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Edited Transcript of SHW earnings conference call or presentation 25-Oct-18 3:00pm GMT

Q3 2018 Sherwin-Williams Co Earnings Call

CLEVELAND Oct 30, 2018 (Thomson StreetEvents) -- Edited Transcript of Sherwin-Williams Co earnings conference call or presentation Thursday, October 25, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allen J. Mistysyn

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

* John G. Morikis

The Sherwin-Williams Company - Chairman of the Board, President & CEO

* Robert J. Wells

The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs

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Conference Call Participants

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* 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

* Dmitry Silversteyn

The Buckingham Research Group Incorporated - Director

* Donald David Carson

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Ghansham Panjabi

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

* Gregory Scott Melich

MoffettNathanson LLC - Partner

* 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

* John Patrick McNulty

BMO Capital Markets Equity Research - Analyst

* Justin A. Speer

Zelman & Associates LLC - MD of Research

* Matthew P. DeYoe

Vertical Research Partners, LLC - VP

* 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

* Nishu Sood

Deutsche Bank AG, Research Division - Director

* 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

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Good morning. Thank you for joining The Sherwin-Williams Company's review of third quarter 2018 results and expectations for the full fiscal year of 2018. With us on today's call are John Morikis, President and CEO; Al Mistysyn, CFO; Jane Cronin, Senior Vice President, Corporate Controller; and Bob Wells, Senior Vice President, Corporate Communications. (Operator Instructions)

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 November 14, 2018 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 earning 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 Bob Wells.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [2]

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Thanks, Jessie. All comparisons in my remarks are to the third quarter of 2017, unless otherwise stated.

Consolidated sales in the third quarter 2018 increased $224 million or 5% to $4.73 billion. Currency translation rate changes decreased net sales in U.S. dollars by 1.1% in the quarter, and revenue reclassification related to the newly adopted ASC 606, which reclassify certain advertising expenditures previously in SG&A as a reduction of revenue, decreased consolidated net sales approximately 0.8% in the quarter and 9 months. Consolidated gross profit dollars in the third quarter increased $109 million or 5.7% to $2.01 billion. Consolidated gross margin in the third quarter was 42.5% compared to 42.2% in the same period last year.

Selling, general and administrative expenses decreased $34.3 million or 2.6% to $1.27 billion in the third quarter and also decreased as a percent of sales to 26.9% from 29%. The revenue reclassification standard decreased consolidated SG&A by approximately $34 million in the quarter.

Interest expense for the quarter was $92.3 million. We also incurred a pretax charge related to the California public nuisance litigation of $136.3 million or 1/3 of the amount of the abatement fund, as recalculated by the trial court. I will provide an update on our Lead Pigment Litigation in a moment. Including the litigation charge, consolidated profit before tax in the third quarter decreased $11.8 million or 2.8% to $416 million.

Our effective income tax for the third quarter was 14.9%, well below our anticipated rate, due to the impact of share-based payments accounting standard, the litigation reserve and purchase accounting expense. Third quarter effective tax rate on adjusted income was 18.5%, and we now expect our full year 2018 effective tax rate on a comparable basis to be in the range of 19% to 20%.

Diluted net income per common share in the third quarter increased 11.7% to $3.72 per share from $3.33 per share. The current quarter includes charges of the California public nuisance litigation and acquisition-related costs of $1.09 and $0.87 per share, respectively. The prior year third quarter includes acquisition-related costs of $1.42 per share. Excluding these charges, adjusted diluted net income per common share increased 19.6% to $5.68 from $4.75.

We have summarized the third quarter earnings per share comparison in a Regulation G reconciliation table at the end of our third quarter 2018 press release.

Let me take a few moments to break down our performance by segment. Sales for The Americas Group in the third quarter increased $126.4 million or 5% to $2.67 billion. Currency translation decreased net sales in U.S. dollars by 1.4 percentage points in the quarter.

Comparable store sales in the U.S., Canada and the Caribbean, that is sales by stores opened more than 12 calendar months, increased 5.2% in the quarter. Sales growth was positive in all divisions in the quarter, led by Southeastern Division and followed in order by Southwest, Canada, Midwestern and Eastern divisions. Third quarter segment profit increased $52.2 million or 9.9% to $577.7 million. Currency translation decreased segment profit $7.5 million in the quarter. Third quarter segment operating margin was 21.7%, an improvement of 100 basis points over last year's level of 20.7%.

Turning now to the Consumer Brands Group. Third quarter external net sales increased $47.2 million or 6.5% to $770.5 million. The revenue reclassification standard reduced net sales by 4.7%. Segment profit for the Consumer Brands Group in the third quarter increased $13.5 million or 19.2% to $83.9 million. Segment profit for the quarter includes a $26 million charge for purchase accounting expense compared to $54.6 million last year and approximately $20 million in unanticipated supply chain costs required to keep pace with load-in of a new retail program while also supporting what is traditionally the peak architectural paint sales volume quarter in North America. Reported segment operating margin for the quarter increased to 10.9% from 9.7% last year.

For our Performance Coatings Group, third quarter net sales increased $52.2 million or 4.2% to $1.29 billion. Currency translation rate changes decreased net sales in U.S. dollars by 1.1 percentage points in the quarter. Segment profit for the Performance Coatings Group in the third quarter increased $45.3 million or 75.9% to $104.9 million. Currency translation decreased segment profit $3.3 million in the quarter. Segment profit for the quarter includes a $55.5 million charge for purchase accounting compared to $102 million last year. Reported segment operating margin for the quarter increased to 8.1% from 4.8% last year.

I'll conclude my remarks on the quarter with a brief update on the status of our Lead Pigment Litigation. On Monday, October 15, we were informed that the U.S. Supreme Court declined our petition for review. It is important to understand that this decision was not based on the merits of the case, and we will continue to press our federal constitutional rights in other lawsuits as we continue to believe the California decision is an aberration. The next steps in the California case will be for the trial court to appoint a receiver and enter a final judgment for the abatement fund. The court has set the amount of the abatement fund at $409 million. ConAgra and NL are also jointly and severally liable to pay that amount along with Sherwin-Williams. There was a hearing on Monday. We believe the judge will appoint a receiver shortly.

Recently, we learned that Lehigh and Montgomery counties in Pennsylvania have filed public nuisance lawsuits against the company and 4 other defendants. As we understand it, these counties were recruited by contingency fee attorneys who are actively recruiting other counties. Based upon what we have seen, these counties are not receiving complete or accurate information concerning the facts or the law. On Monday, Sherwin-Williams filed a federal declaratory judgment action in the Federal District Court for the Eastern District of Pennsylvania. This action specifically seeks to declare that the counties' contingency fee agreements with outside lawyers violate the due process clause and that the counties' claims violate the First Amendment and due process clause. We are seeking an injunction to stop Pennsylvania counties from bringing cases in violation of our constitutional rights.

That concludes our review of the operating results for the third quarter. So let me turn the call over to John Morikis, who will make some general comments and highlight our expectations for the remainder of 2018. John?

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

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Thank you, Bob. Good morning, everyone. Thanks for joining us. Before I comment on our third quarter results, let me briefly address the elephant in the room.

You've seen it in the business press over the past month or 2, an increasing number of stories suggesting that the peak of this economic expansion may be behind us. And it's not hard to find evidence in the form of economic data to support this thesis. We pay particularly close attention to the U.S. construction and remodeling markets, which have also shown signs of weakening. But whether or not an economic downturn actually materializes, we'll continue to focus our time and effort on moving with speed to improve aspects of our business that we control rather than worrying about things we don't.

Integrating Sherwin-Williams and Valspar into a leaner, faster-growing, more profitable enterprise while maintaining our momentum in The Americas Group remain our top priorities, and we continue to make solid progress. Our synergy targets for both 2018 and longer term remain on track. And while we still have work to do, each business in our portfolio is growing at or above the rate of their respective markets and implementing the steps necessary to improve profitability.

Despite this progress, third quarter results fell somewhat short of our expectations. Consolidated revenue growth of 6.9%, adjusted for the negative FX impact and revenue reclassification, slowed from the pace set in the second quarter, which appears to be symptomatic of the industry. Excluding all acquisition-related costs and purchase accounting, third quarter adjusted gross margin decreased 30 basis points sequentially and 130 basis points from the third quarter a year ago, which illustrates the fact that pricing continues to lag raw material inflation in some parts of the business. We incurred significant incremental supply chain costs in the quarter to support the load-in of a new customer program while also supporting what is traditionally our peak volume quarter. These unfavorable impacts reduced consolidated gross margin by 40 basis points but were offset by a lower-than-anticipated effective tax rate in the quarter. Adjusted diluted net income per share improved 20% in the quarter compared to last year, a respectable result in this environment. That said, our entire organization understands we still have work to do.

In The Americas Group, a slower pace of sales growth in some end markets, most notably DIY, and a stiffer currency headwind resulted in total segment revenue growth at the lower end of our expected range for the quarter. Once again, sales to residential repaint contractors in the U.S. and Canada grew at a double-digit pace. That's 18 of 20 quarters for those keeping track. Sales to property maintenance customers grew at a slightly faster rate in the third quarter compared to the second. In Protective & Marine Coatings, sales in the U.S. and Canada grew at a high single-digit pace, but this was slower than the double-digit growth we generated in the second quarter.

From a product line perspective, exterior paint and stain sales slowed meaningfully compared to second quarter, while interior paint and primer sales grew at a similar pace to last quarter. Sales in Latin America were down low double digits due entirely to unfavorable currency translation.

TAG segment operating margin expanded 100 basis points compared to the third quarter last year, reflecting our progress in implementing price increases to offset persistent and challenging raw material cost inflation and managing SG&A expense. Both gross margin and SG&A contributed to the improvement in segment operating margin. During the third quarter, we announced an additional price increase in the range of 4% to 6% to our U.S. and Canada customers, which took effect on October 1.

The group opened 21 net new stores in the quarter, bringing our year-to-date net store openings to 43 and our total store count at the end of the quarter to 4,663 in The Americas. We expect to open approximately 80 to 100 net new stores during the quarter.

Sales by our Consumer Brands Group grew 6.5% in the quarter, or 11.2%, if you adjust for the impact of the new revenue recognition standard. As Bob mentioned, our global supply chain, which is reported as part of the Consumer Brands segment, incurred approximately $20 million in incremental operating costs to support the strong load-in demand during what is typically our peak architectural paint sales quarter. These incremental costs were not included in our earnings outlook for the full year. Excluding the $20 million in incremental supply chain costs and $26 million in purchase accounting expense, Consumer Brands Group adjusted operating margin in the quarter was 16.9%. On a comparable basis, operating margin for this segment was 15.4% in the second quarter of this year and 17.3% in the third quarter a year ago.

Before moving on, I want to take a moment and express my deep personal thanks to the many members of our global supply chain team who supported our effort throughout the summer, often sacrificing evenings, weekends and vacation times with their families. Your dedication is inspiring and a great source of pride to all of us.

In the Performance Coatings Group, third quarter sales, reported operating profit and reporting operating margin all improved compared to the same period a year ago. The pace of sales growth slowed compared to recent quarters, as continued strength in our general industrial, packaging and coil divisions were partially offset by softer sales in our automotive refinished businesses, primarily in Latin America, and industrial wood business in China and Europe.

Excluding $55.4 million in purchase accounting expense, adjusted operating margin for the Performance Coatings Group was 12.4% in the quarter. On a comparable basis, adjusted segment operating margin was 14% in the second quarter of 2018 and 13% in the third quarter a year ago.

We were disappointed by the lack of sequential and year-over-year margin improvement in the quarter. While we have been aggressive in implementing price increases over the past year, raw material inflation has been unrelenting and accelerating. Over time, however, we remain confident in our ability to capture sufficient price to offset inflation.

Adjusted EBITDA, which excludes transaction and integration costs and the litigation accrual, increased 25% to $2.2 billion in the first 9 months compared to the same period last year. Year-to-date, adjusted EBITDA margin improved to 16.5% versus 16.1% last year.

Net operating cash year-to-date was $1.43 billion compared to $1.26 billion a year ago. Net operating cash in the first 9 months last year included a benefit of approximately $88 million from settlement of a Treasury lock hedge. On September 30, the company had $182 million of cash on hand that will be utilized to reduce debt and fund operations. During the quarter, we declared a dividend of $0.86 per share or $81 million in cash.

The balance sheet reflects total debt of approximately $9.7 billion. We intend to reduce our net debt-to-EBITDA ratio to approximately 3:1 by the end of 2018. Through 9 months, we reduced debt by $850 million and remain committed to a total of $1 billion in debt repayment by the end of this year.

Our capital expenditures year-to-date totaled $166.2 million, depreciation was $211.5 million and amortization of intangibles was $239 million. For the full year, we now expect capital expenditures to be approximately $265 million, which is about 1.5% of anticipated sales.

As we continue to invest in productivity improvements, systems and new stores, depreciation should be between $280 million to $290 million, and amortization will be about $320 million. In January, we committed to open-market purchases of company stock during the year at a level sufficient to offset dilution from options exercises. In the first 9 months, we purchased 925,000 shares at an average price of $398.20 per share. On September 30, we had remaining authorization to acquire approximately 10.7 million shares.

Let me turn to our outlook for the remainder of the year. For the fourth quarter, we anticipate our consolidated net sales will increase a mid-single-digit percentage compared to last year's fourth quarter. For the full year 2018, we expect our consolidated net sales will increase by a high teens percentage, including incremental Valspar sales of $1.85 billion for the first 5 months of 2018 compared to the full year 2017. Incremental supply chain costs incurred in the third quarter make it unlikely we will reach the higher end of the full year adjusted diluted net income per share range we provided last quarter. We are, therefore, narrowing our full year 2018 adjusted diluted net income per share, which excludes acquisition, litigation and environmental expense provisions, to be in the range of $19.05 to $19.20 per share, a 27% increase at the midpoint compared to the $15.07 on a comparable basis last year. We've included a Regulation G table with this morning's press release to reconcile adjusted diluted net income per share to GAAP amounts.

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

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Questions and Answers

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Operator [1]

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

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

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I see your SG&A expense was lower year-over-year. Is that a new trend for you? And how do you see that going forward?

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

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No, Jeff. I think the SG&A expense being down year-over-year is a function of tight management and control of SG&A across all the segments trying to offset the inflationary raw material environment. Also, you see the impact of synergies hitting that number. I would expect the fourth quarter to be down year-over-year as well.

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

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And then for my follow-up, after you made all of the adjustments to the Consumer Brands Group year-over-year, the extra costs that you bore, the margins were still lower, even though the sales were higher. Can you talk about what the dynamic is behind that?

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

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Yes, there's a couple of things. First, as we've talked about, as raw material costs had accelerated in the quarter, both in the third and in the second, we're chasing it with price. And we'll be out with price again in the coming quarters and in fourth quarter, first quarter to offset those. We also have the impact of the Lowe's program, as a reminder, that is depressing our margin year-over-year. And if you adjust for the $20 million that we called out in the service costs, the 16.9% operating margin is compared to 17.3%. I think if you back -- if you neutralize the impact of the Lowe's program, we'd probably be flat to up slightly.

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Operator [6]

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The next question is coming from the line of Stephen Byrne with Bank of America Merrill Lynch.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [7]

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So to what do you attribute the slower sales growth in the stores business? Was it in particular geographies that you saw a slowdown? Or was it weather-related? Or were -- what can you attribute it to? You mentioned lower exterior paints. Was that weather-related?

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

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Yes, Steve. I'd say the most significant factors were DIY sales, which slowed from a mid-single-digit to a low single-digit; and our Protective & Marine business, which slowed from a low double-digit pace in the second quarter to a high single-digit pace in the third quarter. From a product perspective, you mentioned our exterior results. Growth rates for our exterior paint and stain were both down significantly on a sequential basis. So we clearly felt the impact of some of the weather and storms.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [9]

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And within the Lowe's store paint aisle now, it's simpler than it used to be. But you still have Valspar Paint on one side, and you got Sherwin-Williams paint on the other side. What's your longer-term strategy there for establishing those 2 brands within the DIY and, to some extent, the do-it-for-me channel there? What -- which one is a higher value or a higher-quality product versus the other? Can you elaborate on that?

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

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I'd say, first and foremost, we're going to support our customer. And so our customers' decisions on placement of our brands and positioning is very important. To your point, it's been much simplified, and we don't believe having an HGTV by Sherwin and a Valspar in the store is confusing. We're going to have different qualities at different price points that are easy and simple for sales associates and customers to understand.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [11]

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I'd add to that, Steve, that the brand perceptions are different. The HGTV HOME appeals to the design audience, whereas Valspar has really been a workhorse brand, covering a pretty broad cross-section of the DIY market.

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [12]

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And the last thing I would add on to it, you mentioned right at the end of your question, Stephen, about the professional or the pro side. We do feel as though there's a terrific opportunity there, particularly with the Valspar brand, to attract the handyman and help our customer grow there as well.

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Operator [13]

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The next question is coming from the line of Christopher Parkinson with Crédit Suisse.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [14]

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Can you just talk a little bit more about your price efforts in Performance Coatings? And any end market mix effects that occur in the quarter? Just anything you could see to help us figure out this is evolving in the intermediate to long term would be helpful.

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [15]

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Yes, Chris. This is Al. I think we've been very successful in getting the price through in our Performance Coatings segment. And you saw that in our second quarter operating margin, which was flat over year. What the challenge was in our third quarter was we saw an acceleration of the raw materials and impacted Performance Coatings more. So we're out with more pricing to recover those margins, and we're confident we can get it. It's just timing and our ability to chase it. As far as mix of the business, I think, John, in his comments, highlighted auto refinish, in particular, Latin America, the Industrial Wood Coatings business in China related to the tariffs and the coil business. I don't think we're overly concerned with the overall mix. I think it's just the shorter-term headwinds are going to persist probably through the next quarter or 2.

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

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Yes. I think that's a great point, Chris. To Al's comments, we're having good success in implementing the pricing, and we expect that to continue. The problem has been that the baskets moved as we've gotten closer to bending that curve. Teams are committed to doing it. We're committing to do it. And in fact, we've got more pricing already scheduled to roll in. So if the basket continues to move, we'll continue to take the appropriate actions.

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

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Great. And just as a quick follow-up. Regarding the growth in The Americas, just to circle back there. There are obviously a lot of puts and takes regarding the U.S. housing market right now. But can you just comment on your own key drivers and what you see right now in the cycle that may differ from previous cycles and just how we can interpret that and how to affect your comps going forward?

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

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Chris, how about if I ask Bob to take a look at it from a market perspective, and then I'll break it down into the various segments that we participate in?

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [19]

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Yes. We -- as far as the market is concerned, we look at the same data you do. Construction activity has been slow over the last few quarters. We expect that will likely continue into 2019, while remodeling has really driven growth in the industry. There's a lot of speculation now that overall remodeling spend is going to moderate in 2019. And to put it in perspective, the moderation we're talking about is from a mid-7% growth rate to a mid-6%. So still solid growth. We are not seeing moderation in our residential repaint results. So it has -- certainly hasn't translated to our volumes yet. Keep in mind also that paint's a unique category. I know you know that. But it's a unique category amongst building materials because more than 80% of the industry is repaint, and the current strength in residential repaint appears to be driven by both baby boomers who are electing to age in place and millennials who are showing a strong appetite for home improvement. The last 2 points I'd add is, first, the deceleration in exterior residential repaint activity in 3Q, we think, likely translates to pent-up demand going forward. We'll either see that come out in the fourth quarter or 2019. And also, the effect of Hurricanes Florence and Michael on paint demand is still unknown. While they didn't do as much damage as the 2 storms the year before, there's likely still going to be a significant rebuild and recovery effort.

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

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And Chris, so when you look at that and how it impacts our business, first, we have terrific confidence, given our industry-leading positions in really all the contractor segments throughout our company store platforms. So we talk a lot about our residential repaint business. We now have 5 consecutive years of compounded double-digit growth. If you think about that momentum, we've just got great confidence that, that continues. In the new residential side, we've actually increased our exclusive agreements and now have an exclusive relationship with 17 of the top 20 national builders, having added one more last quarter. So we've got good momentum there. From a property management standpoint, we have an exclusive relationship with 17 of the top 20 management firms. And when you look at the commercial side, we have a leadership position there by a wide margin. And we're growing there as we further penetrate our color and our product specifications. And I bring all that up because when you back out our DIY and Protective & Marine business, and when you ask about what's happening in the market, if you just look at our contractor business in the third quarter, we grew our sales by around 7% or an incremental $150 million in the third quarter alone. So we're on track this year to grow our contractor business $0.5 billion this year. You combine that to last year, we've grown our contractor business $1 billion in the last 2 years. So it gives us a lot of confidence. And wherever the market's going to move, we're going to be there.

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Operator [21]

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The next question is coming from the line of Nishu Sood with Deutsche Bank.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [22]

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Just following up on that, on the architectural breakdown. Really appreciate your thoughts there. You mentioned that as you think about the potential shift in the market, as people are thinking about a slowdown, we're looking at the DIY segment in particular. The DIY slowdown through your Paint Stores Group, can you compare and contrast that for us, please, with the DIY business through the Consumer Brands Group? Because that has been running a little bit soft for some time now. So are DIY sales through the Paint Stores Group now catching down to what's going on in the Consumer Group? And so what does that tell you the kind of -- the looking -- comparing those 2, please?

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [23]

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Yes. So I'd say that when you look at the DIY-er in the Sherwin stores, I'd say it is a customer who's looking for a specialty store experience. I'd say, perhaps, what's most important to understand that is if there is a shift in the economy and homeowners become a bit more thrifty, if you will, there will be some customers who aspire to have that experience in a Sherwin store or more specialty store experience, and we'll be there to serve them. If it's a shift towards more of the home center customer, we have robust programs there in Lowe's and Menards, and we're excited to take advantage of those opportunities. And if it's a shift to a hardware store shopper, we have terrific relationships with the likes of Ace. So again, it comes back to this unparalleled market coverage that gives us this confidence. Wherever the growth is going to be, we're going to be there. If it's a residential repaint or a do-it-yourself-er, if it's a new residential or property management, we're playing every point of the game here.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [24]

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That last point I'd add, Nishu, is that I think you'd find, historically, our DIY business in our stores has been a little volatile. We'll have strong growth quarters followed by a weak quarter. And that's kind of how we read this quarter is. It's just normal volatility.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [25]

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Got it. Got it. Okay. And second question, on the load-in at Lowe's. The $0.16, I wanted to understand if that's a net figure. Does that just call out the supply chain impact? Or is that netting out the incremental revenue benefit and the profits from that?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [26]

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Yes, Chris, it just calls out the operating impacts -- operating cost impacts. The $0.40 impact that we talked about earlier this year is really unchanged. That'll continue to roll out similar to the schedule we said with -- we're open in our second quarter and then the rest in our third and fourth. Let me just explain the hit that we took, just so we're all clear. I mean, we took incremental people, service, freight to respond to the customer load-in timing. That pulled forward to our expectations during what we -- what is a traditionally really peak demand period. We need to be responsive as we can to changing customer needs and schedules. We would have -- we probably would not have incurred these costs or as much had the timing been later in the year. And just to be clear, it's not exclusive to Lowe's. I mean, we have one supply chain. So we incur these costs throughout the supply chain that really fits the needs of all our customers. If you look at the fourth quarter, we had a little bit of a hit in there related to continuing to optimize our supply chain. And as we get that supply chain optimized, you'll see our operating costs come back to normal -- more normal operating levels.

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Operator [27]

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The next question is coming from the line of Ghansham Panjabi with Baird.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [28]

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Can you first off touch on the level of comparative activity in North American paint, just given the sequential weakness in the market? One of your larger peers called out a high single-digit increase for their Professional Paint Stores based in -- store based in North America. You came at 5%. Do you think you underperform the market to some extent? Or is it maybe just a geographic mix differential?

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [29]

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No. I don't think we're underperforming the market at all, Ghansham. I'd say when you're growing $1 billion over a 2-year period, I mentioned the double-digit growth for 5 consecutive years in our residential repaint, and I'd also point out that we're really proud of the investments that we're making in our stores. We believe we're the only ones with net store increases in the market. So we're making, we believe, really good investments in new stores and territories. Over the last 3 years we've been averaging 175 reps per year, been introducing new products at the rate of between 20 and 25 new products per year. And we're enjoying the benefits of that. And we're continuing to work hard to make our customers more successful. So I've got great confidence in the momentum we have and more determination to only accelerate it.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [30]

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Got it. And then just switching over to Consumer Brands. As you sort of think about total system costs for the segment, the inflation you encounter with raw materials, freight, et cetera, in 2018, do you think you'll be able to offset -- basically be able to fully recoup these costs in 2019 for the segment, assuming cost basket doesn't change materially on a sequential basis?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [31]

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Yes. I think we have pricing going in as we speak. And yes, we expect, assuming that, like you said, the basket doesn't move again, we'd be able to offset the raw material costs.

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Operator [32]

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The next question is coming from the line of Arun Viswanathan with RBC Capital Markets.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [33]

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Just wanted to go back to, I guess, the growth in the quarter. In the past, I guess, you've seen some labor constraints. Was that an issue in Q3? Do you think that could linger? And then, I guess, the reason I'm asking is because you did make a comment that you think there's pent-up demand that could be satisfied. So how does that affect your comp, I guess, going forward?

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [34]

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Yes, Arun, I would say that we typically see labor constraints, particularly in the repaint market, in the third quarter. It is our customers' busiest quarter. If you look at where the storms affected business, those are predominantly warmer-weather markets where they can paint -- do exterior business later in the year. So whether or not that business is caught up this year is hard to determine, but if it's not, it's not likely due to labor constraints, because fourth quarter does not tend to be as constrained from a contractor capacity standpoint.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [35]

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Right. And then just on your comment about the overall kind of macro picture. Obviously hard to call. But where do you see gallons kind of ending up this year? And then where do you see that going over the next couple of years? I mean, what's kind of the peak you're still looking at? Or is it still in that 820 million to 840 million gallon range? And so that would kind of indicate like a low single-digit market growth going forward. And would that mean that you'd still be able to show growth in the kind of the 1.5x to 2x that range?

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [36]

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Yes. Based on our analysis of gallon growth by segment, it is hard to imagine that the U.S. market is growing faster than, say, 2.5%, 3% at the outside this year but is more likely in the 2% to 2.5% range. We do believe that we can continue to grow volume at that pace or stronger in the contractor market. As John indicated, in the third quarter, our contractor business was up 7%. That has a little bit of price in it, but it's much stronger than the 2.5% volume. In terms of where the market peaks out, we realize that we tend to talk about this theoretically, but from a theoretical standpoint, if you consider how much the repaint markets have grown over the last couple cycles, we could see an industry gallon number north of 900 million and would expect to see industry volume above 900 million, assuming no significant economic disruption.

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Operator [37]

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

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [38]

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I didn't hear if you guys mentioned the store addition count. It seems like maybe a little below historic levels. Was there any reason to scale back there? Or is it just the timing issue to getting those stores up and open this year?

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [39]

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Yes, Robert. We're on track to open between 90 and 100 new stores in the U.S. and Canada. Store openings in the U.S. and Canada year-to-date are actually up over last year's 54 versus 50 last year. The difference is, we've closed 11 stores in Latin America through the first 9 months of 2018. So we net out at 43 right now. But we're still on pace, a lot of momentum, a lot of confidence and a lot of excitement behind our initiatives there to continue to invest in stores.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [40]

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Got it. And John, there's -- one of your competitors, I guess, is under a little bit of pressure lately, and there were some comments from the investor that thought there's no synergies between architectural and industrial. I was wondering now that you've had Valspar in the fold for a while, if you could talk to maybe what some of those synergies are beyond just what's in an architectural vertical or an industry vertical? What would kind of overlap -- synergies are there throughout that portfolio?

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [41]

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Yes. Truthfully, Bob, if they don't recognize those, I don't know that I want to share ours. We see them. We're excited about them, but I'm fine with our taking different paths.

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Operator [42]

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Our next question is coming from the line of P.J. Juvekar with Citi.

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

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Can you expand on this incremental supply chain cost that you talked about? Is that related to personnel costs or trucking costs? And is that onetime? And the reason I'm asking is you own your own trucks, but there are many other industrial and retail companies that are complaining about higher logistical costs with trucking and fuel and all that. So I was just trying to wonder how much of that is onetime, how much of that could stay with us going forward?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [44]

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Yes, P.J. Clearly, there are incremental freight costs in the market, and we see that. But to your point, we see it on a less of an effect because majority of our volume is on our own trucks. That being said, through the quarter, we're running at capacity. And when you throw incremental volume into that mix, we end up running almost above capacity, and that's both on the manufacturing side and the distribution side. And my comment about the freight was more related to the supply chain optimization, where maybe we had to make a product on the East Coast and ship it to the Midwest or we had to make a product on the West Coast and ship it back because of those dynamics. We basically are pulling out all the stops to make sure our customers are served, which means we drove our inventory down a little bit also in the third quarter more than what you would see. But we're going to build inventory back more so than we have in the past in the fourth quarter and in the first quarter.

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [45]

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Yes. So the point Al made earlier about the optimization of the supply chain, the ability then to manufacture those products closer to the customer. As we further integrate in the facilities, we'll offset those. So we don't expect those to continue on.

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

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That's correct. It's a onetime event in our mind.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [47]

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And you also mentioned that raw materials accelerated during the quarter. Was there a LIFO impact in the quarter? And can you sort of quantify that?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [48]

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Yes, P.J. I won't quantify it, but on a relative basis, the raw material increase is the predominant part of our increase in costs.

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Operator [49]

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Our next question is coming from the line of Vincent Andrews with Morgan Stanley.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [50]

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Just want to clarify something. Are your expectations for sales growth -- same-store sales growth in The Americas Group for the fourth quarter, is your plan the same today as it was 3 months ago or something changed there?

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

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I would say, it's very similar because, Vincent, one of the things that I'll remind you is we had a very strong fourth quarter last year. Our comp store sales were up over 8%. And with the impact of -- really 2 price increases in October and November, our total sales were up for Paint Stores over 9 6. So yes, we expect it to be in the mid-single-digit range all year for Paint Stores.

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [52]

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In October last year, Vincent, stores was up 11% last year, and we're on top of that this year. So we're feeling good about the momentum that we have there as well.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [53]

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Okay, excellent. And just as a follow-up then. I'm just thinking about, you had a big tax benefit now in the guidance that seems to be maybe $0.50 to $0.60-plus. So what are the buckets of the other things? I know you have the $0.16 in Lowe's, but what are the other issues that are sort of taking that underlying guidance number down?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [54]

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Let me -- the tax rate just is part of a program. And I talked about this in the second quarter. And we're going to continue to look for opportunities to reduce our tax rate. The reason you take the high range -- high end of the range down is the $0.16, plus we had -- we would have missed our sales number in the third quarter as well that we don't believe we'll be able to make up in the fourth quarter.

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Operator [55]

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The next question is coming from the line of Don Carson with Susquehanna Financial.

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Donald David Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [56]

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On raw materials, what's your current outlook for the full year? And if we stay at current level, particularly in oil prices, what would be your preliminary outlook for raw materials in 2019?

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [57]

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Well, Don, the -- as we mentioned, the impact in third quarter, the inflation ran higher than we expected coming into the quarter. We put industry average cost for our basket in the third quarter up 7-plus percent. So that represents about a 100 to 150 basis point sequentially increase from second quarter. Most of the inflation was driven, to your point, by rising crude oil and propylene and a continued tight monomer market. So it's not just inputs, it's supply as well, and that disproportionately affected our Performance Coatings business. Titanium dioxide pricing was relatively stable during the quarter. We -- that alone would put us at or maybe above the top end of our previous range. We initially talked about 4 to 6, then we kind of zeroed in on the top end of that range at 6%. It's possible we could finish the year above 6%, in the 6-point-something range. But clearly, second quarter and third quarter have both been unfavorable surprises to us.

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Donald David Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [58]

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And a follow-up on Paint Stores Group. That 5.2% same-store sales growth year-over-year, what was the price volume breakout? And when -- how should we think of this 4% to 6% increase layering in between Q4 and into 2019?

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [59]

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Don, price/mix was about 2.5% in the quarter comparable to the second quarter. And the second part of your question was...

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

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On the price increase, Don, so far -- and I know it's been short time here, but we're seeing the price effectiveness similar to what we've seen previously. And we would expect that roll-in to be similar to the past, about 75% over that 9-month period.

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Operator [61]

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Our next question is coming from the line of Kevin McCarthy with Vertical Research Partners.

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Matthew P. DeYoe, Vertical Research Partners, LLC - VP [62]

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It's Matt DeYoe on for Kevin. So just looking at the Lyra data and trying to reconcile that with existing home sales, is it possible that Lyra remains elevated as contractors work through the backlog that was created due to labor shortages and just something else? And do you expect the trends to sync up with the existing home sales over time?

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [63]

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Yes, good question because, I mean, we've been pondering the same question internally. What it appears to us now is that the offset to slower existing home turnover in the remodel market has been stay-in-place remodeling by -- primarily by baby boomers. And baby boomers are significantly outspending all other generations of homeowners, outspending millennials by a rate of about 32%. And so this was -- this is a driver that we didn't anticipate at this stage in the cycle. We thought we'd be seeing higher existing home turnover, and that, that would be driving remodeling. But the decision to age in place, at least at this point in time, by baby boomers and remodel the family home rather than sell it is what appears to be driving the market. The good news there is that the millennials, who are now coming into homeownership, are also showing a real appetite for home improvement. On a per-household basis, they're doing like 42% more projects than the baby boomers. So at this point in time, baby boomers are outspending everybody else, but as the millennial homeownership grows, that's going to be kind of the second leg to this remodeling market.

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Matthew P. DeYoe, Vertical Research Partners, LLC - VP [64]

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Okay. And I might have missed it, but did you quantify the synergy capture during the quarter for Valspar and kind of where we are cumulatively?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [65]

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No. We didn't quantify it, Matt. But we're on track to hit the $140 million to $160 million through the P&L that we talked about earlier. If you look at that over a 2-year period, we had seen the $60 million last year, we're on track for the $150 million midpoint this year. So we're at 210, and we still believe we'll come out of this year with a run rate of 320. And we're on pace to hit our longer-term targets of 400 to 415. So we have upside there and room to run.

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Operator [66]

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Our next question is coming from the line of John Roberts with UBS. We'll move on to our next question, which is coming from the line of John McNulty with BMO Capital Markets.

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John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [67]

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I guess, the first one would be around the pricing impact in performance. Have you seen any issues in terms of share loss because of the pricing that you're putting through? I guess, how should we think about that? And maybe some of the volume trends that you've been seeing more recently there.

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [68]

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We have not. We've been working with our customers. We've taken some of that margin compression as part of our strategy to work through the pricing and retain the customers, and we've not lost customers.

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John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [69]

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Great. And then just one question. With unemployment rates kind of at record lows here, and you have a huge number of stores and a lot of people working at them, I guess, how are you dealing with the inflationary pressures in terms of on the labor side for you? And I guess, how should we be thinking about that going forward if it pushes up or if it's kind of manageable at this point?

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [70]

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I'd say it's manageable. It might be slightly up over previous year, but nothing meaningful. I mean, we're working with our employees, and we're really working hard to create the right environment where people want to stay. So we're addressing where we need to, but I don't think it's anything that you need to be concerned with.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [71]

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And part of the magic there is that the full-time employee, the manager and assistant manager in our stores are on incentive comp. So they improve their wages by improving their volumes.

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Operator [72]

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The next question is coming from the line of Scott Mushkin with Wolfe Research.

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

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So I know this is maybe a funny question, but I'm trying to see like -- I'm on your website. It looks like the Emerald paint kind of top end is $92.99 to $94.99 on a list price basis. But what I'm trying to actually get is if I went back, when you started the first kind of price increases, where that would be? And then next year, as you roll through more price increases, where does that go? If you could kind of frame it for me.

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

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Yes, Scott. I wouldn't have that information off the top of my head on that particular product. But maybe where I can go is this, that our focus on our contractors is really to make them more productive and more profitable. And when you think about the average project costing anywhere from 85% to 90% labor of that total cost, the total cost of raw -- of product is a relatively small percentage. And what we focus on is making them more productive and more profitable. So the cost per gallon, if it allows them overall to be more efficient and profitable on a project is less and less of an issue.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [75]

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So I mean -- but -- I mean, I get that. I mean, the paint is really a fraction. Of course, labor costs are up as well. But I guess, what I'm going -- I mean, are you seeing any trade down? Is there any -- has there been any indication, because I think prices are up quite a bit at this stage. I guess, is there any indication of a market -- it doesn't have to have -- I was using residential paint as an example, of a market that is starting to balk and may balk into next year at the heavy increase in prices?

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [76]

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Yes. Scott, if there's a shift, it's a shift up in quality. So you got to remember, many of these customers are hiring tradesmen who are maybe less experienced and, perhaps, slightly less skilled. And so the quality of the product helps them get off the project quicker and more efficiently. So we are seeing the shift, but it's actually up, not down.

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Operator [77]

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Our next question is coming from the line of John Roberts with UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [78]

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You usually have a pipeline of smaller acquisition targets that you stay in touch with. Are the smaller firms recovering yet, so that maybe the bid ask expectations are closing? Or are these smaller firms lagging, so they're still not ready to sell until their earnings start recovering?

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [79]

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Yes, I'd say, it's a mixed bag, John. I mean, you find -- most of -- much of that has to do with geographic with the segments that they're in. Some are experiencing raw material pressure, and that's having an impact. So I mean, it's a mixed bag.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [80]

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Okay. And then as we get closer to year-end now, are you still planning to keep adjusting for acquisition costs indefinitely? Or you plan to, at some point, stop adjusting for acquisition costs?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [81]

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Yes. John, I think what you'll see is we will have additional acquisition and integration costs through next year. We'll give you an update as we have this year on our year-end call. I wouldn't imagine much after '19 that we'd be calling it out because I would expect them to decrease significantly.

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Operator [82]

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The next question is coming from the line of Duffy Fischer with Barclays.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [83]

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Question around the Huarun business. With the little wobble in China, how is that business holding together? And with that view you have of China, what are the insights you can share with us how you think China is doing internally?

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [84]

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Well, from an architectural Huarun standpoint, let's say -- well, we don't break those out. But I would say, all 3 of our businesses, if you look at Europe, Asia and Australia, are up year-over-year, year-to-date. So I'd say there's an architectural component. There's also a wood component piece. And as we've talked, the industrial wood business in China has had some headwinds. The -- we have furniture customers who are feeling the impact or appear to be feeling the impact of the tariffs, shipping products back here into the U.S. And some of those customers are actually looking at shifting manufacturing out of China into the region. So the 2 components of Huarun on the architectural side year-to-date up, and the Huarun industrial wood experiencing some pressure as our wood customers are facing tariffs.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [85]

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Okay. And then you called out a divergence between exterior and interior paint. I think that's the second time in maybe the last 6 or 7 quarters that we've heard commentary like that. I don't recall that historically. Is there something changing in the business, do you think, where there's more volatility between interior volumes and exterior volumes that we should think about going forward?

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [86]

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No. I'd say that, at least in our model and the way that we work with our customers, Duffy, we're unlikely to lose one side of our customers' business. If we experience something like that, it's typically weather-related. So if our customers are coming in our stores every day, buying product and they see a shift in their end markets, we're very focused on keeping those customers. We're likely to feel that with them.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [87]

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And to add to that. I don't mean to be coy, but if you look at the geographic mix in our stores business and where we've seen the strongest growth over the last 5 years, there's definitely been a shift to the southeast and southwest. Hurricanes don't hit North Dakota. So when you have hurricane effect, it's going to have a larger effect on our business because our business is more heavily skewed toward the south.

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Operator [88]

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The next question is coming from the line of Justin Speer with Zelman & Associates.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [89]

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I just want to unpack that weather drag a little more with you, if you can help us think through that progression of interior versus exterior. How big is exterior? Maybe help us understand. We know that weather was really tough in September, particularly in terms of wet conditions and flooding conditions in parts of the Mid-Atlantic. Maybe help us unpack how much of the growth was impacted by that. And what's the mix impact of margins there?

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [90]

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Yes, Justin. On -- just from a market standpoint, I would tell you that exterior is about 1/3 of the industry in volume; interior is about 2/3. Obviously, that mix changes when you get into the second and third quarter, the warm weather months. The mix is heavier toward exterior. Our business would skew more toward exterior than the industry from a margin standpoint.

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [91]

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Yes. We -- Justin, we don't typically talk about margin by product segment, and we don't want to start doing that today.

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [92]

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Yes, it is fair to say that the exterior is a little more profitable than the interior. That's fair to say.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [93]

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And in terms of the wood, coil coatings comments in terms of tariffs that may linger, you say, I guess, help us think about the potential revenue implications to the performance coating segment from that. And how that interplays with the revenue synergy opportunity that you guys see intermediate term in terms of the growth potential of that segment overall?

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [94]

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Yes. I'd say it's -- to compare those, it's shorter term. We are working with our customers through that. And to your point about the sales synergy side, we're very excited. That's really starting to ramp up, and that's going to play long term and be very beneficial to our company and to our shareholders. So we'll work through the short-term side, and we're really, really excited about what we're learning on the sales synergy side.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [95]

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Okay. Last question for me is just thinking about what you're seeing on costs across the portfolio, not just the entire portfolio, not just TAG, but everything. Assuming any deceleration, not a recession, but a deceleration scenario in growth in the coming years, does that dent your confidence in achieving the midpoint or the high end of your intermediate-term margin objectives?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [96]

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Justin, we talked about -- yes, volume drives leverage through our organization. And without that volume, it would be more difficult to get to the midpoint. But I don't think we're ready to give up on that yet. We have a lot of opportunity, as John talked about, in TAG. We have great opportunities with the consumer in those customers and Performance Coatings, like we just talked about. So we have a lot of opportunities for market share growth as well in the different segments and geographies we play in.

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [97]

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Yes. And I'd say that's what's so unique about our model, Justin. As you reflect back on my earlier comments about if it's residential repaint or new residential or property management, we have the unique ability to be responsive to the market and be where the business is. Same with the industrial side. So we've got a lot of confidence in our ability to drive it and a lot of determination to do that.

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Operator [98]

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The next question is coming from the line of Greg Melich with MoffettNathanson.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [99]

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A couple of questions. One, on the tax rate, Al, is what should we be using for the -- a normal tax rate knowing that you're always trying to have it be as low as possible? But is a low 20s number still a good number as we model out the out years?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [100]

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Yes, I think that's reasonable. I think what the variability you get is based on share-based payments, the timing of those that reduce our effective tax rate. I think we'll have discrete items. I think we'll have consistent opportunities to consolidate legal -- foreign legal entities, especially with the larger number that we have with Valspar. And I think, it's -- like I said, it's a program, I think, we'll be able to sustain that low 20%.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [101]

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Well, but something over 20%. Like this year, it sounds like it was extra good. Is that fair?

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

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That's fair.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [103]

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Okay. And then back to the business. It was -- it's helpful to have the price/mix volume equation for The Americas Group. Do we have that for Performance Coatings as well, sort of what mix price we're getting versus volume in the top line?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [104]

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Yes, we typically don't call that out because of the mix and you have 7 different businesses in there, and trying to figure out the mix volume. What I would say related to that is our FX was a bigger headwind in the quarter, and our pricing was a little bit short of where you would see TAG at.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [105]

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Got it. And in terms of flowing price in Performance Coatings, I mean, that is -- we would expect that to take longer and just generally harder to get. Is that fair? Or any way you could sort of frame how we should expect flowing the raw materials in over the next few quarters in performance side?

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

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Yes, I'd say it's fair, but I'd also say we've got pricing that's continuing to roll in as well. So the pricing that's rolling in this week was negotiated, perhaps, months ago. So we've got a steady stream of increases that are coming as well.

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [107]

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Yes. We have talked about there being a 6- to 9-month lag. And as we roll these in, it's sometimes hard to see them, but they are rolling in, and they will continue.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [108]

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Got it. And then a last one just on the balance sheet is, as the cash keeps falling in and you're paying that debt down, I guess, $1 billion a year, where do you want the business to settle before you may actually go back to larger buybacks? Is it this 2.5x leverage, 2x? Where is the right number right now, especially given the credit markets and rate environment?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [109]

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I think -- I would say, in 2019, we're going to get back to our historical capital allocation. We do not need to be at 2.5:1, I would say, especially with how we view the stock as being undervalued. We have talked about opportunistically buying our stock, and we will do that.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [110]

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So it's getting under 3 is the key at this point?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [111]

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I think if I have a view of getting under 3 over the next year, I don't have a problem with that.

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Operator [112]

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Our next question is coming from the line of Chuck Cerankosky with Northcoast Research.

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Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [113]

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I got a question about Consumer Brands. Year-to-date, the margin's down, but in the quarter, it was up despite the load-in costs for Lowe's. Can you talk about that a little bit, please?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [114]

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Chuck, they can -- as we've talked about, the Consumer Brands has -- they will continue to chase price. They saw an incremental increase in the third quarter. And the other part of that is our global supply chain, as you called out, the impact that had in our third quarter. I think as we roll out into '19, as the pricing impacts take effect, we optimize the supply chain, I feel very good about our opportunities in '19 to grow that operating margin.

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Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [115]

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So you look at what's happened year-to-date where it's down, the third quarter is indicative of where it can go if you add back the Lowe's impact. Is that a good way to think about it?

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

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I think that's a fair way to think about it.

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Charles Edward Cerankosky, Northcoast Research Partners, LLC - MD of Research, Equity Research Analyst & Principal [117]

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Okay. And then, any -- going to the Lead Pigment Litigation in California, is there any insurance offset you can talk about there?

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [118]

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We don't talk about insurance coverage, Chuck. It's just -- there's no margin in it for us to discuss insurance coverage publicly.

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Operator [119]

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The next question is from the line of Mike Sison with KeyBanc Capital Markets.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [120]

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The first 9 months of the year, you provided us adjusted EBITDA of $2.2 billion. And given a lot of the uncertainty out there, can you give us a range for what you think EBITDA will be for the full year to see what the operating, let's say, variability for the fourth quarter will be?

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

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Mike, I think based on where we called out the tax rate and where the EPS is, I think -- and where the acquisition-related and purchase accounting is, I think you can kind of get a range based on the $19.05 to $19.20.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [122]

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Got it. So just follow up quickly on Performance Coatings, year-to-date margins, 9%. Are you happy with those results? And just curious, given Valspar had higher margins for that type of business, where you think that could latch to by 2020?

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

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Yes. I guess, I would look at the adjusted margin after -- if you exclude the purchase accounting, we'd be at 12.9%. No, we're not happy with that.

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [124]

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No, we're not happy with that.

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

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And I think what we've talked about, we have a lot of confidence of driving that operating margin to where we talked about, high teens to low 20s. But it's going to come with additional pricing that comes in, revenue synergies. And we still have additional opportunities for integration synergies.

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Operator [126]

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The next question is coming from the line of Dmitry Silversteyn with Buckingham Research Group.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [127]

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A couple of questions. A lot have been answered. But I just want to make sure I understand the comment on the share repurchases. Given where the stock is today and given your 10 million-plus shares under authorization still remaining, can we expect you to be a little bit more aggressive over the next several months with share repurchases?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [128]

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Here's how I'd frame that. We -- on our call at the end of the year, we said we'd offset dilution with share buybacks. We have better working capital performance. Our CapEx is a little bit lower than where we thought. And so the $1.4 billion net operating cash that were generated through 9 months is ahead of where we expect it to be. So year-to-date, we've returned $600 million to their shareholders in dividends and buybacks, while being able to pay down the $850 million. We're going to pay off the remaining $150 million to get to $1 billion debt repayments that we committed to. Any free cash after that is going to go to debt buybacks, excluding any M&A.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [129]

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Okay, that's very helpful. And then just touching -- kind of returning to the unpleasant topic of lead litigation. It sounds like things are getting maybe a little bit less rosy, if they were ever rosy. The Pennsylvania lawsuits, whether or not you're successful in stemming the flow, is it possible that you marched with these litigations through the states from east to west? Is it possible that, that some of these states will come back and revisit what California has done? And can we open up a whole new Pandora's box here going forward? Just how do we gain confidence or at least some sort of peace of mind about what this can be for you 2 years out, let's say?

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [130]

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Yes, Dmitry. Let me preface these remarks by saying we can't predict what any jurisdiction is going to do. We can't predict lawsuits that are going to be filed. I will tell you, we've successfully defended public nuisance in 7 states. And in our mind, those states have fully litigated that issue. So whether or not they can figure out a way to bring it back, I don't know. But whether or not they'd want to is the big question. As a reminder, this California case, while it's not turning out in our favor, it's an 18-year-old case. And so any jurisdiction that is considering a lawsuit has to know that they are signing up for a long-term legal battle. And the question is, does the outcome in California make us any more willing to make these cases go away faster? The answer is no. We are going to grind it out, and we want -- just want any potential litigant to know that's what they're in for.

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Operator [131]

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The next question is coming from the line of Mike Harrison with Seaport Global Securities.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [132]

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Wondering, you mentioned the volatility that you guys can sometimes see in DIY traffic at European stores or DIY sales at your Paint Stores. Is that occasionally impacted by advertising spend? And can you maybe give us some comments on what your advertising spending rates, kind of how those have trended during the course of this paint season?

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [133]

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They've been consistent spending-wise, and I would say that we've not necessarily seen the correlation that you might jump to with the decline or softness, if you will. That wasn't decline, but a softer DIY side.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [134]

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All right. And then, I've got to ask this question. You've got a major competitor with an investor suggesting that they should break up. If that happens, are there pieces that Sherwin-Williams would be interested in?

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [135]

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No, we wouldn't want to speculate on that. Whatever happens in the market happens, and we'll deal with it accordingly.

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Operator [136]

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The next question is coming from the line of Rosemarie Morbelli with Gabelli & Co.

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

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Looking -- still beating the California issue to death, did you take the full amount related to your share? Or is there more to come?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [138]

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Yes, Rosemarie, we took the 1/3 of the $409 million judgment. So we only took our share. We took our share -- full share.

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

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But the entire share? I mean, we should not expect that there is more to come in that particular litigation?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [140]

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The only thing would change is if the judgment changes.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [141]

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Okay. And then looking at synergies potential. After 1 year of Valspar ownership, do you see more opportunities by consolidating more plans versus what you have done currently? Or are you still in the process of studying it?

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Allen J. Mistysyn, The Sherwin-Williams Company - Senior VP of Finance & CFO [142]

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Yes. I think -- like I commented before, I think coming out of '18, we'll be at that run rate synergy of $320 million. And we have more to go to get to the $400 million to $415 million. I would say, we're still studying opportunities across all of our segments and all of our regions. And yes, I would expect to find more opportunities in those.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [143]

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Okay. And then lastly, are you equipped to supply your customers if they move their manufacturing operations, particularly for wood, out of China or coil, for that matter?

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John G. Morikis, The Sherwin-Williams Company - Chairman of the Board, President & CEO [144]

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Yes. We're positioned very well in the region. So where they need us, we'll be there.

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Operator [145]

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It appears we have no additional questions at this time. So I'd like to pass the floor back over to Mr. Wells for any additional, concluding comments.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [146]

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Yes, thank you, Jessie. Let me close by thanking you all for participating in our third quarter call this morning. As usual, Jim, Jay and I will be available today, tomorrow and throughout next week to answering your remaining questions you might have. So thanks again for joining us, and thanks for your continued interest in Sherwin-Williams.

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Operator [147]

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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.