John Morikis: Just picking up the last point there is a good one. The quality of the leads in the bids, it seems like listening to a majority of our customers that while some of the bid activity may have tempered down a bit, the quality of the leads are actually increasing and the scope is actually increasing. So they’re doing more there. And as she mentioned, we’re trying to help them with projects like expanding into cabinets, introducing opportunities in garage floors and a lot of different areas. So even taking some of those new residential contractors that may have been primarily focused on new residential and helping them get into residential repaint. So we’re really partnering very well with our customers to help drive their success and their profitability. So Chris, great question on those two segments. We think those are two really important segments for us going into 2023.
Christopher Parkinson: John, given all that substance, I’ll pass it on. Thank you so much.
Operator: Your next question is coming from Truman Patterson from Wolfe Research. Your line is live.
Truman Patterson: Good morning, everyone. Thanks for taking my questions, as always. So you’re expecting raw materials to decline in the low to mid-single-digit range in ’23. Is this based off of spot pricing for petrochems as you see it today? Does this incorporate expectation for some incremental deflation in spot prices as we move through the year? I’m just asking because the petrochem futures are kind of bouncing around right now. And I’m just trying to understand how you expect the spot market to play out and what’s embedded in the guidance.
John Morikis: Yes. Good morning, Truman, I’d begin by telling you that we called out here, we’ve seen a sequential decrease in our third quarter into our fourth quarter and we’re expecting that trend to continue. In our first quarter, we’re kind of expecting the basket to be flat to slightly up, and you’ll see a bigger benefit as the year goes on. To your point, key feedstock’s like propylene, they have started to come down pretty meaningfully significantly. And eventually, it’s going to find its way even more into the resins and the solvents that we buy. And that’s starting to happen. We buy some of our raw materials on spot prices, so we can take advantage of that where it makes sense, and we have some on contract. I think what you also have to look at, though, is that as we look across the entire basket.
Each commodity really has some dynamics associated with it. So while we’re expecting down low singles to mid-singles for the basket, there’s really a wide range across those different products that we buy. Some are better than that range and some are worse. And I think you’re also seeing — in addition to that, you’re seeing input costs like energy and wages, which are very volatile. Those are also putting some pressure right now. So I think the takeaway would be you can expect us to continue working very closely with our suppliers to bring those costs in line with the industry demand levels, and that also reflects our position in the marketplace.
Truman Patterson: Okay. Thank you. And then when you mentioned the lead demand indicators, could you just — what are those? Could you run through some of those? And then you mentioned that you have a little bit less visibility into the back half of the year. I guess, how is today maybe a little bit different than prior periods outside of just general uncertainty in the economy?
Jim Jaye: Well, I’ll talk about the indicators that you mentioned, Truman. They’re the ones that we’ve cited for many, many years on our Analyst Days and our calls. So you heard a couple of them here on the res repaint side, the Lyra Remodeling index, existing home sales on the new res obviously, it’s permits and starts. Commercial, there’s a couple of different ones. If you look on the industrial side, John, in his remarks cited the PMI numbers, which have not been trending very well at all. So it’s those kind of external indicators married with obviously the real-time feedback we have from our customers and our — it’s one of the advantages of our direct distribution model.
John Morikis: And on the second half, Truman, I would say that the view of the first quarter, first half versus the back half, I think it’s — you can attribute that to a very fluid and changing market. Interest rates are moving up. Housing starts are adjusting accordingly. Quite honestly, in times like this, the flux in the market, and this is my 38 years of experience talking here as well is that the contractors vary in their ability to anticipate what’s happening. Some of them will look at their short-term book and believe that everything is okay. We’re working with those contractors to help them understand some of the pressures that are coming down the pipe. So some of what we leverage our own controlled CRM that we have developed, the fact that we’ve got almost 5,000 store managers and nearly 4,000 sales reps that feed a great deal of our understanding of the market.
At this time, there’s a little bit of a disconnect in that because some of our customers are feeling perhaps more bullish than we think that they should feel. Others are tied to other areas such as new residential, and they understand what the pipeline looks like. So when we talk about the visibility that we have in the first half, it’s tied more towards the bids and contracts that our customers have in hand. It gives us more confidence. And that’s why, as we mentioned in my prepared remarks, as we get through the first half, we’ll reevaluate. I want to be very clear, we won’t be adjusting our earnings forecast after the first quarter. We expect to have a very good first quarter, but we’re going to wait and see as we get through the second quarter, what the balance of the year looks like.
Once we have that better visibility, we’ll speak to our investors as to what to expect going forward. But I would also add is, as we’ve come through COVID and some of the shortages that we’ve had in the market, we’ve become much closer with our customers. It was one of the benefits of the challenges that we’ve had. And so we believe we’ll come out of this with a better line of sight as that relationship has improved dramatically, and it was already strong. But I think that as we get through the second quarter, we’ll have a better line of sight.
Truman Patterson: Alright. Thanks for taking my questions and good luck in the coming year.
Operator: Your next question is coming from Ghansham Panjabi from Baird. Your line is live.
Ghansham Panjabi: Good morning. I guess on Performance Coatings Group, can you just give us a sense as to what you’re embedding for volume expectations by the sub-segments, auto refinish all the way through? That would be super helpful.
John Morikis: Well, on refinish, I’d say there’s a high demand here, coupled with a shortage of body texts and parts contributed to shot backlogs. We’re working through a backlog of demand ourselves as we’re securing more and more raw materials. As you work through some of these challenges, Ghansham, as you know, when there’s a shortage of raw materials, the bottleneck moves through the process. So as we do get, which is a team effort at Sherwin, we’re squeezing more and more raw materials and availability, that’s improving, and we’re trying to get more and more of the product out as a result of that. But as you look at automotive refinish, we’re really pleased with the gains that we’re gaining — that we’ve gained, and we expect that to continue.
I’d say packaging had a terrific year. Year-to-date, we finished the year in the mid-teens. That was on top of a year last year in the high 20s. So tough comparisons. We’re gaining a lot of share here. We’re investing in capacity as fast as we’ve added capacity and add capacity, it’s sold out. So the faster we can get that capacity up and running, the business will grow at an even faster rate. Our coil business. This is seven consecutive quarters of double-digit growth here. Insight here that you’re asking for, I’d say our North America end markets seem to be softening a bit. APAC, soft demand. And real estate market is limiting our extrusion business there and EMEA some pretty substantial declines as major coders in EMEA have shut down lines as a result of the demand.
Our general industrial business, another strong year. And again, here, there are terrific opportunities within these segments. The heavy equipment market is very strong, and we expect that to continue into 2023, particularly in the ag and construction. Appliance manufacturers are appearing to slow down production as inventories get reset. Transportation and building products, I would say, are slowly down a bit. The industrial wood — our industrial wood business is one that is tied to housing in many ways. If you look at kitchen cabinets, flooring, furniture, as I mentioned, they had a tougher quarter and were down slightly for the year. We’ve been investing in this business because we believe in our strategy. We’ve made a couple of acquisitions and have been open with the investors I’ve met with to tell them exactly that when we see these opportunities.
We’re a 156-year-old company. We’re investing in this accordingly. We’re not trying to win a week or a month or a quarter. We’re investing long term. That confidence in our teams in each one of these segments, terrific leadership at the group level, Karl Jorgenrud, and we’ve got a lot of confidence that this is going to be a key driver for our business coming out of the choppiness and that we’ll grow share during these choppy times. So it’s really what we expect in the market. And again, we don’t report we influence. We’re going to outperform the market in each of these segments, we believe.
Ghansham Panjabi: Terrific. And then as it relates to TAG and kind of going back to your prepared comments and your characterization of the world we have today. I mean, obviously, interest rates having spiked over the last year having an impact on the housing ecosystem, including you. What would change the calculus of that? Is it just as simple as it reversible interest rates? And I’m just trying to reconcile the fact that interest rates have pulled back pretty substantially since October.
