The Sherwin-Williams Company - Q3 2023

Transcript

Operator (participant)

Good morning. Thank you for joining the Sherwin-Williams Company's review of Q3 2023 results and our outlook for the Q4 and full year of 2023. This conference call is being webcast simultaneously in listen-only mode by Issuer Direct via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com beginning approximately two hours after this conference call concludes. This conference call will include certain forward-looking statements as defined under the U.S. Federal Securities laws with respect to sales, earnings, and other matters. Any forward-looking statement speaks only as of the date of which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

A full declaration regarding forward-looking statements is provided in the company's earnings release transmitted earlier this morning. After the company's prepared remarks, we will open the session to questions. I will now turn the call over to Jim Jaye, Senior Vice President, Investor Relations and Communications.

Jim Jaye (SVP of Investor Relations and Communications)

Thank you, and good morning to everyone. Joining me on the call today are John G. Morikis, Chairman and CEO, Heidi G. Petz, President and Chief Operating Officer, Allen J. Mistysyn, Chief Financial Officer, and Jane M. Cronin, Senior Vice President of Enterprise Finance. Sherwin-Williams delivered excellent Q3 results compared to the same period a year ago. These results follow our strong first half, and we are again increasing our full-year guidance, which John will talk about in just a few minutes. But first, let me touch on a few Q3 highlights. Consolidated net sales were within our guidance range. Consolidated gross margin expanded significantly, sequentially and year-over-year, driven by pricing discipline and moderating raw material costs. To reiterate our commentary from last quarter, we are committed to investing in and profitably growing the business at the same time.

A high single-digit increase in SG&A over the prior year Q3 reflects those investments, which are deliberately being made at a higher level to take advantage of current market uncertainty and are aimed at driving the success of our customers and growth across all businesses. Operating margin expanded year-over-year, and adjusted diluted net income per share grew by a double-digit percentage. EBITDA also grew by a double-digit percentage, with adjusted EBITDA margin of 20.7%, near the high end of our current 19% to 21% target range. In addition, we returned $566 million to our shareholders through dividends and share repurchases during the quarter. Let me now turn it over to Heidi, who will provide some commentary on our Q3 results by segment. John will follow Heidi with comments on our outlook before we move on to your questions.

Heidi G. Petz (President and COO)

Thank you, Jim. I'll begin with the Paint Stores Group. Q3 Paint Stores Group sales increased 3.6% against a challenging 21.5% comp. The increase was driven by continued effective pricing and higher Pro architectural volume, excluding new residential. Segment margin improved sequentially and year-over-year to 25.9%, driven by pricing discipline and moderating raw material costs. Protective and Marine was the fastest growing in the quarter, driven by strong volume as sales increased by a double-digit percentage against a mid-teens comparison. Industrial flooring, infrastructure, and oil and gas applications remained key drivers. In our Pro architectural end markets, commercial sales were strongest, increasing by a high single-digit percentage versus a high teens comparison. Residential repaint sales increased by a mid-single-digit percentage amid continued softness in existing home sales and against a 20% comparison.

While this is a solid performance in the current environment, we are not satisfied, and res repaint continues to be our largest opportunity for growth. Property maintenance sales grew by a low single-digit percentage against a mid-20s comparison. New residential sales were down mid-single digits, with volume down high single digits against a mid-20s comparison. As we've previously noted, we anticipated new residential would be challenging near term, given prior softness in single-family starts. We expect our continued share gains and new account wins to become more and more apparent as starts improve. Our DIY business was down low single digits against a very difficult low 30s comparison. From a product perspective, interior paint sales were up low single digits, and exterior paint sales were flat, both against double-digit comparisons in last year's Q3.

Sales in our Consumer Brands Group decreased by 4% in the quarter, primarily due to the divestiture of the China architectural business and softer DIY demand in North America, which was partially offset by selling price increases. Sales in North America, our largest region, decreased by a mid-single-digit % against a double-digit comparison. The pros who paint category continued to grow, while DIY demand remained muted by inflationary pressures on consumers. We continue to invest here with our strategic retail partners for growth. In other regions, sales were up high single digits in Latin America and low double digits in Europe. Sales in China were down high double digits as we completed divestiture of the business on August 1st. Adjusted segment margin was 13.8%, which was lower than a year ago, primarily due to lower sales volume and lower fixed cost absorption due to lower production volumes.

Sales in the Performance Coatings Group decreased 1% against a low-teens comparison. Volume decreased by a high-single-digit percentage, but was partially offset by positive low-single-digit contributions from pricing, FX, and acquisitions. Adjusted segment margin increased to 19.1% of sales, primarily due to pricing discipline and moderating raw material costs. Sales in PCG varied significantly by region. Sales were strongest in Europe and increased by a mid-teens percentage. Latin America sales increased by low-single digits against a mid-teens comp. North America sales decreased mid-single digits against a 20% comp. Demand in Asia remained weak, with sales down double digits against high-single-digit growth a year ago. From a division perspective, growth was strongest in our industrial wood business, which was up by a low-double-digit percentage against a mid-single-digit comparison.

This growth reflects our ICA acquisition, share gains, and a potential bottoming of new residential construction. We expect to gain further momentum in this business as we close October 1st on the previously announced acquisition of Germany-based Specialized Industrial Coatings Holding, comprised of the Oskar Nolte and Klumpp Coatings businesses. We are gaining share and seeing steady demand in auto refinish, where sales increased by a mid-single-digit percentage against a high single-digit comparison. Sales in coil and general industrial both decreased by low single-digit percentages against challenging comparisons and varied widely by region. Packaging sales were down by a mid-teens percentage against a high single-digit comparison. We anticipated this decline, given the near-term destocking by brand owners that we described earlier this year. Packaging sales in the quarter were also slightly impacted by the fire at our Garland, Texas, plant.

Our business continuity team is executing our contingency plans to minimize customer impacts from this event near term. Longer term, we continue to feel very good about our position and growth prospects in this end market, and we expect to bring additional capacity online at our Tournefeuille, France, plant by early 2024. With that, let me turn it to John for his comments on our outlook for the Q4 and the year.

John G. Morikis (Chairman and CEO)

Thank you, Heidi. Our team delivered another strong quarter in an environment characterized by ongoing uncertainty. My thanks go to our 64,000 employees for continuing to focus on our mission and for executing on our strategy. Their energy in serving our customers and providing them with solutions remains a true differentiator. On our July call, we described the anticipated second half demand backdrop across our businesses. The Q3 played out much as we expected, and we believe the environment remains largely unchanged in the Q4. Paint Stores Group will face another strong year-over-year comparison. Demand in commercial, property maintenance, residential repaint, and protective and marine remains stable, with new residential remaining soft, as we expected. We have now annualized prior price increases. In consumer brands, North America DIY demand remains soft. Europe demand has stabilized, and Latin America markets remain mixed.

Performance coatings demand remains highly variable by end market and by region. We know we cannot defy gravity in terms of the macro environment. What we can do is aggressively pursue new account and share of wallet opportunities to drive market share gains. We are aggressively focused on doing just that. Moving to the cost side, we're narrowing our full-year raw material outlook. We expect costs to be down by a high single-digit percentage in 2023 compared to 2022. We expect other costs, including wages and other input costs, to be up in the mid to high single-digit range. We also continue to see the current market uncertainty as an opportunity to press our advantages through greater investment in solutions for our customers that will drive their success and ours.

Our SG&A spend in the Q4 will reflect these investments, leading full-year SG&A to increase in the high single-digit to low double-digit range compared to last year. This approach has served us well many times in the past. We are highly confident it will again now, resulting in continued above-market growth and strong returns. Now, moving on to our specific guidance. We anticipate our Q4 2023 consolidated net sales will be up or down a low single-digit percentage compared to a high single-digit percentage increase in the Q4 of 2022, with volume flat to down slightly. As a reminder, we've largely annualized previous price increases across the business. For the full year 2023, we expect consolidated net sales to be up a low single-digit percentage, with volume down a low single-digit percentage.

Our sales expectations by segment for the Q4 and the full year are included in the slide deck issued with our press release this morning. We are increasing our full year 2023 diluted net income per share to be in the range of $9.21 to $9.41 per share. We believe this increased range accurately reflects our strong Q3 performance, continued pricing discipline, and moderating raw material costs, while also acknowledging the ongoing uncertainty in our seasonally smaller Q4. This guidance includes acquisition-related amortization expense of approximately $0.80 per share and restructuring-related net expense of $0.09 per share. On an adjusted basis, we expect full year 2023 earnings per share in the range of $10.10 to $10.30.

This is an increase of 16.8% at the midpoint compared to last year's $8.73 adjusted earnings per share. We provided a GAAP reconciliation in the Reg G table within our press release. Our slide deck includes additional information on our assumptions for the year. As we begin the Q4, we continue to expect choppiness by region and end market. More importantly, we continue to see opportunity amid uncertainty. We are extremely confident in how well our various businesses are positioned. Our strategy is clear, it's working, and it's not changing. We'll continue to provide our customers with differentiated solutions that drive their productivity and their profitability. Our capabilities, products, and services are unique. We remain on offense, growing new accounts and share of wallet in the right markets with the right customers.

We also remain focused on developing and retaining talent, and improving and simplifying our operations. We expect to finish the year with momentum that will carry us into 2024. I have the utmost confidence in Heidi, Al, our leadership team, and our people. Together, we expect to continue outperforming our competitors and the market. This 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 (participant)

Certainly. Everyone at this time, we'll be conducting a question and answer session. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone. Your first question is coming from John McNulty from BMO. Your line is live.

John McNulty (Managing Director and Chemicals Analyst)

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

Heidi G. Petz (President and COO)

Yeah. Good morning, John. Well, I think you make a great point here. You know, I wanna take a minute before I jump right into res repaint, which I absolutely will, and just put this a bit in perspective. You, you heard from some of our prepared remarks that when we look at our performance in general, and we're posting some, some stronger results up against really aggressive comps last year. I think that's an important piece that we anchor in as I get into the res repaint, because it's true for res repaint. Certainly, new res, being up against over 20% comps here and still in this environment, continuing to post. So we're, we're really proud of the team to be able to overcome some of that.

So I think if I just jump right into res repaint, I'll let you know that, yes, we are gaining share in this market. Demand does vary, depending on a few variables. I think if you look at this and separate a bit, those contractors that are more established and well-known and are more experienced in marketing their business, they've got the scale, and they're confident in their backlog. I would say that's more so true for them than those that have less experience, being able to put that type of focus on marketing their business. So I would say there's a bit of a variance there. But, you know, we look at this importantly.

You know, the adversity that these contractors are facing in this choppiness is also an opportunity where I believe that it makes our stores and our reps even more valuable, as we're helping them navigate through a lot of this uncertainty and helping to intercept what it is that they're trying to accomplish in their business. You know, whether it's leads or making sure that we're helping them, you know, finding ways to be more efficient in their process. So I think if we've seen this movie before, we're ready for what's ahead. We're putting investments in. John referenced earlier, some of the SG&A that you see. I'll take you back.

We saw this coming in 2008 and 2009, and making sure that what came out of that was our desire to be well-positioned, you know, as new residential does recover, that we've got all the investments in place here to continue to, to drive res repaint. So this is an opportunity where, where, and I would say, when our model stands out and when we're able to gain a lot of share.

John McNulty (Managing Director and Chemicals Analyst)

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

Allen J. Mistysyn (CFO)

Yeah, John, this is Allen Mistysyn. And, you know, we're in that part of the year where we're going through our operating plans. We're reviewing really, demand outlook with our suppliers. I know we've gotten a lot of questions about oil ticking up, and, you know, that has to be up for a period of time before we see that flow through our raw material basket. I think what you will see is the other cost input items, increasing. I think merit increases will get back to a more normal level, but you've got healthcare, freight, some of the things going on with LTL carriers that are driving our overall costs up. So as we typically do, we push back and, and look for offsets as much as we can.

And then when we don't feel like we have an offset, and we need to go out with price, we'll tell this our customers first, and then we'll talk to the street. So we're going through that process, and we need a little more time to figure that out, and you know, we'll let our customers know, and then we'll come back and let the street know.

John McNulty (Managing Director and Chemicals Analyst)

Thanks very much for the caller.

Allen J. Mistysyn (CFO)

Thanks, John. Thanks, John.

Operator (participant)

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

Vincent Andrews (Managing Director and Senior Equity Analyst)

Thank you very much, and good morning, everyone. You know, wondering if I could just dig into the SG&A a bit more. Understand completely and appreciate what you're doing this year, but how do we think about that into 2024, both in terms of, you know, what level of increase is realistic for next year? Presumably, SG&A is not going to go down, but should it grow a lot less than normal, just given the big step up this year. And then, you know, how do we think about from the outside, you know, over the next couple of years, measuring the return on that? Is it simply going to come through the volume line in Paint Stores Group, or do you think it's going to be about margin or both?

Or, you know, as we, if we're here two years from now and we do a look back, you know, what do you want us to see specifically in the P&L?

John G. Morikis (Chairman and CEO)

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

And so I think as you look forward, the expectation should be increased market share and outpacing the market in volume and profitability as well.

Allen J. Mistysyn (CFO)

Yeah, Vincent, I would say, certainly, as we annualize costs or the investment in our long-term growth initiatives, you're going to see that in the first part of the year. I'd highlight, if you look at our SG&A sequentially, Q2 to Q3, even though we kept investing in Paint Stores Group and reps, Performance Coatings Group sales and tech service reps, and you have investments in the ProWho Paints, we saw those offset by reductions in our G&A costs or admin SG&A, so that we're trying to figure out ways to continue to drive G&A down to offset the incremental costs of those investments. Yes, we will absolutely measure the return, but as we get into 2024, we're going through our budgeting plan.

We're going through key initiatives across each of our functional areas, and we'll keep driving those costs lower to help pay for the incremental investments. Vincent?

John G. Morikis (Chairman and CEO)

Thank you, Vincent.

Vincent Andrews (Managing Director and Senior Equity Analyst)

Sean, I had. Thank you.

Operator (participant)

Thank you. Your next question is coming from Jeff Zekauskas from JPMorgan. Your line is live.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Hi, thanks very much. I know that the year-over-year price comparisons are less positive than they've been, but when you look at sequential pricing from the second to the Q3, were your prices down sequentially in any important product area?

Allen J. Mistysyn (CFO)

Yeah, Jeff, if you look at our pricing, because you annualize pricing throughout each of the segments as we've gone, I know we've talked about Performance Coatings through basically at some points, we're on a 90-day cycle. So, price was still up in the quarter, the Q3, up a low-single-digit percentage. But if you looked at that compared to our Q2, price would have added a mid-single-digit percentage to the Q2. And as you get into our Q4, you'd be at a low-single-digit impact on our Q4. So that's just annualizing

the price increases we've taken throughout 2022, but I would argue and say we have not given that price back, and you can see that in our gross margin performance, in the Q2, up 440, in the Q3, up 490 basis points, and we expect to be up again in our Q4, along with the moderating raw material costs sequentially.

Heidi G. Petz (President and COO)

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

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Okay, great. And your raw materials were down high single digits. I would imagine they would be down low double digits in the Q4 if you're going to be down high single digits for the year, and maybe the Q4 is sort of the bottoming of raw materials for the industry in general. Is that fair?

Allen J. Mistysyn (CFO)

You know what, Jeff, I don't know I'd go that far, and as I mentioned earlier, I think we have to look at the market is still demand, supply driven. We're working with our suppliers to develop what does industry demand look like across each of the regions? And I think that's gonna be a bigger driver of raw material pricing as we get into 2024. I think as we mentioned on our Q2 call, we expected our Q3 to be our biggest year-over-year change in raw material costs, but certainly, they're gonna be down in our Q4 as well.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Great. Thank you so much.

Allen J. Mistysyn (CFO)

Thanks, Jeff.

Operator (participant)

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

Greg Melich (Senior Managing Director, Broadlines & Hardlines Equity Research)

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

Allen J. Mistysyn (CFO)

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

Greg Melich (Senior Managing Director, Broadlines & Hardlines Equity Research)

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

Allen J. Mistysyn (CFO)

Correct.

Greg Melich (Senior Managing Director, Broadlines & Hardlines Equity Research)

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

Heidi G. Petz (President and COO)

Yeah, Greg, I think on the resi repaint side, it, it's similar to what I mentioned earlier. I think you look at, traditionally, you're gonna see somewhere between 13 to 15 weeks out. I would say that that backlog has come down by two or three weeks, so a bit more limited in terms of visibility. But outside of that, again, I would look at it in terms of the size of the contractor, the level of, you know, experience, again, ability to market themselves. They've got further out sightline into 2024 versus some of the other smaller contractors that are still trying to find ways to kind of build those backlogs.

Greg Melich (Senior Managing Director, Broadlines & Hardlines Equity Research)

Great. Thanks, and good luck.

Allen J. Mistysyn (CFO)

Thanks, Greg.

Operator (participant)

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

Ghansham Panjabi (Managing Director and Senior Research Analyst)

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

John G. Morikis (Chairman and CEO)

Well, I think I'd describe it this way, that there's some uncertainty given, you know, the challenges interest rates can have on a market. And I think Heidi and the team are really focused on one very clear mission: we're gonna outpace the market. And we've got confidence in the approach that we're taking, the services that we bring, the products that we are introducing. And quite frankly, we're also taking advantage of other opportunities within the market. We've got competitors that are changing models, as an example. And, you know, our simplified approach of dealing with one Sherwin-Williams store, as it relates to the painting contractor, we believe adds value. So the investments that we're making will enhance that on top of the organic growth that we expect from our stores.

And so we're taking advantage of market conditions, where Heidi just mentioned some res repaint customers that may not have had experience going through a cycle yet. They are now turning to our people for guidance and support on how do you begin advertising. In the past, they just parked their truck in front of a house in a neighborhood, and all the neighbors would flock in. They need help right now, and so they're turning to our people, and our people are playing an important role. And so when we look at what's happening with interest rates, there's some choppiness, but we also believe it creates opportunity. And we've talked openly about adversity creates opportunity at Sherwin, and we're capitalizing on that.

Heidi G. Petz (President and COO)

The other piece I would add to that, I think new residential, specifically relative to interest rates, while the single-family completions have been flat or negative year-over-year for eight straight months. We are starting to see the, starting to see the starts are positive year-over-year for three straight months. So, you know, while we're watching interest rates very closely, it may also signal that we're, we're past the bottom. So knowing that this is a choppy environment, another point that I think is important here, you know, while others are talking, the market are talking about preparing for this slowdown, it's really important that our teams are laser focused on preparing for taking disproportionate shares.

So we went into COVID, you know, with a large majority of exclusive arrangements with these national home builders, and we've come out building momentum in the number of exclusive contracts that we have with some of these builders. I think that's a testament to the team's ability to demonstrate our value in this environment. And I'm going to take it a step further here, and this goes back to some of the discussion on working capital.

We talk about managing our working capital really closely, but as we're having these partnerships and trying to demonstrate more of Sherwin-Williams' value proposition, especially in the new residential space and in this environment, helping to get in front of, you know, helping them to streamline and standardize what it is that they're doing in terms of the product that they're bringing to market, so they can be as aggressive as possible. Helping them look at ways to reduce cycle time, and this all in an effort to, of course, help them drive increased profitability and productivity, but also to be as effective as they can be with their working capital, again, in this environment, with a lot of volatility in the interest rates.

Ghansham Panjabi (Managing Director and Senior Research Analyst)

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

Allen J. Mistysyn (CFO)

Yeah. Gotcha. I think if you remember, coming into the year, I said I thought we'd keep our total debt flat with year-end 2022. But as you saw, at the end of the Q3, our Net Debt to EBITDA leverage ratio was 2.2x versus 3.1x, and that was a combination of strong, if you look at a trailing 12-month EBITDA growth of over almost a little over 28%. But we also reduced our total debt by almost $600 million. I would expect as we kind of forecast the end of the year, we'd keep that total debt lower year over year by about $600 million, and we'll be firmly in that 2 to 2.5 times range.

Ghansham Panjabi (Managing Director and Senior Research Analyst)

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

Heidi G. Petz (President and COO)

Thank you.

Allen J. Mistysyn (CFO)

Thank you, Ghansham.

Operator (participant)

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

Arun Viswanathan (Senior Research Analyst)

Great. Thanks for taking my question. I guess I just had to maybe get your thoughts on protective and the other markets within industrial. What are you seeing? And maybe if you can just run through some of those verticals. Apologies if I missed that earlier, but you know, it seemed like wood was unusually strong. We're expecting some weakness there, but that was actually better. Protective and Marine, obviously strong. Refinish, I would imagine, is still strong. Packaging, weak. Could you just reiterate what you're seeing in those markets? Thanks.

Heidi G. Petz (President and COO)

Yeah. Good morning, Arun. I think first and foremost, I think it's indicative that our strategy is working. You know, when we look at this business and this portfolio, it's really important I share with you what we talk about internally, which is we're not trying to be all things to all people. So when you look across these businesses, you know, making sure that the discipline and how we're thinking about investment, the discipline and when we're investing is certainly a key part of this. So maybe just a little bit across some of these divisions, I'll invite John or Allen to jump in as well. If you start with you mentioned industrial wood. You know, there's been a lot of wins here against some regional competitors.

And while we mentioned earlier, U.S. housing is continuing to soften, we think this is an opportunity for us, just coming out of completing some key acquisitions that we mentioned in our prepared remarks with Oskar Nolte and Klumpp, feel like we're in a really good position here to continue to drive increased value and return of value to our shareholders. Our gallons per day appear to have bottomed out in all regions. Again, so as the new residential swings back, we expect industrial wood to absolutely come along for the ride there. I'll comment briefly on automotive refinish. I think importantly, we've had some really good share gain here. Year to date, installs in North America have been up strong double digits, and our core users are growing. We talked a bit about our Collision Core technology and business.

That momentum and adoption is continuing, and this is a suite of digital tools and solutions that truly is helping to benefit our business here. And I would also add, along with our North America footprint, similar, think of our Paint Stores Group, similar to that footprint. We're really able to have a better opportunity to control a more consistent customer experience, beginning to end here with our auto refinish, which we think is an incredible differentiator for us. We talked a bit about general industrial. Heavy equipment market is holding up, especially in ag, and we expect to see that continue. Building products, general finishing is soft, but we've expected that. The team is laser focused on pivoting and adapting to the market.

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

John G. Morikis (Chairman and CEO)

You know, Arun, I think you mentioned on your question about P&M, I think the team there is doing a terrific job of really staying focused on the value proposition that we bring into high-value projects. So EV battery plants, as an example, semiconductor plants. Heidi and I were just recently out at one of the largest plants I've ever been on, and our floor coating teams are all over these businesses. I think the offshore wind and other alternative energy investments, as well as water infrastructure, I mean, these are all areas that we're focused on. And I'll remind you, it wasn't long ago we were talking about our Protective and Marine business at a time when it was under pressure, and we reminded our investors that we take this long-term approach.

I believe these are terrific examples of our continuing to invest, even when times were a little tough, knowing that these projects can be delayed, but they can't be canceled. Oftentimes, you'll find highly corrosive areas that need to be coated. You might get an extra year or a year or two out of those, but they need to be coated. And it's those types of high-value projects that are almost kind of a return, repeat businesses as you maintain those, that add to the attractiveness of these coatings. So we're really proud of Karl J. Jorgenrud, the entire leadership team within our PCG business for what they're delivering. And importantly, if you, I'll remind you of the operating margin goals that we had set for this team at 19%. it's come in at 19%.

Our goal of getting up into the high teens, low twenties. So they're doing it, and they're doing it by bringing value to our customers and to us.

Arun Viswanathan (Senior Research Analyst)

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

Heidi G. Petz (President and COO)

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

John G. Morikis (Chairman and CEO)

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

Arun Viswanathan (Senior Research Analyst)

Great, thanks.

John G. Morikis (Chairman and CEO)

You bet.

Operator (participant)

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

David Begleiter (Managing Director, Senior Equity Research Analyst)

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

Allen J. Mistysyn (CFO)

David, one caveat to that that I would make, when you look at our Q4 gross margin, because you typically see a seasonal architectural slowdown in volumes and sales, the Q4 margin may or may not be sequentially improving. It's our smallest quarter. You have year-end adjustments and other year-end adjustments that could have a material impact on the gross margin. Also, just to reiterate that, you know, price increases aren't gonna be as big of a tailwind in our Q4 than as what we saw in our Q3. On the other side of that, Paint Stores Group is gonna grow faster in our Q4. That'll help drive gross margin.

You know, as we talked about at our Investor Day, we are at a current range of 45% to 48%. We set aggressive goals for our teams, and as we consistently achieve that, that current range, we'll adjust the range. I, I don't think we're ready to sit here today and, and make a change to, to any range or talk about 2024 at this point, but, we're gonna be consistent in our approach going forward.

Heidi G. Petz (President and COO)

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

David Begleiter (Managing Director, Senior Equity Research Analyst)

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

John G. Morikis (Chairman and CEO)

Well, clearly, the consumer is feeling some pressure on, from an inflation perspective. And, you know, there'll be some normalization, if it's in wages increases, wage increasing or, you know, the spending patterns of consumers that will take effect. But the fact is this, that, you know, I'll remind you that paint is a relatively inexpensive, yet highly impactful, opportunity for people that are interested in their homes, staying in their homes to make a difference. And if people decide they're not going to sell the home and they're gonna stay in place, it's a very viable option. I'll remind you, the average home age now is over 40 years old. So there's more and more investment in the structures. People aging in place is impacting as well.

And additionally, I would say, not only does it help the DIY, but as the population is aging, that generally will turn into more of a res repaint opportunity, which helps, you know, our position in that space as well. We don't want 70-year-old people out there scraping their gutters and eaves of their homes. But inside, yeah, DIY is going to be an important part. There's a cycle, and we're playing the long game here. Whichever way the table tilts, we'll be there.

David Begleiter (Managing Director, Senior Equity Research Analyst)

Very good. Thank you very much.

John G. Morikis (Chairman and CEO)

You bet.

Operator (participant)

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

Josh Spector (Executive Director in Chemicals Equity Research)

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

John G. Morikis (Chairman and CEO)

Well, I think what you're, what you're experiencing right now is the delay between housing starts and the 90 days or so after, maybe a little bit longer, after a start, before homes are painted. So our view, and Heidi mentioned this, when you look at. And I think where your question is going is around the share, our share of new residential. Our position here is very strong and getting stronger every day. Heidi mentioned the exclusive arrangements that continue to grow in count. Our relationship with the new residential builder and our commitment to helping their profitability and success is helping us grow those, those customers. It's delayed right now, 'cause the more agreements that we are signing right now, and, and with the pressure on starts, we're not seeing that.

But I can tell you with great confidence that, as the new homes continue to rise, and they will, I mean, everyone would agree there's a higher demand than there is supply right now. Family formation continues. There's a hole right now that exists in housing availability. When that comes back, we're gonna be this coiled spring that we've been in the past, and it's exciting, actually, to see our teams winning at the rate that they're winning, and it will show up on the scoreboard.

Josh Spector (Executive Director in Chemicals Equity Research)

Okay, thanks. No, I appreciate that. I just on the other side of it, when you think about the res repaint side, not just Sherwin, but maybe the industry. So I mean, we still have turnover down about a third from the peak a couple of years ago. Has the industry fully digested that? So have contractor backlogs reflect that? Have orders reflected that? And just, I mean, how are you thinking that plays out into next year? Is there another leg down in the industry to normalize to that if we don't have a step up, or have we already reflected that in the current run rate?

John G. Morikis (Chairman and CEO)

Yeah, I think it's been reflected. If you take a few quarters back here, we were talking about res repaint contractors that, in many cases, weren't even returning phone calls. I mean, they were. Many people were saying that they'd come out and give you a quote in 6-9 months, and then it'd be about a year before they could get to the project. So there has been a more normalized reality, if you will, as it relates to the residential repaint contractor. Again, I'll reiterate that, you know, this adversity creates opportunity for Sherwin-Williams. You should bet right now, as we are here in this moment, that our customers are getting visited with Sherwin-Williams representatives. You should also bet that our competitors' customers are getting visited as well. So we're not playing, you know, nice here.

We're going after some pretty aggressive market share gains, and we expect to win aggressively.

Heidi G. Petz (President and COO)

And I would add to that, too, Josh. I think there's a lot of confusion in the marketplace right now, and our opportunity, John mentioned, you know, adversity is our friend, and I couldn't agree more with that. You know, our strategy is working here, and I'll take you to. We talk about our distribution or our controlled distribution platform. You know, we own the stores, we own the reps. The store manager owns that P&L. The store manager owns staffing, owns the culture of that store. And I think it's really important because when we talk about that relationship and the consistent experience, we can offer these res repaint contractors, it's critical that they know exactly what they can get from the experience they can have at Sherwin-Williams.

So as they're coming in, as they're traveling, as they're trying to grow and take on more, our teams are prepared, trained, and ready to get any tools that they need in front of them to help them to become as productive and profitable as possible. So I'm really confident in how we are prepared, to differentiate as we, as we add value to this contractor.

Josh Spector (Executive Director in Chemicals Equity Research)

Got it. Thank you both.

John G. Morikis (Chairman and CEO)

Thanks, Josh.

Operator (participant)

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

Mike Harrison (Managing Director and Senior Chemicals Analyst)

Hi, good morning. You have opened 36 new paint store locations so far this year. Is the target still 80 to 100? And are you seeing any delays in either the permitting process or the construction process?

Heidi G. Petz (President and COO)

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

Mike Harrison (Managing Director and Senior Chemicals Analyst)

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

Heidi G. Petz (President and COO)

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

John G. Morikis (Chairman and CEO)

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

Allen J. Mistysyn (CFO)

Yeah, I'd start with, Mike, that as we typically do, we saw our inventory gallons decrease sequentially. As we, you know, we're getting back to a more typical bell curve. We grow inventory into the summer selling season. We see incremental decreases as we go through the second half, and then we'll build inventory in our Q4. That consistency allows our customers to also manage their inventories better because you're back to a more normal environment. To that point, I would say our, we expect our working capital trend towards our 11% to 11.5%. We were at 12% coming out of the Q3, so we're well on track for that.

What it's allowing us to do is drive significant cash flow, and you saw that in our Q3. That's a combination of strong net income results and working capital management. We expect to flow that through into our Q4 and have a really strong cash year that's allowed us to be very flexible. Ghansham talked about our ability to pay down debt, but it also allowed us to return cash to our shareholders in dividends and buybacks, and we've returned over $1.4 billion to our shareholders over that time.

So in this high interest rate environment, we get back to our more normal operating cadence with inventory, and you'll see us manage our working capital down, which then allows that consistency to allow our customers to manage their working capital down.

Heidi G. Petz (President and COO)

One piece I would add to that as well, I go back to Allen's point here. You know, we put, you know, by design, very intentional capacity to work here so that as we're partnering closely to manage and optimize working capital and inventory with our partners, that we've got the confidence that we have the capacity to build the inventory in time for the season ahead.

John G. Morikis (Chairman and CEO)

Thanks, Mike.

Operator (participant)

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

Duffy Fischer (Equity Research Analyst in U.S. Chemical)

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

John G. Morikis (Chairman and CEO)

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

Heidi G. Petz (President and COO)

But what we are seeing there, too, despite you know the spray-sprayers, is the backlog of projects. It's for our commercial contractors and continues to be solid, you know, well through midpoint of next year. So getting back to more of that normal cycle. So good, good indicator of some growth there.

Duffy Fischer (Equity Research Analyst in U.S. Chemical)

Fair. And then, Heidi, I think you made a comment that your gallons per day had bottomed in your view. Was that for the company as a whole, or was that for a paint stores group? And that's even inclusive of kind of the, the seasonal weakness that we generally see in Q4.

Heidi G. Petz (President and COO)

That was just in wood.

Duffy Fischer (Equity Research Analyst in U.S. Chemical)

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

Heidi G. Petz (President and COO)

Yes. Yes, you bet.

Duffy Fischer (Equity Research Analyst in U.S. Chemical)

Thank you, guys.

John G. Morikis (Chairman and CEO)

Thanks, Duffy.

Operator (participant)

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

Kevin McCarthy (Partner covering the Global Chemicals Industry)

Yes, good morning. I was wondering if you could comment on your administrative costs. It looks like they jumped up a bit in the Q3, and in reading the commentary, you called out two items, namely environmental expense and asset disposals. So, you know, a few questions would be, you know, what are the nature and magnitude of those items, and would you expect that line item to come back down in the Q4 and beyond?

Allen J. Mistysyn (CFO)

Yeah, Kevin, the year-over-year increase, I would say, you know, environmental, was a little less than half of that increase year-over-year, and then, costs related to the, our Garland, plant fire, is a little less than half. And we also are going up against the sale, which benefited our, again, on a sale of that, gain on sale of assets last year that benefited our, our, Q3 last year. I would say, I'm glad you asked that question because I think, I want to give a little color around our Q4 guidance, even though we don't get EV-EPS guidance, it, it's implied, and it's backwards.

But I think a better way to look at that is our guidance at the operating margin line, and we're expecting our Q4 operating margin to be flattish at the midpoint year-over-year, compared to a strong Q4 last year, with operating profit up to over 60%, and our operating margin was up 450 basis points. So, we're not, we are expecting gross margin expansion in our Q4, not as much as we saw in our Q3. We see raw material moderation. We're not going to get as big of a price tailwind that we got in our Q3, and I do expect higher SG&A year-over-year because of the long-term investment.

So then, that gets us to these non-operating costs, and we have approximately a $60 million increase in our non-operating costs that'll be predominantly in our admin segment. And it's due to the credits that we realized last year in environmental and other income in the Q4 that we don't expect to repeat and really get environmental and these other expense lines to a more normal level.

Kevin McCarthy (Partner covering the Global Chemicals Industry)

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

Allen J. Mistysyn (CFO)

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

I'd rather wait till we get more line of sight or a better line of sight and give you an update in January.

Kevin McCarthy (Partner covering the Global Chemicals Industry)

Okay, fair enough. Thank you.

Allen J. Mistysyn (CFO)

Thanks, Kevin.

Operator (participant)

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

Aleksey Yefremov (Managing Director and Senior Chemicals Equity Research Analyst)

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

Allen J. Mistysyn (CFO)

No, I think that's gonna be the bigger driver sequentially you have is the decrease in sales on the seasonality of that. I think what's hard, Aleksey, as you look at our last four years, it has been choppy, really choppy quarter-to-quarter, including Q3 to Q4. So I think you gotta go back pretty far to find a more normal year. I think, like I said, the gross margin, I do expect to be higher year-over-year, but sequentially lower because of less of the tailwind in price.

I think SG&A growth is probably higher in this year's Q4 sequentially than it has in past years because of the things Heidi talked about, about leaning in harder on investments in our paint stores and long growth, long-term growth initiatives within PCG and CBG. So that probably is driving some of it. It is our smallest quarter, so some of these year-end adjustments have a bigger impact on our Q4 than they would on our Q3.

Aleksey Yefremov (Managing Director and Senior Chemicals Equity Research Analyst)

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

Heidi G. Petz (President and COO)

So I'll take that. That's a great question. I think you're spot on, and I would say that there is, go back to my comment earlier, great amount of confusion out in the marketplace, and this is an opportunity where our consistent strategy, I think is on full display. And I have a lot of confidence in Justin Binns and his organization and the depth of leadership that we have there. This team is well prepared to not only execute our strategy, but to adapt to market conditions around us, and I think we've got a competitive advantage in doing that.

And I suppose if we didn't own 5,000 stores and 4,000 reps and have strong customer relationships and data that can help our customers be more successful, I think, we too, might try to stitch together a strategy that helps to get, you know, products placed on the shelf. But this is really an opportunity for us to do what we do well and to demonstrate to our customers a very consistent experience with Sherwin-Williams. We're working with them closely to help, you know, fight through a lot of the complexity out there and make sure that they're coming out winning. So I do think, you know, where we're seeing competitors make different choices on store closings or channels, we think, again, this uncertainty is our opportunity.

John G. Morikis (Chairman and CEO)

Thanks, Aleksey.

Operator (participant)

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

Garik Shmois (Managing Director and Senior Equity Analyst)

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

Heidi G. Petz (President and COO)

Well, I think the way to characterize that would be more back to a normal cycle, where you're seeing kind of strong, you know, backlog front half, and then, you know, it would obviously kind of look to soften a bit in the back half. So I would characterize it more as a normal cycle. But I do think that this is an opportunity. You know, we talk about the strength and position in commercial for us is amongst the highest of our segments. So we're going to be hard at work, focusing on share gains, making the right decisions, making the right investments, and our people and our resources are aligned and ready to help these customers to respond through the duration of these projects.

I think, you know, regardless of the demand outlook, you know, we will take share of this environment, and part of our differentiation is we are with these contractors at every step of these projects. And so as they're navigating uncertainty and/or, you know, changes that come up in every single project, our team is right there side by side, to make sure that they're getting those complete on time.

John G. Morikis (Chairman and CEO)

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

Garik Shmois (Managing Director and Senior Equity Analyst)

Great, that's, that's helpful. Wanted to follow up on consumer brands, just the, the sequential weakness in margins Q3 versus Q2. Was it really just the decline in volumes quarter-over-quarter, or was there something else that drove the change in the margins?

Allen J. Mistysyn (CFO)

No, Garik, it's primarily, well, it's primarily two things. The sequential decline in volume, but also, you know, as we have talked about, we, and I mentioned on our working capital, you know, we're targeting a year-end inventory level so that when we come out into 2024, our inventory is in great shape, which means we're, we tweak our production volumes to make sure we stay in line with that targeted inventory level. So, with production gallons being down sequentially, a low single-digit number, that does have a head, is a headwind for us in this segment.

Garik Shmois (Managing Director and Senior Equity Analyst)

Understood. Thanks for the help, and best of luck.

John G. Morikis (Chairman and CEO)

Thanks, Garik.

Operator (participant)

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

Adam Baumgarten (Managing Director)

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

Heidi G. Petz (President and COO)

Well, I'll start, and I'm sure Allen will jump in here. I'll go back to, you know, especially on the TCG side, you know, where we're not trying to be all things to all people. I think it's a really important point, and we are laser focused on driving increased operating margins, to your point. We're proud of the work that the team has done in delivering a 19% margin in Q3. We'll get some benefit from recent acquisitions, but I'll point to, you know, four of our six businesses are up against very strong comps last year.

The team is doing all the right things to ensure that we are taking a very disciplined approach to decision-making, investment, pacing, et cetera, as we're watching the market closely and making sure that our investments are pacing with the demand in the market.

John G. Morikis (Chairman and CEO)

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

Adam Baumgarten (Managing Director)

Thank you. Goodbye.

John G. Morikis (Chairman and CEO)

Thanks, Adam.

Heidi G. Petz (President and COO)

Thank you.

Operator (participant)

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

Steve Byrne (Managing Director, Senior Chemicals Analyst)

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

John G. Morikis (Chairman and CEO)

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

We're just getting started here, and there's a long opportunity and a big opportunity, and that's why we believe investing in Sherwin-Williams is the right approach.

Steve Byrne (Managing Director, Senior Chemicals Analyst)

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

John G. Morikis (Chairman and CEO)

We don't. They're all opportunities for us, Steve, and the teams that are focused on residential repaint have the greatest opportunity. Then, when you get to the property management-

Steve Byrne (Managing Director, Senior Chemicals Analyst)

I ask

John G. Morikis (Chairman and CEO)

When they get to the property management, they have the greatest opportunity. Then you will get to the commercial, they have. We deliver on each of those segments as that's how we feed our families. Each one of them offer terrific opportunities. So when you look at share gains, we've talked openly about residential repaint offering the greatest amount of share opportunity, and our position in these other segments are a little bit stronger, but there's terrific opportunities there. But, but our approach, I wanna be very clear, you know, we were boxers, and we're in the center of the ring. We're not looking for—to get to the bout and stand up, waiting for our hands to be raised. We want a decisive knockout as it relates to these segments, and, and so we're pursuing aggressively each one of these.

I'm not gonna parse out which offers great opportunities. They all do, and we're very determined to get after them.

Steve Byrne (Managing Director, Senior Chemicals Analyst)

Okay, thank you.

John G. Morikis (Chairman and CEO)

You bet. Thanks, Steve.

Operator (participant)

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

Eric Bosshard (Analyst)

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

Allen J. Mistysyn (CFO)

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

Heidi G. Petz (President and COO)

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

So I think it's, you know, obviously, always gonna be room for improvement here, but as we're looking to manage that closely, Allen and I are locked at the hip relative to SG&A working capital to drive those operating margins.

Eric Bosshard (Analyst)

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

Allen J. Mistysyn (CFO)

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

John G. Morikis (Chairman and CEO)

We'll outperform the market.

Allen J. Mistysyn (CFO)

That's right.

Eric Bosshard (Analyst)

Thank you.

Allen J. Mistysyn (CFO)

Thanks, Eric.

Operator (participant)

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

Speaker 23

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

John G. Morikis (Chairman and CEO)

Yeah, Abigail, happy to do that. So as we said, the Q3 was likely the biggest benefit for us from a year-over-year perspective. I would say, as we've commented, you know, the petrochemical side of the basket is where we've seen some relief. TiO2 has been a little bit stickier, but I think Allen said it well earlier, as you think about going forward, you know, oil is moving around, and while it hasn't necessarily made its way into those commodities yet, I think it's to be determined of where that heads into next year. So right now, it's again, petrochemical side has been probably the greatest relief. TiO2, a little bit stickier. We feel very good about our ability to hold on to the pricing that we've put into the marketplace, given the solutions we're providing our customers.

We'll have a better update on where it goes as we get into January.

Speaker 23

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

Heidi G. Petz (President and COO)

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

John G. Morikis (Chairman and CEO)

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

Speaker 23

Okay. Thank you.

John G. Morikis (Chairman and CEO)

Thank you.

Operator (participant)

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

Speaker 22

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

John G. Morikis (Chairman and CEO)

Well, we're clearly seeing improvement in share gain in our PSG, our stores business. Heidi mentioned the comparisons to last year in the quarter were all very strong, nearly 20% comparisons, and we've continued to perform very well, even against that backdrop. The investments that we're making are easy to point to as key drivers for future share, but I'd drive you back to the core business that we have and the, and the expectations we have for organic growth. Heidi mentioned quickly in one of the M&A questions about that we don't need acquisitions. And, you know, in stores, when you look at our business, you could arguably say that this core business in itself is going to be a fantastic show to watch, and it will be. But our expectations are to accelerate growth even faster.

So the investments that we're making will allow us to capture that even quicker. As it relates to our consumer business, we've got wonderful partners. We're committed to their growth. Heidi mentioned things like capacity and helping them to drive down their inventory with the reassurance that we have the ability to respond to them. So from the backside, we're clearly trying to help position them financially, but more importantly, we're introducing new products, we're bringing innovation, we're adding people on our team to help train their team members. And we do believe there's a continued opportunity to convert people that might be in our customers' stores as shoppers. We can help turn them into buyers of products in our category. So we're excited. This is a type of market that most don't hope for.

I would say, arguably, we don't hope for this type of market, but we know what to do, and we're going to turn it into an advantage to our shareholders.

Allen J. Mistysyn (CFO)

Thanks, Eric.

Operator (participant)

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

Aron Ceccarelli (Equity Research Analyst)

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

Heidi G. Petz (President and COO)

Yeah, Aron, I would say we're early innings, really confident that there's an aggressive roadmap ahead here. And the way I would characterize this is thinking through this is truly an end-to-end effort across the enterprise. So you mentioned whether it's SKU rationalization, formula, you know, rationalization, but really starting with raw material and understanding the basket all the way through, to what it is that we're sending out to our customers. But I think an important point here is it's a mindset that we have adopted going forward, and so it's part of how we, John mentioned innovation as part of our new product development process. I mean, we're gonna make sure that we're always looking at opportunities to take complexity out of the business. And I'd take it a step further.

If you look at, you know, our Performance Coatings Group, we still have a lot of opportunity as we think about even, you know, rationalization of footprint. So the team's hard at work. You know, this isn't gonna be something that we land in the next 12 or 24 months. This is something we're gonna be constantly looking at going forward.

John G. Morikis (Chairman and CEO)

I think, Heidi's strength here is, and she's a humble person, she won't say this, but I will say this, having a front row to this show, you've got a leader that is driving the opportunity to the bottom line. She's got a very respectful approach to our traditions and to our norms. You know, we're a 157 year-old company. There's a lot of things that we do and have done, and many of them are right. And we've got an opportunity, I think, to take a look at those traditions and norms and ask if there's a better way to do that. And this simplification effort is a great example of that.

I think our company is gonna come out much stronger, much more efficient, better responsiveness to our customers, and an opportunity to pursue business in new ways. We didn't really get into our digital approach, and the approach that Heidi's leading there to our team to better use the data that we have available in ways that we just haven't in the past. We've scratched around the surface, but there are some terrific opportunities that she's leading that I think will further differentiate Sherwin-Williams.

Aron Ceccarelli (Equity Research Analyst)

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

Heidi G. Petz (President and COO)

Yeah, the underlying demand is solid. I think, you know, we've seen some delayed CapEx and a lot of deferred maintenance that is now being addressed, and we'll continue to see that coming into next year. I would say relative to apartment turns are improving a bit influenced by, you know, the return to travel, office, school, driving some of that demand. But much like our momentum in new residential, you know, we're demonstrating our unique ability here to really serve the property management segment with a consistent experience that I believe only Sherwin-Williams can deliver. And regardless of the size or the location of these contractors, you know, our goal is consistently the same. It's we wanna make it as convenient as possible to leverage our stores, our reps, and our segment-specific tools and solutions here. So we're taking share.

We're increasing our number of, you know, sole preferred or exclusive contracts, if you will, and we're confident that we're gonna continue with our, our foot on the gas going forward.

Aron Ceccarelli (Equity Research Analyst)

Thank you. All the best.

John G. Morikis (Chairman and CEO)

Thank you, Aron.

Operator (participant)

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

Heidi G. Petz (President and COO)

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

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

Operator (participant)

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.