Allen Mistysyn: Yes. I’d start with, Mike, that as we typically do, we saw our inventory gallons decreased sequentially as we — we’re getting back to a more typical bell curve. We grow inventory into the summer selling season. We see incremental decreases as we go through the second half, and then we’ll build inventory in our fourth quarter. That consistency allows our customers to also manage their inventories better because you’re back to a more normal environment. To that point, I would say, we expect our working capital trend towards 11% to 11.5%. We were at 12% coming out of the third quarter. So we’re well on track for that. And what it’s allowing us to do is drive significant cash flow, and you saw that in our third quarter and that’s a combination of strong net income results and working capital management.
And we expect to flow that through into our fourth quarter and have a really strong cash year that’s allowed us to be very flexible. Ghansham talked about, our ability to pay down debt, but it also allowed us to return cash to our shareholders in dividends and buybacks, and we’ve returned over $1.4 billion to our shareholders over that time. So in this high interest rate environment, we get back to our more normal operating cadence with inventory, and you’ll see us manage our working capital down which then allows that consistency to allow our customers to manage their working capital down.
Heidi Petz: And one piece I would add to that as well, I go back to Al’s point here. We put by design very intentional capacity to work here so that as we’re partnering closely to manage and optimize working capital and inventory with our partners that we’ve got the confidence that we can have the capacity to build the inventory in time for the season ahead.
Operator: Your next question is coming from Duffy Fischer from Goldman Sachs.
Patrick Fischer: John, you’ve often talked about things like sprayers being a good leading indicator what you’re seeing in your stores with like a 1- to 2-quarter lag. What is that equipment sale telling you today about what the next couple of quarters holds for the store sales?
John Morikis: Well, Duffy, I’d say that, what it’s telling me now is that we’re ending a season. So I’d say, while we talk about that, typically, the greatest correlation between those types of sales and confidence is usually as we go into the season. As we’re coming out of the season, we are continuing to see spray parts right now move. And I’d say right now, as we’ve talked, there’s a choppiness in the market, but we have confidence in our position in the market, and we’ll see how this unfolds next year as we go into the paint season. Coming out of it, though, it’s typically not the best tool to use to gain a level of confidence of contractors.
Heidi Petz: But what we are seeing there too, despite the sprayers is the backlog of projects for our commercial contractors continues to be solid, well through the midpoint of next year. So getting back to more of that normal cycle. So good indicator of some growth there.
Patrick Fischer: Fair. And then Heidi, I think you made a comment that your gallons per day had bottomed in your view. I didn’t understand — was that for the company as a whole or was that for Paint Stores Group and that’s even inclusive of kind of the seasonal weakness that we generally see in Q4.
Heidi Petz: That was just in Wood.
Operator: Your next question is coming from Kevin McCarthy from Vertical Research.
Kevin McCarthy: Yes, I was wondering if you could comment on your administrative costs. It looks like they jumped up a bit in the third quarter. And in reading the commentary you called out 2 items, namely environmental expense and asset disposals. So a few questions would be, what are the nature and magnitude of those items? And would you expect that line item to come back down in the fourth quarter and beyond?
Allen Mistysyn: Yes, Kevin. The year-over-year increase, I would say, environmental was a little less than half of that increase year-over-year. And then costs related to our Garland plant fire is a little less than half. And we also are going up against a sale, which benefited our — gain on sale of assets last year that benefited our third quarter last year. I would say, I’m glad you asked that question because I think, I want to give a little color around our fourth quarter guidance, even though we don’t get EPS guidance, it’s implied and it’s backwards. But I think a better way to look at that is our guidance at the operating margin line, and we’re expecting our fourth quarter operating margin to be flattish at the midpoint year-over-year compared to a strong fourth quarter last year with operating profit up to over 60%, and our operating margin was up 450 basis points.
So we’re not — we are expecting gross margin expansion in our fourth quarter, not as much as we saw in our third quarter. We see raw material moderation. We’re not going to get as big of a price tailwind that we got in our third quarter. And I do expect higher SG&A year-over-year because of the long-term investments. So then that gets us to these nonoperating costs. And we have approximately a $60 million increase in our nonoperating costs that will be predominantly in our admin segment. And it’s due to the credits that we realized last year in environmental and other income in the fourth quarter that we don’t expect to repeat and really get environmental and these other expense lines to a more normal level.
Kevin McCarthy: Okay. And then as a second question, if your raw material costs were to trend flat from here, would it be reasonable to estimate that you could see relief in 2024, perhaps in the negative low single to mid-single-digit percentage range, or how would you frame that outlook for next year as it relates to raw material costs, specifically?
Allen Mistysyn: Yes, Kevin, I think with the current environment and the volatility we’re seeing both in oil, in the choppy demand environment. I know historically, we’ve given run rates, a preliminary run rate on raw materials. I think that’s probably a little too soon for that in the sense that we also have to take a look at the other cost factors in the total input costs. I talked about the merit increases, getting back to more normal levels. But health care is growing significantly. We have freight costs and there’s some things going on in the LTL freight side of the market that are driving our overall cost up. So I think it’s a little premature to give that level of guidance. I’d rather wait until we get more line of sight or a better line of sight and give you an update in January.
Operator: Your next question is coming from Aleksey Yefremov from KeyBanc Capital Markets.
Aleksey Yefremov: Al, I wanted to follow up on your comments regarding fourth quarter EPS. I guess, historically, it’s hard to find — in Q4 where sequential EPS fell by more than $1. You’re looking at somewhere around $1.50, $1.55, based on your guidance. Is there anything else going on sequentially besides the year-over-year things that you just pointed out?
Allen Mistysyn: No. I think that’s going to be — when you — the bigger driver sequentially you have is the decrease in sales on the seasonality of that. I think what’s hard Aleksey is, you look at our last 4 years, it has been choppy, really choppy quarter-to-quarter, including third quarter to fourth quarter. So I think you got to go back pretty far to find a more normal year. I think the — like I said, the gross margin, I do expect to be higher year-over-year, but sequentially lower because of less of the tailwind in price. I think SG&A growth is probably higher in this year’s fourth quarter sequentially than it has in past years because of the things Heidi talked about, about leaning in harder on, investments in our paint stores.
