Michael Sison : And as a quick follow-up, given your new capacity, better cost structure and such, if you do get your volumes back to where they were prior to this downturn, where do you think earnings or margins should be at this going forward?
John Morikis : Well, we’ve talked about our — speaking to the margin — gross margin, we expect we’ll be in the range of the 45% to 48%. We’ve I think demonstrated the incremental sequential margins in this quarter, getting close to that bottom level of the range, and we expect to poke through that. And the reason we do expect that is, is that we believe we’re focused on the right customers with the right solutions. Our focus is really simple. I mean we want to help them make more money, help them to be successful. And as a result, we are in a position to be able to build that combined success. And as a result, we expect to be able to provide margins for both our customers and our shareholders. And the combination of the right customers with the right solutions, we believe will lead us to that.
Allen Mistysyn : The only thing I’d add to that, Mike, is when thinking about it by segment, we have a lot of confidence in our Performance Coatings Group to drive operating margins to that high teens, low 20s. The first quarter, excluding acquisitions, we were at 16.4. Again, if you remember, we hit that mark in the third quarter. It’s an all-time high since we’ve owned Valspar. And we’re confident in driving Consumer Brands Group back up to that high teens and low 20s. So we get our cost structure right, that will be a tailwind. We hold on the price. But as we come out of this, we drive strong architectural gallon growth, market share growth in our Performance Coatings business, and that’s what’s going to drive those operating margins back up to the high watermarks we experience in different occasions on the different businesses.
Operator: Your next question is coming from Steve Byrne at Bank of America.
Steve Byrne : What fraction of your Consumer business is the Pros the Paint category versus what was it back when you first got that exclusivity with Lowe’s? What would you say is driving that growth? For example, is it the product offering? Or I know Lowe’s has at least in some stores offering free delivery to the job site? Can you comment on how extensive that is? Is that meaningful? And are you involved in that?
Heidi Petz : Yes — well, go ahead, John.
John Morikis : No, I was just going to say I want to start and then kick it to you, Heidi. I’d say, first of all, as there’s a commitment by both companies to grow this, that terrific leaders inside our organization and they’re working with terrific leaders inside the Lowe’s organization, an outstanding partner. And I think we’re combined looking at the right elements of the business. And so we’re not going to disclose the percentage on that, Steve. But Heidi, I would like for you to maybe could talk a little bit about the Pros Who Paint, but also on a broader view, the importance of this relationship and in the Consumer Brands portfolio as well as the initiatives that we have to grow.
Heidi Petz : Steve, this is Heidi Petz. John covered a good bit of this. I think, at the end of the day, we want to make sure that we are demonstrating that we’re the very best partner. In fact, we want to be their #1 partner. So we think of some of the engagements here and how we’re activating, certainly, there’s a lot of support as they’re working through their promotional calendars, making sure that we’re investing in the right areas, not only to drive traffic, but to make sure that we’re converting those shoppers in the aisle certainly. And we’ve got a lot of great brands. We’ve got some launches that are taking place right now. We won’t get into too much detail here, but we want to make sure that we’re a lockstep with them in terms of driving those conversions.
John mentioned this, but the leadership team, certainly all the way through the organization, I would say our partnership has never been better than it is right now in terms of making sure we’ve got the alignment across the organization, both with their Pros Who Paint and the DIY segments. So when you think of the structures, we’ve got to make sure that those are mirrored and that the metrics are aligned there. So I feel really confident in the way that we’re moving forward and got big plans for the year. So we’re going to keep moving.
John Morikis : On the Pros Who Paint, specifically, Steve, to your point, there are customers that prefer a home center platform. They can purchase everything from dry wall to every other element that they might use on a project. And — so to get to your question about who supplies delivery or sales calls or anything, there’s a team effort that goes along with that. And while we don’t disclose the details of those for strategic and competitive reasons, I think hit at best. The collaboration and focus has never been stronger.
Steve Byrne : And maybe one more for you, Heidi, and that’s the Huarun brand over in China that is an old Valspar brand. I recall a few years back when the merger the company was going to drill into that those Huarun stores in China and see if that could be driven into a paint stores type of model like is in the U.S. was the conclusion of that effort? Is it really didn’t have that potential? And thus, you’re not the best owner for that brand?
Heidi Petz : Steve, I think you answered it perfectly. Yes, there was — there’s a better model here. I think the divestiture certainly it does align with our strategy And as we’ve done a lot of work in that group to optimize the portfolio of the brands, certainly making sure that we’re driving a focus on where we can get a return for our shareholders. And I think you said it — sometimes they’re just assets that are more valuable to others and this is an example of just that. We had — the business was about $100 million in revenue with 300 employees — and frankly, it was acquired as part of the Valspar acquisition, you remember, in 2017. So as we move down the next quarter here, we’d expect to close on this second half of 2023.
Operator: Your next question for today is coming from Gregory Melich at Evercore ISI.
Gregory Melich : Thanks for the helpful volume trends through the quarter in architectural. Is it fair to say, given the deceleration in top line that you expect that April is running negative volume year-over-year now? Or is it — has the deceleration been less dramatic than that?
Allen Mistysyn : Yes, Greg, I would just say that April is trending as we would have expected it to trend, not any better or worse.
Gregory Melich : All right. Well, I have to try. But how about this? In the first quarter, could you break down the sales growth, the 8.9% into — I think volume was down slightly and just sort of what was price and FX in that to sort of help us frame the sales going to flat in the second quarter. How much of it is from volume deceleration? How much of it is from price staying where it is?
Allen Mistysyn : Sure, Greg. I would say price is up high single digits. And with that being a little bit higher, acquisitions added a low single-digit percentage, which was mostly offset by FX headwinds. And you’re right, the volume was flattish. If you look at that in our second quarter, effective price is going to be slightly lower year-over-year in the second quarter compared to the first quarter as we annualize the Paint Stores Group 12% price increase February 1 and some of the other price increases. As you know, the other divisions and groups were out with significant price increases as well. So they’re just not as uniform as Paint Stores Group, but they will annualize as we get through our first — as we’ve gotten through our first quarter and into our second quarter.
The main difference is lower volumes, primarily due to lower new residential that we talked about, some softening in North America Performance Coatings Group. And then FX headwinds will mostly offset acquisitions in both quarters.
Gregory Melich : And is it fair to say that — or maybe you could help by breaking down the gross margin expansion in the first quarter. Was that primarily getting price on top of raws? Or the fact that volume sort of held in there, were you able to get some margin expansion from volume not being down so much?
Allen Mistysyn : Yes. I’d say most of the impact were price increases. But the benefit — we did see a nice benefit of the increased volumes in Paint Stores Group. As a reminder, that is our highest gross margin segment and plus the slightly moderating raw materials that John talked about. And we are getting on top of the raw material costs. As you know, as we get into significant raw material inflation, we see that short-term contraction. As pricing starts catching up, we moderate our gross margins flatten out, and then we see growth as raw materials moderate and we hang on to most of the price. And it’s because of the investments we continue to make. And…
John Morikis : Yes. I think it’s an important element. We continue to invest not in the products, but the services and technologies as well as the other assets. Additionally, I’d say the obvious and important investment in talent that we just talked about, the retention of talent and as well as new talent. So it’s more than what’s in the can. We’re investing in the success of our customers with every rep, every tech rep, every store, even the trucks we’re adding to our fleet, all designed to improve the profitability of our customers. So there’s more to it than the cost of what’s in the can, and we’re trying to drive the success of our customers with the investments that we’re making.
Gregory Melich : And with that, John, maybe I’ll jump on that. Given those investments you’re making in wage pressure and other costs besides raws, is this a year where you actually could have a price increase, even if raws are slightly down?
John Morikis : Greg, we’ve talked for many years together about our approach, and it’s not — it doesn’t change. Every 30 days, we sit down, Al, Heidi, myself with the entire leadership team, and we have a discussion. And the discussion isn’t just on raw materials, to your point, it’s on every cost that we have. And we do everything we can to try to drive more and more efficiency into the operations that we have. We try to use our leverage with purchasing. We try to drive efficiencies in the plant, everything so that we don’t have to go out with price increases. So that’s our first choice. But there are times when we find ourselves, as you’ve described, in situations where it may not be the lever on raw materials that drives it, it might be some of the others.
Energy, transportation, whatever it might be. So on a monthly basis, we evaluate that, we make that decision, we take it to our customers, and then we talk to our investors. At this point, we’re not in a position to talk about any increases because we’re not out with those on a broad scale inside our stores. I will say that with some customers in different parts of our businesses, where we’ve been working to put pricing in, we’re still putting pricing in. So there’s no finish line in this area.
Operator: Your next question is coming from Mike Leithead at Barclays.
Michael Leithead : Just one on my end. I wanted to dig in on the Performance Coatings outlook. I guess revenue was up, call it, 3.5% in 1Q. You’re guiding 2Q down low single digits, so call it flattish for the first half and the full year guide is down about 10% or so, which is seems to imply some pretty steep second half decline. So can you maybe just unpack that a little bit?
