Gregory Melich: I had a couple of questions. One is, how much did the volume decline year-on-year hurt gross margins in the quarter?
Allen Mistysyn: Yes. I think Greg, the — when you look at the volume decline being overall down low single digit, certainly, as I’ve talked about, that’s always typically the biggest driver of operating margin leverage. When you look at how that mix changes in the quarter, so we talked about Paint Stores Group being flat and then the other 2 segments being down more than that. So it was less of an impact than if Paint Stores was down similar, if that makes sense to you, because Paint Stores Group has a higher gross margin profile.
Gregory Melich: So it may have hurt, but not as much as you think, given the mix of where the volume decline was?
Allen Mistysyn: Correct.
Gregory Melich: Okay. And then I guess my follow-up question is more specifically on architectural. Could you give us some update on what the backlog that you’re hearing about or what it sounds like from the PROs, particularly in resi repaint, you mentioned how new residentials weak, but I’d love to hear more on the new res — I’m sorry, the resi repaint side.
Heidi Petz: Yes, Greg, I think on the res repaint side, it’s similar to what I mentioned earlier. I think you look at — traditionally, you’re going to see somewhere between 13, 15 weeks out, I would say that, that backlog has come down by 2 or 3 weeks, so a bit more limited in terms of visibility. But outside of that, again, I would look at it in terms of the size of the contractor, the level of experience, again, ability to market themselves. They’ve got further out site line into ’24 versus some of the other smaller contractors that are still trying to find ways to kind of build those backlog.
Operator: Your next question is coming from Ghansham Panjabi from Baird.
Ghansham Panjabi: I guess with the reversal high on interest rates since you last reported and just sort of building on the last question, how do you think this dynamic will play out for your 6 verticals within PSG relative to what you saw with the first iteration of interest rate increases because it seems like some of that was just dampened — some of the impact was dampened by the fact that the backlogs were actually very strong coming into this year.
John Morikis: Well, I think I’d describe it this way, that there’s some uncertainty given the challenges and interest rate can have on our market. And I think Heidi and the team are really focused on one very clear mission. We’re going to outpace the market. And we’ve got confidence in the approach that we’re taking, the services that we bring to the products that we are introducing. And quite frankly, we’re also taking advantage of other opportunities within the market. We’ve got competitors that are changing models as an example. And our simplified approach of dealing with 1 Sherwin-Williams stores as it relates to the painting contractor, we believe adds value. So the investments that we’re making will enhance that on top of the organic growth that we expect from our stores.
And so we’re taking advantage of market conditions where Heidi just mentioned some res repaint customers that may not have had experience going through a cycle yet. They are now turning to our people for guidance and support on how do you begin advertising. In the past, they just park their truck in front of a car — I’m sorry, a truck in front of a house in the neighborhood and all the neighbors would flock in. They need help right now. And so they’re turning to our people, and our people are playing an important role. And so when we look at what’s happening with interest rates, there’s some choppiness, but we also believe it creates opportunity. And we talked openly about adversity creates opportunity at Sherwin, and we’re capitalizing on that.
Heidi Petz: The piece I would add to that. I think New Residential specifically relative to interest rates, while the single-family completions have been flat or negative year-over-year for 8 straight months. We are starting to see the starts are positive year-over-year for 3 straight months. So we’re watching interest rates very closely, it may also signal that we’re past the bottom. So knowing that this is a choppy environment. Another point that I think is important here, while others are talking, the market are talking about preparing for the slowdown, it’s really important that our teams are laser-focused on preparing for taking disproportionate shares. So we went into COVID with a large majority of exclusive arrangements, with multi — with the national homebuilders, and we’ve come out building momentum in a number of exclusive contracts that we have with some of these builders.
I think that’s a testament to the team’s ability to demonstrate our value in this environment. And I’m going to take it a step further here, and this goes back to some of the discussion on working capital. We talk about managing our working capital really closely. And — but as we’re having these partnerships and trying to demonstrate more of Sherwin’s value proposition, especially in the New Residential space and in this environment, helping to get in front of — helping them to streamline and standardize what it is that they’re doing in terms of the product that they’re bringing to market so they can be as aggressive as possible, helping them look at ways to reduce cycle time, and this all in an effort to, of course, help them drive increased profitability and productivity, but also to be as effective as they can be with their working capital again in this environment with a lot of volatility in the interest rate.
Ghansham Panjabi: Got it. And then in terms of free cash flow allocation, I guess, going back to the fact that interest rates are much higher. It looks like you have about a little over $2 billion of debt due for refinancing between ’24 and ’25. How are you thinking about the terminal sort of balance sheet leverage for Sherwin-Williams at this point, given the changed interest rate environment?
Allen Mistysyn: Yes, Ghansham. I think you remember, coming into the year, I said, I thought we’d keep our total debt flat with year-end 2022. But as you saw at the end of the third quarter, our net debt-to-EBITDA leverage ratio was 2.2x versus 3.1%, and that was a combination of a strong — you’ll get a trailing 12-month EBITDA growth of over almost — a little over 28%. But we also reduced our total debt by almost $600 million. I would expect as we kind of forecast the end of the year, would keep that total debt lower year-over-year by about $600 million and will be firmly in that 2 to 2.5x range.
Operator: Your next question is coming from Arun Viswanathan from RBC.
Arun Viswanathan: I guess, I just had to maybe get your thoughts on Protective and the other markets within Industrial. What are you seeing maybe if you can just run through some of those verticals? Apologies if I missed that earlier, but it seemed like wood was unusually strong. We’re expecting some weakness there, but that was actually better Protective & Marine, obviously, strong; Refinish, I would imagine there’s still strong; Packaging, weak. Could you just reiterate what you’re seeing in those markets?
