Q or 3Q, or is that kind of a good cadence to think about?

Speaker 5

20? Yes, I would say, that's probably a good cadence. There wasn't anything one time that jumps out, Truman, as you 18. I can imagine across the global business, there's puts and takes every quarter, but nothing that drove the over 18% increase in our gross and our operating margin.

Speaker 3

Truman, I'd give a lot of credit to our leader there, Karl Jorgenrude and his Lieutenants that are out driving every day to your point, we see this sequential improvement. There's a lot of hard work, the identification of eighteen. The right customers, the right segments, the right technologies and really demonstrating the ability to help our customers to improve their profitability. And 20. We've said for a long time that we expect this to be in the high teens, low 20s.

Speaker 3

And if Carl was in the room right now, I'd look him in the eye and tell him I'm expecting him to get there very quickly. Eighteen. And he would probably respond that he's going to. So we've got a lot of confidence in that team, a lot of expectations, high expectations and we are going to deliver.

Speaker 5

20. The only other thing I would add to that is acquisitions were slightly dilutive in the quarter. As we continue to integrate those acquisitions, Realized synergies as the year goes on, my expectation that, that will improve as the year progresses and help drive 20. Better operating margin in this segment.

Speaker 16

Perfect. Thank you all and good luck in the upcoming quarters.

Speaker 1

Thank you, Truman.

Operator

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

Speaker 17

Thank you. John, just on Q2, historically, you see about A $75.75 increase sequentially from Q1. Would you expect a similar increase this year or perhaps a little bit less eighteen given the demand weakness that you've been talking about here?

Speaker 5

Yes, David, we're not going to give guidance on our 2nd quarter EPS. I understand the question. 18. I understand the question. What I think you can expect to see in our Q2 is gross margin, we expect 18.

Speaker 5

Sequential and year over year improvement. We talked about the price increases and a sequential carrying over and 20. Sequential improvement in raw material costs will have a positive impact, partially offset by higher wages within manufacturing distribution. I would say, 18. With SG and A, I do expect a smaller year over year increase in our Q2 as we annualize that merit increase from last year eighteen.

Speaker 5

And we start realizing more of the cost reductions from restructuring activity. So we typically see an increase in SG and A as I talked about with paint stores Ramping up to service the increased sales. But as a percent of sales, I would expect our SG and A as a percent to be lower in our Q2 because of that seasonally higher architectural sales. So you do expect a lift in our Q2 eighteen. Because of the improvement in paint stores group quarter to quarter, architectural sales that we're not going to

Speaker 3

We expect to have a good second quarter 20. And we're going to update you at the end of the quarter. But as what we see right now, we expect a good quarter.

Speaker 17

Understood. And John, just on the paint stores group, are you giving are you seeing any price erosion or givebacks in that business?

Speaker 3

18? No. Actually, David, normally what we see is a small percentage of large, 18. Perhaps what we might call marquee jobs that get a lot of attention and we're all proud and 20. Some of us have egos, we admit that, that we want to see our pain on specific projects.

Speaker 3

But for the most part, what you see is a pretty disciplined industry because we all understand eighteen. It is competitive and the ability to continue to keep your company healthy and invest in those drivers that will help your customers to be successful Requires that help. And so, it's competitive for sure. But for the most part, It's a race to demonstrate the value that you can bring and we believe that in that race, strong wins wins.

Speaker 17

18. Very good. Thank you.

Speaker 3

You bet. Thanks, David.

Operator

Your next question for today is coming from Josh Spector at UBS.

Speaker 18

Yes. Hi, thanks. I wanted to follow-up on the pro contractor side of things. I think 18. Last call, John, you made some comments that some of your customers, you need to almost educate them about the fact that there were going to be market declines and They weren't really seeing declining in backlogs or anything to that extent.

Speaker 18

Has that changed? Has that conversation changed? And from what you guys have visibility on the backlogs now, 2019. Has that changed much versus a few months ago?

Speaker 3

Yes. I should be careful in making general statements like that Because to characterize an entire industry like that can be challenging to say the least. But 20. Yes, I would say that many customers that have in the past not been able to even return phone calls on bids Bid requests are now either returning those calls or looking for some of those bid requests. Eighteen.

Speaker 3

There's an understanding that there's an opportunity to continue to grow. If you look at the homes in the U. S, 18? They are aging. The residents of those homes are aging.

Speaker 3

And while many of those people may choose to eighteen. Move into a new home, many are choosing to stay in those homes and paint remains relatively inexpensive yet highly impactful twenty nineteen. And those painting contractors are pursuing those. So again, I mentioned earlier, I would describe it as a more normalized market. 2019.

Speaker 3

Contractors are looking and doing a lot of work and they're also probably a little more aware that Having a marketing aspect to what they're doing is important part of their future success and we're helping them with that. It's an element that 20. Most people don't recognize. And when I say it's not just what's in the can, we've been at this for over 150 years, obviously, and 20. Our ability to align with our customers, help them to understand not only that they should be looking around the corner, but how to prepare for that.

Speaker 3

They might have been great painters, 18. Now they own a paint company. And when they started the business, they put a sign on a project and every person in the neighborhood came to them. We're helping them to 18. Understand how to reach out and grow their business, how to, in some cases, specify products, in some cases, even how to interview potential painters.

Speaker 3

So 18. We're locked up with these firms helping them to grow their business in ways that most people wouldn't understand.

Speaker 18

Thanks. And I guess if I ask about the repaint demand side of things, just we've been in this downturn now for the last 6, 9 months or at least when starts come down and some of the housing turnover softened. Given the higher DIY demand during COVID And where interest rates are more people staying put, I guess how do you square all those to say is repaying that 75%, which is more defensive, is that Staying defensive, is that less defensive, more defensive now? Any way to characterize how you're thinking about that based on what you're seeing today?

Speaker 3

20. I'm not sure I quite understand your question, but I might say that we see this residential repaint business 18. And have seen it as an important element to offset some of the softness in the market. Coming out of the last downturn, Al, myself and many of the leaders that are currently running the company sat And reviewed during a slowdown, what would like we had experienced then, what would we like to have going forward? Eighteen.

Speaker 3

And it was a larger, more meaningful residential, repaint business and we've been successful in doing that. We were successful in growing new residential. 20. Our position there, we love our position there and we've over indexed now given the success that we've had. And so the offset to that Has been the residential repaint, the property management and on the industrial side, businesses like our automotive refinish and some other 18, even sub segments within some of our areas.

Speaker 3

So we manage this business with a long term view and we're always looking at the war game of 20. If this happens, then what? And residential repaint right now is an important element. If you look at our DIY business, our DIY business was up double digits, But it's because the comparisons were so small. Last year, we made the decision to deemphasize.

Speaker 3

We weren't making our DIY twenty 18. We took a hit there in last year sales in DIY to help our large and important customers grow. 20. As a result, our DIY comps look good now, but it's on a small base. The residential repaint business is important element that we expect 20.

Speaker 3

DIY, we'll take that business, but our focus is on the 90% of the professional through our stores.

Speaker 12

18. Josh, one more thing

Speaker 2

I would add to that on the residential repaint side. I think if you look at your back to your question on the backlogs and how we think about this eighteen. This is offsetting some of the other softening demand. We're introducing new products. So if you think about these contractors going in largely focused on the walls, eighteen.

Speaker 2

We've introduced a new professional cabinet coating. It's essentially a one component that performs much like a 2 component epoxy. So 18. Excellent chemical and moisture resistance and allowing these contractors to go in and essentially help to complete an entire kitchen from the walls to the cabinet. So 20.

Speaker 2

Really trying to arm them with the ability to take advantage of while they're in the home, where else they can generate revenue.

Speaker 18

Okay. Appreciate it. Thank you.

Speaker 1

Thank you, Josh.

Operator

Your next question is coming from Aleksey Yefremov at KeyBanc Capital Markets.

Speaker 19

18. Thanks and good afternoon everyone. I have two questions on the cost side. One is on the labor costs. 18.

Speaker 19

What are you seeing in terms of trends? Any signs of inflation leveling out there? And the second part is on the real estate. 20. As you sign new leases or renew existing leases, are you seeing any cost moderation there?

Speaker 5

Yes. Let me I'll take the first one on our labor costs. We talked about 20. Mid high single digit labor costs through our non factory distribution facilities. 18.

Speaker 5

We do expect that to level out, especially as we get into our second half. In our factories and distribution centers, I would say 20. The rate of increase has been higher to attract and retain those individuals in our sites. 20. I would say on that side, Alexei, we're going to continue to do specific market studies to make sure 20.

Speaker 5

We don't get out of bed, if you will, or outside of the market in any given area. I think what I would admit to is we maybe got a little behind 20. Previously, we're not going to let that happen. So I believe it's leveled out as we see 18. More unemployment rates tick up, it will put less pressure on wage inflation going forward.

Speaker 5

But I think we've got to be diligent in the manufacturing distribution areas to each market is a little different. Each one is going to be more twenty-twenty 20. Specific to what's happening in that market and we'll be more diligent there, but I do expect them to

Speaker 3

level out. And on the rent side, I would tell you that 18. For the most part, I'd say rents seem to be relatively flat. We make a very good tenant. We try to use that and leverage that.

Speaker 3

The fact that 20. As the predominant or premium brand here, eighteen. We'd like to talk about what it is that we bring. We talk about our financial strength and the fact that we're investing in our industry while others are closing stores, 18. We think plays well to those tenants that are looking for a long term tenant that can pay their bills and we fit that bill.

Speaker 3

18.

Speaker 19

Thanks a lot. Very helpful.

Speaker 11

Thank you.

Operator

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

Speaker 20

Great. Thanks for taking my question. Hope you guys are well. So first question, I guess, was you guys have obviously many, many 20 20. What would those be?

Speaker 20

Would that be maybe commercial and maybe new home new resi potentially not being as bad as you initially thought or how should we think about that?

Speaker 3

18? Well, I would say that commercial certainly has performed better. Our property maintenance has performed better. Our 22. Protective and Marine has performed better.

Speaker 3

I think that our residential repaint is we had high expectations of that going in. 20. So we I think I would never say they're meeting our expectations. When they meet our expectations, we raise our expectations. 20.

Speaker 3

On the industrial side, I think our automotive business is really doing very well. And I'd say that 20? There are some others that it's hard to answer this question, Arun, because in each of our businesses, there are opportunities. So 18. In our business, the way we look at it, it's not a 1 or a 0.

Speaker 3

When our teams come in and talk about if you're looking at our paint stores group, 20. You can come in and talk about new residential being under pressure, but then the focus is on where are the opportunities. And so even within new residential, we know there 18. And so there's I often say there's no finish line in each of these businesses. There are opportunities 18.

Speaker 3

And the role of our leadership teams that have been through many of these in the past is to find those opportunities 18. And they exist in every single business, even industrial wood, where there's a lot of pressure. There are opportunities for growth and we expect the team to find those opportunities, 20. Grow in those segments while improving their position within the segments or the sub segments that we play in now, so that when the market does 18. Return that we are that coiled spring and we take advantage of it.

Speaker 3

So we expected them all to grow faster than the market.

Speaker 20

Okay. Thanks for that. And as a follow-up, I wanted to ask about the EPS outlook here a little bit. So $3. Prior to your last earnings report, I think several of us, rightly or wrongly, were in the $9.50 to $10 range for 23 20.

Speaker 20

You know yourselves and us have rebased our expectations to $8.35 or so at the midpoint. 20. So does that $1.50 or so that we had to remove from our outlook, What would it take for that to come back in 2024? Is it mainly lower, a better affordability environment Driving higher housing turnover. I know there are several things that you can probably mention, John, but similar, what are maybe a couple of the top drivers that we get you back into that near $10 range on EPS?

Speaker 20

Thanks.

Speaker 5

Yes. Arun, 18. The first and always the biggest is volume growth. I mean, there's been a lot of macro headwinds. There's a lot of uncertainty and you hit Some of the mortgage rates are higher, existing home turnover is lower, new family single family starts are lower.

Speaker 5

As eighteen. We keep investing in new stores, in new reps, and some of the other long term growth opportunities, reps across each of the businesses 20. As the market improves because of the added investments we've put in over time, we expect to grow much faster than that market. So instead of a headwind with the macro environment becomes a tailwind and then we 20. I keep going back to 'eight and 'nine because I believe it's a similar environment and a similar dynamics.

Speaker 5

So 20. We expect to grow not 1 to 2 times the market, but 2 to 2.5 to 3 times the market. And that's how 20. We're going to drive that operating margin back to where we expect it to be.

Speaker 3

Yes, and it's capitalizing. I meant 18. Arun mentioned in the last response that in every one of these segments, I agree, volume is the key 20. And growing share is important and even we talk about we talk a lot about new residential and we point to single family frequently when we're having that discussion. But 18.

Speaker 3

The fact that multifamily starts have been more robust since last summer is a terrific opportunity and our ability to shift 20. Resources and attention to those opportunities is what differentiates us and why we believe that we'll get there and eighteen. The opportunity to really see that expansion, we're not just waiting for the market to come back. We're working every day to 22. Take that volume and be in a better position to capitalize on it once the markets improve.

Speaker 20

And just one last quick one. I know you guys have moved the Was that mainly just so you had a little bit more visibility into the year? Or, I guess, usually it's done in May or June. So just There was anything to that, just wanted to understand that move. Thanks.

Speaker 3

We wanted to bring you to Cleveland in August. It's a beautiful time to be here. Great. 20. Yes.

Speaker 3

I mean, it's to bring you in and be able to talk a little bit more about our line of sight in August is going to be much better. 18. And quite frankly, we're proud to put our teams in front of you and we think we're going to have a lot of really good things to talk about. So we're looking forward to hosting you here.

Speaker 5

18. Thanks, Arun.

Operator

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

Speaker 3

Thank you. Your auto refinish business has been consistently strong for a long time right now. During the pandemic, I thought it was duplicolor, but now we're out of the pandemic and it's still strong. Is it controlled distribution? Is it new products?

Speaker 3

Twenty. What's driving that above market performance? Yes, it's control distribution, it's technology. We talked about the combination of the technology 18.2% of our system between some technology combined combining Sherwin and Valspar technology. 18.

Speaker 3

We have wonderful leadership.

Speaker 1

We have

Speaker 3

great products, great distribution that's controlled. And we've been talking to your point, John, about our position here for some time and expected it to grow and we think the numbers are eighteen. Proving exactly what we said was going to happen is in fact happening. And then you've got over 300 stores in Latin America. Now that they're in the consumer segment, do you run them differently?

Speaker 3

Are you going to be repositioning those stores? 18? No. All along, we've been sharing talent as well as best practices amongst the consumer brands and 20. There is a realization that more and more of that business represents or mirrors 20.

Speaker 3

Business that might most likely be found in our consumer brands group. We've got talent in our consumer brands group. Todd Ray and 18. That team has really done a wonderful job and we think bringing their expertise to that market where we can 20. Leverage their experiences will be terrific and quite frankly, it will work both ways.

Speaker 3

We have Terrific leaders in Latin America as well and we expect to learn from what it is that they do down there and bring some of that back to North America. So it's a win win for both businesses and certainly for customers on both sides.

Speaker 6

Okay.

Speaker 13

Thank you.

Speaker 14

John.

Operator

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

Speaker 21

Eighteen. Good afternoon, everyone. With regard to your Performance Coatings Group, is it your sense that customer destocking eighteen is done as we sit here in April or is it still playing out among certain businesses within the segment?

Speaker 3

I would say it's likely played out, although I would say there might be some differences in region by region, 20. Kevin, if you look at what's happening in Europe as an example, there's a lot of concern in the market. So eighteen. We might have some customers that might still be in a unique position. But for the most part, particularly here in North America, 20?

Speaker 3

I don't think there's a great deal of inventory in the segments that we play in.

Speaker 21

Good to hear. And then 18. Secondly, if I may, what percentage of your Performance Coatings Group sales eighteen are linked to contracts that would feature some sort of indexed pricing mechanism as it relates to raw materials?

Speaker 3

A very small percentage.

Speaker 21

Okay. So when you say, in your prepared remarks, John, that eighteen. You hang on to the majority of your price increases. It sounds like that would be a vast majority indeed if index pricing is quite small.

Speaker 3

That's correct.

Speaker 21

Okay. Thank you very much.

Speaker 3

You bet. Thanks, Kevin.

Operator

Percent. Your next question is coming from Duffy Fischer at Goldman Sachs.

Speaker 16

Yes. Hi. Just first question on structural raw materials. A year ago, you guys were shorted and couldn't supply 20. Your customers what you wanted.

Speaker 16

Obviously, now things are slack in the system. We're seeing prices roll over. If we get back to a normal demand level, let's say, next 16.5% year. Are raw materials structurally short again? Or have you guys taken steps?

Speaker 16

And what steps have you taken To increase the availability of raw materials if we get back to a normal demand level.

Speaker 1

20. Duffy, I would say they will not be structurally short. The availability has recovered very nicely for us. We've taken eighteen. A number of steps over the past couple of years in response to what we've seen.

Speaker 1

One of those was certainly our purchase of specialty polymers, which has eighteen. Increased our internal resin production. We've worked closely with many of our suppliers. We've simplified the portfolio as well. So There are maybe not as many raw materials that we would have to procure as we would have in the past.

Speaker 1

I don't know.

Speaker 3

I'd say from an assurance of supply, 20? It's very important to understand Duffy. We're not trying to return to a supply chain of the past. 18. Our goal has been to improve our position and our ability to supply our customers and we've taken appropriate steps.

Speaker 3

20. For competitive reasons, we're not going to lay out what those steps are, but Heidi and her team Heidi is leaning on the edge of her seat wanting to answer this question. 20. We're not going to get into those details right here right now. I would tell you that we have been very 18.

Speaker 3

Forward thinking and how we're going to work through future issues and we learned a lot during this process. And I'd say we're coming out 18? Better and smarter as a result.

Speaker 1

Fair.

Speaker 16

And then, a decade ago, the Gliddon brand bumped you guys out of Walmart once 24. And I think if my notes are right, it was like a $250,000,000 opportunity back then. This time, does it move the needle? It's no longer Dutch Boy, but it's Valspar, 18. But does it move the needle for you guys or that's kind of a non event in what we'll see in your printed numbers?

Speaker 2

Yes. We don't think this will really have any impact 20. To be really candid with you, and I think if you look at the business in general, Walmart is still a very important customer to us. We sell them a lot of our key brands such as Minwax, 18. While we have, to your point, enjoyed the private label in the past, eighteen.

Speaker 2

I think this is an exciting opportunity for us as we move forward because we're going to continue to service the existing brands that we have and we will look forward to 18.5% and an opportunity in the future. If there comes to be something where we can both create value on both sides or both companies, we'll absolutely be interested in looking at that.

Speaker 9

Thank you.

Speaker 3

Thanks, Duffy.

Operator

Your next question for today is coming from Adam Baumgarten at Zelman and Associates.

Speaker 7

Eighteen. Hey, good afternoon, everyone. Just one for me. Are there any other businesses at this point in the portfolio that are under strategic review? Or are you kind of through that process?

Speaker 3

20? Adam, we look at every business, every brand, every program, everything constantly. We have that discipline.

Operator

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

Speaker 5

20. Good afternoon, everyone.

Speaker 3

Hey, Chuck.

Speaker 1

When you look at

Speaker 5

the Paint Stores Group, 20. DIY was up double digits in the quarter. And I think you touched on some of that, but in the consumer group in North America, DIY was 18. Soft. Was there more to talk about there than just short supplies a year ago at paint stores?

Speaker 3

20? Not really, Chuck. I'd say we had really deemphasized DIY last year to serve our customers. And 18. So we now have product to sell.

Speaker 3

And so it's on a smaller base because of last year. 18. And again, I think it's important to mention that our focus and our success is going to largely be determined 25. By the professional sales that we have representing about 90% of what goes through our stores. So we'll take the DIY business where there helps us, but 20.

Speaker 3

The focus is on our pro business.

Speaker 5

Got it. Thank you.

Speaker 3

You bet.

Operator

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

Speaker 14

18. Hi, thanks for taking my question. I wanted to follow-up just on the inventory fill that you saw in consumer brands. Was that across both DIY and 20. And do you expect any of that to bleed into the Q2?

Speaker 5

20. No, typically what we see in our mid spring and summer selling months are you'd start seeing declines in inventory as we come out of the season. So I wouldn't expect to see inventory builds like we saw in our Q1. So I think you'll see a more typical seasonal inventory pattern this 18. Sure.

Speaker 5

Raw materials are in a good place. Like I said, we're through the total supply chain inventories are in a good place. 20. Just to put in perspective, we're back to servicing our customers at the level that we expect to service them at and they expect to be serviced at. So I would expect that management of inventory will happen similar to the flow of past cycles.

Speaker 5

20.

Speaker 14

Got it. Thanks for that. Just wanted to follow-up. It doesn't sound like it, but just wanted to confirm if you're seeing any trade down Or any change in mix at all, be it in paint storage or in consumer brands?

Speaker 3

No, the opposite. We see a positive mix shift.

Speaker 14

Okay. Thank you.

Speaker 3

Customers that have labor as a percent of sales continue to 18. Learn that higher quality product might cost them a little bit more per gallon, but that they actually make more on a project. So 18. Our mix is positive in our stores.

Speaker 5

18. Thanks, Garik.

Operator

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

Speaker 9

A follow-up for you, Al, I guess, on gross margin, 18. The upside performance in the Q1 or strong performance, however you'd characterize it, I'm assuming there was some benefit from strength in volume. What I'm trying to figure out is the volume behaves differently in the coming quarters

Speaker 5

as you've talked. Do you build from

Speaker 9

the 1Q gross margin? 18. Is that having an impact on the gross margin? How should we think about the linkage between volume and gross margin as we move through the balance of the year?

Speaker 5

20. Yes. It's certainly because Paint Storage Group had a better had increased volume and it's our highest 20. Gross margin segment, it certainly improves our gross margin going in the Q1 for sure. I think as you know, we're 20.

Speaker 5

Moderating some volumes, but still paint stores is still going to be our best performing segment in our 2nd quarter. 20. And we do also expect to hang on to the price and get to see that sequential raw material 20? Moderation. So I think the volumes help for sure.

Speaker 5

And when in Paint Stores Group is stronger than the other segments because of that 20. Mix dynamic, it will help our gross margin, but I do expect to see sequential and year over year improvement in gross margin in our second quarter. And then we'll give you an update, Eric, on the rest second half after the second quarter.

Speaker 9

Okay. That's all I have. Thank you.

Speaker 1

20. Thanks, Eric.

Operator

Your final question for today is coming from Jadeep Pandya at Onfield Research.

Speaker 22

Thanks. The question really is on industrial wood. Could you tell us when did the destocking actually start? And eighteen. Is there any signs of really destocking or weaker demand coming towards an end?

Speaker 22

20. And then the second question really is on the multifamily homes. 1 of your competitors was sort of eluding that There is a decent backlog this year, but there could be some air pocket next year as the projects sort of finish. 20. So do you expect weakness in the multifamily homes or for that matter in commercialproperty management in 2024?

Speaker 22

Or eighteen? It's not something you worry about. Thank you so much.

Speaker 3

Well, on the industrial wood 20. And multifamily, I'd say, let me start with the multifamily and work backwards. I'd say our line of sight right now 18. On both commercial and multifamily is strong for the balance of this year and certainly going into next year. We'll see 18.

Speaker 3

What happens as we move forward, but right now our confidence is high and the pipeline is full. We're bidding a good eighteen. The amount of activity with contractors in this space, so I'd say our future looks pretty positively on that. 18. The industrial wood timing, it's been under pressure likely along with eighteen.

Speaker 3

So if you want to look at housing starts as a good precursor for this business, it's not exact, but we'll give you eighteen. Some insight as to how that business has behaved. And again, our expectation is that there are opportunities in this business to 20. Outpaced the market in both in all the segments you talked about, multifamily as well as 18. We have teams that are out there focused on growth every day.

Speaker 2

Thank you.

Speaker 3

You bet. Thank you.

Operator

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

Speaker 1

Yes. Thank you everybody for joining us today. I did want to remind you that please save the date for our 20. Annual financial community presentation that will be in Cleveland, as John said, on August 24. The event will also be webcast.

Speaker 1

20. Registration details on that will be available soon and we'll look forward to seeing many of you here. To close out the 18. Call here, you heard today that we're off to a very good start to the year with today's results. And at that same time, 18.

Speaker 1

Our team knows we still have work to do and we're prepared to do that. We know there's going to be macro headwinds as the year progresses, but we'll deliver strongly 18% in those conditions. And we're going to remain focused on what we can control. So thank you for attending today. And as always, I will be available along Eric Swanson for your follow-up phone calls.

Speaker 1

Thanks for your interest in Sherwin. Have a great day.

Operator

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

Powered by Quartr
Earnings Conference Call
Sherwin-Williams Q1 2023
00:00 / 00:00