Good morning. Thank you for joining The Sherwin-Williams Company's review of third quarter 2022 results and our outlook for the fourth quarter and full year of 2022. With us on today's call are John Morikis, Chairman and CEO; Al Mistysyn, CFO; Jane Cronin, Senior Vice President, Corporate Controller; and Jim Jaye, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode by Issuer Direct via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com, beginning approximately two hours after this conference call concludes. This conference call will include certain forward-looking statements as defined under US federal securities laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the company's earnings release transmitted earlier this morning. After the company's prepared remarks, we will open up this session to questions. I will now turn the call over to Jim Jaye.

Thank you, and good morning to everyone. Sherwin-Williams had an excellent performance in the third quarter, including high-teens sales growth resulting in the first $6 billion sales quarter in company history; significant, sequential and year-over-year gross margin improvement, record adjusted diluted earnings per share and strong cash flow. Demand remains strong in pro-architectural and North American industrial end markets in contrast to continuing softness in Europe and China. While year-over-year cost inflation remained very significant in the quarter, we were encouraged by a modest sequential decrease in raw material costs. The industry supply chain also continued to stabilize, though conditions remain tight with some previously noted specialty resins in particular remaining in limited supply. Throughout the quarter, our team continued to focus on growth initiatives, product innovation, customer solutions, pricing actions, cost control, supply chain improvements and business optimization activities while also taking actions and planning for a wide range of scenarios that could unfold next year. I'd like to go through just a few of the numbers at a high level and then turn it over to John, who will provide some additional color on the third quarter and our outlook. Comparisons in my comments are to the prior year period unless stated otherwise. Starting with the top line. Third quarter 2022 consolidated sales increased 17.5% to a record $6 billion. Pricing was in the low double-digit range. Consolidated gross margin increased to 42.8%. This was an improvement of 120 basis points year-over-year and 110 basis points sequentially, reflective of our pricing actions. Gross margin improved sequentially month-to-month in the quarter, with September increasing 650 basis points year-over-year. SG&A expense decreased to 25.3% of sales. Consolidated profit before tax increased $265.7 million or 43.5%. Diluted net income per share in the quarter was $2.62 per share versus $1.88 per…

Thank you, Jim, and good morning, everyone. As we've indicated since the start of the year, we expected 2022 would be a year of two contracts to have, and that's exactly what we're seeing play out. We delivered strong results in the third quarter, and I want to thank our entire leadership team and all 61,000 employees for their focus, their determination and drive in what remains a challenging operating environment. We continue to have great confidence in our strategy. Before moving on to our outlook, let me provide some additional color on our third quarter. In The Americas Group segment, we delivered record sales and PBT. Mid-teens volume growth and high single-digit pricing drove sales, which were up by a strong double-digit percentage in every end market we serve. The sales growth was led by DIY, which was compared to an extremely soft quarter a year ago, where we prioritized our Pro customers given limited product availability. Sales growth was next strongest in our property management, followed by new residential, residential repaint and commercial, respectively. Sales were also up by a double-digit percentage in Protective & Marine, but were dampened by the ongoing limited availability of alkyd resin. We are seeing strong effectiveness from the 10% price increase we announced September 6. TAG segment profit increased due primarily to double-digit paint volume growth and selling price increases, partially offset by increased raw material costs and higher SG&A costs related to continued investments in our long-term growth initiatives and our strategy. From a product perspective, exterior and interior paint sales were both strong, with exterior sales growing slightly faster and interior being the larger part of the mix. We've opened 32 net new stores year-to-date and expect to open 40 to 50 in the fourth quarter. We continue to invest…

Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Your first question for today is coming from Vincent Andrews.

Thank you. Just a question on TAG and the margin, both sequentially and year-over-year. You saw a lot more improvement in margins in the other two segments. I mean you didn't TAG. So I was wondering why that was. I did notice you called out some long-term investment spending in TAG that might have affected that. So perhaps, you could talk about that a little bit as well in terms of what that is? And whether it carries over, not just in the 4Q but into next year as well?

Yes, Vincent, this is Al Mistysyn. Yes, I mean, we saw a little over 20% increase year-over-year in our segment profit. Flow-through is a little in the low 20% range, and it typically is the case. We had higher sales volumes, which generally drives improved operating margin. I've historically talked about a low to mid-single-digit volume gain, getting in a normal state environment, mid- to high 20%. We had one really month of selling price increases, but these are still partially offset by the higher raw material costs that we had talked about being sequentially better, but still up maybe a mid-single digit in our fourth quarter. And really, the higher SG&A costs that we called out are the continued investments in long-term growth initiatives. So we've added 67 stores. We've put in over 80 reps. We've added headcount into our stores to support the growth outlook. And as John mentioned, we're going to add and really accelerate our growth in the fourth quarter by adding 40 to 50 new stores. So what I would expect in the fourth quarter is, you're going to see your normal seasonal slowdown in architectural demand, which is typical, and you also see a sequential decline in operating margin, but we expect stronger flow through in our fourth quarter, really upwards of over 30%. And you get a full quarter of the 10% price increase for -- that was implemented September 6. I would tell you, that price increase is going even a little better than what we had seen in the past, the fourth quarter sequential moderation of raw material costs and an easier comp. So you're going to see bigger year-over-year improvement in our operating margin in the fourth quarter. And you're going to see that SG&A growth into the first half of next year, and we'll give you more color on that in January.

And just as a follow-up, we talked a lot about raw material shortages for a year now, and part of what you were doing this year was trying to get your TAG inventory back to a comfortable level to service your customers. Are you there now? And given that maybe a lot of that was done over the last quarter or two when raws were peaking, should we be thinking about you carrying sort of peak COGS inventory into next year's spring season, or how should we think about the cadence of sort of lower raw material costs flowing through in TAG specifically?

Vincent, I'll take the inventory piece first, and I'll show it to Al to talk to the accounting. Yes, we're in a very good place right now for the majority of our products. I mentioned earlier, the issue that we continue to face with the alkyd resin and some of the specialty resins, we'll fight through that. It's getting better. As I mentioned earlier, we expect to have the majority, if not all of that behind us, at the end of the first quarter. But for the most part, the remaining portion of our product line is available for our customers. You should -- and I know you do know Sherwin-Williams, our model is not to unlock the door and hope that people are finding their way back into our stores to find them. Our sales reps and store managers are very aggressive in the hunt of pursuing customers, both existing and new to share with them the fact that we have these products available for them.

Yes. And Vincent, we actually built a little bit of inventory from our second quarter to our third quarter, which is typically not the case. But to meet the strong demand that we're seeing, specifically within TAG with mid-teen volume growth in our third quarter and high -- low double-digit we expect in our fourth quarter, I think what you're going to see us do is try to manage our architectural inventory by year-end, maybe up another 4 million gallons. The reality of that is, we're going to monitor that very closely as the quarter progresses and look at demand trends specifically going into our first half next year, and we may adjust that number a little bit. And that's specifically to the DSCs. Our store level inventories are in great shape. We are meeting our demand -- our strong demand with high service levels, and we expect to continue to do that. But as you can imagine, we're -- as our inventories get in better shape, we'll get back to managing our working capital. Our working capital at the end of the third quarter is over 12%. We're going to target to try to drive that down between 11% and 11.5% by year-end, but still a very strong inventory position going into next year.

And Vincent, this ties also back to your first question on the SG&A to Al's earlier point. We are continuing to invest in people to provide the service in the stores. So, as the product becomes more available, you may recall in the last couple of quarters, we talked about the new account activity at record levels and active accounts. So, now we've got a lot more people coming into our stores, new accounts coming in. We've got product available. We want to make sure that we have the service to deliver on our promise. And so they're all interrelated, and they're all working very well.

Great to hear. Thanks guys.

Your next question is coming from Truman Patterson.

Hey good morning everyone. Thanks for taking my questions. First, clearly, there are a lot of moving parts on raw material inflation between suppliers, the petrochem oil. But John, you mentioned the trajectory of raw material cost that's trending favorably as you exit the year. Can you just help us understand at this point in time what the gross margin basket or the raw material -- sorry, raw material basket might look like exiting the year sequentially versus kind of third quarter levels?

Yes, Truman, this is Jim. I'll take that one. So, if you look at our third quarter, the raw material basket was up by mid-teens percentage year-over-year. I think as we get into the fourth quarter, we're looking at that being more like a mid-single-digit year-over-year number. I think, as John said in his prepared remarks, the trajectory is good and heading in the right direction. I think it's hard to project exactly what it's going to do next year. We're trying to still formulate that, and we'll come back to you in January with our full year guide to give you some more color on that.

Yes. Truman, I'd just add to that. As we typically do and our planning for the upcoming year, we work with our suppliers closely on looking at demand trends, looking at volume trends by region, and it gives us a better line of sight as we get through the end of the year. And that's why January, we are able to give you a much better outlook on the raw material basket and other input costs, quite honestly, as we've talked about. Labor rates have been up high single digits, and in some cases, across our supply chain, low to mid teens in an effort to reduce turnover, which is very expensive, but the expertise that goes with that turnover and then freight and other transportation costs. So, we'd like to talk about the full basket as we get into January, and we'll have a better line of sight to that.

Okay. Okay. Perfect. And then, you all mentioned some of the cost control initiatives in PCG and CBG in preparation of a slowdown, right? Savings of $50 million to $70 million annually. I'm hoping you can walk through those in a bit more detail. And then also, assuming volumes turn negative or remain negative through '23, how does that impact your thoughts on kind of decremental operating margins for both of those segments?

Yes. Truman, I want to be careful about getting into too much detail on this call. I mean, we're making these decisions in our fourth quarter and going forward. And it's -- as we talked about on our second quarter earnings call in July, it's part of our normal earning process that we continue -- and as John talked about, we continue to assess these portfolio of business brands and customer programs and their ability to drive above-average market share growth and the operating margin and cash flow targets we set for them. And if we don't see that happening, we take action similar to what we did with the -- exiting the East private label business, the sale of our Australia and New Zealand business architectural. I would say, on the run rate savings, more of that is due to the portfolio review than what I would call more purely cost reductions, and that's relative to the macroeconomic headwinds we're seeing. And it's probably a 60-40 split. And why I think that's important is because, we're not overreacting to the macro environment. It means that we are driving operating margin improvement across consumer brands, across the PCG. And I would even venture to say that within PCG, yes, as John talked about, we hit the low end of the high teens of 17%. We have more work to do. This -- these actions we're taking in the coming quarters is not related to our long-term high teens, low 20 operating margin. This is really in response for the slowdown we're seeing in Europe and Asia. So we have opportunities to grow with platform consolidations. As we integrate these acquisitions going into next year, they'll start to be accretive as we get to the second half. So, if we see additional slowdowns in demand, we have more levers to pull to offset any decremental operating margin. So...

Yeah. And Truman, I’d answer this point as well. When you heard Al talk about not overreacting, I think your question is a good one, but I'd also point out that there are many areas of our business that we're actually continuing to invest and in some accelerating investments. So the leadership that we have, the ability to view and see where those opportunities are, I think, comes with a great deal of experience and what we're doing. And so we just talked about adding stores as an example. We'll have 35 new stores in the fourth quarter -- I'm sorry, 40 to 50 this year, this fourth quarter compared to 35 last year. And if you look at the staffing that we just talked about investing in digital programs that we're investing in. So we are making, we believe, the appropriate steps in reducing where we need to, but we're also investing in those areas that are appropriate.

The only other comment I'd make, Truman, related to that on the one-time cost. We'll call those out as we have typically done in the past, specifically even with the Valspar integration. So we didn't put them in the guidance in the fourth quarter. There are estimates. The timing is uncertain. We're pushing the teams pretty hard to take action and get these done, but we'll call them out over the next quarterly calls, and we expect to get approximately 170 over the next four quarters.

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

Thanks Truman.

Your next question for today is coming from Josh Spector.

Yeah. Hey guys, thanks for taking my question. A question on the Performance Coatings guidance. I guess, when I look at things sequentially, normally, it's relatively stable. You guys maybe have a 10% decline. Understanding things are getting worse in some of the regions, but I think when I look at some of the competitor guidance, things were already pretty bad in 3Q, and generally things stay bad into 4Q. Your guidance implies things are getting worse. So I'm wondering if you can maybe dig into some of the details there about getting worse or maybe your 3Q was helped by some items, which go away?

Yeah. Josh, I think where we're seeing maybe a little bit more of a slowdown would be in Europe and Asia. And I think our largest region, North America, we talked about being in the low to mid-teens and price will start to annualize, so you don't get as much of a tailwind on price. Our comps are still pretty strong in our fourth quarter relative to last year. And so I don't know there's a significant step change that we're seeing other than -- I think we've got to be prepared and try to look at -- based on our history and what we've seen over the last few years is maybe a little bit wider range on sales as we go into the fourth quarter with the holidays and things of that nature. So I don't want to read too much into that other than maybe a little less price as we get into the fourth quarter and then a little bit worsening outside of North America.

Well, I do think, to Al's point, if you look at the comps, if you take, for example, our packaging business, we had a high single-digit growth this past quarter versus strong double-digit comp. If you go into next quarter, fourth quarter comps last year were up over 30%. We've got a lot of momentum here in this business. We expect it to continue to win with our customers and grow with them. If you look at coil at a similar situation, fourth quarter last year, comps were up 20% coming off of a strong double-digit growth here as well. So there are some really strong performances here up against some really strong comps, and we think that these teams are continuing to grow in a pretty challenging environment.

Okay. Got it. Thank you.

Thanks, Josh.

Your next question for today is coming from Jeff Zekauskas.

Thanks very much. In the fourth quarter, should your average prices in TAG be up about six percentage points sequentially?

No, Jeff. I think what what's going to happen is, we're going to get the full quarter of 10%. We're going to annualize the August 2021, 7%. We're going to annualize the September 4% of last year's surcharge. So when you net them all together, it's about flattish quarter-to-quarter or high single digit.

I'm sorry, the fourth quarter of 2022 relative to the third quarter of 2022? Shouldn't – since your prices are lifting, you increased prices 10% in early September, shouldn't you capture that all sequentially? No?

We are, but we're also annualizing some of the price we took last year. So from quarter-to-quarter, our dollars will be higher. I agree with that, but it's still in the high single-digit range for TAG.

Okay. And then in terms of raw materials, can you frame the alkyd resin sales and EBITDA penalty for 2022? And is TiO2 – are TiO2 prices going down sequentially in any area other than Asia?

Yeah. I'll take the TiO2 piece, Jeff. What we did see in the quarter was some inflation that's happening. I think as we go forward, it will depend on some of the softening demand that we're seeing. And I think it's part of our overall view that TiO2 should start to be part of that basket that starts to moderate. The alkyd piece, I'll let Al.

Yes, Jeff, I think the alkyd impact. I mean, it could be around 1% on top line. It's – we're having to make choices. So, as an example, why it's difficult to pinpoint it. We're – there's a broad basket of alkyd, and we're somewhere getting fully what we need. Others, we're not. And it's just trying to look at ordering and reorders and things like that. So I think it's about 1% on the top line. The bottom line, I don't think we've quantified or really going to quantify at this time.

Okay. Great. Thank you so much.

Thanks, Jeff.

Your next question for today is coming from Ghansham Panjabi.

Thank you. Good morning, everybody. I guess, first off, starting off with TAG and the various sub-verticals within there, residential repaint has been a very strong grower for you for many years. I think part of that has just been due to higher home prices and consumers accordingly investing in what typically is your biggest asset. So just based on that, how do you think that category evolves as higher mortgage rates start to impact housing prices perhaps on the downside going forward?

Ghansham, I might say it remains positive. If you talk with our contractors, they look at the backlog ahead, and they feel it's a terrific opportunity for them to continue to grow. The LIRA, if you look at the forecasting they have, is for double-digit growth for the remainder of 2022 going into 2023. I would agree that there's some projections that remodeling may slow down mid-2023, but I'll also remind you that paint represents a terrific project to have high impact of relatively low cost. And while rates are moving, house price appreciation has also moved as has the aging of housing. The stock -- aging stock home price -- values, I'm sorry, let me do this. The aging home continues to require more remodeling, more updates, people aging in place, and we see that. You see it in the NAHB, which has slowed just a bit, but still well above 50. And while existing home sales have slowed against strong comps, it's largely because of lack of inventory. And when people have a tendency to stay in home, they'll continue to invest in those homes. Res repaint, we've often talked about, is the largest segment in the professional sub-segment space. It's a great opportunity for us. These customers respond very well to our personal approach of selling with our store managers and our sales reps. Our focus here is pretty simple, and why we have confidence is that we focus on the services and the solutions that allow these customers to be more successful. And I mentioned just a moment ago about the new accounts and share-of-wallet, these are accounts that are responding well to us. And I mentioned earlier, the innovation, I thought I'd just share one really quick one with you as an example, because here in Cleveland, we've just experienced a pretty dramatic swing from cold weather to warm weather. And we've introduced a product called Latitude with Climate Flex Technology, and it's a terrific product that fits, and I think it's a great example of why we continue to grow. We're responsive to these customers' needs, and this is a product that can be applied anywhere from 35 degrees all the way up to 120 degrees with the same application, same flow, same hiding, same appearance. And so what you end up is with customers that understand we're really focused on making them successful, launching products that help them on projects longer, allowing them to work later into the season. And this product with very minimal warning, if it starts to rain usually within a few hours, not even about 30 minutes actually, the product is resistant to moisture. So these are just small examples, but it really allows us to demonstrate how we're moving the needle and why we have confidence in continuing to move the needle in this space.

Okay, thanks for that John. And just for my second question, just on your comments on pricing effectiveness, which sounds like it's better than your initial expectations. What do you attribute that success towards in context of just the visible sort of plateauing of some of the inflationary numbers out there with oil prices stabilizing, et cetera?

Well, it's really simple. It's not a 30-minute discussion. We don't win or lose our price increase on how well we talk to them about the price increase in a pricing meeting. It's everything that I just talked about. Every day, we earn the value that our customers are willing to pay us for our products and services. And so the fact that we're out there helping them to be more successful, more profitable, when our costs go up, they understand that we're doing everything we can. Every customer that does business with Sherwin-Williams should know, we're doing everything we can to drive our costs down in both raw material and every other item in that basket. But when we're with them in a meeting to talk about pricing, it's because we need it. We've done everything to offset it, but what's most important is, we're helping them to be successful and we're partnering with them in their business. And so yes, we're more effective now because we're helping our customers to win.

Thanks John.

Your next question is coming from Kevin McCarthy.

Yes, good afternoon. John, last year, I think you spoke about adding 50 million gallons of architectural coatings capacity. Can you provide an update on that? Has any of it come online? And if so, what percent is loaded these days?

It is online. It's allowed us, as Al mentioned earlier, to build inventory at a time where we typically would have been running flat with demand outside of Orlando, a terrific team. I got to hand it to our entire supply chain team for the great work they did in getting that capacity up and running as quickly as they did. It's pretty well utilized. We don't talk to the specifics, but we run a 10-year model out on capacity. And this capacity was needed, came in perfectly at a great time, and it's allowed us to be responsive to our customers. We've got more capacity coming in, in Statesville, which will allow us to further meet the growing demands that we're projecting. And again, I hope that you see exactly what we see, which is confidence in our ability to deliver and the investments to support the demand that we're going to create.

Okay, that's great. And then secondly, if I may, I wanted to talk a little bit about the acquisition activity that you've done. I think you mentioned three bolt-ons closed during the quarter. What is the aggregate sales contribution that you would expect from those in 3Q and 4Q? And based on your margin comments and performance, it sounds like maybe the acquisitions feature significantly lower margins, is that correct? And if it is, maybe you can talk about the game plan to raise those to the company average or beyond over time.

Yes. Let me start with the latter part of your question. I'll go over to Al to talk about the first piece. You're right, when we split out the acquisitions, it was to highlight to our investors our ability to reach the commitments that we've been talking about. In fact, when we first announced the Valspar acquisition, we painted a picture that we were proud of the performance of our TAG business and that we expected to drive this industrial business in that direction, citing our desire to get into the high teens, low 20 operating margins. The fact that we've reached adjusted backing out, to your point, the last 12 months of acquisitions up into the 17, there's no one popping corks here. We're not done. We know that, and it's one quarter. We understand that as well, but it clearly demonstrates what it is that we're out to do and how we're doing it. The fact that we've reached 17%, we think, is an indicator of where we are. And I will tell you where we're going is higher. The fact that we backed out these acquisitions should, in fact, indicate that we believe in these acquisitions. Some of them are as little as 30 or 60 days old, and we've not had the opportunity to drive the synergies that we know we can drive into these acquisitions. We're making these acquisitions with a long view in mind. We're not trying to add on the first 30 days of their joining our family. Do we expect them to be contributing what it is that we expect them to do? We buy them with a goal of bringing our synergies and plugging them into our platform, driving more volume out and cost reductions and synergies in. So, we're excited about these wonderful companies, the people that have joined our company as well as the technologies they bring, and we will drive those in the right direction, and they will contribute to our profit.

Yes, Kevin, the acquisitions that we've had to date have added a little over 1.5% in the third quarter, expected to be similar in the fourth quarter. When I look at PCG, that would -- they would add about a mid-single-digit percentage. And just to highlight John's point, I mean, we spent over -- or about $630 million for the year on acquisitions. Most of that are two-thirds in the third quarter.

The offset, as we talked earlier, to those acquisitions is in FX. So, about even if you're looking there just at the scoreboard.

That’s helpful. Thank you.

Thanks, Kevin.

Your next question is coming from John McNulty.

Yes, thanks for taking my question. So, there's been a tremendous number of price hikes and announcements throughout the year at different times. So, I guess, can you help us to think about, if no further price hikes were announced, how should we be thinking about what the pricing in 2023 is year-over-year? Just to kind of help us to level set a little bit, just given how much you've been putting through.

Yes. John, with all the annualization, you'd expect mid-single-digit price effectiveness as you roll off the February 2020 increase and annualize this last increase along with each of the price increases we went out with through the other regions and segments. Right now, that's our estimate.

Got it. Okay. No, that's helpful. And then earlier, I guess, in the prepared remarks, you spoke to some of the e-commerce investment that you're making. I guess, can you give us an update as to some of the investments that you're making there? And how that market seems to be evolving at this point? We know it's still relatively early in that process, but I guess an update there would be helpful.

Yes, John, I think what's important to understand is that our e-commerce initiative is not just a transaction. It's more than selling paint. The ability to transact over a platform like that is table stakes and ours goes well above that. It's a much broader approach towards trying to tie in the entire ecosystem that we bring. So that last mile delivery through our local store is something that we want to be able to deliver in, but we're reaching in to the contractor base that we have relationships with, and we're beginning to conduct more and more business along with the rep and the store manager in a very unique and differentiated way. We want these customers living on our platform, running their business on our platform and seamlessly doing business with us as a result of that, and it's working quite well. We've got a number of painting contractors, as well as a lot of national accounts that are that are really dialing into our platform. There'll never be a finish line to this. We're investing pretty heavily right now, but that -- as we're ramping up, it's part of our plan that will stabilize and diminish over time. But right now, we think we're in such a unique position with our store platform and the ability to conduct business in a way that no one else can that we're excited about it. We're leveraging it and more and more people are using that.

Great. Thanks very much for the color.

Thanks John.

Your next question is coming from Christopher Parkinson.

Good morning. Can you just hit on your broader expectations, whether it's 4Q or 2023, on what you're hearing in your general industrial businesses? Perhaps, just parsing out various content from geographies and then also more consumer versus core industrial businesses, it would be particularly helpful. Thank you.

Chris, our industrial business, I would say, I talked just briefly about our packaging, but our packaging non-BPA coating is continuing to gain great traction. We mentioned that we're investing in this business. We've got great relationships with our customers here, and we are investing alongside with them with great agreements that allow us to really collaborate well and to grow with them. There's strong growth, for example, in beverage in both North America and Europe as the preference more and more moves away from other containers into aluminum cans. The Euro Food Safety Association opinion in Europe is also driving an increased demand for non-BPA coatings. We think that continues through 2022 and 2023. So this is a really, really unique technology, great customers. We've got a wonderful team here that's really executing very well. We're excited about this business. The coil business has been up double digits in seven of the last eight quarters. I mentioned earlier that we're facing some tough comps here with a 20% comp in the fourth quarter, but we're not running for the quarter. We're running this for years to come. We're really excited to hear again about this leadership team as well as the technology. Our solutions here have allowed us to be much more responsive to our customers. Quicker turns, smaller batches, works well in the face of adversity for our customers, and that's where we're headed, allowing them to be more responsive to their customers. So it's working very well. Our industrial wood business is another area that we believe we're growing share. Kitchen cabinets is a big part of this business. It's still positive now, but we do expect to see a little bit of slowdown in this business as new residential slows down. Furniture same way, we are…

That's very helpful color. Just as a very brief follow-up, there's been a lot of debate regarding pent-up demand in both resi and commercial repaint. Can you just quickly assess what you're currently hearing from your customers in terms of backlog, longevity, scope? I mean there's been kind of some rumors about the scope of certain projects, especially on the resi side actually expanding for people that are waiting a lot of time. Can you just give us your latest assessment on what you're hearing from your customers? And what -- how that drives your confidence at least into year end? Thank you so much.

Well, Chris, hold on one second before you just gauge. Are you talking about new residential?

No. Resi repaint and commercial repaint, I apologize.

Okay. Got it. Well, commercial and resi repaint, I'd say, the underlying demand on commercial is strong. Projects are resuming and starts are positive. If you look at the Dodge Momentum Index, it's strong positive for every month in 2022 in the ABI, the Architectural Billing Index. And I'm sure you all know that's the index that really the metric for how architects are billing has been positive for 20 straight months. So that typically means projects in the next 9 to 12 months are going to be coming out of the ground and the fact that, they remain positive, we believe, is a good sign. Customers who are positive, they're still reporting delays resulting from some labor and material shortages that we are seeing a terrific opportunity for our products. Infrastructure spending here as well is strong and schools, airports, hospitals and also areas such as data centers, our position here is strong. Again, we really leverage our platform. We leverage our specification teams. We're calling on architects and continuously drive new products for customers that allow them to be more productive on the job. The combination of those local stores, reps and really great stable of products. I've got to hit it to our innovation team. It continues to do that. I know, they've been gathered just in the last couple of days, talking about how they can continue to add more to our success, and they're doing a wonderful job doing that. So I want to call out to them as well. As it relates to the residential repaint side, as I mentioned earlier, it's still positive. We see contractors in our stores every day. They're talking about the strength through the balance of the year and turning the corner into next year, still a pretty good…

Thank you as always.

Thanks, Chris.

Your next question is coming from David Begleiter.

Thank you. Good morning. Al, should gross margins be up in Q4 sequentially?

Yes. Yes. And part of that, David, is the full impact of the 10% price increase. We do have a softer comp, but really, you also have a strong low double-digit volume in TAG, which is our highest margin segment. So we should see a nice -- better flow-through, if you will, in our fourth quarter relative to our third quarter in TAG, which will help drive that gross margin up. So yes, I'm expecting sequential and a bigger year-over-year improvement in our fourth quarter and possibly even getting to the low end of that long-term 45% to 48% range.

Very good. And John, just on the Home Depot PPG relationship, has there been -- have you seen any negative impacts in your business in terms of business losses or share losses?

Well, I would say this. Our belief is that we're in a really, really good position. We've been working hard, developing our approach towards a controlled distribution model that allows us to differentiate. When we're doing our job, we would expect people to react and change their models. And when they do that, we like to take advantage of that change. We think we're executing really, really well. We think people are reacting exactly the way we'd expect them to react, and we'd say that we're capitalizing on that, and we will continue to capitalize on that.

Thank you very much.

Thanks, David.

Your next question is coming from Arun Viswanathan.

Great. Thanks for taking my question. Good morning. I guess, first off, you noted that there could be some challenges in 2023. Could you just describe that a little bit more? Is that a continued slowdown in Europe and China and potentially, that spreading over into North America in the TAG business, or is it mainly still kind of more likely in PCG. I will stop there. Thanks.

Yes, Arun, I think we've talked about it. We do expect continued slowdown in Europe and Asia. I think as we get into North America architectural demand, I'd prefer as we've gone through or going through our normal preparation for the coming year in the operating plan to give you a bit more color on that in January. We'll have a few more months under our belt. There's a lot of moving macro trends and things that are happening, and they're moving daily. So rather than try to give you an outlook for 2023 on ARC in the regions, I'd prefer we'd be better prepared to do that in January. I think the fourth quarter, like we talked about, strong high teens, low 20% in TAG and low double-digit volume likely to carry over into the first quarter and then the price of high single digits that we've got certainly carries over into the first quarter. I think that's as far as I think we can go on color.

Okay. That's helpful. And just as a follow-up then, have you seen your customers change their order patterns at all in maybe some different market segments as the backlog actually growing, or is it that they're getting to jobs that maybe that were deferred during 2021 because of lack of availability to raws and labor? Maybe, you can just comment on that. Thanks.

Well, there are certainly some of that. And I would say that -- two things: one is, I think we're working much closer with our customers. Adversity brings out the best. Sometimes you have to find it. The fact that we've gotten through this challenging time with raw materials with a closer relationship with our customers, we better understand what projects they're on. In the past, they just walked into the store and they knew they could have it, whatever it was. When they needed it, it was there. As we went through that process of working through the raw material shortages, we were more responsive or better responsive when we understood what the needs of the customers were. So I'd say, the pattern, first of all, for us, it's a closer pattern. We're working better with them. We do see some, I would call it, maybe, they're more fluid. They're moving to projects when they become available and if it's weather changing or getting outside when they can, the fact that they're racing with a pretty sizable backlog. They don't want to take any time off that they don't need to. It's why I mentioned that product that I mentioned earlier, it extends the painting season for them. But I'd say, as it relates to the pattern themselves on the architectural side, we're seeing more frequency, I would say. We're seeing people in our stores more. And on the industrial side, I'd say, we're probably seeing small orders more frequently -- smaller orders more frequently as our customers are trying to prepare for cash management, while being responsive for their teams with their teams or their customers. And again, that works to our advantage, given our model of responsiveness.

Thanks.

Thanks, Arun.

Your next question for today is coming from John Roberts.

Thank you. A nice quarter. One of your longest lead time planning items is new store openings. I assume you have your sights for 2023 selected. Can you give us some insights into what new stores might look like next year?

You're right, we do have that planned out. And I'd say that we're probably get this point going to tell you, it's going to be in the 80 to 100 range. And you'll see those in a combination of metro markets where we're continuing to feed in locations, as well as in some markets where we want to supplement some of the previous investments with added locations for our customers. But you're right, John, as we go into the year, a good portion of those are already identified and the deals are just getting finalized, and we're working through those. So, we're prepared, and again, confidence. Confident in our model, confident in the differentiation of Sherwin-Williams adding stores while others are closing stores and taking advantage of the market opportunities that exist as a result.

Okay. And on a one-year comp, the DIY in your stores was obviously very different than the DIY in your consumer segment because a year ago, you were prioritizing the propane or over DIY in your stores. If you looked at a two-year comp, is the DIY in your stores roughly up the same amount as the DIY in the consumer segment on a two-year stack?

I think it'd be up higher than that, John. I think we've had really nice strength in that DIY customer within TAG. And the fact that we've been able to do turn on super sales again to bring them in has really helped drive that growth.

Great. Thank you,

Thanks John.

Your next question is coming from Mike Sison

Hey guys, nice quarter. Just one question for me. You sort of mentioned thinking or sort of managing the business on a worst-case scenario, what would that look like for the stores? Would demand be flat, down, down a lot? And in the event sort of that unfolds, what can you do to help mitigate some of that potential volume decline?

Yes. Mike, trying to guess how bad could be is not something that we're going to do on this call. The reality is that we prepare for a number of scenarios. Our view is that, particularly in that store's business that when things get tough, we go hunting. And the reality of a really difficult time in stores might include scaling back on some of the staffing if we didn't have the transaction count or other expenses that we might feel are appropriate. But I would say this that in the 37, soon to be 38 years I've been with the company, our approach has been to take advantage of these situations. I mentioned earlier, the work we've been doing to grow res repaint as a percent of our business coming through COVID, I think it's a great demonstration of what we do in really difficult times. We go find customers. Those customers need to paint to put food on their plate, feed their families. We grow share, we grow active accounts and we outperformed the market. And I'd say, that's what you should expect us to do in difficult times.

Mike, I would just add to that. If you, kind of how I frame it, so to speak, is if you go back and look at new residential in 2008 and 2009, where there's a lot of housing speculation and things of that nature, our new res was down in the low 22% range. And as John talked, as we've come out of that -- and back then, res repaint and new res ratio is 1:1. Fast forward that to today and our residential repaint versus new res is 2:1. And when I look at also property maintenance over that same time period, you look at the combination of res repaint and property maintenance that are less recession -- more recession-resistant, we're probably over 50% of our sales relative to just over 40% back then. So, when he talks about how we've map the company to help us mitigate a recession, those are the types of things. And the metrics I look at to say, okay, I don't believe it can be bad as 2008 and 2009, but if it is, we're much larger in other segments to help offset it.

And again, not to keep everyone here all day, but the res repaint is an important part of it. The Pros Who Paint is another piece. When we think about the residential, that is a new focus for us as well, as in that industrial side where packaging, auto refinish, these are growing parts of our business that weren't as strong in the past. So, we don't wait for bad things to happen. We're trying to make good things out of it.

Great. Thank you.

Sure, Mike.

Your next question is coming from Mike Harrison.

Hi. Good morning. You guys noted that you're working through some inefficiencies in your supply chain still. Presumably, that means that you're starting to get back to playing a little bit more offense when it comes to procurement. So I'm curious, when you're talking about raw materials coming lower sequentially, is that really just a decline in market prices, and that's mostly what you're talking about, or does it also include this greater supply chain and procurement efficiency that you should see over time?

Yes, Mike, I think what we're speaking to there has been our willingness to serve our customers even at a cost. And so, I think it will, as Ghansham might have been asked about the supply or the capacity that came on the 50 million gallons. As our raw materials have become available, we don't want to turn those down. We may need finished product in one part of the country, but the raws -- because of the supplier base might be available in another part, near another plant. We've manufactured that product and shift it to our customers to serve them. We have worked with our suppliers at times, where they've been unable to ship raw materials to us. We've used our own tank wagons or our own vehicles or 18-wheelers to secure a product and get it to our plants, when needed. So, there's an advantage of doing business with Sherwin that starts with the customer in the store or the rep plant, but it works all the way through to the raw material and manufacturing piece. And we'll do what we have to, to keep our customers in business and producing, because we know in the long run, the better job we do at keeping them in business, is the better supplier we are to them. That's in our best interest long term.

Right. And then looking at the restructuring actions, it looks like a good portion of those are targeted at the Asia Pacific region. Is that a region, where you're still investing for growth and still seeing a lot of opportunities, or is that -- is there kind of a retrenchment going on there? Maybe talk just a little bit about your strategy in the APAC region.

Mike, I'd say, on the industrial side, we are investing and continue to grow. Nearly every one of our PCG businesses has a good and growing business there, and we expect that to continue. As you would expect, we are taking the appropriate actions based on slowdowns. And as I would say, is our custom, we continue to evaluate our businesses. And as Al mentioned, not only our businesses, our programs, our customers, relationships, everything we can to ensure that they reach the hurdle for us to continue to invest in those. I think it is safe to say that we're doing a deep dive review of our architectural business in China. And based on how that review comes out, we'll decide about what we do in the future. The industrial side, we know we can demonstrate the value for our customers that can allow us to win there.

All right. Thank you very much.

Thanks Mike.

Your next question is coming from Greg Melich.

Thanks. Thanks for the insight on the gross margin going forward, guys. I'd like basically asked the same thing on SG&A. I think it was up almost 12% year-on-year in the third quarter. Is that a -- should we assume a double-digit growth in SG&A as well in the fourth quarter?

Yeah. Greg, I think what you're going to see in our fourth quarter, with the TAG stores that we've invested in and then opening another 40 to 50, and in our fourth quarter along with the reps to support that, we'll continue to grow or control our SG&A pretty tightly. I do expect to get leverage still in our fourth quarter on SG&A. But as you typically see with the seasonal slowdown in our architectural demand, SG&A as a percent of sales will be up. I don't expect our SG&A to be up as much in our fourth quarter just because some of the actions we've taken on holding new positions, reducing travel, things of that nature will help offset some of those additional investments.

Got it. And then I guess my follow-up is, given that the -- we've tend to focus on getting on top of raws, and clearly, it seems like you're there now. But given all the other costs that are going up, is it possible next year that there could be another round of price increases even if raws are flattening out?

Greg, I think we've got to get through our normal planning process here. We'll evaluate the merit increases and different other inputs like labor and transportation. And if we -- you know us, if we need to go out again, we will, but we're not in a position today to talk to that specifically.

And if we need to go out, we will have wrestled everything we can to the map to try to avoid having to go out, but I think we've demonstrated an ability and a willingness if we have to. But we don't take that lightly. Our goal is not to have to, but there are some inflationary areas of wages or whatever it is. We also want to make sure that we retain the best talent, and so we know we need to be competitive as well.

That's great. And then my last is really a follow-up on gross margin. Could you help us, if gross margins end up being, I guess, they were up 110, 120 this quarter, and let's say they're up 300 or more in the fourth quarter, is that going to be more from price versus raws or more just from volume increases? I think last year, you called out that was hundreds of bps of help. Can you just help us on that?

Yeah, I think it's going to be the strong volume through TAG of double-digit pricing and then the raw moderation in that order.

Got it. Thank you guys, and good luck.

Thank you Greg.

Thanks Greg.

Your next question is coming from Adam Baumgarten.

Hey, good afternoon everyone. Just maybe sticking on DIY. I know you mentioned that volumes in TAG were really strong there. Were North American DIY volumes positive in Consumer Brands in the quarter?

North American volume was up strong single digits.

Yes. I'd say, on the volume side, we were up low to mid-teens in the third quarter. Volume was up low single-digit.

Okay. Got it. And then just as we're thinking about the raw materials, if we were to keep the current basket at the levels where they are today and flow that through to next year, what would that look like from a raw material inflation perspective, if everything just stays stable where it is?

Yes, Adam, I think you're -- if everything stayed exactly the same, which we know you're still talking probably low mid single-digit by the time you annualize everything, that's a hard answer today. Like we talked about let us get through our planning cycle, let us get through our demand outlook with our suppliers and let us give you a better view of our full basket of input costs, raw materials, labor, freight transportation on our January call. I think it's too early to be speculating too much on 2023 costs at this point.

Okay. Got it. Thanks.

Your next question is coming from Garik Shmois.

Hi. Thanks. I'm curious if you could speak to any mix impact in TAG, or are you seeing any signs or anticipating any signs of trade down?

No, actually, we see the opposite as customers are facing labor shortages and trying to get through projects as quickly as possible. They have a tendency to move up in quality. And we're actually even seeing that in our new residential as well as we've introduced new products, new one of Painters Edge Plus. It's an ultra flat product that hides in perfections as an example. So you get in some of these projects where the drywall contractors are struggling to hire and find experienced drywallers. They're passing drywall on that may not be as perfect as the painter might have liked. And so we're helping them with products that hide some of those imperfections. Our customers are willing to pay for those. 90% -- 85% to 90% of their cost is labor. So shifting up in quality helps them on the overall profitability of the project.

Got it. Thank you. Follow-up question is just one more on DIY. It sounded a bit more sluggish coming out of 2Q. Just curious, are you seeing a sequential strengthening there?

I'd say, some of what you're seeing in our DIY first in our stores -- and Al was right, we've seen more DIY in our own stores, but it's a relatively small percentage of our business. We're mainly focused on the pinning contractor through our own stores, but the comparisons there where we were shifting product away from DIY products into contractors is a portion of the benefit that we see. And then also on the consumer brand side, as we've reached a more level state, if you will, of raw materials. We've been able to benefit from some of the pipeline filling into other customers that we've not been able to in the past just because of availability. So we're seeing some benefit there as well.

Got it. Thanks, again.

Your next question for today is coming from Steve Byrne.

Yes. Thank you. Are the equipment sales that you're paying contractors sometimes buy from you, the spraying machines and so forth. Are they still a good leading indicator of paint demand for you, or does that depend on which of the business is? I was just curious if it's still useful, how would you characterize those sales in recent months? And on the same theme, John, you talked about having visibility for the paint for the pro backlog through the end of the year, here we are almost in November, would you normally have a view of a backlog beyond year-end at this time?

So let me answer the first question. You're right that the spray equipment sales, any given time of year, could vary as how much of a leading indicator would be. So residential repaint, as an example, I don't think many of us would appreciate a repaint contractor coming into our homes where we're living with an airless sprayer trying to spray the inside of the home. And as exterior slows down, they're less likely to purchase spray equipment. So I'd say that for the most part right now, spray equipment is riding along, as you would expect, with the sales volume of paint that we're experiencing. And then the second part of your question, Steve, was –

Just whether you’re seeing more of a backlog beyond a couple of months at this time of year?

I'd say, right now, as we'd be talking historically to our customers, the outlook that we have is pretty much in line with what we would normally hear from them. Commercial contractors generally have a – a longer view. These are larger projects that go out to bid as far out as a year earlier. Residential repaint would be on the other end of the spectrum and those contractors could get contracts or agreements that could start in weeks, others in months. So I'd say, it's pretty much in line with what we would normally see if you put them all together and look at the backlog. It's pretty consistent with what we've seen.

And then with respect to the consumer business in China, is that basically wallroom brand. And I was just curious whether that brand that you acquired with Valspar just hasn't worked out as well as you had hoped?

It is the wallroom brand. And if I'm talking on a call about a deep dive, it probably is safe to say, it's not worked out as well as I had hoped.

Okay. Thank you.

You bet.

Your next question for today is coming from Eric Bosshard.

Good afternoon. Two things for you. First of all, Al, in terms of production and inventory from here, can you just clarify what the plan is as you head into what you characterize as a bit uncertain in volume in some areas? What is the plan through 4Q and into 2023?

Yes, Eric, I talked about building some inventory in our fourth quarter on architectural specifically. I think of those as maybe some of the -- if you rank products, being your fastest mover rebuilding some inventories in Bs and Cs and Ds just to make sure we got the full spectrum of products covered going into next year's selling season. That being said, as John talked about, we're going to stay very close with our customers and what their backlogs and outlooks are, and we'll adjust production accordingly. I don't want to get too far out in front of demand, knowing that we were able to keep up with demand through the summer season with the additional capacity we brought online that we talked about earlier. So I think it gives us more flexibility to manage inventory lower if need be going into the summer. But I think those are things that we're very -- going to be very cautious about. Like I said, I want to get our working capital back down towards that 10.5% of sales, where we -- I would like to run the company. We think we can get down there around 11% to 11.5% by the end of this year, knowing we're going to carry a little bit more inventory into next year or I should say it that way, I should say, we'll be back to a more historical level of inventory than we were a year ago, obviously. But I think that's something we'll manage pretty tight.

Okay. And then secondly, John, I understand your comments on how the portfolio is different with more resi repaint versus new. In the last cycle, the industrial business is also, I'd say, notably bigger than it was before as well. I'm curious how that influences the gross margin path? How you talked about getting to the low end of the 45% to 48% in 4Q? But how does the gross margin recovery path behave? In this cycle, should it behave like in prior cycles, or is the inclusion of industrial change in the arc of that path?

Eric, I think what you see is that mix shift of -- on the industrial side is a little bit better for us from a gross margin standpoint. And then you got to kind of look at it even within architectural, the mix shift is a little bit better for us. So I get your question. We didn't have packaging through the last cycle. It's a larger portion -- a much larger portion of industrial even now than it was two years ago. So I think when you look at margin profiles, we might have a positive -- a little bit more positive shift when you get into these slowdowns. We're seeing some of that. I would argue with a slowdown in Asia and Europe across some of our businesses within Industrial. So as North America hangs in there and has better demand, our margins will be a little bit better around the business.

To weigh in segments like our auto refinish and coil, I mean there's -- it's a very good question. Eric, I think if you look at the overall, we think we're not only better positioned from a demand standpoint. We talk about resi repaint, but you also would have to include property management in there, the auto refinish, the packaging, all of these are really better positioned, but we're going to be, I think, in a better position to grow volume as well, more absorption through the plant than we may have to the last cycle as well. And there's a lot that we bring in our approach even with existing segments. The strategy work that we've done to allow us to better focus on the sub-segments and those customers within there that are willing to pay for the solutions that we bring is where we're focused, and we think that's going to benefit us.

Thank you.

Thanks, Eric.

There are no further questions in queue. I would like to turn the floor back over to Jim Jaye for any closing remarks. End of Q&A:

Thank you, Holly, and thank you, everybody, for joining us today. As you heard, we're looking forward to delivering a very solid fourth quarter that will result in 35% growth in our second half adjusted earnings per share. We're also very focused on preparing for any number of scenarios that might unfold next year. Our team is very deep and experienced, as John said. So very confident heading into next year, and we're looking to execute – continuing to execute at a high level. We'll be available along with Eric Swanson for your questions afterwards, and again, thank you for joining us today. Have a great day.

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