U.S. Markets open in 7 hrs 46 mins

Edited Transcript of SHW earnings conference call or presentation 23-Jul-19 3:00pm GMT

Q2 2019 Sherwin-Williams Co Earnings Call

CLEVELAND Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Sherwin-Williams Co earnings conference call or presentation Tuesday, July 23, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Allen J. Mistysyn

The Sherwin-Williams Company - Senior VP of Finance & CFO

* James R. Jaye

The Sherwin-Williams Company - SVP of IR & Corporate Communications

* John G. Morikis

The Sherwin-Williams Company - Chairman & CEO

================================================================================

Conference Call Participants

================================================================================

* Arun Shankar Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Charles Edward Cerankosky

Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal

* Christopher S. Parkinson

Crédit Suisse AG, Research Division - Director of Equity Research

* David L. Begleiter

Deutsche Bank AG, Research Division - MD and Senior Research Analyst

* Dmitry Silversteyn

The Buckingham Research Group Incorporated - Director

* Garik Simha Shmois

Longbow Research LLC - Senior Research Analyst

* Ghansham Panjabi

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Gregory Scott Melich

Evercore ISI Institutional Equities, Research Division - Senior MD

* Jeffrey John Zekauskas

JP Morgan Chase & Co, Research Division - Senior Analyst

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* Justin A. Speer

Zelman & Associates LLC - MD of Research

* Kevin William McCarthy

Vertical Research Partners, LLC - Partner

* Michael Joseph Harrison

Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst

* Michael Joseph Sison

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* P.J. Juvekar

Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD

* Patrick Duffy Fischer

Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst

* Robert Andrew Koort

Goldman Sachs Group Inc., Research Division - MD

* Rosemarie Jeanne Pitras-Morbelli

G. Research, LLC - Research Analyst

* Scott Andrew Mushkin

Wolfe Research, LLC - MD and Senior Retail & Staples Analyst

* Steve Byrne

BofA Merrill Lynch, Research Division - Director of Equity Research

* Truman Andrew Patterson

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning. Thank you for joining the Sherwin-Williams Company's review of the second quarter of 2019 and the outlook for the third quarter and full fiscal year of 2019. 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 sherwin.com. An archive replay of this webcast will be available at sherwin.com beginning approximately 2 hours after this conference call concludes and will be available until Friday, August 9, 2019 at 5 p.m. Eastern Time.

This conference call will include certain forward-looking statements as defined under U.S. federal securities laws with respect to sales, earnings and other matters. 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 the session to questions.

I will now turn the call over to Jim Jaye.

--------------------------------------------------------------------------------

James R. Jaye, The Sherwin-Williams Company - SVP of IR & Corporate Communications [2]

--------------------------------------------------------------------------------

Thanks, Jesse, and good morning, everyone. Thank you for joining us on the call today. All comparisons in my remarks are to the second quarter of fiscal 2018, unless otherwise stated.

Consolidated sales in the second quarter of 2019 increased $104.1 million or 2.2% to $4.88 billion. Currency translation rate changes decreased sales by 1.5%. Consolidated gross profit dollars in the quarter increased $142.8 million or 7% to $2.18 billion. Consolidated gross margin in the second quarter increased to 44.7% from 42.7% in the same period last year. Excluding impacts from purchase accounting, adjusted consolidated gross margin in the quarter increased to 44.9% from 43.1%.

Selling, general and administrative expense increased $23.4 million or 1.8% to $1.33 billion in the second quarter, but decreased slightly as a percent of sales to 27.3% from 27.4% in the same quarter last year. Interest expense for the quarter declined $4.3 million to $89.2 million. Consolidated profit before tax in the second quarter increased $137.6 million or 25.6% to $675.7 million.

Our effective tax rate in the quarter was 30.3%, which includes the previously disclosed tax credit investment loss. Excluding acquisition-related costs and the tax credit investment loss, our effective tax rate on adjusted income for the quarter was 19.7%.

Diluted net income per common share for the second quarter 2019 increased to $5.03 per a share from $4.25 per share in the prior year second quarter. Earnings per share in the second quarter of 2019 includes charges for acquisition-related costs and a tax credit investment loss of $0.75 and $0.79 per share, respectively. The $4.25 per share reported in the second quarter 2018 included charges for acquisition-related costs and environmental expense provisions of $1.23 and $0.25 per share, respectively. Excluding these items, adjusted diluted earnings per share increased by 14.7% to $6.57 in the second quarter 2019 from $5.73 last year. We have summarized the second quarter earnings per share comparison in a Regulation G reconciliation table in our press release.

Let me now take a few moments to break down our performance by segment. Sales for The Americas Group in the second quarter increased $131 million or 5% to $2.76 billion. Comparable store sales in the U.S. and Canada increased 4.3% in the quarter. Regionally in the second quarter, our Southeast division led all divisions followed by Midwest, Eastern, Southwest and Canada. Sales were positive in every division in the quarter. Second quarter segment profit increased $42.5 million or 7.5% to $612.4 million. Second quarter segment profit margin increased 50 basis points to 22.2% from 21.7% last year.

Turning now to the Consumer Brands Group. Second quarter sales increased $26.7 million or 3.4% to $804.5 million. Sales from continuing operations, excluding approximately $16 million in revenue from the divested Guardsman business, increased 5.6% in the quarter. Second quarter segment profit increased $49.8 million or 54.7% to $140.7 million. Purchase accounting expense decreased segment profit by $22.5 million compared to $28.5 million in the second quarter 2018. Second quarter segment profit margin increased to 17.5% from 11.7% last year. Excluding the purchase accounting expense in both quarters, adjusted segment profit margin increased to 20.3% from 15.4% in the second quarter 2018.

For our Performance Coatings Group, second quarter sales decreased $52.4 million or 3.8% to $1.32 billion. Currency translation rate changes reduced second quarter sales by 2.7%. Second quarter segment profit increased $6.1 million or 4.3% to $150.3 million. Purchase accounting expense decreased segment profit by $53.9 million compared to $47.6 million in the second quarter 2018. Second quarter Performance Coatings Group segment profit margin increased to 11.4% from 10.5% last year. Excluding the purchase accounting expense in both quarters, segment profit margin increased to 15.5% compared to 14% in the second quarter 2018.

I'll conclude my remarks with an update on our California lead litigation. As we reported in a press release last week, 10 California cities and counties, Sherwin-Williams and 2 other companies have mutually agreed to resolve litigation, subject to court approval. The agreement ends a nearly 20-year legal battle that challenged the company's legal advertising of lead-based paint over a century ago, when such paints were the gold standard and specified for use by the federal government as well as state and local governments across the country.

Terms of the agreement call for a total payment of $305 million, with each defendant paying approximately $101.7 million over 6 years. The $305 million is a significant reduction from the court's original $1.15 billion judgment and the reduced $409 million judgment ruling following the defendant's appeal.

Sherwin-Williams continues to believe the California case was an aberration. All other appellate courts have found that companies should not be held retroactively liable for lawful conduct and truthful commercial speech decades after they took place. Seven other states have already rejected public nuisance claims similar to those brought in California.

Sherwin-Williams is pleased to have reached an agreement to resolve this litigation and it will continue to vigorously and aggressively defend against any similar, current or future litigation. That concludes our review of our operating results for the second quarter.

So let me turn the call over to John Morikis, who will make some general comments on the second quarter and provide our outlook for the third quarter and full fiscal year 2019. John?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [3]

--------------------------------------------------------------------------------

Thank you, Jim, and good morning, everyone. Thanks for joining us. I'd like to make just a few additional comments on our second quarter before moving on to our outlook.

Our second quarter was a strong one, with record results in net sales, EBITDA, profit before taxes and net operating cash. While consolidated second quarter sales came in at the low end of our expectations, North American Paint Stores, the growth engine of our company, performed well in the quarter and was above the high end of our revenue guidance as we anticipated. Overall, our consolidated sales results continue to highlight significant regional and end market demand variability with growth in North America and Latin America, partially offset by softness in Asia and to a lesser degree, Europe. Pricing was favorable across all of our businesses in the quarter. Consolidated gross margin, on an adjusted basis, improved sequentially and year-over-year to 44.9%, just below the low end of our annual long-term target. The improvement was driven by the realization of previously announced pricing actions and a sequentially lower rate of raw material inflation. SG&A in the quarter came in largely as expected. We will continue to maintain appropriate discipline on spending as the year unfolds. All 3 segments delivered sequential and year-over-year profit margin improvement.

Within The Americas Group, sales increased 5% against a prior year comparison of 7.7%. Sales were positive in all North American customer end markets in the quarter, led by residential repaint, which was up high-single digits. Sales in Protective & Marine, New Commercial and Property Management were all up mid-single digits and new residential sales were also positive. Selling conditions remain challenging throughout much of the quarter, likely delaying a number of projects in multiple end markets. Our customers continue to report very solid backlogs heading into the back half of the year.

Looking at total segment profitability. Segment profit dollars increased by more than $42 million, segment margin expanded by 50 basis points to 22.2% and incremental margin was nearly 33%. Year-to-date, we've opened 20 net new stores, finishing the quarter with 4,716 stores in operation compared to 4,642 last year. Our plan calls for this team to add approximately 80 to 100 new stores in North America by the end of this year.

In the Consumer segment, second quarter sales increased by 3.4%, including the impact of the Guardsman divestiture, which was about 2.1%. Sales and profitability improved in North America and Europe, but were partially offset by softer demand in Asia and Australia and New Zealand. Volume leverage and cost control, which were partially offset by incremental investments in a new customer program, are enabling us to continue to drive the profitability of this business as segment margin, excluding purchase accounting expense, increased both sequentially and year-over-year to 20.3%. We continue to feel very good about our strategy in this business and in particular, our relationship with our largest customers.

Performance Coatings Group sales were down 3.8% in the quarter, with variability by region and business. Comparing businesses, revenue growth in our packaging and coil divisions was more than offset by softness in the segment's other businesses, most notably in our industrial wood division, which continues to be impacted by tariffs.

Geographically, sales were up in Latin America and flat in North America, which were more than offset by softness in Asia and Europe where sales decreased by low double digit and mid-single-digit percentages, respectively. Notably, packaging and coil continue to be positive outliers in Asia and Europe. Despite the sales decline, adjusted segment margin increased 150 basis points to 15.5%, evidence of good cost control and that recent pricing actions are gaining traction to offset the raw material inflation we've experienced over the last 2 years.

EBITDA in the quarter was $908 million or $921 million adjusted to exclude integration costs. Adjusted EBITDA margin was 18.9% in the quarter. Adjusted EBITDA year-to-date was $1.5 billion or 16.8% of sales. Year-to-date, we've returned approximately $660 million to shareholders through cash dividends and share repurchases, an increase of 33% year-over-year.

At the end of the quarter, we had approximately $9.5 billion of debt on the balance sheet. We reduced debt by approximately $375 million in the quarter and intend to retire a total of approximately $600 million this year, which will result in a net debt-to-EBITDA ratio below 3:1 by the end of 2019.

We paid $105 million in cash dividends and purchased 325,000 shares of common stock for $145 million in the second quarter. At quarter end, our share repurchase authorization stood at 9.05 million shares. Capital expenditures were $77 million in the quarter, depreciation was $65 million and amortization was $78 million.

As we move into the third quarter 2019, we expect consolidated net sales to increase by low single-digit percentage compared to the third quarter of 2018. Although we do not typically provide quarterly sales guidance by segment, I'd like to provide some additional color this quarter due to end market variability.

We expect growth in The Americas Group to be in the mid-single digit range. I want to reiterate that we continue to feel very good about the demand environment for our North American stores, with our customers reporting full order books and working to catch up on jobs that were likely delayed by weather in the second quarter.

For the Consumer Brands Group in the third quarter, we expect sales to be down by high-single digits as we face tough comparisons to the largest portion of last year's load-in volume for the Lowe's program as well as the final quarter of the divested Guardsman business.

We anticipate Performance Coatings sales to be up by a low single-digit percentage. While comparisons do ease in the back half of the year, we do not see a near-term catalyst driving significant improvement in the European or Chinese macroeconomic environment at this time. We expect demand in these regions to remain highly variable as it has over the first half of the year compared to a relatively more stable demand environment in North America. As a result of our revenue outlook for the third quarter, we are reducing our full year 2019 revenue guidance and now expect sales to increase 2% to 4% compared to the full year 2018.

At the same time, we feel good about North American stores volume in the second half, the progress of our pricing initiatives, the trajectory of raw material inflation and our ability to control spending. Given these dynamics, we are reaffirming our adjusted 2019 full year diluted net income per common share guidance to be in the range of $20.40 to $21.40 per share, which excludes Valspar acquisition-related costs and nonoperating items. This is an increase of approximately 13% at the midpoint compared to the $18.53 reported last year on a comparable basis. We've included a Regulation G reconciliation table with this morning's press release to reconcile adjusted and GAAP earnings per share.

A few additional data points for the full year may be helpful for modeling purposes. These data points have not changed from the guidance we updated in April. We expect raw material inflation for full year 2019 will be in the low-single digits compared to 2018. The rate of our year-over-year inflation, assuming stable petrochemical feedstock and no supply disruptions, should diminish from the level we saw in the second quarter as we progress through the year. We expect incremental synergies of approximately $70 million to $80 million in 2019, with a total annual run rate of approximately $415 million at year-end. We expect our 2019 effective tax rate to be approximately 20%. We expect full year capital expenditures to be approximately $320 million, depreciation to be about $257 million and amortization to be about $315 million.

With that, I'd like to thank you for joining us this morning and we'll be happy to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Jeff Zekauskas with JPMorgan.

--------------------------------------------------------------------------------

Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

--------------------------------------------------------------------------------

Your cost of goods sold was down about 1% in the quarter and I imagine your volumes were up. Can you analyze the decrease, how much of that was lower raw materials and how much of that was cost-reduction effort?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [3]

--------------------------------------------------------------------------------

Jeff, this is Al Mistysyn, and you're absolutely correct. We did see a sequential decrease in our raw materials from quarter-to-quarter.

As we discussed on our first quarter call, we thought the first quarter would be our highest raw material cost year-over-year, declining into the second quarter and then sequentially from there. So a good part of it was raw material cost. But you're absolutely right, we continue to focus the team on implementing the synergies that we had talked about. We had approximately $75 million in synergies in our guidance. We talked about 2/3 of that being realized in the first half and the remaining 1/3 in the second half. And you are seeing the benefit of that as well.

--------------------------------------------------------------------------------

Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

--------------------------------------------------------------------------------

And so raw materials continuing to move sequentially lower for you, in general?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [5]

--------------------------------------------------------------------------------

Correct. And that's what we talked about, Jeff, in our guidance at the beginning of the year and that hasn't dramatically changed. Now what we talked about was low-single digits for the full year, probably the highest in the first quarter. The basket ticked down in the second quarter. And we think it's reasonable based on what we're seeing now to expect the back half to be slightly deflationary.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

The next question is from Ghansham Panjabi with Baird.

--------------------------------------------------------------------------------

Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [7]

--------------------------------------------------------------------------------

I guess first question, John, on your comments on customer backlogs. Can you sort of expand on those comments? Is it a reflection of just stronger fundamentals, given the drop in interest rates or just weather disrupting 2Q and pushing it out into 3Q? What are your customers sharing with you?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [8]

--------------------------------------------------------------------------------

Well, I think there's an overall confidence that we started the year with, Ghansham, and I think it's continued as we progressed through the year.

To your point, clearly, weather did impact our customers. Not just our customers, I'd say all trades, certainly painters, but construction in general. But I think as we look forward in the back half of the year, it's going to be a dead sprint for our customers. There's a backlog that they're carrying over and we believe, quite frankly, it's an opportunity for us to shine for our customers because of the backlog that exists and the demand that they'll have on them. We think the position that our teams are in to serve those customers will ultimately end up with customers that have a higher level of loyalty to our people and our stores as a result of the service we provide.

--------------------------------------------------------------------------------

Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

--------------------------------------------------------------------------------

Okay. And then for my second question, you've had Valspar in your portfolio for a few quarters now and the industrial-facing business is already facing a tougher macroeconomic backdrop, especially overseas. How are these businesses performing relative to your initial expectations from a cyclicality standpoint? How would you characterize that?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [10]

--------------------------------------------------------------------------------

Well, we're very pleased, as you would expect, and these businesses are doing very well. If you look at packaging, for example, we had growth in all regions and we continue to focus on great relationships with great innovation to help grow that business. Our coil was strong across all regions except for North America, which was down slightly. And I'd say that was largely the impact of some of the tariffs. When we look at the opportunities from a market share standpoint and the growth opportunities, we're really very, very excited. Our challenge right now is prioritization. As we move forward, there are terrific opportunities, terrific customers. We've just got to make sure we're focusing on the right opportunities and executing well.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Our next question is from the line of Robert Koort with Goldman Sachs.

--------------------------------------------------------------------------------

Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [12]

--------------------------------------------------------------------------------

Could you give a little more granularity on the big margin lift in Consumer Brands, sort of the buckets where that came from, whether it was costs, price, raws, et cetera?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [13]

--------------------------------------------------------------------------------

Sure, Bob. Yes. There's a number of levers, starting with the strong volume performance we saw in North America. And as you know, we always start with volume because that's the one that gives us the most leverage from an operating margin standpoint. We did get a little bit of a benefit from the raw material decrease sequentially. The synergies that I talked about with Jeff also impacted our Consumer Brands Group in the quarter. So you're seeing the nice volume lift in North America and those other 2 factors is what should help driving that margin expansion.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Our next question is from Christopher Parkinson with Crédit Suisse.

--------------------------------------------------------------------------------

Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [15]

--------------------------------------------------------------------------------

In terms of the Lowe's agreement, do you just have any general views on how much of the legacy business at Home Depot, so Thompson's, Minwax, Purdy, et cetera, you've recaptured thus far and how much there more is to go? And just do you have any additional programs in the pipeline to further help Lowe's close the gap with Home Depot, maybe with pros, et cetera, et cetera?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [16]

--------------------------------------------------------------------------------

Yes, Chris. We have a number of programs, initiatives and focus on execution on those that are out already. So yes, I think that we have a number of initiatives and programs for our customer and we're really focused on the execution. As you would expect, we're not going to disclose what those are here on this call, but we clearly have a terrific relationship and a lot of areas that we're focused on to grow.

--------------------------------------------------------------------------------

Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [17]

--------------------------------------------------------------------------------

And just in PC, can you comment broadly just about how you're feeling the longer term competitive positioning in each of those markets, pricing power ability and just how those views funnel into your longer-term outlook for PC margins?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [18]

--------------------------------------------------------------------------------

Yes. So we've spoken about our goal to drive this business up to a 20% operating margin, and we feel as though the businesses, the customers, the technology, all give us even more confidence than when we initiated this acquisition.

The key area here is our focus on the solutions that will help our customers to be more successful. When we look at this business, we're not driving and chasing every shiny object. We're really focused on those areas that are meaningful for our customers that allow them to reach and exceed their goals and in turn, allow us to provide a reward for our shareholders. So we're very focused on the right customers, the right programs, the right technologies, having the right people at the right place doing the right things that drive these results. And we have great confidence in our ability to do that.

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [19]

--------------------------------------------------------------------------------

And Chris, I would just add to that. On the pricing side, you can see after 2 significant raw material inflationary years, the past 2 years plus the inflation we saw year-over-year in our first quarter, our operating margin, adjusted operating margin improved 150 basis points in the quarter. That tells you we have to be getting price...

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [20]

--------------------------------------------------------------------------------

Yes. It's working.

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [21]

--------------------------------------------------------------------------------

To be able to get on top of that raw material inflation.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question is from Steve Byrne with Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [23]

--------------------------------------------------------------------------------

How have your new stores that you're building now compare to your legacy stores with respect to size? Does that affect the cost to build out these stores and the operating cost of these stores? And has your view of optimal store density changed?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [24]

--------------------------------------------------------------------------------

Yes, Steve. I think they are changing and I think I would describe it this way. Historically, when I was in our store's organization, we'd typically look for 5,000 square feet. That was the model. We tried to put those everywhere. Now I'd say that our teams, and we have terrific leadership teams here, 30 years-plus experience with Pete Ippolito, Bill DeSantis. I mean these people really have been with our teams for quite a period of time. And they're really driving us to be more responsive and more selective in what it is that we're doing to drive the results in the markets that we need.

In some cases, we might be going with a little smaller store. Some cases, we might go a little larger store. We're focused on these different end markets. And so we're tailoring the footprint and the store as well as the staffing to be responsive to those segments that we're pursuing.

So I'd say they are adjusting. You're exactly right. But it's not adjusting one way or the other, it's adjusting more to reflect the market opportunities.

--------------------------------------------------------------------------------

Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [25]

--------------------------------------------------------------------------------

And the optimal store density, any update on that?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [26]

--------------------------------------------------------------------------------

No. I'd say we're still continuing to learn. We continue to add stores. And I would say that we've not reached a saturation point here where we're saying, we're not going to add any more stores. We can point to markets like Cleveland or Atlanta, where our saturation is stronger than some other markets and we still need stores in these markets. And we're excited to continue to add them. And I would also say this, that our field organization is doing a better job of getting these stores up and profitable faster as well. We're students of continuous improvement. So these new stores are our focus. We don't just plug them in and wait for them to get better. Every day, we have teams working on how do we get these new stores up and profitable faster.

--------------------------------------------------------------------------------

Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [27]

--------------------------------------------------------------------------------

And just a quick one on the Consumer segment. Any changes in the spray paint business at Lowe's?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [28]

--------------------------------------------------------------------------------

There's not a meaningful change there. I believe some area outside of the paint department that there was some adjustments. But we're really focused with this customer on making that paint department the most successful it can be. And that's what we're really focused on.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Our next question is from Duffy Fischer with Barclays.

--------------------------------------------------------------------------------

Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [30]

--------------------------------------------------------------------------------

In the PC segment in particular, can you talk about what you're seeing from your customers as far as their inventory? Are they destocking your products? Is that part of the volume issue there or do you think that's just closer to their real demand and consumption?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [31]

--------------------------------------------------------------------------------

I'd say their consumption is a bit choppier, Duffy. I'd say the demand, it's not a smooth line, up, down or sideways. There's choppiness. And so we're starting to see -- I wouldn't say starting to see. We have seen perhaps more orders of smaller volume as they're trying to adjust their inventories.

From our perspective, the ability to serve those customers with our facilities close to these customers, with a quick response and platforms that we're building to be more responsive, we think it's a way of differentiating with our customers.

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [32]

--------------------------------------------------------------------------------

And Duffy, I would just add to that. John talked about the macroeconomic headwinds we're seeing in China that have continued through the first quarter and in Europe. We don't expect those to get materially better. That being said, we have had businesses that we called out, packaging and coil, that are still performing well. Latin America has performed well in the quarter for industrial and we still feel most optimistic about North America.

--------------------------------------------------------------------------------

Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [33]

--------------------------------------------------------------------------------

Okay. And then the change that Ace Hardware made, is that big enough that, that will be seen in your results? And if so, kind of what's the timing of that?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [34]

--------------------------------------------------------------------------------

I'll let Al in a second talk about the impact on financials, but I will say they've announced a decision to augment their assortment with Benjamin Moore. And they'll continue to offer many of our well-known brands, the Minwax, Thompson's, Cabot, Purdy. And this was a deal that we assumed with the Valspar acquisition. And the program itself had many assumptions in it that really just didn't play out. And as you'd expect, as we began reviewing these programs, we found ourselves where a mutually beneficial path forward was difficult to construct. And under terms of that agreement, we felt as though -- our view is, we've got to be focused on those areas that we can drive meaningful results for those customers, but also in the same token, the results for our shareholders.

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [35]

--------------------------------------------------------------------------------

And the timing is such, Duffy, that we don't believe there's going to be any material impact on our 2019 results. From an operating margin standpoint, it's well below the segment average. But we include those, both the top line and the bottom line impact on our 2020 guidance.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Our next question is from Vincent Andrews with Morgan Stanley.

--------------------------------------------------------------------------------

Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [37]

--------------------------------------------------------------------------------

Just wanted to dig in a little bit more on the Paint Stores comp in the quarter, which was quite impressive, given the weather and some of the third-party data that's out there. So I guess a couple of questions to this. I know there were some initiatives starting a couple of years ago to really go out and try to build the customer base, so maybe you could discuss on -- if you've sort of reached the tipping point on that and/or strategically you figured out a better way to serve clients and to pick up incremental share when the conditions are challenging. Does your service offering play a real role in that?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [38]

--------------------------------------------------------------------------------

Yes. Well, let me begin by pointing out that Q2 was the toughest comparison to last year. It was up -- same-store sales were up 6.8%. So comps were tough and you're right, our teams finished up 5.3%. And this focus that we have been talking about on new accounts, on share of wallet, even the new products that we're introducing, those efforts are clearly coming to fruition.

It was wet, no question about it. And it impacted, as I mentioned earlier, both the painters and all trades. By some measures out there, this was the wettest in 125 years. But this, as you mentioned, is a resilient team as I mentioned earlier. We've got great leadership. And this is a point where we love our model and the position that we have in the market and our team is executing very well.

Are we doing anything specifically different? I'd say, we continue to train our people. We continue to hire the best people we can. We've talked openly about hiring around 1,400 college graduates a year to ensure that we've got a steady pipeline of people. And we continue to focus on the training that will allow them to differentiate.

When you look at some of the areas inside the store with staffing and the quality of people, even the inventory, you might see, notice that we've had a slight uptick in our inventory. That's nearly all in the architectural business. We want to make sure we have the inventory when they need it close to the customers. And we're really focused on those areas that will help our customers be on the job and most productive.

The products that we're introducing are helping them, the services that we're introducing. But there's not one silver bullet that we'd say, this is what we did this quarter. I'd say it's the culmination of many, many years of good leadership by that team and a lot of execution in the field. I want to thank our teams in the field because they're doing a terrific job representing our company.

--------------------------------------------------------------------------------

Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [39]

--------------------------------------------------------------------------------

And just maybe as a follow-up. If you can give us sort of your sense of where the M&A outlook is, both for small transactions and then something potentially larger than that, particularly given one of the announcements that was out there by a large competitor?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [40]

--------------------------------------------------------------------------------

Yes. So there are a number of comments out there regarding what's out in the market. We don't make a practice to talk about any particular project. I will say, because I've been consistent in this though that we've been very clear in our position on automotive OEM and it's not an area of interest for us. As far as M&A, I'd say we're very, very active. We're pleased with the progress that we have on a number of projects. And we think it's an important part of what is going to help us grow. But we don't feel that we're sitting here with the absolute need for acquisitions to grow. We think it's an opportunity, but we've got a lot of growth opportunities and sales synergies as Valspar and Sherwin come together.

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [41]

--------------------------------------------------------------------------------

And Vincent, I'd just like to add to that, that M&A is an important part of our capital allocation policy, like as we discussed in June. As John mentioned on his opening remarks, we returned $660 million to our shareholders in the form of dividends and share buybacks. That was a 33% increase year-over-year. We're going to, with CapEx, continue to invest in growth opportunities and new stores and in capacity expansions in a number of our North American businesses. And then as we talked about, the dividend is up 31%. But absent M&A, we're going to continue to buy back our stock.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Our next question is from P.J. Juvekar with Citi.

--------------------------------------------------------------------------------

P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [43]

--------------------------------------------------------------------------------

John, I think you talked about your Consumer Brands margins jumping up 580 basis points and some factors behind that. I was wondering if you can talk about how different brands, like Valspar, HGTV paint are doing at Lowe's. And was there any surprises, positive or negative, in your first full season?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [44]

--------------------------------------------------------------------------------

Well, we're not going to talk specifically on any brands, but I will just say that the process that we're going through with Lowe's, we continue to learn. I think we're trying to be responsive and we believe that we're very driven. I mentioned earlier a continuous improvement mentality here. We think that as we go through this, it's important that our efforts are always on finding where we are and how we get better. I think we share that culture not only with Lowe's. Lowe's is a terrifically important customer, but if you look at other customers like Menards. I mean that's our mentality is to gain alignment and seek improvement.

And so I don't want to get into any specific profitability of brands, products, SKUs, any of that. But I would tell you that when we set these goals to march up into the 20% operating margins for this business, we know that there's improvement needed and it's not just going to be by setting the can on the shelf. We want to help our customers succeed and that's in all facets of the business.

--------------------------------------------------------------------------------

P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [45]

--------------------------------------------------------------------------------

Okay. And then back in June, you pushed out your 2020 goals due to mostly higher raw materials. But since then, raw materials, particularly ethylene, propylene chains have really come down. Your margins seem to be improving here despite a difficult weather quarter or weather-wise quarter. So do you have any updated comments on your 2020 goals as we sit here today?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [46]

--------------------------------------------------------------------------------

Yes, P.J. We're very pleased with the progress we're making on the gross margin, the 44.9% in the quarter, so a nice improvement there. But year-to-date, our gross margins are 44% and the pricing activity that we've had needs to continue. As you know, our long-term rates are 45% to 48%. So we have work to do to get to that. And I expect, as we progress, obviously -- and I talked about this on the previous call, to get to almost 13% increase at our midpoint for EPS, we're going to need margin expansion. And we're up 9.5% year-to-date. That tells you, we have to be up a little bit over 16% in the second half to get to that midpoint. And that tells you, we do expect margins to continue to expand in the second half.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

Our next question comes from the line of Greg Melich with Evercore ISI.

--------------------------------------------------------------------------------

Gregory Scott Melich, Evercore ISI Institutional Equities, Research Division - Senior MD [48]

--------------------------------------------------------------------------------

I have 2 questions, both on the sort of the outlook as much as what we just saw. If we look at the Americas business, to get that mid-single-digit growth in the third quarter, is that going to be more volume or price, especially if you consider, it looks like the second quarter was probably 2% volume and 2% price if I look at the comp. Is that correct?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [49]

--------------------------------------------------------------------------------

Greg, I think the price would be a little bit better than that, maybe closer to 2.5%. And I would expect a similar type of cadence in our third quarter, which would tell you that we have to be up low to mid-single digits in volume. But I do expect volume to improve sequentially.

--------------------------------------------------------------------------------

Gregory Scott Melich, Evercore ISI Institutional Equities, Research Division - Senior MD [50]

--------------------------------------------------------------------------------

So an acceleration in comp in the third quarter is more likely to be volume than price related?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [51]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Gregory Scott Melich, Evercore ISI Institutional Equities, Research Division - Senior MD [52]

--------------------------------------------------------------------------------

And then second on Consumer Brands, just a little more color on the inflection of it being up to going to down high-single digits. I think you mentioned it was cycling just the loads, load-in and then Guardsman. Is there anything else there? And then, how should we think about when those items cycle for the fourth quarter and beyond?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [53]

--------------------------------------------------------------------------------

I think like we talked about, in the second quarter, we felt very good about North American volume. We did see some softness, continued softness in the retail channel. I would expect that to continue. And then we have, outside of that, we have a couple of our smaller businesses outside the U.S., specifically Asia and Australia that were soft in the first half. I don't expect them to get materially better in the second half.

--------------------------------------------------------------------------------

Gregory Scott Melich, Evercore ISI Institutional Equities, Research Division - Senior MD [54]

--------------------------------------------------------------------------------

So that decline that you see in the third quarter could also persist beyond...

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [55]

--------------------------------------------------------------------------------

Not to the degree. Our fourth -- just that our largest load-in was in the third quarter for Lowe's, a headwind that Guardsman goes away after the third quarter. So I don't think it gets materially...

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [56]

--------------------------------------------------------------------------------

Yes. It's largely the load-in and the...

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [57]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [58]

--------------------------------------------------------------------------------

Guardsman annualization.

--------------------------------------------------------------------------------

Gregory Scott Melich, Evercore ISI Institutional Equities, Research Division - Senior MD [59]

--------------------------------------------------------------------------------

Got it. That's great. And then if I could sneak in one more on the 3x leverage. And getting to that point, how important is that point to where you would -- where do you want that to stabilize when you think about -- you mentioned buying back stock after you get through the dividend increase and invest in CapEx?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [60]

--------------------------------------------------------------------------------

Yes. Greg, I -- we're committed...

--------------------------------------------------------------------------------

Gregory Scott Melich, Evercore ISI Institutional Equities, Research Division - Senior MD [61]

--------------------------------------------------------------------------------

3x, 2.5%?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [62]

--------------------------------------------------------------------------------

Yes. I think long term, we spoke about 2% to 2.5%. We'll be under 3% by the end of this year. We committed to paying down $600 million of debt. We paid off the $300 million of $7.25 billion debt in June. And the rest will come out of short term. But yes, I think we'll be below 3% to 1% at the end of this year, and the target is still 2% to 2.5%.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

The next question is from John Roberts with UBS.

--------------------------------------------------------------------------------

John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [64]

--------------------------------------------------------------------------------

What's going on in coil that's allowing that business to be an outlier in Industrial Coatings?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [65]

--------------------------------------------------------------------------------

Probably a lot of good products and a lot of really good people serving really good customers, John. I don't think there's a blanket statement that we'd make across the board except that we've got some really good things that are happening, and we're determined to continue to drive them.

--------------------------------------------------------------------------------

John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [66]

--------------------------------------------------------------------------------

Okay. And then in Industrial Wood, do you need to restructure that business? Or do you just wait to see how the trade issues play out?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [67]

--------------------------------------------------------------------------------

No. That's a good question. We're taking -- we're forced to take some costs out of that business. We've seen a material change in the market, at least, for the time being. And we're adjusting accordingly, as you would expect.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

Our next question is from Scott Mushkin with Wolfe Research.

--------------------------------------------------------------------------------

Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [69]

--------------------------------------------------------------------------------

So I guess I wanted to poke a little bit more on the volume outlook. I think last call, I asked what would generate upside surprise. And you guys said increased volumes over expectations. So it seems like volumes did come in better in the second quarter, maybe the volume outlook, I'm specifically talking to the Americas. And I'm just wondering, what's changed in the thought on volumes? Is it the market? Is it things you guys are doing specifically? And then I had a follow-up.

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [70]

--------------------------------------------------------------------------------

Yes. Scott, I -- coming into the quarter, we talked about our Paint Stores Group being at or above the high-end of our range. And that happened. They were at 5.3%. And that was a positive even with -- in spite of the wet weather we saw. Our Consumer Group came in pretty much as we expected, but it's a tale of 2 -- kind of a tale of 2 cities, if you will. We had strong growth in our North America business, even including the soft retail sales that I talked about, but we also saw the continued softness in Asia/Pacific and Australia.

And I expect those to continue, and they're probably softer than what we had planned. And then finally, in Performance Coatings Group is where we really saw softness, Asia/Pacific and Europe with the macroeconomic headwinds. Although we expected them to continue in the second quarter, we did not expect them to be as heavy as they were. So that, again, we expect to continue in our second half. So I would say we had -- we have to be realistic about the forecast. Our teams have opportunities. And they wake up every day, driving market share growth with new products and leveraging technology and services to provide solutions for our customers, but it's very difficult to come over the top when we're seeing the headwinds we're seeing from a macroeconomic environment.

So that's really what we're seeing. It's the continued retail sales softness and more than we expected in consumer, along with Asia/Pacific and ANZ and then in Performance Coatings, it's primarily Asia/Pacific and Europe.

--------------------------------------------------------------------------------

Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [71]

--------------------------------------------------------------------------------

Perfect. And my follow-up is just again, it goes to the Paint Store Group or the Americas. I know you guys have been pretty active in remodeling stores. And I just wanted to get any color you have there. How much of that, the comp, is being attributed to that activity? So any update there would be great.

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [72]

--------------------------------------------------------------------------------

Yes, as I said, we've always maintained a commitment to the store, we call store readiness, the appearance. And that includes not only just the physical appearance of painting and displays, but even our employees. And I'd say it's a contributing factor.

But Scott, as we look at the model, the -- it's really important to understand, there's not 1 lever. We want to continue adding in those areas, the services, the quality of products and the differentiation that helps our customers to be the most successful. And if we continue to do that and help our customers to win, then funny thing happens. We become successful as well. And so that's what we're really focused on. I know there's been a couple of questions now pointing towards that one thing here, and this is just a continuation of a long strategy executed by really wonderful leadership and outstanding people in the field.

--------------------------------------------------------------------------------

Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [73]

--------------------------------------------------------------------------------

Appreciate it, guys. Congratulations on a good quarter.

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [74]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [75]

--------------------------------------------------------------------------------

Thank you, Scott.

--------------------------------------------------------------------------------

Operator [76]

--------------------------------------------------------------------------------

Our next question is from Arun Viswanathan with RBC Capital Markets.

--------------------------------------------------------------------------------

Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [77]

--------------------------------------------------------------------------------

Just a question on the outlook you provided. It sounds like there's an element of conservatism in your PCG outlook, and it's related to kind of macro challenges and Europe and China still remaining weak, I guess. Is that correct? And if there is some resolution on the trade side, do you see that kind of helping you to get to the upper end of guidance? Or how should we think about the range you provided with the rest of PCG?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [78]

--------------------------------------------------------------------------------

Yes. Arun, I wouldn't use the term conservatism. I'd say realistic is more apt to be what -- how we have approached the forecast. If the trade wars ended today, I don't -- it will not help us through the rest of this year. Many of those customers -- and we've tried to characterize this in the past, have already decided to move, and that process has started. It's tough for them to stop and then start. So -- but we're well positioned to accept that business in wherever they go, whether it's in Southeast Asia, if they come to Mexico, wherever those businesses land.

What will drive the needle on our guidance towards the high-end is North America stores volume. And that's always the case. It's the engine -- growth engine of our company. We expect to continue to grow our market share and grow 1.5 to 2x the market. And I believe we're doing that in the second quarter, and I believe we'll do that through the back half. It's just -- that will be what drives us to the high-end of the range.

--------------------------------------------------------------------------------

Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [79]

--------------------------------------------------------------------------------

And just on that point, it sounds like resi repaint is still holding up pretty nicely, high-single digits. Commercial, likely it's pretty strong. So it seems like most of your end markets are doing quite well. But you do face tough comps there. So what gives you the confidence that some of these markets will continue to grow so heavily, especially resi repaint where we've seen double-digit quarters for many years here?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [80]

--------------------------------------------------------------------------------

Yes. So I think it's 5 years compounded growth rate or -- double digits. You're right, Arun. And I would say this, as far as your comp question, the back half of the year actually gets a little bit easier, whereas the first half was a little tougher. In fact, the second quarter itself was the toughest comparison. So from that standpoint, we feel the comparisons get a little bit easier.

We don't like to fly the victory flag as a result of easy comparisons, though. I mean it's the reality. But what we're really trying to do is continue to invest in those areas that allow us to continue to grow our account base and our share of wallet with those customers.

And so all of these initiatives, the new products, the skill training that we put with our employees, the addition of specification reps. I mean you can go through the long list of things that we're doing, all of those we think are driving in the right direction. And we're going to continue to feed this. This is -- we've said a number of times already this morning, this is the engine of the company. And we're going to continue to put fuel in this machine and push it as fast and as hard as we can go.

--------------------------------------------------------------------------------

Operator [81]

--------------------------------------------------------------------------------

Our next question comes from Kevin McCarthy with Vertical Research Partners.

--------------------------------------------------------------------------------

Kevin William McCarthy, Vertical Research Partners, LLC - Partner [82]

--------------------------------------------------------------------------------

Mortgage rates, as you know, have fallen more than a full percentage point since last November. My question is, if you look back at history, can you speak to how lower mortgage rates flow through to demand for architectural paint? And if there's a positive linkage there, what sort of lag effects should we be thinking about in terms of the impact on remodeling or existing homes? Any thoughts along those lines would be appreciated.

--------------------------------------------------------------------------------

James R. Jaye, The Sherwin-Williams Company - SVP of IR & Corporate Communications [83]

--------------------------------------------------------------------------------

Sure. I think the drop in rates over the last few months in general is support of new build. If look at builders' sentiment, most recent data that I've seen is June. And builder sentiment is very positive in June. But I think Kevin, what's fundamentally the driver, and we've talked about this for several quarters now, is the rate of household formation, which continues to be very strong, but new home construction has not been keeping up with that. It's been unsustainably low.

So we think there is still some pent-up demand out there that eventually that -- it's certainly -- there's demand out there for new homes, especially at the entry level. And that's what's we're starting to see. Some of the builders are adjusting to that. We had positive growth in the new res space in our first quarter.

From a remodeling perspective, one of the things that people often point to is existing home sales. And that's been very choppy over the last year or so. New data was out this morning that wasn't particularly great. But at the same time, there's a lot of other drivers beyond existing home sales that I think are helpful for remodeling in the repaint business for us. So you have things like baby boomers aging in place, and they're doing a lot of remodeling to make homes the way they want them to be. You have strong employment numbers. You have home value appreciation continuing to move in the right direction, maybe a little bit slower than the past, but still continuing to appreciate.

And the other thing I'd point out, a fact that we presented at our Analyst Day as well, is since the last peak, there's been about close to 20% growth in square footage that's out there to be repainted. And so we think there's plenty of demand out there in the repaint, and we're very well positioned to continue growing that part of our business.

--------------------------------------------------------------------------------

Kevin William McCarthy, Vertical Research Partners, LLC - Partner [84]

--------------------------------------------------------------------------------

Jim, as a brief follow-up, with that as the backdrop, would you be confident that industry architectural gallonage can rise directionally in 2020?

--------------------------------------------------------------------------------

James R. Jaye, The Sherwin-Williams Company - SVP of IR & Corporate Communications [85]

--------------------------------------------------------------------------------

I don't want to comment specifically on an outlook for 2020, but we've seen gallon growth over the last several years. And I think based on some of those factors that I've just said, the new -- the pent-up demand and the increased square footage that's out there, yes, I think we can see gallon growth continue to improve.

--------------------------------------------------------------------------------

Operator [86]

--------------------------------------------------------------------------------

Our next question is from Mike Sison with KeyBanc.

--------------------------------------------------------------------------------

Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [87]

--------------------------------------------------------------------------------

Guys, nice quarter. Still waiting on my [Bob mural] also. Hopefully, that's not part of cost savings. But on a serious note, so when you think about the Americas Group, the outlook for the second half of the year, the first half, you had weather issues. And if weather is favorable and the backlog for your customers are really good, where could growth be? Could it be a couple of percent better if weather plays its part?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [88]

--------------------------------------------------------------------------------

Yes. I mean it's really hard to speculate. Mike, you're right. I mean I think if the weather is better, we have a more mild entry into winter. And our customers are able to paint a little bit longer or they're able to capitalize on the weather and catch up on some of these projects, it would definitely add to what it is that we projected. But as Allen mentioned, we're trying to be realistic with -- we're in the midst of some pretty unique weather patterns, and we don't know what's going to happen. I don't know that anyone does. And -- our forecast, we think, reflect the best that we have as far as our little crystal ball.

As it relates to the customer though and the demand, that's the piece that we're blessed with. We've got over 4,000 stores, over 3,000 territories out there. We're getting the feedback from our store managers. We get the feedback from our reps about how our customers are feeling. And that's the most important part to us. If it gets delayed, it gets delayed. We don't think those projects are going to go away. But what we are confident is how our customers are feeling about their pipeline of projects.

--------------------------------------------------------------------------------

Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [89]

--------------------------------------------------------------------------------

Got it. And then as a quick follow-up, how are you thinking about pricing for the stores heading into 2020? Every year, it's hard to tell what inflation's going to do. But just when you think about usually October-ish, you start to think about some sort of pricing action potentially. Can you maybe give us an update on your current thoughts there?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [90]

--------------------------------------------------------------------------------

I would tell you more about how we think about it than our current thoughts. And when we get together on a monthly basis, we look at our total cost basket, not just raw materials, but just total cost. And we make a very informed decision as a team on a monthly basis. And as you know, given your coverage of our company, the first people to know that clearly are our employees, the second are our customers, and then we go public with our investment community.

So we have nothing to announce right now. We'll stay close to it, and we'll make adjustments as needed.

--------------------------------------------------------------------------------

Operator [91]

--------------------------------------------------------------------------------

Our next question is coming from the line of David Begleiter with Deutsche Bank.

--------------------------------------------------------------------------------

David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [92]

--------------------------------------------------------------------------------

John, following up on the prior question. If you do see deflation in raw materials, what areas are you most at risk for giving back some pricing? I assume it's not the stores, but perhaps performance. Is that fair?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [93]

--------------------------------------------------------------------------------

Well, what we typically have seen over a long history is that on some of these large projects as it relates to the stores, more stadium or very large kind of marquee projects on the store side, those might get a little pressure overall. And on the piece -- on the Performance Coatings side, that's -- I was very deliberate in my conversation or my response there earlier about looking at total costs.

We're continuing to add in those areas that we believe can help our customers reach their goals. And some of that clearly is in the raw material costs. In other areas, it could be in facilities or different investments that we might make to help a customer be more successful and more profitable themselves. So as we look at it, I'd say that it's a discussion that we always have to have.

But a discussion isn't a discussion that takes place on 1 day. If we're doing our job all year, we're doing our job and delivering the solutions and services that allow our customers to be successful, that conversation is a better discussion and one that our customers understand the need for us to stay healthy as well.

--------------------------------------------------------------------------------

David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [94]

--------------------------------------------------------------------------------

And John, just on TiO2, do you expect to pay higher price for TiO2 in the back half of the year than in the first half of the year?

--------------------------------------------------------------------------------

James R. Jaye, The Sherwin-Williams Company - SVP of IR & Corporate Communications [95]

--------------------------------------------------------------------------------

Yes. This is Jim. Industry pricing for TiO2 has been fairly stable over the past 3 quarters. And we don't see anything really changing a whole lot in the global demand environment, favorable or unfavorable. So our view at the beginning of the year was TiO2 fairly stable for the year. And I think that's still our view at this point.

--------------------------------------------------------------------------------

Operator [96]

--------------------------------------------------------------------------------

Our next question is from the line of Garik Shmois with Longbow Research.

--------------------------------------------------------------------------------

Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [97]

--------------------------------------------------------------------------------

Just wondering if you can comment on this. You guys have actual construction does increase in the second half of the year, just given some of the leading indicators that you cited. What's the usual lag between when starts increase and when you start seeing that demand come through?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [98]

--------------------------------------------------------------------------------

We typically see it in a few months.

--------------------------------------------------------------------------------

Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [99]

--------------------------------------------------------------------------------

Okay. Has that changed over the last several years? Has that lag gotten extended due to whether it's labor group constraints or any other factors?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [100]

--------------------------------------------------------------------------------

Yes. It may push it back -- depending on the market, I would say. It may get pushed back or be a little more volatile in some markets where the labor shortage might be a little tougher, to your point. But I don't know that it's a material amount. Builders are clearly working on how to deliver efficiency into their process. So there's some opportunity there from a speed standpoint, but there's some volatility, to your point, about labor as well.

--------------------------------------------------------------------------------

Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [101]

--------------------------------------------------------------------------------

Okay. And I just want to follow up on consumer. You talked about some of the comp headwinds you're facing in the third quarter. But should we expect volume growth to turn positive in the fourth quarter as you anniversary the Lowe's load-in and the Guardsman exit?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [102]

--------------------------------------------------------------------------------

I would say, Garik, we've got to see how the inventory levels -- what happens to the inventory levels as we come out of season. Obviously, we are working closely with Lowe's. But last year, being the first year and we're putting a ton of inventory in to make sure we're servicing these end customers, it's an anomaly. So this year is the first year where we're going to see a more normal -- normalized run rate and process. And we're still going through that right now with them.

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [103]

--------------------------------------------------------------------------------

But importantly, I think at the core of the question is we do expect to help our customer grow their business.

--------------------------------------------------------------------------------

Operator [104]

--------------------------------------------------------------------------------

Our next question is from Mike Harrison with Seaport Global Securities.

--------------------------------------------------------------------------------

Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [105]

--------------------------------------------------------------------------------

I was wondering if you could maybe break out the same-store sales growth number between exterior and interior. Is it fair to assume that the exterior growth was much weaker?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [106]

--------------------------------------------------------------------------------

No. Actually, in a broader market, the exterior, believe it or not, was up slightly ahead of interior. And when we went back and started to dial in on that, what we saw were on those days when the weather had been supportive of exterior paint, we saw some really incredible increases. And so we saw chunks of business going out on the exterior side, which gives us great confidence in the future if we get a little more stable weather pattern of what we're capable of. But we had a very good performance as you -- in both interior and exterior.

--------------------------------------------------------------------------------

Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [107]

--------------------------------------------------------------------------------

And then I wanted to ask also, you made several references in the press release and in your comments to cost controls or cost management. I know you mentioned specifically that you were taking some actions in Industrial Wood Coatings. But are there some other areas where you're taking additional actions? Or should we think of these as being part of the Valspar synergies? Just how do we think about that cost management that's going on?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [108]

--------------------------------------------------------------------------------

Yes. Mike, I think part of it is on the Valspar synergies, part of it is just our normal part of our culture of continuous improvement. And as we talked about going into 2020, we're not going to be calling out synergies because we want to roll that into just part of our culture. And you could expect, as John talked about, we're going to take action where we need to in certain -- whether it's markets or geographies or parts of our business where we see softness and continued softness over a period of time.

On the other hand, you are going to see us continue to invest in growth opportunities, whether that be in our stores group, consumer group programs or our performance coatings to drive future sales.

--------------------------------------------------------------------------------

Operator [109]

--------------------------------------------------------------------------------

Our next question is from Dmitry Silversteyn with Buckingham Research Group.

--------------------------------------------------------------------------------

Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [110]

--------------------------------------------------------------------------------

I just wanted to follow up on a couple of things. Number one, as you look at your margin recovery in Performance Coatings, you talked about continuing to sort of press for pricing. I'm just trying to understand if by that you mean getting greater protraction on the pricing you've implemented at the end of 2018 and the first quarter of 2019. Or do you plan on going out with new pricing as the year unfolds because you feel that you still have a couple of quarters of catch-up to do?

And then secondly, if it's the latter, how does that jive with the slowing industrial markets that you're seeing beyond wood, just in general, sort of macro slowing in industrial, not necessarily -- or maybe in your business?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [111]

--------------------------------------------------------------------------------

Dmitry, I would respond that we have a little bit of everything that you've talked about. We've got some areas where we've already had those discussions. And we are working with our customers, rolling pricing in. And we have some areas where if you look reflective in the past year on what's happened to raw material costs, we've yet to recover some of what has rolled in, in raw material costs. While there might be some relief, the basket is still higher in some products and some areas than when it was in 2016.

And so we're having those discussions on a customer-by-customer basis. And our goal -- I know it sounds a bit repetitive here, but in helping our customers to be most successful and helping them by bringing them the solutions that help them win, we need to stay healthy as well. And we're having those discussions on a regular basis.

--------------------------------------------------------------------------------

Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [112]

--------------------------------------------------------------------------------

Okay. That's very helpful. And then just as a quick follow-up, staying with the industrials theme. You talked about the Coil Coatings being a standout for you in terms of growth, and wood coatings obviously for the last couple of quarters has been a problem child, and that's totally understandable. Can you talk about, perhaps maybe not regionally, but so much as sort of a product-type, if you will, what your other businesses in Industrial and Performance Coatings have done in the second quarter and what your outlook for the second half of the year is in terms of capital projects or Protective & Marine? I know you're in the pipeline business and a few other businesses. So if you can kind of look at some of the end market or product categories and give us a little bit more granularity on what your view is of the market.

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [113]

--------------------------------------------------------------------------------

Sure, Dmitry. Maybe if I break it down a little bit by region initially and just tell you. In North America, overall, I'd say was flattish. Our general industrial business was positive, and we expect that to continue here.

Europe, I would say was soft for the most part, excluding, as I mentioned, packaging and coil. And I want to give our packaging team their due. I've spoken about coil, but really, it's packaging that's leading the pack. So I don't want to get a phone call as soon as this call is over from my President, Sam, in our Packaging business to correct me here. They're doing a terrific job, so I want to give them their due.

Asia/Pacific was soft overall. Again, packaging and coil were the exceptions here. Both of those were up double digits in Asia. And we expect that to continue in both packaging and coil.

And Latin America was positive in every category as well.

And so our focus, giving you the best forecast, we don't generally like to forecast by segment, but I would say that we don't see a lot of change to what's happening right now. We expect to continue to grow in those markets and continue to work closely with our teams to make sure they have the resources that they need to win. And as I've mentioned earlier, every day, we feel as though we have to earn the business that we have. And when we're blessed enough to work with some of these new customers, our focus is on making them successful.

--------------------------------------------------------------------------------

Operator [114]

--------------------------------------------------------------------------------

The next question is from Truman Patterson with Wells Fargo.

--------------------------------------------------------------------------------

Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [115]

--------------------------------------------------------------------------------

Nice quarter. First, just wanting to look at your EPS guidance. You all lowered your sales guidance from about 5.5% at the midpoint to 3%. So a decent deceleration, if you will, but you left EPS guidance unchanged. Could you just walk us through some of the positive offsets relative to your prior expectations? Are raw materials easing more, getting better pricing power synergies, cost controls? Anything like that relative to your prior expectations that helped you guide EPS unchanged?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [116]

--------------------------------------------------------------------------------

Yes. Truman, I think part of it is volume in North America and the continued strength we see in our North America stores. If you think about the TAG organization in the second quarter, they have flow-through of over 32%. And you asked the question in -- on the first quarter, we were down 80 basis points. What is the outlook for that TAG organization? We said we're confident in our ability to grow our operating margin year-over-year. We were up 50 basis points in a considerably bigger quarter. That brings us about flat. And we're optimistic about the continued progress we're going to make in that group. It's the largest segment we have. It's the fastest growing.

The other segments, we talked about the softness outside the U.S., but continued progress then, holding the price with raws flattening as we need to keep that price to get back up to whole on our margins over the past few years, and then synergies that continue to flow through, both first half and second half.

So it's really a combination of a number of things. And mix, being one of them. A bigger, faster stores, North America stores growth. It's our highest margin business. That's going to help drive the margin and drive our EPS.

--------------------------------------------------------------------------------

Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [117]

--------------------------------------------------------------------------------

Okay. And then jumping back to a few previous questions on Performance Coatings. Revenues fell 4% in the quarter. It looks like demand will be a little bit of a headwind in the back half of the year as well. Could you just run us through how pricing has acted historically in this type of environment? And really, what I'm trying to look at is, in the back half of 2019, do you think you can improve your operating margin sequentially versus the second quarter? Because the past couple of years, you guys have mentioned an ability to do that.

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [118]

--------------------------------------------------------------------------------

Yes. Truman, one point that -- before jumping into that is, you're exactly right on the numbers, but I'd also point out that the comp for the quarter was 11% for the PCG. So some tough comparisons there.

But I think if you look at pricing historically, what has happened, and this is over decades and not just Sherwin but also Valspar, is that we've historically gone out with pricing, and we've worked with our customers to get the pricing into the market. Our goal has always been to get the pricing and retain the customer. And I'd say that in this time of integration, we've been very open with our customers about our willingness to work with them in stepping this pricing in, but the fact that we needed to get the pricing. And during that same time, we've been working very, very hard to provide those solutions, such as products, services, whatever it might be, to make them more successful. And our success in rolling this in is evidenced by the most recent quarter. And our results, we think continues to point in the right direction going forward. And we're never going to reach the point here where we just say, oh, we're not going to -- we can't do better or we don't expect this improvement. We clearly see opportunity for improvement. This was a better performing business. We need to get back to those levels. And our teams understand that, and we're working hard to get it.

--------------------------------------------------------------------------------

Operator [119]

--------------------------------------------------------------------------------

The next question is from Justin Speer with Zelman & Associates.

--------------------------------------------------------------------------------

Justin A. Speer, Zelman & Associates LLC - MD of Research [120]

--------------------------------------------------------------------------------

Just a few questions or 2 questions. One, if you could characterize the monthly cadence of trends in the quarter and maybe even into July thus far in your core Americas business.

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [121]

--------------------------------------------------------------------------------

Yes. I would say, Justin, July is in line with the guidance, quarterly guidance we provided for that business. In the quarter, it's hard to look when you have day changes in that. We talked about -- even have gotten a number of notes about maybe and the what if may in the history of mankind. So as what you would expect, there are ups and downs within a quarter depending on weather patterns. But -- so it's hard to point to 1 month and say, okay. That was good. And this one's softer because of that. So we feel good about the 4.3% same-store sales growth on top of a 6.8% same-store sales growth last year.

--------------------------------------------------------------------------------

Justin A. Speer, Zelman & Associates LLC - MD of Research [122]

--------------------------------------------------------------------------------

Okay. And then the one thing that stood out to me in the quarter positively as well is the cash flow side of things, very strong into the first of this year, particularly in the second quarter. We don't have -- I don't think we have your cash flow yet out on your -- from your filing. But just trying to get a sense for what drove that above and beyond working capital. Was there any onetime item that explains the strength there? How should we think about the full year free cash flow as a percentage of revenues this year, given how strong the first half has been thus far?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [123]

--------------------------------------------------------------------------------

Yes. We did have a very strong first half, $758 million, up $179 million year-over-year. Core net income and earnings are always a big driver. Our working capital was a lower use of cash. So even though we're carrying more architectural inventory like we talked about end of the year and into the first quarter, you start seeing that improve as the year goes on, and we get through the summer selling season. So I would expect some benefit there, not any real onetimers, I would say. You look at free cash flow, again, we're targeting to modify that, say, free cash flow over 11%. We're going to make progress towards that. I don't -- I'm not committing that we'll get to it exactly this year, but we're certainly going to make progress to do that this year.

--------------------------------------------------------------------------------

Justin A. Speer, Zelman & Associates LLC - MD of Research [124]

--------------------------------------------------------------------------------

Okay. And then a lot of people picking at this question in a lot of different ways. And I know you're -- in terms of reading the tea leaves for Performance Coatings, you put -- you recast your view in terms of the timing of achievement of the margin goal, the intermediate term destination for Performance Coatings. Is there anything incrementally in the softening macro environment that dissuades you from achieving that goal? It sounds like you're still confident, but does this make it a harder putt in terms of slower conditions than maybe what you were thinking even a few months ago?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [125]

--------------------------------------------------------------------------------

I -- it's -- for our businesses, we get the most leverage out of volume. If you get a project -- projected macroeconomic headwinds for longer periods of time -- we had talked even in our first quarter that we thought we'd get past these trade impacts and we'd start seeing a better cadence into our second half. We still may. I talked about maybe not helping our guidance number for this year, but certainly heading into next year. That remains to be seen. So it's hard to predict when these businesses come back.

That being said, like I talked about, we have market share opportunities in all our businesses across all our regions, and we have people waking up every day trying to drive growth in those businesses aside from any macroeconomic headwind. So we're still confident about getting to the high-teens, low-20s timing. If it moves a little bit, it moves a little bit. But we're committed to hitting those, and we believe we can.

--------------------------------------------------------------------------------

Operator [126]

--------------------------------------------------------------------------------

Our next question comes from Chuck Cerankosky with Northcoast Research.

--------------------------------------------------------------------------------

Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [127]

--------------------------------------------------------------------------------

Yes. Just to all and a quick question before a financial question for Al. I saw, John, you opened, I think, 5 paint stores in the quarter versus 18 or so in the second quarter last year. Was Sherwin itself delayed by the weather in getting the stores opened?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [128]

--------------------------------------------------------------------------------

Well, we had some I'm sure, but we had some impact. I think our net stores...

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [129]

--------------------------------------------------------------------------------

Yes, that's a net store number, Chuck. For the 6 months, we've opened 29 new stores versus 33 last year. In that TAG number, we have some closures in Latin America. We did have some closures in North America, but this is a process that we go through every quarter, every year looking at stores and trying to refine the base to be more effective, both on the top line and our bottom line. So I wouldn't read into anything as far as net new stores, but we're still going to open 80 to 100 stores, and we may net a little bit below that.

--------------------------------------------------------------------------------

Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [130]

--------------------------------------------------------------------------------

Okay. And more importantly, looking -- Al, as you're paying down $600 million in debt, good free cash flow behind the company. With the stock price where it's at, do you lean towards paying down more debt than that? Or do you bite the bullet and end the year, as you usually like to say, without cash and buy back the stock?

--------------------------------------------------------------------------------

Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [131]

--------------------------------------------------------------------------------

Yes, Chuck. We're going to be consistent in that approach. We're not going to hold cash. And as -- like I said earlier, absent M&A, we believe our stock price is a good value, we'll continue to opportunistically buy it.

--------------------------------------------------------------------------------

Operator [132]

--------------------------------------------------------------------------------

Our final question comes from the line of Rosemarie Morbelli with G. Research.

--------------------------------------------------------------------------------

Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [133]

--------------------------------------------------------------------------------

I was wondering if you could give us a little more details on the Performance Coatings, the packaging side of it. Where do you see most of the growth? Is it on the food cans? Is it on the beverages? And considering that there was some kind of a secular decline in North America, where are you seeing the growth?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [134]

--------------------------------------------------------------------------------

Well, we're experiencing good growth across the market, Rosemarie. If you go back to the comments I made about the European, Asian and Latin America growth of packaging, it may vary a little bit in each of those segments. If you had to lean one way or the other, I'd say probably beverage is a little bit slightly higher than food, but we're, by market, focused on those areas with the greatest opportunity.

--------------------------------------------------------------------------------

Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [135]

--------------------------------------------------------------------------------

Okay. And then I was wondering, with the election of Johnson as the new Prime Minister in the U.K., is that going to end his expectations of getting out of Brexit regardless on how? Is that changing your U.K. strategy or European strategy, for that matter?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [136]

--------------------------------------------------------------------------------

Well, we've played a number of war games on this, as you would expect. From an inventory standpoint, we've built up, we've taken down, we built up and now, we've taken down again. We'll play this out business by business to understand the best approach. Our supply chain teams have really dialed into this as well as our procurement teams. So at the core of the question, I think you should know that we've looked at this a number of different ways, and we'll be responsive by business and with our vendors and suppliers to make sure that we're positioned properly in the market.

--------------------------------------------------------------------------------

Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [137]

--------------------------------------------------------------------------------

So you don't think it is going -- it could have a negative impact based on what you are doing?

--------------------------------------------------------------------------------

John G. Morikis, The Sherwin-Williams Company - Chairman & CEO [138]

--------------------------------------------------------------------------------

No. I don't think it'd be significant. But like you and everyone else, we're going to stay close to it and adjust accordingly.

--------------------------------------------------------------------------------

Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [139]

--------------------------------------------------------------------------------

And just lastly, if I may. If -- since you are out of the private label at Ace, my conclusion based on your comments would be that yes, it will have an impact on revenue -- on the revenue side in 2020, but we could see a higher margin just on that particular piece of the business. Am I correct?

--------------------------------------------------------------------------------

James R. Jaye, The Sherwin-Williams Company - SVP of IR & Corporate Communications [140]

--------------------------------------------------------------------------------

That's fair, Rosemarie.

--------------------------------------------------------------------------------

Operator [141]

--------------------------------------------------------------------------------

Thank you. We have reached the end of our question-and-answer session, so I'd like to pass the floor back over to Mr. Jaye for any additional concluding comments.

--------------------------------------------------------------------------------

James R. Jaye, The Sherwin-Williams Company - SVP of IR & Corporate Communications [142]

--------------------------------------------------------------------------------

Thank you, Jesse, and thanks, everybody, for participating in our call today. Appreciate your continued interest in Sherwin. I will be available for calls the rest of the week as will my colleague, Eric Swanson. Please contact Natalie Darr to get yourself in the queue. And thank you again. Have a great day.

--------------------------------------------------------------------------------

Operator [143]

--------------------------------------------------------------------------------

Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation, and you may disconnect your lines at this time.