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Sherwin-Williams Inc. (NYSE: SHW) Third Quarter 2021 Earnings Conference Call, October 26, 2021, 11:00 AM Eastern Time

Good morning. Thank you for joining Sherwin-Williams in its review of the third quarter of 2021 and our outlook for the fourth quarter and full year of 2021. Joining us in today's conference call are Chairman, President and CEO John Morikis; Al Mistysyn, Chief Financial Officer; Jane Cronin, Senior Vice President, Corporate Finance Director; and Jim Jaye, Senior Vice President of Investor Relations and Communications. This conference call was simultaneously webcast on www.sherwin.com by Issuer Direct via the Internet in a listen-only mode. An archived replay of the webcast will be available on www.sherwin.com approximately two hours after the end of the conference call. This conference call will include certain forward-looking statements regarding sales, earnings, and other matters as defined by the US Federal Securities Law. Any forward-looking statements are only issued on the date of making such statements, and the company does not undertake to update or revise any forward-looking statements, whether due to new information, future events or other reasons. The full statement regarding forward-looking statements was provided in the company’s earnings announcement earlier this morning. After the company has prepared comments, we will start asking questions.

I will now forward the call to Jim Jaye.

James R. Jaye - Senior Vice President of Investor Relations and Corporate Communications

Thank you. Good morning everybody. Sherwin-Williams remained focused on solving customer challenges in the third quarter, dealing with rising costs through pricing, and investing in future growth in a difficult and highly fluid environment that affects the entire coatings industry. The overall demand remained strong, but raw material inflation continued to remain high, and the supply of raw materials failed to improve. Although these situations pose challenges to our quarterly performance, we continue to strengthen our relationships with customers and take actions to lay a solid foundation for our long-term positioning. We are full of confidence in the prospects of demand, and more confident in our strategy, our employees and our position in the market. Let me briefly summarize the quarterly figures. Unless otherwise stated, all comparisons in the comments we prepared this morning are for the third quarter of 2020. Start from the top line. Consolidated sales in the third quarter of 2021 increased by 0.5% to US$5.15 billion. The supply of raw materials has an estimated high single-digit negative impact on sales, of which the American Group accounts for about 75%. The remaining impact mainly occurred in the consumer brand group, while the impact on the high-performance coatings group was not significant. The consolidated gross profit margin decreased by 630 basis points to 41.6% due to lower sales volume, raw material cost inflation exceeding our recent price increases, and supply chain inefficiencies. SG&A expenses decreased by 2.7% in U.S. dollars, and the percentage of sales decreased by 90 basis points to 26.6%. Consolidated profit before tax decreased by US$264.1 million, or 30.2%, to US$611.5 million.

The third quarters of 2021 and 2020 include USD 70.3 million and USD 76.4 million of acquisition-related depreciation and amortization expenses, respectively. Excluding these items, consolidated pre-tax profit fell by 28.4% to US$681.8 million. Diluted net earnings per share for the quarter fell to US$1.88 per share from US$2.55 per share a year ago. Both 2021 and the third quarter of 2020 include acquisition-related depreciation and amortization expenses, both at US$0.21 per share. Excluding these items, adjusted diluted earnings per share in the third quarter fell 24.3% from US$2.76 per share to US$2.09 per share. EBITDA for the quarter was US$834.2 million, accounting for 16.2% of sales. In the first nine months of 2021, net operating cash increased to US$2.1 billion, accounting for 13.5% of sales. Continue our operations department. Despite strong demand, the Americas Group’s sales fell by 0.4% because sales volume and mid-single-digit price increases could not fully offset the decline in raw material supply. The segment profit margin fell by 3.8 percentage points to 21.3%, mainly due to the decline in sales volume and the increase in raw material costs, which were partially offset by the increase in selling prices. As we continue to invest in strategic growth plans, the SG&A division in USD terms and its percentage of sales remained basically the same year-on-year. Compared with a very strong comparison a year ago, the sales of the consumer brand group fell by 22.8%. The reduction includes approximately five percentage points related to the Wattyl divestiture, lower sales volume and the negative impact of raw material supply, partially offset by higher selling prices.

The adjusted segment profit margin fell by 11.7% to 14.7% of sales, mainly due to the decline in sales volume, inefficiency of raw materials and supply chain, which was partially offset by rising sales prices and good sales and marketing cost control. Driven by sales volume, price increases and favorable currency exchange, the performance of the High Performance Coatings Group's sales increased by 17.4%. The adjusted segment profit margin fell by 5.5 percentage points to 10.5% of sales. This was because higher sales volume, rising selling prices, and good cost control were offset by higher raw material costs. Inflation was the company’s third The highest among operating segments. Now let me forward the call to John Morikis to get more comments on the third quarter and year-to-date, as well as our guidance for the fourth quarter and full year of 2021. John?

John G. Morikis - Chairman, President and Chief Executive Officer

Thank you, Jim, and good morning everyone. Let me start by reiterating the themes we provided on the September 29 update conference call. First of all, the demand environment in our professional construction and industrial end markets remains strong. Many external indicators, and more importantly our customers, are still very positive. Demand is not a problem. Secondly, we are ready to meet this demand. We continue to invest in growth plans. We have a large amount of available production capacity today, and we will add 50 million gallons of incremental construction production capacity in the next two quarters. Our ability is not a problem. The issues that affected us in the third quarter and persisted in October were still raw material supply restrictions and inflation throughout the industry. Let me know very well how we responded. No one has more assets and capabilities than Xuanwei. We are using all of these to make our customers better than our competitors in paint and work. We will continue to focus on customer solutions. We are actively responding to raw material inflation and taking major pricing measures in each of our businesses.

We have implemented multiple price increases this quarter. We will continue to do so when necessary. We will continue to work closely with our suppliers to develop solutions to improve availability as early as possible. At the same time, we are exploring various ways to better control our own future destiny, including our recent announcement of the acquisition of Specialty Polymers, Inc. Our team has no shortage of confidence, they are experienced and experienced. I am deeply grateful to all the 61,000 members of our global family. We fully expect that we can stand out from these current challenges, become a stronger company, have stronger customer relationships, and continue to create strong value for our shareholders. Later, I will add some color to Jim's third quarter performance summary. But first, I want to comment on our results so far this year. Although the incident was largely beyond our control, it forced us to adjust our expectations, but we still performed well. Year-to-date consolidated sales in 2021 increased by 9.4%, or US$1.31 billion. Despite high youth raw material inflation, adjusted PBT increased by 1.5%, or $33.1 million, and adjusted diluted net income per share increased by 4.8% to $6.80 per share. Adjusted EBITDA was US$2.73 billion, accounting for 18% of consolidated sales. Even in this unusual environment, we continue to invest to promote our long-term development momentum. We believe that as availability and inflation headwinds finally fade, we will see a significant expansion in profit margins. Now back to the market segment performance in the third quarter. In the Americas Group, raw material supply challenges have severely dragged down sales.

The good news is that potential demand remains solid and the reported backlog of orders is strong. We expect the growth rate to increase significantly, commensurate with the improvement in the industry's supply chain. The sales growth in the third quarter was led by Protective & Marine, with an increase of up to single digits. We see good demand for this business from customers in the oil and gas, flooring and seal manufacturing markets. TAG's largest business, residential repainting, has grown by a low single-digit percentage compared to a strong double-digit comparison. With the resolution of the industry's supply chain issues, we expect the business to return to the previous level of growth, and we have achieved double-digit growth in the past five years. Sales of new homes increased by a low single-digit percentage. Since last summer, new housing permits and start-up trends have been good, and our customers have reported a steady order rate. Due to the short supply of various building materials other than coatings, we have seen many projects being launched. Property management increased slightly this quarter. Improving apartment turnover and returning to travel, workplaces and schools are favorable factors, and when the supply of raw materials improves, it should support higher growth. Our commercial business declined slightly during the quarter.

Similar to new houses, it will take longer for the project to enter the painting stage due to the shortage of various building materials. Finally, as expected, our DIY business dropped by double digits compared to extremely difficult comparisons, and the problem of raw material supply exacerbated the situation. From the product point of view, the sales performance of interior wall paint is better than that of exterior wall, and interior wall is a larger part of it. Due to the price increase on February 1st and August 1st and the surcharge in mid-September, we achieved a mid-single-digit price increase in the third quarter. We expect that the combination of these pricing actions will result in a high single-digit percentage of prices in the fourth quarter, enabling our full-year price of TAG to be in the single-digit median range. We will continue to evaluate other pricing measures as needed. So far this year, we have opened a net 50 new stores. In addition to these new stores, we continue to invest in sales representatives, management trainees, innovative products, e-commerce, and productivity-enhancing services. In these growth plans, we have not given up. Go to our consumer brand group. Sales fell by double digits due to difficulties compared with the previous year, consumers returning to the workplace, raw material supply issues, and the divestiture of Wattyl's business. Overall, compared with 2020, DIY demand continues to slow to a more normal level.

This was partially offset by the growth of professional paint professionals in North America, which saw strong double-digit growth in this quarter and year-to-date. Although sales in all regions are declining, compared to Europe and Asia, sales in North America, our largest region, have been less affected, while COVID restrictions in Europe and Asia have a greater impact. Pricing for the quarter was positive, but below the level of the American Group. As you know, our global supply chain organization is managed within this department. The team continues to work with suppliers to deal with industry-wide raw material supply chain disruptions caused by winter storm Uri and Hurricane Ida. We are always ready to have sufficient production capacity. With the increase in the availability of raw materials, we are adding more production capacity to serve customers at a higher level. Finally, let me comment on the third quarter trends of Performance Coatings Group. We continue to see momentum because this is the fifth consecutive quarter of growth in the business. Group sales during the quarter increased by more than 17%, including a 2% currency conversion tailwind. Prices are in the high single-digit range, and all regions and all sectors have achieved growth. From a regional perspective, the fastest growth in sales this quarter was in Europe and Latin America, followed by North America and Asia. Driven by strong potential demand, new customer wins, and wallet revenue share, every division in the group is growing, most of which have increased by double digits. I will start with packaging. Compared with last year's high single-digit comparison, packaging has produced strong double-digit growth. Sales in each region achieved double-digit growth.

Demand for food and beverage cans remains strong, and our non-BPA coatings continue to gain traction among existing and new customers. This is followed by General Industrial, the largest division of the group, which achieved strong double-digit growth for the third consecutive quarter. Sales in each region achieved double-digit growth. Sales of most of our customer bases are strong, led by heavy equipment, containers and general finishing. Our coil coatings business continues to perform well. Sales grew by double-digit percentages for the second consecutive quarter and were positive in all regions. The team continues to do an excellent job of winning new customers in all regions. The construction industry and home appliance industry drove growth. Sales of automotive refinish paints increased by a mid-single-digit percentage. The mileage is close to the pre-pandemic level. New installations of our products and systems in North America remain strong. The industrial timber sector produced low single-digit growth. North America is our largest region and achieved strong double-digit growth, but it was offset by the Asia-Pacific region, where COVID-related shutdowns had a significant negative impact on sales. New residential construction continues to drive strong demand for our products in kitchen cabinets, flooring and furniture applications. Before discussing our outlook, let me talk about the capital allocation so far this year. We returned slightly more than US$2.5 billion to shareholders in the form of dividends and share repurchases.

We have invested US$2.1 billion and purchased 8.075 million shares at an average price of US$265.88. We paid a dividend of $442.9 million, an increase of 20.4%. We also invested US$248 million in our business through capital expenditures, of which approximately US$36 million was used to build our future projects. Our ratio of net debt to adjusted EBITDA at the end of the quarter was 2.5 times. We also announced the acquisition of Sika and Specialty Polymer, which are expected to be completed in early 2022 (if not earlier). Turn to our prospects. We expect strong demand in the North American professional construction terminal market to continue. We expect that as consumers return to work, DIY demand will continue to normalize. We expect industrial demand to remain strong. The raw material supply challenge will still be the headwind in the fourth quarter, but the situation is improving. We believe that we have passed the worst of Hurricane Ida, and supply should continue to recover. We expect to be in manufacturing and shipping mode, and do not expect to build any inventory before the first quarter of 2022. In terms of the cost of the equation, our raw material inflation expectation this year has risen to a low range of 20%. Since the last guidance, we have seen additional pressure from high school students. We will not see any meaningful improvement until 2022.

All companies actively implement price increases when necessary to offset these costs. We recognize that the timing of price realization will continue to put pressure on profit margins in the short term. As we have said many times, we expect long-term profit margins to expand and maintain our gross margin target in the range of 45% to 48%. In this context, we expect that consolidated net sales in the fourth quarter of 2021 will increase in single-digit percentages compared to the fourth quarter of 2020. We expect that the sales of the Americas Group will grow by a mid-to-high single-digit percentage. As a percentage of figures, professional sales have reached or exceeded the high end of this range, while DIY sales have returned to historical levels. We expect the sales of Consumer Brands to fall by about 15%, including the negative impact of approximately 7 percentage points related to the Wattyl divestiture, and we expect the sales of Performance Coatings to increase by about 15%. As we experienced in the third quarter, a similar impact on our construction business was embedded in our guidance, namely raw material availability as a percentage of sales. For the full year of 2021, we expect consolidated net sales to grow by a high single-digit percentage. We expect the Americas Group to grow at a high single-digit percentage; the consumer brand group will drop by 15%, including the negative impact of approximately four percentage points related to the Wattyl divestiture; and the Performance Coatings Group will grow by a low percentage of 20%. We expect the diluted net earnings per share in 2021 will be between 7.16 US dollars to 7.36 US dollars, and 2020 will be 7.36 US dollars per share.

Earnings per share guidance for the full year of 2021 includes acquisition-related amortization costs of US$0.85 per share and a loss per share of US$0.34 from Wattyl’s divestiture. After adjustment, we expect full-year 2021 earnings per share to be US$8.35 to US$8.55. Let me end with some additional data points that may be helpful for your modeling purposes. With the implementation of additional price increases this quarter, we expect the continuous gross profit margin in the fourth quarter to improve slightly. Due to the decline in gross profit margin, we expect the operating margin to decline in the fourth quarter, partially offset by SG&A leverage due to strong sales growth. We will continue to invest in the entire enterprise to enhance our ability to provide customers with differentiated solutions. We expect to open approximately 80 new stores in the United States and Canada in 2021. We will also focus on sales representatives, capacity and productivity improvements, and system and product innovation. We also plan to make additional incremental investments in the digital platform of the family center channel. These investments are included in our annual guidance. We expect foreign exchange exchange to be a tailwind of about 2% in the fourth quarter. We expect the effective tax rate in 2021 will be slightly lower than 20%. We expect annual depreciation of approximately US$270 million and amortization of approximately US$310 million.

We expect the full-year capital expenditure to be approximately US$370 million, including approximately US$70 million for the construction of our future projects. The interest expense guidance we provided last quarter remained unchanged at approximately $340 million. We expect the full-year dividend per share to increase by 23.5%. We expect to continue opportunistic stock repurchases. We will continue to evaluate acquisitions that are in line with our strategy. Even if we are experiencing considerable supply chain and inflation headwinds, we are still expected to achieve solid full-year results. I am still very proud of our team and their focus on providing solutions to customers. Demand remains strong, our customer relationships are strengthened, and we continue to invest in our capabilities. We expect to end the year with a strong momentum in 2022. This concludes our prepared speech.

With this, I want to thank you for joining us this morning, we are happy to answer your questions.

[Operator Instructions] Our first question comes from John McNulty of BMO Capital Markets. Please continue with your question.

John McNulty-BMO Capital Markets-Analyst

Yes, good morning. Thank you for answering my question. Therefore, when you look at the impact of raw materials that hinder your ability to deliver in certain situations, especially in the TAG business. I wonder if you can say that your confidence is whether the business will return or transfer to other channels, maybe even your consumer brand group or other channels?

John G. Morikis - Chairman, President and Chief Executive Officer

Yes. John, this is an important area that we really want to emphasize and feel very comfortable and confident about it. Frankly speaking, we have great confidence and vision in terms of customers and their needs. We are very confident that when we leave this chapter, our relationship with our customers is deepening. I will point out how we spent this experience with our customers, which is the backbone of why we are so confident. We are fortunate to have a controlled distribution model. It has our store in the market where our customers live and work, and the representatives are their business partners. Through this experience, these relationships have become deeper, because we have closer cooperation with our customers.

Our views on the projects they are working on and their needs will only increase. So you are right. There may be some shifts from here to there. We keep saying that. We have always hoped that DIY can be normalized, and as people return to work, business will begin to move to other parts of the business-sorry, back to work. So we have always expected that when DIY declines, other areas will rise, and we also look forward to this. We work very hard strategically to enable the company to take advantage of the growth of any market segment that the market may turn to. Therefore, when you look at residential repainting or DIY or new residential and property management; we work very hard to develop products and services and, frankly, people in these markets can take advantage of them. So I want to say that our confidence may be as high as I was before. I have seen what happened to our customers from the record Net Promoter Score; our record new account activity; and our share of wallet activity hit a record high. Every indicator we see, I would describe it as a coil spring that is almost ready to expand. So we are excited about this chapter because I call it the end because we believe that we will really speed up to take advantage of this.

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Het John, this is Al. Another comment I want to make is that, as John said, with the standardization of DIY, if we look at our combined construction business with TAG and consumers, our double-digit low in the first half of the Since the winter storm Uri we talked about had a high-single-digit impact in our third quarter and a similar impact in our fourth quarter, we will achieve high-single digits in the combined business. The number of growth. So as far as John is concerned, we will capture it on any channel where the customer is.

John McNulty-BMO Capital Markets-Analyst

understood. thanks. This is a useful color. Then maybe it's just a follow-up question. As far as inflation is concerned, I know that there are many problems surrounding the scarcity of labor, and Xuanwei has never encountered this problem in the past. It has always been a destination for many employees. But I think, can you talk about the environment you saw there, how to consider the wage inflation of your professionals, and some of the labor efficiency measures you talked about might help offset some of them?

John G. Morikis - Chairman, President and Chief Executive Officer

John, I want to make sure I am catching your question. Are you talking about wage pressures that we may be experiencing?

John McNulty-BMO Capital Markets-Analyst

this is correct. Salary pressure, and even the ability to get employees into the store.

John G. Morikis - Chairman, President and Chief Executive Officer

amazing. I will start with that. We have to make some wage rate adjustments to some of our factories, distribution centers and fleet drivers to attract and retain some of our employees. I would say that I am very excited about this fact because I pointed out that all our employees are very important. But what I want to say is that the customer-facing employees, store managers, and representatives I just talked about are absolutely crucial. The turnover rate of these two employees is between 6% and 8%. And I would say that most people in our space or who operate 4,700 stores will have this ratio. Therefore, although we experienced some pressure in other areas, those customer-oriented employees, but we were able to retain, we believe this illustrates the excellent culture we have. Our ability to recruit and retain employees boils down to many areas that we believe are critical to this culture, namely the ability to enter. We employ 1,400 university graduates every year. We bring people in. We give them a career opportunity and they can accelerate their entry.

We-when you see the opportunity to enter and run a business and own an income statement within a few years, we think it is an excellent opportunity for those who work hard and really make a difference. When I look at its impact, 1,400 By the time 1,500 college graduates and what it means to our company over time, our company has nearly 10,000 graduates of the MTP program. We think—I want to spend a little time on this, John, because I think this is a very important element.

We call it our secret weapon. In fact, we have these employees who enter the organization. They understand our culture, our strategy, and they understand our expectations. It is important that they understand our aggressiveness. When they work with us, which is an important element of the strategy, these employees will move throughout the organization. They grow in experience and grow in understanding.

Now, when you look at our team of representatives, 80% of our representatives in TAG come from the program. Therefore, when you are looking for opportunities for promotion from within and the meaning of retaining talents, they are looking for, if you want, to enter the organization, 70% of the TAG field leaders come from our TAG-I'm sorry, our MTP program . This is driving more and more reservations.

We look at our employee turnover rate and what this means for the wider organization, we have 7,000 employees-we have more than 20 years of experience in the company. Therefore, when we are in front of customers, we are talking about trying to provide them with solutions to make them better. These experienced people help us stand out from the competition.

So when you look at the external recognition we received from Forbes, in fact, we are recognized in places where we diversify and recruit, intern and start a career, all of which are very important to us. We are not fighting for these awards. What we do is work hard to create a beautiful culture that people want to be a part of. Therefore, we are better able to take care of our customers. So I will say that it is working and it is working very well, which is an area that we will continue to focus on.

John McNulty-BMO Capital Markets-Analyst

great. Thank you very much for the color. Appreciate it.

John G. Morikis - Chairman, President and Chief Executive Officer

James R. Jaye - Senior Vice President of Investor Relations and Corporate Communications

The next question comes from Ghansham Panjabi and Baird. Please continue with your question.

Ghansham Panjabi - Baird - Analyst

Thank you. good morning everyone. John, I mean, the supply chain chaos in the supply chain has always been there, obviously including your customers, including the customers who reported on housing construction this morning. When you consider the various sub-vertical industries within TAG, how should we consider the air pockets of demand, because even if you can obtain raw materials, maybe your customers are experiencing other bottlenecks? And, I think, specifically, I mean new resources and businesses

John G. Morikis - Chairman, President and Chief Executive Officer

Yes. I want to say that these are a few very interesting examples you use in new homes and businesses, because you are right, these customers deal with more than paint. There are many raw materials or materials entering these projects, and they are affecting the pace of these projects. However, I want to say that these two markets are still very strong. New residence permit.

We are also expanding multi-family families. I will add this. Ghansham, not only raw materials or materials, but also labor is also affecting it. So there are some challenges there. What I want to encourage our shareholders to understand is that we not only want to grow with existing customers, but I just mentioned the promise of wallet share and new customer activity.

So we look at this issue from many different perspectives. We are excited about our penetration there, but there are excellent growth opportunities there. What I want to say is that as this market begins to recover, we believe that not only in terms of existing customers but also in terms of new customers, the position we have will put us in a favorable position in the market. So I feel as if this customer has been pushing the project farther and farther because of some of the supply. First of all, we will oversupply, and we believe in our competitors. But we are also looking for a wider network, not just our existing customers.

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Ghansham, I want to add one more point. If you look at our working capital and our situation today, we are significantly lower than our planned quarter-end inventory gallons. Therefore, as the availability of raw materials increases, you can count on us to keep our feet on the ground in building inventory. We will be in manufacturing and shipping mode in the fourth quarter, and we plan to build inventory in the first quarter of 2022.

If these jobs are pushed back by our 50 million gallons of building capacity added by the end of the year, we will convert every pound of raw materials we can get to better serve these customers. The work is ready.

John G. Morikis - Chairman, President and Chief Executive Officer

Let me build on it, because this is a very good point made by Al. This can be traced back to the point I made earlier, Ghansham, we-we do not distinguish which market segment drives our results. Therefore, if the new house is being relocated, we will be there. If it moves to another market segment, we will use these raw materials, where we will manufacture the product, and then launch it. The fact that we are leading in these areas is that we will actively use this in order to be able to turn every ounce of precious raw materials into sales and profitability for our shareholders.

Ghansham Panjabi - Baird - Analyst

OK. As for my second question, can you describe to us the evolution of the availability of raw materials in the past few months and the fourth quarter so far, perhaps as a measure of force majeure, or how do you want to define it, supply Quotient allocation, etc.? I just want to know the rhythm, because at the end of September you have improved your guidance compared to now (about four weeks later). I'm just curious about how you consider the speed of the raw material curve. thanks.

John G. Morikis - Chairman, President and Chief Executive Officer

Yes. I would say it is improving. We hope it will come sooner. What I want to say is that we have developed a strategy over the years not only to work with our existing suppliers, but also to try to make them as productive as possible. When we buy Valspar, we always say that there is an opportunity for integration of raw materials. We are actively working to expedite this process because it will help us become an efficient customer of the supplier (if you wish).

I would also like to say that the same strategy we used included the introduction of alternative suppliers. This is our goal, which is to ensure the quality and consistency of the products we provide to our customers through qualified suppliers. So I describe it as getting better and better. We hope it will continue to get better, and we are taking very active measures to ensure that we can best serve our customers.

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

And Ghansham, I will add one more point. We did raise our raw material cost outlook from a teenage high to a low 20% on September 29. We expect something to happen. As you might imagine, they did not happen as we imagined. Therefore, it puts pressure on the cost of raw materials for our high-performance coatings business and other businesses.

If you look at our second half of the year, our raw material growth in the second half of the year was more than twice that of the first half. I mentioned in the conference call on September 29 that we will track raw material costs by the end of this year and the first half of next year. I want to make sure you understand our commitment to this.

Our team is in the third wave and the fourth wave. TAG has been out. Just to remind you, on February 1st this year, it was out again at a rate of 3% to 4%. On August 1st, it withdrew again at 7%. On September 20th, a 4% surcharge will be charged. We fully hope that This translates to a full price increase in early 2022. I can say that in each of our groups and regions, we are committed to offsetting these rising raw material costs, and we are disciplined in our approach.

As John said in the past, we will not lose customers because of these discussions. So we may have to postpone it a bit, but we will offset the raw materials through price increases. As they ease, we will begin to see an increase in our profit margins. As we have done in the past, when we step out of this cycle, we will see our expansion into the upper part of this cycle.

Ghansham Panjabi - Baird - Analyst

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Our next question comes from the cooperation between Jeff Zekauskas and JPMorgan Chase. Please continue with your question.

Jeff Zekauskas - JPMorgan Chase - Analyst

thank you very much. John, hi, your DIY volume has dropped significantly year-on-year. Are consumer brand sales in the third quarter of 2021 today very similar to the third quarter of 2019?

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Yes, Jeff. If you do not consider the impact of Wattyl, we will increase the low single digits and stay flat to the low single digits. You will expect a similar comparison in our fourth quarter.

Jeff Zekauskas - JPMorgan Chase - Analyst

right. So, if you can offset the increase in raw material costs through price increases, I think you can say that you can, for example, by the order of the third quarter of 2022. If your income is roughly, I don’t know, adjusted operating profit of $140 million, even if you don’t grow too much, because that’s your return in the third quarter of 2019. Now you will offset raw material inflation, right?

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Yes, in a sense, consumers are lagging behind. Therefore, our expectation for TAG Group is a single-digit price increase in the fourth quarter. Consumers are lagging behind in this area, it's just a matter of timing. So they will come back to chase it. The other part is supply chain efficiency. We do hope to get better with the improvement of flow and raw material supply in the next year, because as you know, our global supply chain has been embedded in the performance of our consumer brand group, which has had a positive impact on our profit margins. Negative pressure.

John G. Morikis - Chairman, President and Chief Executive Officer

Jeff, I would like to add to Al’s point about price just now. It must be consistent across all groups and consumer brands. We got some prices. We need more. It's coming, we will get it.

Jeff Zekauskas - JPMorgan Chase - Analyst

Okay, great. thank you very much.

John G. Morikis - Chairman, President and Chief Executive Officer

Our next question comes from Chris Parkinson and Mizuho. Please continue with your question.

Chris Parkinson-Mizuho-Analyst

great. Thank you very much for answering my question. Therefore, it is clear that as the industry continues to navigate in an inflationary environment, your pricing efforts are gradually advancing. However, can you quickly comment on the current overall competitive landscape in the United States and your ability to continue to gain professional and trade shares in 2022 or even 2023? Any comments you hear from employees and customer groups will be greatly appreciated. Thank you.

John G. Morikis - Chairman, President and Chief Executive Officer

Yes. Chris, I would say so. First of all, I want to reiterate our determination and confidence in obtaining prices. We are not a commodity. We provide solutions to our customers to help them make more money. We are determined to continue to do this in every business we own. Therefore, we are not asking for something to become fatter or take advantage of a situation. We try to be consistent in our model, which is a solution that helps our customers to be profitable and successful.

If you go back to 2016, I think from an industry perspective, when there are some different dynamics in the market and people are not considering prices, Sherwin-Williams, we are also the first to bear the brunt. I will tell you that our employees often talk about the experience of this leadership team and the types of scar tissue. This is an enduring leadership team that has experienced a lot and we have learned lessons from it. I think-I suspect others have done the same. What it means is that when the price of raw materials moves like it does, you must get the price, otherwise it will be cruel and will be cruel for a long time. We learned a lesson from it.

So when you hear that I want you to hear the faith, determination and confidence on this subject from me and Al, this is it. We will get this price. We are not going to be arrogant about it. We know that we have a responsibility to help our customers make more money in this process, and we will do so. But we believe that our ability to do this is very high. As for what our competitors are doing, yes, we heard about the pricing in the market. But what we really care about is the value proposition to our customers. As long as we are doing our work, we hope to continue to develop our business and make a profit.

Chris Parkinson-Mizuho-Analyst

This is very helpful. As a follow-up, it is related to some unfavorable factors released today, so it is a bit off the radar screen, but when we step back and consider the PC profit margin, the 13% to 20% argument, so to speak. Can you quickly break down the latest thoughts on the progress of price costs, overall operational improvements, and market mix? Any color on how you think this will develop in the initial recovery and how to conceptualize long-term opportunities would be greatly appreciated. once again, thank you.

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Yes, Chris. We are still very confident. I will respond to what Justin said on the September 29th conference call, our PCG Group President Justin Bins. We made a very good product in 2020. Operating profit margin rose by 100 basis points in the second half of the year.

15.2% of traffic was very strong and sales increased by 4%. Our circulation has increased by more than 40%. So now we see stronger sales, but the growth rate of our raw materials is amazing. As I said, the increase in raw materials is twice that of the second half and the first half of the year.

Therefore, we are about to usher in the third and fourth waves of raw material or price increases. Most importantly, the team is continuing to find the efficiency of platform integration and SKU rationalization. They also have many projects that can improve our profitability outside the U.S.

What I want to say is that depending on the timing of the slowdown in raw materials and our pricing catch up, we will make positive changes in operating profit margins again. One thing we are talking about is that we are still in the process of rationalizing facilities. We will not comment on this until our employees know about it and make it public, but there are opportunities there.

I talked about facility rationalization, SKU rationalization, platform integration, and COVID will undoubtedly set us back a year and may increase incremental profits by 100 million US dollars. We are working hard to overcome it. However, in the medium term, we expect short-term improvement in the medium term, and in the long term, it will reach the 10s and 20s.

John G. Morikis - Chairman, President and Chief Executive Officer

So I think, Chris, adversity brings the best. I just want to mention the facilities and some opportunities there. But there is another point about the platform you mentioned. The point I made before, regarding the integration of raw materials, we have always found some opportunities there. Through the strong growth of our organization's resin, the opportunities to integrate these are more efficient.

All of these will have a significant impact on the 20% operating profit margin of this industrial business. We are confident in our ability to get there. We will do this in the right way, and we will work with our customers to achieve goals and bring them value.

Chris Parkinson-Mizuho-Analyst

John G. Morikis - Chairman, President and Chief Executive Officer

Our next question comes from the collaboration between Arun Viswanathan and RBC Capital Markets. Please continue with your question.

Arun Viswanathan - RBC Capital Markets - Analyst

Great, thank you for answering my question. I think my first question is on-demand. In the past few years, with the resurgence of COVID and DIY, there have obviously been many different dynamics in the market, and now sales may be lost due to lack of raw material supply.

Maybe if you can help us with TAG and PCG. Is there a way to quantify how far your backlog has grown? Or do you understand this? When you do not sell due to lack of raw material supply, will it enter a backlog of orders? Or it just might be lost? Maybe you can comment on this. Thank you.

John G. Morikis - Chairman, President and Chief Executive Officer

Yes. Arun, what I want to say is, once again, let’s not knock too hard here, but the fact that we have this controlled distribution model gives us an in-depth understanding of the CRM system, which gives us confidence and insight into what happens. On our customers.

What I want to tell you is that in almost all of these professional areas you mentioned in the TAG, the backlog of work is increasing. Our customers' confidence in working with us and how we handle their business and the cooperation we have gives us insight.

As I mentioned before, our team works more closely, more closely than ever before. And understand what they are doing and when it will happen. So yes, we are very confident. We will not list any type of number, specifically what it looks like.

But I want to tell you that if you talk to any painter now, they may tell you that they are bidding farther than they may have done in the winning work. People understand and accept this as next year. In spring, line up next summer.

So have an absolute understanding of what is happening. I mean people are turning on the TV and listening to the news and understand that there are some problems. From a supply chain perspective, we are unique. Since you asked TAG, when you consider our construction products, the supply chain issues we face can be traced back to our earlier views on winter storm Uri and Hurricane Ida that we made earlier in February and September. These are the two issues that have the greatest impact on us. With the progress of this year and the beginning of next year, we have high confidence in achieving this goal. Our customers are learning about the fact that they do business with us, and our employees can scramble from different stores or different distribution channels. Get product centers and keep them in the paint better than most of our competitors. So we will get out of the predicament with a stronger and more loyal attitude. Yes, we will enjoy the large backlog filled for our customers.

Arun Viswanathan - RBC Capital Markets - Analyst

great. thanks. Then, if I can get your ideas in 22 years. Therefore, assuming that the supply of raw materials has improved, especially in the second half of next year, your demand seems to recover. You will have specialty polymers for a whole year or so, but you may also see some stability in DIY. Can you provide '22 with any initial indications on how to consider the growth of each segment?

John G. Morikis - Chairman, President and Chief Executive Officer

Well, I think at this point I just want to look back, Arun, we are very comfortable and very confident that there is a growing backlog. Except when talking to customers, we will not provide you with any kind of data points now, the backlog is longer than it-longer and deeper, and the growth rate may be faster than any rate they see. But I think we don’t want to share any kind of figures yet. We will provide this information later.

Arun Viswanathan - RBC Capital Markets - Analyst

John G. Morikis - Chairman, President and Chief Executive Officer

Our next question comes from the cooperation between Vincent Andrews and Morgan Stanley. Please continue to answer your questions.

Steve Haynes-Morgan Stanley-Analyst

Hi, this is Steve Haynes from Vincent. I want to go back to your comment about having to build up some inventory in the first quarter, maybe just pair it with the total amount of deferred transactions you have. I mean how do we think about gradually catching up with certain delayed transaction volumes? Can it happen in the first half of the year? Or what are the key considerations?

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Yes. I think, Steven, we must pay close attention to availability, not just the availability of our existing suppliers, but we are doing our best to find alternative suppliers to help us meet the important demand expectations that John said. Therefore, our ability to build inventory in the first half of the year will depend to some extent on the increase in raw materials to meet the real forecast demand, which is much higher than the level that entered the season this year. As John said, we have the ability to make gallons. Our factory is fully staffed. This is an investment in our customers. Ensure that we can convert each raw material as soon as possible so that it can be delivered to the site in the fourth quarter, and then build inventory on the TAG side and the consumer side to ensure that we can meet the demand positively.

John G. Morikis - Chairman, President and Chief Executive Officer

I think this is an important point that Al just made. In fact, we made a conscious decision—it did affect our gross profit margin to keep labor in our manufacturing and distribution centers so that we can respond. This is a good example when we talk about why we have confidence in our prices. Our customers, we openly talk about the fact that we are investing here so that we can supply. As Al mentioned, as raw materials become available, we will quickly convert these raw materials.

Steve Haynes-Morgan Stanley-Analyst

John G. Morikis - Chairman, President and Chief Executive Officer

Thank you. Our next question comes from Truman Patterson and Wolfe Research. Please continue to answer your questions.

Truman Patterson-Wolf Research-Analyst

Good morning, every body. Thank you for answering my question. John, I believe you are very happy that Johnson looked like Nick Chubb last week and performed so well.

John G. Morikis - Chairman, President and Chief Executive Officer

Truman Patterson-Wolf Research-Analyst

Therefore, it sounds like the supply chain is improving slightly recently. But you all mentioned that in your previous update call, some petrochemical facilities were still closed due to the winter storm in Texas. Can you compare and contrast Hurricane Ida? Are there any major differences that will allow the Ida facility to recover relatively faster? Or on the other hand, they may be online longer than Texas Storm.

John G. Morikis - Chairman, President and Chief Executive Officer

Well, I think Ida’s situation is a bit different. Why don't I let Jim talk about that briefly, and then I will come in if there are any gaps in there.

James R. Jaye - Senior Vice President of Investor Relations and Corporate Communications

Yes. Good morning, Truman. As we have been talking about all year, if you look at Texas, what I want to say is that it is more based on the physical damage to the facility due to the freezing of the pipeline, and all the damage we discussed in detail. I think Ada, and more importantly, the lack of electricity in the facilities, has been significantly restored. You also have other offline utilities, such as water supply, steam, etc., which are very important in production. We even see a lack of nitrogen in some of these facilities, and nitrogen is a key factor in preventing explosions. People who produce this nitrogen have turned to producing oxygen to help deal with the COVID pandemic. So the dynamics of the two are a bit different. I want to say that in Texas or Louisiana, we are still not fully recovered, but we have made progress as we move forward.

John G. Morikis - Chairman, President and Chief Executive Officer

Yes. I think you are right, Jim. The key here is that there are several key facilities in the paint and coatings field, especially resin manufacturing and other thickeners and rheological products. They will ultimately affect the production capacity of paints. Similarly, not only Sherwin's, but for the industry .

Truman Patterson-Wolf Research-Analyst

OK. Then at TAG, I believe your sales in Canada and the Southeast have increased. But your sales in the Southwest, East, and Midwest have all declined. I just want to untie it a bit. Is it because of regional supply chain differences that lead products to more profitable areas? I just want to understand what's going on there.

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Do not. I would say, Truman, it's just a usability issue running through the chain. I think what you see in Canada is a determined team that is correctly focused on the right market segment and has done a great job of increasing new account activity, gaining share of the wallet and focusing on growth. You can say, well, haven’t you been very concerned about growth in the past? Yes we did. But I think the execution level of this team is higher than ours in the past. I will argue the same thing in the Southeast.

What I mean is that different customer combinations will also affect usability, but our southeast division has performed well in all cycles, and I will try to surpass the southwest division of the southwest division. We will see if the Southwest can pick it up, go back to the Southeast and defeat them.

Truman Patterson-Wolf Research-Analyst

John G. Morikis - Chairman, President and Chief Executive Officer

Our next question comes from Mike Sison of Wells Fargo Bank. Please continue with your question.

Mike Sison-Wells Fargo Bank-Analyst

If I calculate the shortage of raw materials correctly, it will appear, possibly exceeding 900 million US dollars. If you can really get all the raw materials you need to enter 2022, given the strong demand in other areas, can you-or can your customers do all of this work?

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

So Mike, to clarify, are you quoting the full-year impact on 900 million US dollars?

Mike Sison-Wells Fargo Bank-Analyst

annual. Yes.

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Yes. Yes, I agree with this.

John G. Morikis - Chairman, President and Chief Executive Officer

Well, because it involves-so your problem is actually a labor issue. What I want to say is that there must be some challenges there. Once again, I continue to return to this controlled distribution model and our strategy. But Mike, I think these challenges are good for us. When our customers are faced with the challenge of where to go and what to do, we are the ones who have stores in the market so that we can respond and provide services to them. In fact, we are developing products to help them increase productivity. What we are now experiencing is a positive combination shift, and customers who may have used mid-range products are stepping up to buy more high-end available products. Did you know that they find that they work more efficiently and they learn more. So-they earn more, I'm sorry. So I will say there will be some challenges. But I also think we are in a unique position to be able to take advantage of this.

Again, we mentioned the new account and wallet share. So we are not just-I want to be very clear. We are more than just a retailer that opens its doors and wants people to come in. I mean we are actively pursuing people every day. We are working hard to help those customers who do business with us increase productivity and make more money, and we are attacking the hills of others. We don’t just want to protect us.

So the plans we have, from customer plans to incentive plans, everything we have is about growth. This is our promise, and we are very confident. As these raw materials become more accessible and they will be converted through the available capabilities we have, we will develop our business and we will grow faster than our competitors.

Mike Sison-Wells Fargo Bank-Analyst

understood. Just a quick follow-up, just curious about how excited you are for Sunday's big victory. That's not for Al. Thank you.

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

John G. Morikis - Chairman, President and Chief Executive Officer

Yes. There is a Steelers fan among us. I don't know how we let people from Pittsburgh in. Thank you, Mike. Next question, Al.

thanks. The next question comes from the cooperation between PJ Juvekar and Citigroup. Please continue with your question.

PJ Juvekar - Citi - Analyst

Yes. Hi. Your protection and marine business has grown by high single digits. The price of oil is approaching, what, 85 dollars today. What are your expectations for the energy business? How big do you think this is a return in coating demand?

John G. Morikis - Chairman, President and Chief Executive Officer

We think this will be an important part of our future, and PJ we enjoy a very strong position there. The demand there is increasing. We do believe that this is not just oil and gas. We have been working very hard and are very transparent about the need for further diversification of this business beyond oil and gas. So we have been focusing on some other key areas.

When you see the possible upcoming infrastructure opportunities and our penetration into other areas such as flooring, water, wastewater, etc., we do work hard in many key areas. Therefore, our position in the oil and gas field, we expect to continue to penetrate. But you can rest assured that in these adjacent markets, as well as other markets in the protection and marine business, we are very focused and have achieved very good success there.

PJ Juvekar - Citi - Analyst

great. great. Then, different coating companies hope to fully catch up with the raw materials at different times based on their product mix or raw materials. If oil and raw materials stay here instead of rising from here, when do you think they will be able to fully catch up? Will it be like early 2022? Or will it be in the middle of 2022?

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Yes, PJ I talked on the September 29th conference call that with the growth we see and the additional growth we just updated our guidance on raw materials, we will be chasing it by the end of the year. Earlier this year, I thought we would offset it with US dollars. I think what we want or plan to do is to launch in early 2022. If there is no growth-if we don't see other growth, we will reach the peak in early 2022. This means you can offset the dollar. Before you start to see major changes in our gross margin improvement, some moderate adjustments to raw materials are needed. But yes, you will-our expectation is early 2022.

PJ Juvekar - Citi - Analyst

John G. Morikis - Chairman, President and Chief Executive Officer

Thank you. The next question comes from the series between Bob Koort and Goldman Sachs. Please continue with your question.

Bob Koort-Goldman Sachs-Analyst

Hi, everybody. Thanks for the question here. I want-I'm curious-you have to short some customers who don't have products available. Likewise, your supplier in terms of raw materials. I want to know in these two cases, do you make up for the price at the time of ordering? Or can you sell it in the future where deferred sales or deferred purchases may actually have a richer portfolio?

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Maybe it's both, Bob. I think we will try our best to do our best on the offer we are preparing. However, this is a very unstable year, and it is difficult to fully achieve this in this environment. Therefore, we are trying to be as transparent as possible to our customers and understand that some jobs will be transferred, but this is not only because of its paint aspect, but also because some of our customers have encountered other supply chain problems. So I want to say that we are transparent and we work closely with customers to determine what the pricing looks like.

Bob Koort-Goldman Sachs-Analyst

You notice that the backlog is very healthy and you will build on it. Are you worried that the labor resources of your customer base cannot cope with this surge? Are you worried that you might miss some sales because of this?

John G. Morikis - Chairman, President and Chief Executive Officer

Well, we will work with customers. That’s why I think, Bob, when we talk about working with customers, it’s important to understand not just our existing customers. Therefore, we are absolutely responsible for helping them to be as efficient as possible. This is not just the way we run our business. It helps them run more efficient businesses and the products we sell to them to improve their efficiency. At the same time, we are increasing the number of accounts with which we do business and increasing the share of wallets of new customers. So I think we are in a unique position in the market.

I call it stickiness, if you will, these customers realize that we are working hard for them now. This is why this Net Promoter is not only in terms of DIY, but we have also conducted a comprehensive research to understand the customer's point of view, and it is actually growing in this market. I think many people may be surprised by this. But in these challenging times, our loyalty actually increases with these customers. Therefore, we have many customers with whom we have business dealings, some of us are growing, some of us are in contact, in fact, this is the first time, or we may have contacted some of their businesses, we are cooperating with them to save People who have survived difficulties. We expect that this will have a positive impact on our future. We will take all possible steps to ensure that this goal is achieved.

Bob Koort-Goldman Sachs-Analyst

amazing. And I'm not sure what sports people are talking about. I'm looking at the baseball stadium where the World Series starts tonight, so I want to cheer for the Astros.

John G. Morikis - Chairman, President and Chief Executive Officer

Bob Koort-Goldman Sachs-Analyst

John G. Morikis - Chairman, President and Chief Executive Officer

Our next question comes from David Begleiter of Deutsche Bank. Please continue with your question.

David Begleiter-Deutsche Bank-Analyst

Thank you. Good morning, good afternoon, sorry. John, Nippon just bought Cromology in France. That might be-are you interested?

John G. Morikis - Chairman, President and Chief Executive Officer

David Begleiter-Deutsche Bank-Analyst

very clear. Just in the fourth quarter, do you expect TAG's earnings to fall or stay flat or rise again in the fourth quarter?

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Yes. When you look at Q4, it actually depends on usability issues. As the quarter started, we encountered more of these problems. We will definitely face stricter competition. We increased by 9% in the fourth quarter of last year. But according to the current outlook, availability in the fourth quarter will have a similar impact. We will have more prices in the fourth quarter. So I think-from a profit point of view, it is difficult to exceed last year's figure. The U.S. dollar may be close to flat, if not rising slightly, but in terms of profit margins, it is difficult to exceed last year.

David Begleiter-Deutsche Bank-Analyst

Understood. thank you very much.

John G. Morikis - Chairman, President and Chief Executive Officer

Our next question comes from a conversation between Steve Byrne and Bank of America. Please continue with your question.

Steve Byrne-Bank of America-Analyst

Yes. Thank you. I want to delve into how you can drive share growth within TAG. It seems that some of the end markets such as commercial developers, new residential developers, property managers, etc. are not customers who walk into your store. Your business relationship is much higher than this. And you-and John, you talked about stickiness with your professional contractor. It seems that you have done a lot of things to make the lives of those professional contractors easier so that they don't have to go to your store to buy products. So my question to you is, first, about the value proposition of your store, is it mainly for your homeowner to have a store nearby to choose products? Secondly, what are the key driving factors that drive market share growth into these end markets that you really have a higher-level business relationship with?

John G. Morikis - Chairman, President and Chief Executive Officer

Yes. Steve, I think it might be a healthy way to look at this ecosystem. I may not agree with the idea that the store is just for DIY. They play a very important role in business, new homes and all aspects of our business. We take advantage of this position, and we do believe it is a competitive advantage in the market. So let me give you some highlights there, and then I will discuss the drivers of market share growth beyond that. I will give you some, but I will tell you that I am willing to talk about more than this here.

So let's talk about the store first. When you look at any given market, you have a local store. If you remember, labor costs account for approximately 85% of the cost of goods for paint contractors. We have a representative in a store in the market who responds to customers in that market. Especially now, when you look at things like COVID, where you might have-you take business as an example, you might have a commercial paint contractor in a project, and he starts from the first floor under the direction of the general contractor Moving to another layer, because of the number of people in a given area or due to some delay, there may be no product or substrate to be painted, because anyway, the drywall tape was not finished on time or anyway.

The paint contractor is turning to our representative and our store manager for help, and he now realizes that he is paying a lot of money for this project or the painter. Without that local store and responsiveness, that day may be lost, and a few days may be lost. No matter what situation they face, our store and our employees can respond there. Therefore, when a customer calls and says I need something now, and our store is 10 to 15 minutes away from us, we can respond. This is an important advantage that we are trying to take advantage of with our customers. We are trying to help They become more efficient. This involves every market segment. Without these stores, anyone believes that you can accomplish what we do with the stickiness and loyalty that we strive to achieve, but they may not yet understand our work. When you talk to these customers and the role we play, you will find that this is more than just a truck displaying products. They established a relationship in our shop. There are questions to ask. There is training. I think this is an important part of our identity.

I return to the secret recipe I talked about. In many cases, we are recruiting college graduates to serve as assistant managers and managers of these facilities. Therefore, they can wisely talk about the problems faced by these contractors and how to help them through the difficulties. The local representative is definitely a key part of our becoming part of this client’s business, not just the supplier. When we talk about our ability to work with customers in areas such as compressing short-term profit margins, it proves our partnership and how we work with them. Therefore, we do believe that we are fortunate to be able to win more and more loyalty from our customers.

Because it involves commercial contractors, the new residence you mentioned and how we developed it, you are right. The ecosystem I'm talking about is very broad, very broad. From architectural representation, color representation, it is all designated. It has technicians on site to help solve this situation. One product may not be available, but another is available. Do we have technical staff close to the customer who can help them start the application so that the project can proceed smoothly? We are indeed. Few people, if others do in any particular market. Therefore, when we talk to customers, we are not just talking about whether we can provide a gallon of paint. This is a complete ecosystem. When I said that we just don’t open the door and want people to come in, we are very active in all the decision-making process from owner to architect, to specifier, designer, application all the way through, we are in various ways Cover each of these foundations to ensure that these customers know and understand the value we bring.

Steve Byrne-Bank of America-Analyst

John, you mentioned the example where this store is 10 to 15 minutes away. I believe you have analyzed in detail whether the distance of 5 minutes and 30 minutes is valuable. Think you can still drive revenue growth before the North American market begins to stabilize?

John G. Morikis - Chairman, President and Chief Executive Officer

Yes. So, we-you are right, we have delved into this. What I want to tell you is that we have not yet reached saturation in any market. In these large markets where we have a considerable number of representatives, if it is Cleveland, Atlanta or Dallas or some of these markets where we may have 100 stores, we are still Looking for more and more facilities. What happened, Steve, when we develop these stores and pass sales through these stores, we will look at the adjacent markets, and we will add a store to these markets. We will develop this new market, but we will also take some of these customers from existing stores and transfer them to new stores. Therefore, both the comp store and the new store are growing faster.

So when you look at the number of stores, we can see that the next mile mark I often talk about is 5,000, but that doesn’t mean we think we have 5,000 stores. When we reach 5,000 stores, our next mileage markers will be 5,500 and 6,000. As long as it makes sense, we will continue to add them. But it is-we are still decades away from the saturation point of our attention.

Steve Byrne-Bank of America-Analyst

John G. Morikis - Chairman, President and Chief Executive Officer

Our next question comes from the collaboration between Kevin McCarthy and Vertical Research Partners. Please continue with your question.

Kevin McCarthy-Vertical Research Partner-Analyst

Yes, good afternoon. I just want to peel another layer of onion skin on the ingredients. I would like to know if you saw an example of cost reduction in your shopping basket in October. On the other hand, which inputs may get worse by the end of the year. And related to this, I am curious if you see the tightness of specialty chemicals. It seems that after Uri and Ida, you have received a lot of interference upstream of commodity chemicals, but recently, we have heard more examples of interference in special categories. I would love to know if you are also dealing with this issue.

James R. Jaye - Senior Vice President of Investor Relations and Corporate Communications

Yes. Kevin, I will give it a try. So I might start in the third quarter, we are talking about raw material prices rising by more than 20% in the third quarter. This is a continuous one. The monomers, resins, solvents, and packaging materials have changed in the third quarter compared to the second quarter. If I fast forward some of our latest data on prices that have stabilized, if you look at the entire month of September, all the major categories we see are still higher than the same period last year.

If you look at whether it is propylene, ethylene, epoxy resin, HDPE, all these raw materials have greatly improved year-on-year, and it can be said that there is not much improvement, in order. I think propylene may have fallen by US$0.01 or US$0.02, but most of it has not fluctuated continuously. We also see an increase in steel and titanium dioxide. I think Al may have said it earlier in October and we have already seen-in terms of usability, we have seen some improvements. But it still may not be enough for us to build inventory in the fourth quarter.

If you look at the inflation in the fourth quarter, it will be at a similar level, with an increase of 20% in the fourth quarter. It wasn't until we entered 2022, which is the first few months of 2022, that I really saw many meaningful improvements.

Kevin McCarthy-Vertical Research Partner-Analyst

OK. Thank you very much for the color. Appreciate it.

James R. Jaye - Senior Vice President of Investor Relations and Corporate Communications

Our next question comes from the relationship between Edlain Rodriguez and Jefferies. Please continue with your question.

Edlain Rodriguez-Jefferies-Analyst

Thank you. good afternoon everyone. Just want to know can you talk about your popularity in the fourth quarter? Just like you gave guidance, then how much visibility do you have? Do you set it more or less according to your order? Or is the transaction volume still changing and may change based on what happens in the next two months (especially November)?

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Yes. Edland, I think it depends on-the quarter, the situation has improved throughout the quarter, and there are no other interruptions-just like John-we have already talked about our capabilities and we have people in place. So our capabilities are there, and our needs are there. Therefore, we believe that every gallon of gasoline we produce will be shipped to customers and received --. So, this is just about current availability.

Edlain Rodriguez-Jefferies-Analyst

OK. Thank you. This is what I have.

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Our next question comes from the collaboration between Mike Harrison and Seaport Research Partners. Please continue to answer your questions.

Mike Harrison - Seaport Research Partner - Analyst

Hi. good afternoon. You noticed some of the sales and marketing cost controls you implemented in your consumer business. Can you elaborate? I assume that when you don’t have enough products to sell, it doesn’t make sense to spend money on advertising. But it may help us to consider how much higher these sales and marketing costs might be next year if we assume the normalization of product supply?

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Yes. What I want to say is that we have always wanted to be more efficient on non-customer-oriented projects. We did gain leverage this quarter. I should say that we reduced our spending this quarter, but most of it is volume driven, what is our outlook. You are right. If we can't get the product, do more advertising, marketing, and things of the nature that you don't have.

I think that just providing you with a one-time SG&A in 2022 will send a mixed message. I think we have to look at the progress of the entire group, sales and profits. This really gives us a better understanding of how we will deal with this year's SG&A spending.

John G. Morikis - Chairman, President and Chief Executive Officer

Yes. We will invest in its development and market position, and we will work closely with our customers to do this.

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Having said that, Mike, even if our dollar drops, we continue to invest in Pros Who Paint from some of our retail partners to ensure that this opportunity can be realized as quickly as we want and need.

Mike Harrison - Seaport Research Partner - Analyst

OK. Then, my other question is about mixing. John, you mentioned that you have seen some positive combination shifts from some of your professional customers to higher-level products to increase productivity, but at the same time, lower DIY may hurt the combination. So when we now consider the profit margin and the effective combination in your TAG business, is it fairly neutral? Or did the decline of DIY bring a little headwind?

John G. Morikis - Chairman, President and Chief Executive Officer

I would say it is neutral. Mike, your conclusion should be that you have professional contractors who know they can make more money with higher quality products, and they are likely to continue to do so.

Honestly, we believe that this helps the relationship between Sherwin-Williams and these customers because they are more successful and profitable, and we also play a role in it. Thank you Mike.

Our next question comes from Duffy Fischer and Barclays. Please continue with your question.

Duffy Fischer-Barclays-Analyst

Yes. good afternoon. Compared with PC, raw materials have a greater impact on TAG and consumers. Is it because these types of paint use specific raw materials? If so, which ones? Or is it because you prioritize the use of scarce raw materials for PC and make structural decisions to grow the business faster?

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Yes. Duffy, this is not because we put TAG above other customers. It is related to specific raw materials affected by Hurricane Ida, and has a greater impact on TAG than on consumers and PCG. I don't think it is appropriate to specify what raw materials and what products are, but it does have a greater impact on TAG.

Duffy Fischer-Barclays-Analyst

very fair. Then about your upcoming 50 million gallons new capacity, I guess it might do one or two things, or one or three things? 1. Is your capacity insufficient today, so once it runs, you will get a good volume boost? Or, B, does it replace third-party products and you can get better profits? Or is this really just a project that has been developed over many years?

John G. Morikis - Chairman, President and Chief Executive Officer

We are growing and hope to fill this vacancy as soon as possible.

Duffy Fischer-Barclays-Analyst

John McNulty-BMO Capital Markets-Analyst

Our next question comes from Greg Melich and Evercore ISI. Please continue to answer your questions.

Greg Melich - Evercore ISI - Analyst

thanks. I really just followed up on the progress of the guidance and the availability of raw data. So, from the perspective of raw material volume, it sounds like you expect the headwind in the fourth quarter to be similar to the third quarter. Am I right, high single digits?

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Greg Melich - Evercore ISI - Analyst

Therefore, if I go back to the guidance, it looks like sales in the fourth quarter may increase by 400 or 500 basis points year-on-year. So to be fair, is this more of a realized price or a mix of price and combination?

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Yes. Greg, I think it is a combination of price and quantity. I mean TAG will charge a full quarter of the surcharge and the price increase in August. Usability, the impact is flat, but I do think it is a combination of the two.

Greg Melich - Evercore ISI - Analyst

OK. great. I guess-if we think about the acquisitions you made-I know they won't help this year, but is this a key part of really solving capacity or some bottlenecks early next year? I guess how important it is for them to return to that state-without the adverse effects of raw material supply?

John G. Morikis - Chairman, President and Chief Executive Officer

No, I don't think it will become the magic key to the door here. I think this will help us. If you wish, we will bring some best practices to the acquired company. But we are working with our suppliers, and we hope we will study this. As I mentioned, Greg, in the conference call, this is our overall view of this. We are paying attention to this specialty polymer and the current supply base, which allows us to ensure that we increase our productivity as much as possible, while increasing the productivity of some suppliers, which will also help us obtain more raw materials. We will increase the production capacity of the specialty polymer asset base. On the one hand, this will allow us to continue to supply the external customers they own while continuing to increase our supply.

Greg Melich - Evercore ISI - Analyst

But is it fair to describe it as it is not about acquiring capacity itself, but more about de-risking what you have and need next spring?

John G. Morikis - Chairman, President and Chief Executive Officer

I think this may be a little frustrating in the short term. But in the long run, with the expansion of the capacity we have, it will be a relatively cheap investment to provide us with greater flexibility and future capacity.

Greg Melich - Evercore ISI - Analyst

thanks. Good luck and have fun.

John G. Morikis - Chairman, President and Chief Executive Officer

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

The next question comes from John Roberts of UBS. Please continue with your question.

John Roberts-UBS-Analyst

Thank you. In TAG, commercial new construction is a long-term business. So you can usually see farther there. Do you think this is the beginning of at least four quarters of performance decline, until we usher in the anniversary of the decline in business start-up rates, the worst of the pandemic?

John G. Morikis - Chairman, President and Chief Executive Officer

Well, actually, if you look at the Building Billings Index, John, it has been positive for eight consecutive months. You're right. The project started at the end of 2019 or early 2020 and has now entered the painting stage. But what we heard from customers is that these delayed projects are beginning to see light. And we are confident that, first of all, we have an excellent position in business, our relationship with customers and previous questions about our store in the right place. Therefore, we are in the right market for a large number of commercial activities. We think this will be a growth area for us, and we are happy to be able to take advantage of this.

John Roberts-UBS-Analyst

OK. And among consumers, is Pros Who Paint similar to the repainting of TAG's homes? Should we consider those tracking together? Or, will the number of painting professionals among consumers grow faster due to growth from a smaller base?

John G. Morikis - Chairman, President and Chief Executive Officer

It will grow faster. This is a smaller base and we are very excited about it. We work with some great partners in this market segment, and we have been able to buy some tickets through our store, but some customers prefer this setting. The home center setting, if you want, can provide a wider range of products, which actually just like the setting.

We want to ensure that our customers can make good use of these opportunities. Their store now has many customers, and this may be the first time because customers may be looking for products or availability. We want to ensure that the quality of the experience and the products and services they receive is good.

John Roberts-UBS-Analyst

Our next question comes from the collaboration between Garik Shmois and Loop Capital. Please continue with your question.

Garik Shmois-Loop Capital-Analyst

great. Thank you for your hospitality. My question is about professionals and the high-end growth that is expected to meet or exceed TAG's guidance. Was the growth a year ago more of a function of the COVID company? Or do you see an accelerated return here?

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Yes. Our competition rate in North American paint shops last year was 9.7%. It was 3.5% in the third quarter. So I think it is more for better usability, even if the impact is the same, but from a dollar point of view, it is smaller because this quarter is smaller.

What I want to say is that we usually see a seasonal slowdown in the construction industry in the fourth quarter after the third quarter. What I want to say is that based on what we have seen, you won’t see—if you will, we won’t see such a big seasonal slowdown. So that's why you see a good rise in TAG.

Garik Shmois-Loop Capital-Analyst

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Our next question comes from Eric Bosshard of the Cleveland Research Center. Please continue with your question.

Eric Bosshard-Cleveland Research-Analyst

Two things, first, John, you commented on the increase in loyalty to your company during this time.

I am curious, when you experience these price increases for a period of time when the service level is below your standard, how do you receive the price increase? It is absorption. Does it take longer to persist? Or follow the historical normal?

John G. Morikis - Chairman, President and Chief Executive Officer

Do not. I would say it is either historical or even faster now, Eric. It does-it's weird. I can understand a question about increased loyalty when prices increase and availability is challenged, but I think it does illustrate the point I made earlier.

There is a question about the location of our store. I have to be surprised by this question, because it does make it difficult for what we have. This is the unique point of differentiation. If we don’t have a store, and you are trying to pass pricing and trying to build loyalty, then you don’t have a product, I Understood.

But in fact, when you walk into a store, in many cases, these are your friends, with whom you now have a good relationship and are working with you. I need this product I need it as soon as possible. The person on the other side of the counter is with you. We are working hard to empower our employees to make decisions.

We are working hard to provide them with products as soon as possible. Therefore, customers understand the efforts of our employees, and pricing is pricing. Similarly, from the perspective of raw materials, we are facing a lot of pressure. We are helping our customers improve their profitability and we need to stay healthy. This is our ongoing discussion.

This health includes the price increase of the products we provide you. As a result, the indicators and numbers are there. I mentioned the Net Promoter Score, which people are familiar with. We looked at many other indicators internally. They all point in the right direction. So this makes me very confident that what we are doing is effective.

Eric Bosshard-Cleveland Research-Analyst

Great and very helpful. Secondly, Al, you talked about catching up with raw materials in early 2022. Based on where you are now, obviously you are already in this statement, and you have some understanding of costs and pricing in 2022.

Judging from the current world, next year will be a year when raw material prices will rise by 10% and prices will rise by 5%. Is this reasonable? Is this the correct initial way to think about 2022 in relation to the statement you made in 2022?

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

Yes. It will be equal, Eric. We have not seen additional growth, which will obviously get us out again like this year, but your direction is accurate.

Eric Bosshard-Cleveland Research-Analyst

OK. This is very helpful. Thank you.

John G. Morikis - Chairman, President and Chief Executive Officer

Our last question today comes from the collaboration between Christopher Perrella and Bloomberg Intelligence. Please continue with your question.

Christopher Perrella-Bloomberg Intelligence-Analyst

good afternoon. A quick question about China. With the energy issue there and the property market issue, has the risk increased? Have you encountered problems with raw material supply or even demand in China?

John G. Morikis - Chairman, President and Chief Executive Officer

Well, I want to say that China has always been a challenge. You're right. I think-so let's talk about the demand side first. In terms of construction, we performed well last year, and this year is under great pressure. Obviously, this accounts for a very, very small proportion of the results of the entire consumer brand group. So it is under pressure, but it is meaningless in terms of its impact on our results. In terms of industry, we have encountered some challenges not only in China, but also in Malaysia and Vietnam.

We-our customers and our factories are under pressure due to COVID. We have already-we believe we have started to solve this problem locally, and we think we can take advantage of this. But if you look at our business in China, in particular, we have some very strong performance. We have performed well in packaging. As we mentioned, we have achieved strong double-digit growth in every region. We continue to expand our market share there.

We are proud of this. I think if the president of our general industrial business is in the room, we will want to point out their performance there. This is a good strong performance of our coil business. In fact, almost all of our industrial companies are doing very well in China, but there is pressure in that market. Likewise, our focus on solutions is what we believe will become a differentiating factor.

Christopher Perrella-Bloomberg Intelligence-Analyst

John, it’s really fast. If Southeast Asia reopens and passes the lockdown, should we expect this business to rise sharply in the fourth quarter? Or seasonal, how will this be resolved?

John G. Morikis - Chairman, President and Chief Executive Officer

No, we expect it to rise there. Our factory in Malaysia is only closed to people there. They must be isolated in the hotel and then in and out of the factory. So I mean there are many-many of our customers are completely closed. Vietnam, very similar challenges. So it has been-there is a lot of pressure there, and we hope that this pressure will pick up, and we have the ability to do it.

We have been using inventory that must be transferred from other factories and nearby factories to Malaysia and Vietnam to ensure that we have inventory because they will increase. So we have been thinking about how to best position customers when they reappear, but this should be good for us.

Christopher Perrella-Bloomberg Intelligence-Analyst

OK. Thank you, John. I appreciate it.

Thank you. At this point, our Q&A session has ended. I will turn my voice back to Jim Jaye's closing remarks.

James R. Jaye - Senior Vice President of Investor Relations and Corporate Communications

Yes. Thank you everyone for joining our conference call today. If I have to summarize the key points that I want you to leave today, it is that we are still very confident in our demand environment. Our pricing plan is in place and we continue to move forward. We are very confident about our overall strategy and our employees. Therefore, we thank you for your interest in Xuanwei. As always, we will provide you with follow-up services later today and throughout the week. I hope you have a nice day. Thank you.

James R. Jaye - Senior Vice President of Investor Relations and Corporate Communications

John G. Morikis - Chairman, President and Chief Executive Officer

Allen J. Mistysyn - Senior Vice President of Finance and Chief Financial Officer

John McNulty-BMO Capital Markets-Analyst

Ghansham Panjabi - Baird - Analyst

Jeff Zekauskas - JPMorgan Chase - Analyst

Chris Parkinson-Mizuho-Analyst

Arun Viswanathan - RBC Capital Markets - Analyst

Steve Haynes-Morgan Stanley-Analyst

Truman Patterson-Wolf Research-Analyst

Mike Sison-Wells Fargo Bank-Analyst

PJ Juvekar - Citi - Analyst

Bob Koort-Goldman Sachs-Analyst

David Begleiter-Deutsche Bank-Analyst

Steve Byrne-Bank of America-Analyst

Kevin McCarthy-Vertical Research Partner-Analyst

Edlain Rodriguez-Jefferies-Analyst

Mike Harrison - Seaport Research Partner - Analyst

Duffy Fischer-Barclays-Analyst

Greg Melich - Evercore ISI - Analyst

John Roberts-UBS-Analyst

Garik Shmois-Loop Capital-Analyst

Eric Bosshard-Cleveland Research-Analyst

Christopher Perrella-Bloomberg Intelligence-Analyst

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