宣偉 (SHW) 2021 Q4 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's Preliminary Review of Fourth Quarter and Full Year 2021 results. With us on today's call are John Morikis, Chairman, President and CEO; Al Mistysyn, CFO; Jane Cronin, Senior Vice President, Corporate Controller; and Jim Jaye, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode by Issuer Direct via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com, beginning approximately 2 hours after this conference call concludes. This conference call will include certain forward-looking statements as defined under U.S. Federal Securities Laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the company's press release transmitted earlier this morning. After the company's prepared remarks, we will open the session to questions. I will now turn the call over to John Morikis.

Thank you, and good morning, everyone. Earlier this morning, we released preliminary sales and earnings per share results for the fourth quarter and full year 2021 that differ materially from the sales and EPS guidance we provided back on October 26, 2021. Fourth quarter consolidated sales increased approximately 6%, a number within our guidance, but at the lower end of the range. Segment sales mix was different than anticipated, which I'll detail in a moment. Full year sales increased approximately 8.6% to $19.9 billion. Our preliminary full year 2021 adjusted diluted EPS of $8.15 missed the midpoint of our previous guidance range by approximately $0.30, and compares to 2020's adjusted diluted EPS of $8.19. The majority of the miss was driven by the Americas Group, where sales came in below our guidance in the fourth quarter. In the interest of time, I'll keep my prepared remarks brief. Then we'll open the call to questions.

I'll start with sales. While we were within our guidance on a consolidated basis, segment mix was different than anticipated, which impacted profitability. Fourth quarter sales in the Americas Group were up a low single-digit percentage, a level below our mid- to high single-digit guidance. We experienced unfavorable mix in the quarter with paint sales missing our targets, but partially offset by a better-than-expected performance in non-paint sales. This was against a 9% comparison a year ago. Price realization in the quarter was in the high single-digit range. Sales were impacted by continued choppiness in raw material availability, including selected resins and additives which are key ingredients in many of our professional contractor products. Logistics and transportation issues also impacted the supply chain. TAG sales in October met our expectations, highlighting strong demand in the market. Given the slower-than-anticipated recovery in raw material availability, industry-wide logistic challenges and the resurgence of COVID, sales progressively softened starting in late November and into December and finished well below our expectations.

The virus meaningfully impacted our TAG workforce, including store managers, field sales reps and drivers, resulting in reduced staff availability, store hours and deliveries in some districts, particularly in the last 2 weeks of the year. Multiple suppliers and customers also reported increasing rates of labor absenteeism in the quarter due to the virus. January is off to a slower start as availability and COVID headwinds are persisting. The underlying good news in all of this is that demand remains solid in all TAG customer segments.

Fourth quarter consumer brand sales were down by high single-digit percentage, which was better than our guidance of down mid-teens. Price realization was significant but less than TAG. Sales improved sequentially each month and were positive in December. The majority of the sales beat was driven by stain in other non-paint products. Paint gallon production was below anticipated levels, though raw material availability was slightly better here than in TAG, given the different product formulations and more uniform offering appropriate for customers in this channel. Performance Coatings Group sales also exceeded expectations and were up by a high teens percentage in the quarter. This was against a high single-digit comparison in the fourth quarter of 2020. Price realization was in the low double-digit range. Sales were up double digits each month and we generated double-digit growth in all regions in most businesses.

Turning to our preliminary earnings results. As I mentioned, the miss in the quarter was mainly related to lower-than-anticipated volume in TAG. Additionally, raw materials and other cost inflation exceeded our estimates. We also experienced supply chain inefficiencies as we made the strategic decision to maintain people in our plants and distribution centers despite the choppiness in raw material availability. Given the current labor environment, we believe this is the right decision so that we are able and better positioned to produce paint quickly as raw material availability improves more meaningfully. As we enter 2022, demand remains strong across the majority of our end markets, though we expect raw material availability in COVID issues to persist through the first quarter. Raw material and other costs remain elevated, and we continue to respond with aggressive pricing in every group, including a 12% price increase in the Americas Group effective February 1. We've continued to make additional investments in our business, including the additional 50 million gallons of incremental architectural capacity, which we discussed last quarter. This capacity is now online and making paint. Additionally, we opened 79 paint stores in the U.S. and Canada during 2021, including 32 in the fourth quarter. We also continued to return cash to our shareholders during the year, paying $443 million in dividends and buying back 10.1 million shares of company stock for a total of $2.75 billion. And finally, we closed on the acquisition of Specialty Polymers Incorporated in the quarter, which will strengthen our in-house resin capabilities. The purpose of our press release and call this morning is to update you on our preliminary results for the fourth quarter and full year 2021. I realize this information likely raise as many questions about 2022, and we intend to address those questions on our fourth quarter year-end earnings call scheduled for January 27. We appreciate you holding your 2022 questions for that call.

As I've often said, we're not running our business for the perfect quarter. While we're not pleased with our fourth quarter performance, we remain highly confident in our strategy and our ability to emerge an even stronger company, following the current near-term disruptions. We have an experienced leadership team in an unparalleled workforce, which will continue to drive our success in the marketplace.

At this time, we'd be happy to answer any questions you have about this morning's release.

Ladies and gentleman the floor is now open for questions. (Operator Instructions)

And our first question today is coming from John McNulty at BMO Capital Markets.

I guess the first 1 would just be on TAG because it sounds like it was kind of steaming along as expected in October, which is such a big month relative to the other 2. I guess, can you help us to understand how much things fell off as you kind of went into November and December to kind of come in with this being kind of the big driver behind some of the weakness?

Yes, John, I think your observation is a good one. Demand is strong and October came in as we had planned, and there are a lot of reasons for that. So I'll take a minute to get on to that, and then I'll turn it over to Al to talk a little bit about the specifics of your question as far as diminishing results. But as it relates to October, it's driven based on the demand that we see, strong Lyra, ABI, Dodge, all pointing to strong demand, and many contractors who obviously, we're spending a lot of time with, with our sales organizations, referring to a backlog through Q2, with bids increasingly coming in at a pretty steady rate. So as we came through the beginning of the quarter feeling pretty good and feeling as though there was some good momentum. Outside the comments I just made referenced primarily residential repaint, we talked about property maintenance you know lot of demand in this area as well. Specifically, if you look at the higher turns that we're experiencing in our property management companies, these all bode well for repaints as well as CapEx in common areas so was as exteriors and new construction. So there as well as in commercial where we've seen consistent indication of a strong backlog gives us confidence in the demand equation. But we did face a growing issue in COVID and a repeating new with the raw materials that you referenced, that did have an impact. And I want to turn it over to Al to talk a little bit about what that looked like as the quarter where...

Yes, John. So like we talked about, the availability issues that we thought we'd get passed in October and improve in November and December, didn't happen exactly the way we expected. So if you think about just versus our expectations, the total of the real miss was in November and December. And in the third quarter, our forecast for the fourth quarter, we assume a seasonally adjusted sales trend, maybe less though than what we experienced in prior fourth quarters. So we were expecting to see less of a decrease because as I talked about in the third quarter call, we are expecting to be in a make-and-ship mode. And not build any inventory in our fourth quarter, and then we build inventory in our first quarter. Well, I'll just talk about inventory briefly. We did build inventory in our fourth quarter that I think actually puts us in a better position coming out of the fourth quarter than we would have been previously all driven because of the miss and TAG. If you look at our inventory build, it was in TAG, consumer, every gallon we made got shipped. And the part of the inventory build, just to be clear, we made gallons where we have raw materials. They may not have been the right gallons in this time frame, but we made them. We know we're going to sell them in the coming quarters, but we had to make as much as we can make. And even then, we didn't have all the raw materials we needed to make the gallons we had projected to make coming into the quarter.

And clarity to Al's point about it may not have been the right gallons, that's based on the raw materials that were available. So as some of those raw materials became available, and there might have been sample some exterior gallons that we'll need as spring rolls in rather than pass on those raw materials, we grabbed them, made the exterior product knowing that we would need them in spring, which gives us the capacity to come spring to be able to be more responsive to our customers on that side.

Got it. Makes sense. And then maybe just as a follow-up, it seems kind of nuance but it seems like you've got -- it sounded like you have the raw materials or at least a better supply of the raw materials for the consumer side than you did for the TAG side. I guess, can you help us to understand maybe the few raws that are just really out of whack at this point that would cause a dynamic like that?

Well, let me -- I'll turn it over to Jim to talk about some of the more specifics. But the point there that you referenced, I think, is an important one. We made whatever products we could based on the raw materials that were available to us, as you look at the consumer business, much of that is legacy Valspar business that came with a different formulation, often resins and different thickeners that might be a little different than what our tag business was based on. So we're out buying everything that we can and making it and converting it as quickly as possible to getting it to our customers. With that in mind, as those products that fit the consumer -- customers' product lines were available. We were quick to produce those and get them out to our customers.

Yes, John, I agree with what John just said. I mean, to reiterate that we're not necessarily going to get into the specifics of what raws were in short supply beyond our common specific resins and additives that are key for the pro contractor formulas. As you know, the offering in TAG is highly tailored to specific end markets and applications while the CBG offering is a little bit more uniform to meet the needs of customers in that channel.

Yes. I think that's really well said. When you look at our segments, we take great pride in our controlled distribution model. So we know firsthand what a res repaint customers' expectations are in a gallon of paint versus a property maintenance versus new residential and we formulate our products uniquely for those. We think that's part of the secret sauce. Some of those additives, particularly might be what they refer to as small molecule, small batch products are sometimes difficult to get our hands on right now, but very important in the consistency of the product that we're providing our customers. So we're moving aggressively. And the other thing I want to point out and I give great credit to our procurement team, our new leader over there, Colin Davie and his team for doing a wonderful job of -- we're working very closely with our suppliers in a very collaborative way. And we think going forward, there's additional opportunities for this collaborative effort to help us to be a better customer of our suppliers by working to consolidate some of these products, minimizing risks in the future. and becoming more efficient ourselves at the same time. So there's a lot of work going both short-term and long term to better position our company as we exit this.

Our next question today is coming from Ghansham Panjabi at Baird.

A belated Happy New Year. I guess going back to the labor impact specific to Omicron within TAG, can you give us more color on how that is playing out for you in real time? Has absenteeism peak for you based on what you can tell at this point? Or is it too early? And then related to that, I assume your backlogs are very high, but the labor challenges are going to be a big issue throughout the supply chain. So just based on that, how long do you think it will sort of realistically take for the supply chain to catch up to the backlogs?

Well, I'll start with the end, we're going to be working hard all year. And our teams are preparing for that, and our suppliers know that. And so you're right, there's some choppiness here that we're going to expect. We just added that capacity that we referenced both last quarter and earlier this morning -- earlier in my prepared comments, and we're going to be utilizing those assets as hard as we can going forward. As you mentioned, the impact on our stores, this might give some color to your question, Ghansham. 35% of our districts had a greater than 5% case rate in the fourth quarter, 9% of those districts had greater than a 10% case rate. And so it is impacting our entire organization. And -- And so you look at our stores, our reps, our plants, our distribution centers, our field leadership, our drivers, certainly, even here in our corporate offices, but it's our employees are not the only ones in the community getting sick to your point. So it's impacting our suppliers. But it's also important to understand that it's impacting our customers as well. So if you apply that same map just as a guide, many of our customers are referencing 5%, 10%, 15% of their workforce that were home sick. And if you extend that out, many of their customers. So you take a res repaint customer who is painting in someone's home, many homeowners were home sick. And naturally, many of those people were not inviting people into their home while they were home quarantine for COVID. So there was almost -- I might describe it this way, and I have a lot of discussions about this as the quarter was rolling through. And even as we come out in the new year. I wouldn't call it universal, but there certainly was a common theme that we were experiencing, which were painting contractors experiencing this phenomenon of their workforce sick, their customer sick. And as the holidays rolled in, it was really spiking. There was a sense of, okay, let's just shut this down and get through the holidays, and we'll restart on the other side.

That said, I want to be very clear in this. The reason we're so confident and remain very bullish and you see it in our investments and what it is that we're doing. Demand is strong, and our customers are feeling very good about it. So -- but to your point, labor is going to be an issue for the contractors. This COVID, we're not sure the run that it's going to take some speculation that it's come in fast, it will leave fast. There's others that say it will be here for a little while. We're not experts in that. But we're experts in taking care of our customers. And that's what we're working really hard to do is understand what it is that their needs are and how to deliver those. So -- we're working with our suppliers. We're going to convert these raw materials as quickly as possible, and we're going to serve this really strong demand as best as we can.

Yes. Ghansham, the only thing I would add to that is if you look at the cadence of the case rates, and I'll just say it as a company, October was pretty light, and then it ramped up in November and it really spiked in December. If you look at December, the case rates were double -- more than double what they were in October and November. So just from a line of sight standpoint, it was tough to see on October 26, what the impacts we would experience as the quarter went on. But it definitely spiked in December.

Yes. That's very helpful. And then just on the 12% price increase, effective that one for the TAG segment. Just give us more color, does that catch you up on previous inflation? Or are you just adjusting for search pricing that you're seeing for some of the cost baskets, labor cost inflation? Just more insight into that 12% number?

Yes. It's encompassing each of the raw material increases that we've experienced that will annualize into 2022. It does include labor cost impacts. As you know, the labor wages in various -- both in plants, distribution centers, are drivers our employees at the field location have gone up dramatically. So we can keep the quality employees that we have hired throughout the year. The wage inflation is a real event in a series, and we're building that into our price increase to make sure that our customers are not seeing the turnover at the counter that they've become used to. Quite honestly, our turnover rates have been so low in our field organizations, and we're making adjustments where we need to, to make sure that continues.

And Ghansham, I'd just add, you asked about the 12% in TAG. We are with aggressive pricing in every group in response to raw materials in TAG specifically we -- as Al just mentioned, there is a level of expectation, if you will, with our low turnover in the stores. those are customer-facing relationships that are so important. But even there, our customers are telling us that this is a market where they're getting price. So while we're pushing this through, they are as well. And I'll remind you, and I know you know this, we've talked about this a number of times, 85% to 90% of the contractor's cost of goods, if you will, is labor. And so our ability to continue to help them with products and services that help their productivity are well received. No one is happy with price increases right now, but this is a market where our customers are pushing the pricing through.

Our next question today is coming from Vincent Andrews at Morgan Stanley.

Maybe in Consumer Brands, you mentioned that sales were ahead of forecast, but not because of paint, these are stains and other things. Could you just talk about is the driver of that, just the paint wasn't on the shelf to sell? And if it was, then you would have had paint sales in excess of your expectations? And I guess I'm really just asking for an update on where you think DIY trends are in Consumer Brands?

Well, I think we absolutely could have sold more through CBG if we could have made more. There's no question about that. And we've got a lot of wonderful customers there that we're trying to work through. We know they have strong demands, and we're working hard to get on top of those. The difference between some of the stains and paint-related products had to do with our ability to get the raw materials. I believe the ability to get back on top of this. We have been forced to, in some cases, lower down the breadth of the product line to be able to make sure that we're servicing our customers. So the opportunity ahead is to continue to serve in these other areas, obviously, expanding our availability to our customers in the workhorse lines, but also in some of those ancillary or adjacent product lines as well. And we're determined to do that. We believe the relationships that we have with our suppliers and the additional capacity that we have will allow us to ramp up and be able to do that. Now that said, First quarter is an important quarter for us to build that inventory and get on top of that. So we're working hard right now to acquire and convert as much as possible so that we can get into the paint season where demand is much higher with as much inventory as possible.

Yes, Vincent, I'd just add to that. If you look at the quarter for consumer on sales, if you back out the impact of the waddle divestiture earlier this year, our sales would be up flattish to last year, but up almost mid-teens versus the fourth quarter of 2019. So you do start seeing the annualization of the tough times that we saw in 2020 and improvements on top of those.

And there's a lot of really good things taking place with this Consumer Brands business. We've got a lot of -- we talked openly about our pro to paint initiative, a lot of effort going in, not just in the DIY side through these important customers, but also on the professional side as well. We're committed to this. We're going to make this happen.

Our next question is today coming from David Begleiter at Deutsche Bank.

John, just on raw material availability, is it improving? And how do you expect it to improve throughout Q1 and Q2?

It is improving. I expect it to continue to improve, but I do expect it to be choppy. I'll remind you, let's say, on an average gallon of paint, just directionally, let's say there are 16 raw materials that go into a gallon of paint. We need all 16 of those to be able to make paint that batch. And so when 1 small item is missing, it could be a challenge for that plant, that batch. And so we're -- as Al mentioned, this is real time. We're not building or working off of a lot of inventory. It's making shift from us to our customers, and oftentimes, most -- nearly every time right now with our suppliers to us. So each of those elements -- items are very important in the manufacturing. I expect the first quarter to be choppy. I expect it to be better as the year goes on.

Very good. And just maybe longer term, there was a recent announcement by Home Depot and PPG about expanded relationship targeting the Pro sector. any concern on your end or how strong competitive do you think they'll be in that Pro setting going forward?

I respect every competitor I have, but I have a lot of confidence in my customers and our determination. So we're going to be working really hard to make sure that every change that a competitor makes is an advantage to us. And we've got a terrific set of customers on that CBG side to be able to compete. This is -- again, if you go back in time just a moment and just say, we made a very, I think, bold and important strategic decision to pull some brands and move them into other customers. That alignment between Sherwin-Williams and Lowe's and Sherwin-Williams and Menards. They were -- our determination on display was our determination on display. These contracts and the reason we call them pros who paint are they typically are remodelers and they do other work other than just painting. Many of them prefer that channel of distribution so that they can go in get a broader assortment of products than just paint. This alignment gives us a terrific opportunity to better penetrate a segment that as a paint store, we don't offer all those other products. So we absolutely believe that it was the right thing to do, and we've got terrific confidence in our ability to deliver for our customers and a greater amount of determination to do just that. It's -- It's moving in the right direction. We want it to move faster.

Our next question today is coming from Kevin McCarthy at VRP.

John, relative to the 12% pricing you have set to flow through in TAG effective February 1. How would you characterize the pricing uplift in consumer and in Performance Coatings? I appreciate you have a variety of customers and end markets there. But perhaps you could give us a sense of the relative magnitude and timing of price contributions there.

Yes, Kevin, the consumer price increases is very similar to the TAG, if not a little higher, just because of the catch-up that needs to happen in the channel, as you know, or TAG. It's a little more uniformed a little more consistent across each of the customer base, the consumer is a little more choppy. But ultimately, we need a similar amount of price in our consumer -- Performance Coatings, depending on the business, it may be out with more -- maybe out with a little less. It really, as you know, the increases we saw in 2021 on raw material costs hit our industrial businesses harder. I talked about 60% of the increase in raw materials in industrial. So they've been chasing it all year, and they're going to be out strong in the first quarter across all our businesses, all our regions, some much higher than 12% just because of the need.

Yes. We've learned a lot. If you go back to 2016 to today, in particular, the need to be out there, getting the price when it's moving and we've got a lot of conviction to be able to do that. And we work hard every day for our customers, trying to improve their efficiency and drive their profitability, help them reach their goals. And to be able to do that, we need to be able to take care of our shareholders. So we're not looking to get fat here. We're trying to protect our company while helping our customers. So there's -- you should expect a great deal of determination in getting this pricing in.

Understood. And then as a follow-up on consumer, is there a way to characterize how depressed your customers' inventory levels are in general? Just trying to get a sense of looking through the other end if we're able to alleviate all the various constraints. How much of a volumetric uplift might we expect at some point in '22 as the downstream inventories begin to normalize?

Yes. There's a fine line here. I hope you'll respect. I will tell you their inventories are lower than they would like, lower than we would like. We're going to be working hard to build them. But I don't feel it's appropriate for me to comment on their inventory levels. Out of respect for my customers, I will tell you that we have our work ahead of us and a lot of conviction and determination and confidence that we'll be able to do it.

Fair enough.

Our next question today is coming from Mike Harrison at Seaport Research Partners.

John, I was wondering if you could maybe give us a little bit more color on how it affects your paint stores when you have staffing issues. Are you -- you mentioned operating reduced hours. Are you having to close some of your stores temporarily? Are you paying over time? I assume that they're in addition to some higher costs, maybe some service impact that are dragging on volume. So maybe just help us understand at the store level, what the impact looks like? And what steps are you taking to work around some of these staffing issues again at the store level?

Yes. So it's a really good question because I think that the way that we've experienced has impacted different areas and different density -- or intensity, maybe better word. So let me start with this. We don't believe that we've lost customers. We do believe that there have been times we might have lost projects or some specific products. But we believe these are transactional. In fact, many customers have returned to our stores with a greater appreciation for Sherwin-Williams and our value proposition. Through this process, we believe we've maintained a transparent and, I'd say, a very responsive approach to our customers. And we've utilized our distribution platform, we believe, to be in a way to be more responsive and more deliberate in working with our customers, kind of leveraging our core, I guess, is the way that I would describe that.

Now -- so to your question, what does that mean? And then I'll also add maybe how the result has been. First, I would say, as I mentioned earlier, our customers have felt the same impact. So part of what's impacted the sales. And we're using the statistics I just gave you about the number of case rate we had in our districts as kind of an indicator or indicative of what's happening in the market. But what has happened in some cases is customers have come in and we may not have had delivery available because the drivers that we're out were sick, and we may have not been able to hit a time line where someone needed it. And in a time like this and the holidays as an example, where people are trying to get projects done, it could have been impacted. -- could have -- actually, let me start with we had issues with raw material suppliers that work through our plants, that work through our distribution center then to our stores. So it's kind of a compounding issue that we face. But as it relates to our stores specifically, you have reps that may not have been out calling and working with their customers, could have been specification efforts that may not have been taking place and staffing levels in the store. And what separates us from our competitors is in a specialty store format, where we are exceedingly responsive to our customers' needs. As we faced some of these challenges, you're right, there were times where we had to close stores. earlier than we would have liked. In some cases, we had to close stores and because we didn't have staff to be able to do that. So the responsiveness at our field level with our leadership teams of ensuring that we're doing what's right, what we believe will allow us to get back on top of that. When I say what's right, that includes the steps we're taking to ensure our people are safe in our stores that they have the resources that they need and certainly that they have the product that they need.

Now all that said, what I think is important to understand also is that our teams are executing. And what's amazing is despite the challenges that we faced, as I'll give you another couple of statistics here. I think that we'll capture what's happening. If you just go back in time, I'll use a 2018 period, and then I'll use today, as an example of the ability of our stores to execute. In 2018, if you use our national accounts, as an example, which is a big part and growing part of our business. 63% of our national accounts that we contracted with would have called us exclusive. As we exit 2021 with the challenges that we have faced, not only last year but the year before, our account base, the numbers have grown and the penetration has grown. So what used to be 63% contracted as exclusive is now 83%. So we're focused on the success of growing with our customers and growing the number of customers. And then people in our stores and our reps allow us to do that. During a very short period of time between November and December, as this COVID rolled in, we weren't able to always deliver on what it is that has allowed us to separate ourselves from our competitors. We have a lot of people that were sick and a lot of customers that were sick as well. And so as we come out of this, we're resuming that level of service, and we expect to regain those customers and build on those relationships.

All right. Appreciate the detail there. And then you mentioned the SPI acquisition. I'm not sure exactly when that closed, but you have expected to incorporate that into your internal resin production network. Can you maybe give us a sense -- again, I know it's not been very long that it's been in the fold, but how is that integration progressing? And have you started to see that alleviate some of the resin availability issues?

Yes, it only -- it closed in December 1. So we've not seen a tremendous amount of impact yet, but we do have high expectations. And this is -- our teams have been inside these facilities. I think I'm going to be there in the next week or 2 as well myself. Our teams have been there, very impressed with the assets, very impressed with the people. We've known these people. They've told produced resin for us in the past, but we're really excited about this. This is going to be a an area that we feel we can invest in and not a tremendous amount of money but get a very good return.

Our next question today is coming from John Roberts at UBS.

You opened up a fair amount of new stores in the fourth quarter. How did you do that? And did they mostly open in October before the staffing issues? And will they take longer now to turn profitable because of the staffing issues?

So John, I think the lay-in was pretty consistent throughout the quarter, and we'd like to see that lay-in spread out more evenly throughout the year. But I think it's a question that we have to answer every year. It just seems like we're always fourth quarter heavy as just the negotiations and construction take place. Our teams have been hard at work in building up the pipeline of people. As I think we have -- I know you and I have spoken about this, our MTP program, we recruit about 1,400 to 1,500 college graduates a year to feed this important pipeline of talent to be able to serve our customers. So that's not a pipeline that gets filled when the store opens. So all of that heavy lifting goes through the year so that we're training and getting those people up to speed and ready so that when the store opens, they're fully prepared. Our view on this is that a customer is not coming into a new Sherwin-Williams store expecting anything less than the best. They're not going to accept that there's a new employee who doesn't understand our product line and our system. So those employees have been in the pipeline getting trained and prepared. And as they open, we staff those stores accordingly.

Yes. John, I'd just add to that. It just it shows the confidence and the commitment we have to our long-term strategy of putting stores in, putting reps in commensurate with those stores to drive future growth. And I don't believe the profitability will be impacted due to availability, due to inventory issues. We have a plan. We're working the plan. In our densest markets, we fully expect those stores to get to profitability within 18-months and grow from there and our least dense areas we keep putting stores in to hit -- we've talked about the glide path in our least dense districts. And there is a step change when we get to the density number that you have to be committed though to continuing to invest in these stores, and we believe long-term profitability will pay off for it.

And then last week, RPM indicated that they had a problem getting dryers in 1 of their businesses. Your stores distribute a lot of products that go along with paint sprayers, ladders, tapes. Is there -- are there any collateral constraints there as well? And I know sprayers and ladders tend to be leading indicators of paint sales. But is that connection maybe going to break down because of constraints in those other products?

No, I don't think it's significant. I mean I think a majority -- or many companies are having challenges with supply chain right now, but I don't think that there's anything sticking up they're saying, hey, we're going to have a problem in the paint industry because of this adjacent product or associated product. Our teams on that side and procurement are doing a wonderful job as well. And quite frankly, we work with our suppliers in a way we want to be the ones that our suppliers are betting on. We're going to be growing. They know it. We've laid out a number of our growth plans and strategies. We just talked about new reps and managers. We didn't talk about new products. We didn't talk about some of the other digital initiatives. I mean there's a lot of things going on that give us great confidence in a market with strong demand. And so when we are working with our suppliers, we want to be the ones that they're serving, and they see the growth opportunities. And I think we'll be ahead of the curve, taking care of our customers.

Our next question today is coming from Steve Byrne at Bank of America.

I recall last spring, when some of the raw material cost inflation was really starting to take off. You seemed very deliberate then about not pushing price in TAG as much as, say, your competitors. And I just wondered your view on whether this 12% now starting February 1 is a function of just the magnitude change now in raws? Or is it that you're a little bit of a cushion here ahead of the peak season for your contractors. Does that give you a little more latitude? And maybe just a follow-on on that. Do you have any empirical way of assessing whether the impact of that 12% price increase in TAG will erode demand in any way, whether it will cause your contractors to maybe have less loyalty or homeowners to take a break from remodeling activity. Any thoughts on that?

Yes, Steve, I think it's an important question. We really do a lot of work in the price elasticity modeling of our business to gain a really good understanding. So let me address the points that you made. First, as it relates to the end demand consumers. The fact that we build a very quality product that also comes along with great service, I believe, is an important element. And again, I'll repeat the important statistic of the fact that 85% to 90% of our customers costs are labor. And so we don't take that lightly. That doesn't give us the right to go in and charge whatever we'd like to. We need to be competitive, and we are competitive. But we're not trying to be the lowest price. We're trying to be the best at helping our customers be successful and the best at helping them make more money, and there are some costs associated in doing that. And if those costs aren't justified and we're not helping our customers to make more money, then we shouldn't be doing those things and they shouldn't be buying product from us. But the fact is, is that we, I think, demonstrate every day that value proposition in a way that helps our customers to, in fact, make more money. And that's an important gauge and an important question that we ask in nearly every survey, every market research project we do, which is who helps you make more money. We're proud of our position in that, which has been strong and continues to grow. As it relates to price, I think it's important to understand that we're not out there pricing with the idea that this gives us some cushion to be able to absorb more in the future. Our commitment to our customers is the exact opposite. We try to minimize the price increases that we go out. We try to drive more efficiency through our factories, our plants. I just mentioned earlier, formulation, everything that we can do that allows us to provide a high quality, the highest consistent product in the market at the most competitive price with all the other services that we provide. And as it relates to the cadence that you mentioned, the cadence, I would do that I'd make that exact same decision again. And for the rest of my career, I will always do exactly what we did because I know what it does to our loyalty with our customers. what we did was we worked with them as the cadence was picking up to give them more time to get in front of their customers. What we -- Well the difference now between this time that we're experiencing now and what we experience then is that we've been able to communicate to them a changing environment. So our pricing at that time was going out, and there were times when we talk about the paint season pricing or how long the price has been good. Now as we experienced a different environment, we've been more deliberate in sharing with our customers some of the challenges in -- or choppiness in pricing and availability, so that they can incorporate and cover that pricing in their pricing. And what we did during that time, I think, was terrific. We built a lot of loyalty, a lot of transparency, and we think we differentiated ourselves in the marketplace. And as we've come through this and I mentioned earlier, starting to get better as we exit this, I absolutely believe that we're leaving this chapter with a higher level of loyalty and a greater partnership with our customers as a result of the way we've handled this.

And any empirical assessment of homeowner impacts here? Do you see any price inflation causing an erosion in remodeling activity?

No. Actually, if you look at our mix, which I would use as a gauge for this, our mix is a positive mix. People are moving up in quality, paying more in product price to get a better product, both at the consumer level and the painting contractor. So it's the exact opposite of what you're asking.

Okay. That's helpful. And just 1 quick one. Are there any other raw materials that you are looking at that you might consider back integrating into?

No, not at this time.

Our next question today is coming from Eric Bosshard at Cleveland Research.

A follow-up and then a question. The price realization, I think you had a surcharge in 4Q. I'm curious in this environment, how you're seeing price realization playing out relative to history and the same thing with the 12%? Is the price take similar? Is it diluted because of service challenges in the market? Or should we assume that it's behaving as it always behaves?

Yes, Eric, our expectation is it's going to behave similar to past price increases. We, the team and our TAG organizations spent a lot of time with how to communicate that transition from a surcharge to a permanent price increase. And I think they've done a really good job at preparing our customers to understand it and our store employees to understand it. And my expectation is we'll be as effective, if not a little bit better than past increases.

Okay. That's helpful. And then secondly, just a little bit of clarity on the share gains that you've made with big customers. And John, I thought that data was helpful and your conviction you're coming out of this with an even better share position. Specifically within November, December, you talked about, you're not able to deliver. I'm curious as you look at like how that played out, is that these projects are deferred or did your customers buy paint somewhere else? And if they bought paint somewhere else, what are competitors doing in this environment that you're not doing?

Yes. I'd say, Eric, at times, we needed to adjust paint systems to accommodate. So earlier, we mentioned our procurement team's terrific efforts to acquire a product at times because of some shortages in some areas, we were able to buy maybe a different basket of raw materials or a couple of different raw materials to be able to make a product to help our large customers through that. I would say that many of our -- if not most of our customers have expressed a much greater sense of appreciation for our supply chain capabilities. I'm not sticking my head in the sand. There have been some challenges, and we run right at those -- from a senior leadership team to senior leadership team, all the way down to the local people servicing the cleaning contractors. There's a level of openness and transparency that allows us to, I believe, be responsive. But to your point, is I want to reemphasize as we exit this, we exit with a stronger relationship and I believe with greater trust. Now were there customers that on a specific job, if we didn't have? I don't know maybe there was some trim paint in some area that we didn't have in a market and someone else might have had some of that trim paint in that market and the project needed to be done. They might have gone down the street and bought some and our product might arrive the next day or 2 days later. We hate those situations. We hate it because, a, we put our customers in a difficult situation. Residential is an example. There's a there's a family waiting to get into that home. We know how serious that is. And that's part of why I think we've been able to work so closely and retain the agreements that we have with our important customers because we understand their world and an important role that we play. And in those rare cases, they needed to get products somewhere else, while we didn't like it, we understood it. That didn't stop us from replenishing that store, getting back on top of it and working with our customers to avoid that happening in the future. But with this choppiness comes a little bit of a whack-a-mole, we're moving product aggressively to be where it is needed, when it is needed. But there are select occasions where it might have arrived a day, 2 or 3 days later than what was needed. -- that's getting better as the raw materials availability improves, and we want to get this behind us as quickly as possible.

Okay. And then just 1 other point of clarity, how you commented about more finished inventory in TAG, which didn't make sense and so you clarified that this is maybe making exterior paint. I'm trying to connect that with the comments on the choppiness through 1Q. Are you suggesting you're in a better inventory position for when 2Q and exterior season starts back up? Or is that too strong of a point?

Yes. I would say we would be all else being equal, Eric. I think that we'll sell through some of that in our first quarter. We're trying to move exterior product where it's needed in the Southeast, Southwest, and we're actively doing that. But we're going to need exterior in the Midwest. We're going to need to exterior in the East. And if we can build interior versus exterior and then you have a little bit of a cushion, we'll do that. But in some cases, yes, we'll see that extra year go in the second quarter.

Our next question today is coming from Gregory Melich at Evercore.

I just had really a follow-up on pricing to make sure I fully understand it. On my math, I get about 20% now of announced price increases to TAG over the last 13-months. I just want to make sure I got that right once we get February 1. And then I guess you said that price realization was high-single-digit in the fourth quarter. Could you provide what it was for all of 2021?

Yes, Greg, the pricing that you're talking about that we've announced, including the surcharge to your point, is going to be a little bit -- in that it will be in that 20% range, assuming the 4% surcharge rolled into the February 1 price increase, which we do. If you look at it for the full year, on TAG the effectiveness, if I get your question right, is we expect that to be in the kind of the high -- the high-single-digit or mid-single-digit range when you look at all the effectiveness, mid to high for the full year.

Got it. That makes sense. And I guess there's another follow-up on your -- you mentioned that the pricing you're thinking about the 12% is really encompassing getting on the right side of raw materials. But I thought that you mentioned that it didn't include labor cost increases. Did I get that right or not?

No, Greg, it does. It includes labor. We're seeing labor accelerate faster than what we have in previous years. So you have to bake that into the price increase. And our expectation is we will start seeing margins recover, but we'll get into that more on the 27 call.

Sure. But that -- and do you have a number that you can provide for labor inflation, like high single digits or anything like that?

When you look at it across the company, it varies. We have some that are in the double digit, low-teens, we have some in the low-single-digits. So I don't have an average number, but it's going to be mid to high when you look at it all in.

Our next question today is coming from Chris Parkinson at Mizuho.

Just 2 very quick questions here. One, just on the demand backdrop, it doesn't seem like it's really an issue, but can you just give us a sense of where we stand right here right now in terms of resi repaint, housing inventory, new builds, commercial multifamily. Like is there anything that we should be paying particularly close attention to heading into 2022?

I would say, Chris, what you should be paying attention to is strong demand across every professional segment that we serve, strong demand.

All right, John. Fair enough. And then the second question is, I just want to circle back to 1 of my competitors' questions. On the price points, you guys kind of dominate that top end of the shelf space well pretty much across the board at Lowe's. And then at the top end with INFINITY nevertheless, (inaudible) PPG and Menards. But just given the degree and the magnitude of the price increases over the last 12- to 18-months, I'm not necessarily worried about demand destruction on the gallon that covers roughly 400 square feet. But just perhaps specific question, but does that begin to change regional competitive dynamics versus guys like Ben Moore in the Northeast and who haven't necessarily raised prices at much just as much, just given the spread per gallon is a little bit more narrow than as historically? Or is that just not even coming into play?

It's not an issue. I'd say that, again, a couple of different dynamics. And Chris, again, I know you know this, again, labor issues, only 85% to 90% of the cost, number one. Second, our customers, the professional contractor, if you take just dialing in because you asked about some specific customers that mainly play in residential repaint, Labor is an issue for them. And so oftentimes, they're hiring maybe less experienced in some cases, less qualified labor and they're trying to train them. And what we are finding is a positive mix shift to these products that I mentioned earlier are formulated for the residential repaint. And what it does is it helps to hide some of the [sins] of a less experience, less qualified contractor.

Now that works its way into some of the challenges that we've talked about in raw materials because while our products are formulated with a better -- what we would call better rheology package that allow the flow and leveling that helps to hide some of these sins . It does come with a broader basket of raw materials, some of which have been challenged. So we're working through that, and we expect to -- for that to get better. But the value proposition in addition to a gallon of paint that will help make a newer labor painting contractor produce as an experienced tradesman -- tradesperson as well as the durability that comes along with that has definitely resulted in a positive mix shift that we think is favorable, not only for our customers but also for our shareholders.

(Operator Instructions)

Our next question today is coming from Michael Sison at Wells Fargo.

Just 1 question. It does sound like demand is there to grow sales in '22. Maybe just qualitatively, what -- What do you think needs to happen to grow earnings next year? What's in your control? And maybe what are areas that are going to -- could continue to be a headwind in your ability to sort of get back on sort of EPS growth?

Yes, Mike, you know what, let us get into that on our 27 call where we can have full year results fully complete this year. We'll have our plan and roll out, and we can talk more specifically about that on that call.

Okay. And then just as a quick follow-up then. What was the total impact of inflation in '21? And what's sort of the total impact of sales that you weren't able to generate because of the raw material availability?

Well, Mike, as you know, we said raw material inflation was north of 20% for the full year on the full basket. And I think on the availability, we're coming in somewhere high.

Low-single-digit on TAG specifically, and the range was mid- to high-single-digit.

Our next question today is coming from P.J. Juvekar at Citi.

I was -- I joined a little late, unfortunately. So if this question has been answered, let me know. But the Omicron variant seems a bit more contagious. So is that causing less traffic in big boxes for DIY? Or is it like the first wave when people were sitting at home, they're painting more. Can you just comment on that?

Well, I'd say it's a bit of a mix. And as it relates to anything with customers going through a home center out of respect for our customers, we'd rather than talk to that than us.

Okay. And then secondly, on the infrastructure bill that was signed by the President, when do you think demand in your industrial area will kick into higher gear from that? And will the raw material situation be resolved by then?

First, I would say we're excited to have a business that can capitalize on many of the elements that will be invested in. So if you look at airports and we target the high-value infrastructure. So in bridge and highway, we would be focused on the higher-valued bridge, coatings and other elements that we believe we can bring a very unique solution to timing-wise on something like that. You have to think about what it takes in some areas where projects have been on hold, holding for funding. Those might be more readily available and quicker to come out through our FQ process. Those could be within a year. But the largest majority of these things are going to be projects that are going to be designed, engineered, a lot of process work that goes through and then finally build. And oftentimes, while we could play a piece in structural steel in some of those areas, oftentimes, we're at the very end of the project. So you're looking at projects that could be measured well beyond a year period. So -- What I would say is that we've got a pretty dedicated team that's working every angle on this preemptively to ensure that we get more than our fair share on this, this spending.

We have no further questions in the queue at this time. I would now like to turn the floor back over to Jim Jaye.

Thank you, Kate. And what I'd like to say is even with today's near-term news, I hope you heard in our comments that we're very confident in our strategy, our people. We look forward to providing more details on the fourth quarter, as Al said, and our '22 outlook on Thursday, January 27. So we look forward to speaking with you then. And as always, we will be available for your follow-up calls. Thanks very much for joining us today.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. We thank you for your participation.