Allen Mistysyn: Yes, Josh, I think you hit it, I mean, if demand continues to deteriorate, we would — or more so than what we expect in the back half, you’d expect raw material costs to drop with that. And there’s not long-term contracts or agreements that lock us into to not participate in those kinds of actions.
John Morikis: These principles of supply demand we’ve dealt with for decades.
Operator: Your next question is coming from Greg Melich from Evercore ISI. Your line is live.
GregMelich: Thanks. Two questions. One, thanks for the helpful CAGRs on new resi versus resi repaint. Could you remind us as to how much bigger the resi repaint businesses compared to new residential?
Allen Mistysyn: Yes. It’s — Greg, it’s today, 2:1 res repaint versus new residential. Back — prior to ’08 and ’09, it was 1:1. So John talked about the tremendous low double-digit growth in both segments since 2010. It’s just the new res repaint was starting from a higher base.
Greg Melich: So repaint is 2x new res today?
Allen Mistysyn: Yes.
Greg Melich: Perfect. And then the second is more about understanding the gross margin progression. It sounds like 45% to 48% is still the right goal. I think, John, you talked about getting that in a couple of years in a normalized environment. So I guess my question is, if volume this year ended up being flat or slightly up as opposed to down, would we be back in that 45% to 48% range this year? Or is there something else going on that is impacting being on…
John Morikis: No, I think that’s a fair — that’s directionally fair. I think if the volume is better. And in particular, the volume is better in TAG because it’s our highest gross margin segment. And yes, with the pricing that we would maintain the majority of monitoring raw materials, the continuous improvement mindset that we have across our manufacturing and distribution facilities all play into driving that margin to that 45% to 48%. But to your point, Greg, it’s always about volume, and it’s about volume through TAG that’s going to help lift that gross margin.
Greg Melich: Fair enough. Would it be fair to use the fourth quarter as a proxy to get an idea of that operating leverage? In other words, it looks like volume was maybe 300 or 400 bps lower than you thought it was going to be and gross margin end up being 200 basis points lower? Or am I thinking about that the wrong way?
Allen Mistysyn: No, I think you’re I would say, you’re directionally accurate here.
Greg Melich: Yes, good luck and thanks for all the info.
Operator: Your next question is coming from Steve Byrne from Bank of America. Your line is live.
Steve Byrne: Just following up on the comment, John, you made earlier about your home center partners or you’re helping them as they requested for the Pros Who Paint. And I was just curious whether any of your home center partners within consumer are trying to do what you can do through your stores, like delivery of large volumes to the job sites on a digital access. Are you seeing any of them do that? And does that have any impact on your stores in the area?
John Morikis: Yes, Steve, I want to be really clear here that we’re supporting our customers and their efforts to apply and execute on the strategies that will help them grow in this business. I think what you’re trying to get after is cannibalization between the home centers and our stores. And we’ve looked at this in great depth. There would be very little — there might be a few accounts here. They are a small amount. But we would gladly put those on the table to expand into a virtually untapped market for us. And the painter that’s in our stores every day has expectations that are likely best filled through a specialty paint store. Some of them find their way into home centers, and we want to support those that find their way in there.
But I would say that the target here and the higher level of success is going to be attracting those customers into the home centers that prefer the home center experience, largely because of the breadth of the product lines. And so we’re not bashful about it. There’ll be a little bit of cannibalization, very little compared to the opportunity that collectively we can pursue with our partners.
Steve Byrne: Okay. And I wanted to ask you how much visibility do you have to the backlog that your contractors have? And do you have a view on how much do they have, whether it’s residential repaint versus commercial and property management? Are those meaningfully different right now? And was there a big change recently. We had some dialogue with some contractors where there was a significant change like in the last month.
John Morikis : Yes, there’s been some change. I referenced that earlier that the pipeline of bidding has tempered down a bit. The quality of those bids seems to be improving and the scope of the projects continue to actually grow. I’d also say — so the answer is yes. We do work closely with our customers. And as I mentioned previously, we I think are working much closer with them than ever in my career, partially because of the experience that we’ve had over the last couple of years. And so I’d say there’s a wide spectrum. If you look at the one end, the commercial painting contractor and the industrial painting contractor, they generally have a longer view of what’s happening because of the scope of the project. On the commercial side, something might be coming out of the ground and that project may be in a couple of years in the making.
Industrial side, when they’re talking about the protection of assets, there’s usually a plan that they’re following. That would be on the far right side. And on the other side, a shorter line of sight would be the residential repaint side. And in between would be property maintenance and new residential where there are varying lengths of view, if you will. So we work with our customers, all of them to have a good understanding. There has been some shift that’s reflected in our guidance that we’ve given. But again, I want to reiterate, I want to — this is really important. I apologize for repeating it so often here. We’re not sitting here on our back saying well bad things are happening to us. We’re aggressively pursuing any one of these segments we can talk to, what we think the market is going to perform it and how much better we expect to perform in that market.
So whilst even some of the bidding that might have tempered down, again, we’re not sitting here with 100% market share. We’re aggressively pursuing and we expect our competitors as they pull back, we’re going to take advantage of those opportunities as well as the new products. You mentioned a couple of those, the services, the new stores, we’re going to be very aggressive during these times. And we expect as we go through this, to grow share. And as we come out of it, that coil spring is going to pop.
Heidi Petz: The other thing I would add is, I think everything that John just covered across segments, I would say that in general, our customers like we have become better planners. And together, we are creating not just that stickiness we always talk about, but becoming better business partners and business planners together.
Steve Byrne: Thank you.
Operator: Your next question is coming from Garik Shmois from Loop Capital. Your line is live.
