The Sherwin-Williams Company

Good morning. Thank you for joining the Sherwin-Williams Company's review of the third quarter of 2019 and the outlook for the fourth quarter and full fiscal year of 2019. With us on today's call are John Moragis, Chairman and CEO, Al Mastichian, CFO, James Cronin, Senior Vice President, Corporate Controller, and Jim Jang, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode by issue or direct via the internet at www.sherwin.com. An archived replay of this webcast will be available at Sherwin.com beginning approximately two hours after this conference call concludes and will be available until Friday, November 8, 2019 at 5 p.m. Eastern Time. 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 that statement is made and the company undertakes no obligation to update or revise any forward-looking statements. whether as a result of new information, future events, or otherwise. A full declaration regarding forward-looking statements is provided in the company's earnings 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 Jim Jay.

Thanks, Jessie, and good morning, everyone. Thank you for joining us on the call today. All comparisons in my remarks are to the third quarter of fiscal 2018, unless otherwise stated. Consolidated sales in the third quarter of 2019 increased 136.2 million dollars, or 2.9 percent, to 4.87 billion dollars. Currency translation rate changes decreased sales by 0.9 percent. Consolidated growth profit dollars in the quarter increased 215 million dollars, or 10.7 percent, to 2.23 billion dollars. Consolidated gross margin in the third quarter increased to 45.7% from 42.5% in the same period last year. Excluding impacts from acquisition-related amortization, adjusted consolidated gross margin in the quarter increased to 45.9% from 42.8%. Selling, general and administrative expense increased $72.1 million or 5.7% to $1.35 billion in the third quarter and increased slightly as a percent of sales to 27.6% from 26.9% in the same quarter last year. Interest expense for the quarter declined $7 million to $85.3 million. Other expense for the quarter increased $29.3 million to $31 million, primarily a result of debt retirement expense and expense associated with Argentina hyperinflation. Consolidated profit before tax in the third quarter increased $293.9 million to $709.8 million. Our effective tax rate in the quarter was 18.8%. Excluding acquisition-related costs and the reduction of the California litigation expense, our effective tax rate on adjusted income for the quarter was 19%. Diluted net income for common share for the third quarter 2019 increased to $6.16 per share from $3.72 per share in the prior year third quarter. Earnings per share in the third quarter of 2019 includes a charge for acquisition-related costs of 77 cents per share and a reduction of the California litigation expense provision of 28 cents per share. The $3.72 per share reported in the third quarter of 2018 included charges for acquisition-related costs and the California litigation expense of 87 cents and $1.09 per share, respectively. Excluding these items, adjusted diluted earnings per share increased by 17.1% to $6.65 in the third quarter 2019 from $5.68 last year. We have summarized the third quarter earnings per share comparison in a Regulation G reconciliation table in our press release. Let me now take a few moments to break down our performance by segment. Sales for the Americas Group in the third quarter increased $232.5 million, or 8.7%, to $2.90 billion. Comparable store sales in the U.S. and Canada increased 8.1% in the quarter. Regionally in the third quarter, our Eastern Division led all divisions followed by Southwest, Southeast, Midwest, and Canada. Sales were positive in every division in the quarter. Third quarter segment profit increased $85.9 million, or 14.9%, to $663.7 million. Third quarter segment profit margin increased 120 basis points to 22.9%, from 21.7% last year. Turning now to the consumer brands group. Third quarter sales decreased $92.1 million, or 11.9%, to $678.5 million. Sales from continuing operations, excluding the Lowe's load-in and the divested guardsman business, decreased approximately 6% in the quarter. Third quarter segment profit increased $31 million to $114.9 million. Acquisition related amortization decreased segment profit by $22.6 million compared to $26 million in the third quarter 2018. Third quarter segment profit margin increased to 16.9% from 10.9% last year. Excluding the acquisition-related amortization in both quarters, adjusted segment profit margin increased to 20.3% from 14.3% in the third quarter 2018. For our performance codings group, third quarter sales decreased $4.3 million, or 0.3%, to $1.29 billion. Currency translation rate changes reduced third quarter sales by 1.6%. Third quarter segment profit increased $32.6 million to $137.4 million. Acquisition-related amortization decreased segment profit by $54.3 million compared to $55.4 million in the third quarter 2018. Third quarter performance coins group segment profit margin increased to 10.7% from 8.1% last year. Excluding the acquisition-related amortization in both quarters, segment profit margin increased to 14.9% compared to 12.4% in the third quarter 2018. I'll conclude my remarks with a comment on our balance sheet. In the third quarter, we refinanced and extended the maturity of our debt to improve our liquidity position and to lock in favorable interest rates ahead of expected rate increases. Specifically, we tendered approximately $1 billion of our 2020 senior notes and $500 million of our 2022 senior notes. We financed this transaction with $800 million of 10-year notes at 2.95%. $550 million of 30-year notes at 3.8%, and $150 million of commercial paper. That concludes our review of our operating results for the third quarter. So let me turn the call over to John Marikis, who will make some general comments on the third quarter and provide our outlook for the fourth quarter and full fiscal year 2019. John? Thank you, Jim, and good morning, everyone. Thanks for joining us. I'd like to make just a few additional comments on our third quarter before moving on to our outlook. Our team continued to execute at a high level. We delivered another strong quarter as adjusted EPS increased more than 17% to $6.65. Our results were driven by outstanding performance in our North American paint stores, where we drew same-store sales by a high single-digit percentage and generated growth in every customer and market. On a consolidated basis, adjusted growth margin increased over 300 basis points year-over-year to 45.9%. While we still have work to do, this improvement shows that we are making progress towards offsetting the significant raw material inflation we experienced over 2017 and 2018. We remain committed to achieving our long-term full-year growth margin target of 45% to 48%. The increase in growth margin in the quarter was driven by strong North American volume growth, operating efficiencies, and moderating raw material costs. Adjusted EBITDA margin expanded 150 basis points over the prior year to 18.9%. And for the second consecutive quarter, all three operating segments increased segment profit and margin compared to the prior year. I'm also pleased with our ongoing integration efforts. and we remain on track to exit the year at a synergy run rate of $415 million. Looking at our top line, consolidated sales increased 2.9% in a quarter, in line with our revenue guidance of a low single-digit increase. Our sales varied by region, with North America and Latin America each increasing by mid-single-digit percentages in a quarter. We continued to see softness in Asia and Australia, and to a lesser degree, Europe. Within the Americas group, sales increased 8.7% against the prior year comparison of 5%. Sales were positive in all North American customer and markets in the quarter, led by residential repaint, which was up low double digits. Sales in commercial and DIY were up high single digits, while protective and marine, new residential, and property management were all up mid-single digits. Looking at total segment profitability, Segment profit dollars increased by more than $85 million, and segment margin expanded by 120 basis points to 22.9%. We leveraged the strong volume growth to deliver incremental margin of approximately 37%. We ended the quarter with our customers continuing to be very optimistic, reporting solid backlogs for the remainder of the year and a strong sense of confidence heading into 2020. Year-to-date, we've opened 31 net new stores, finishing the quarter with 4,727 stores in operation, compared with 4,653 last year. Our plan calls for this team to add approximately 80 to 100 new stores for the year. Similar to prior years, we will have a significant ramp-up in the fourth quarter. In the consumer brand segment, Third quarter sales were down mainly related to the comparison to last year's load-in of the Lowe's program and the impact of the Guardsman disaster. Sales decreased slightly more than we expected due to weakness in international markets, most significantly in Asia and Australia. In North America, we remain very encouraged with our relationships with our largest customers, where we are also committed to helping them accelerate sales to the pros who are shopping in the home center channel. Segment margin, excluding acquisition-related amortization, increased year-over-year to 20.3%, driven by synergies and moderating raw material costs, along with improving year-over-year supply chain costs. We continue to feel good about our strategy in this business and our portfolio of hero brands that serve the North American retail market. Performance coating troop sales were down 0.3% in the quarter. as choppy industrial demand led to variability by region and business. Geographically, total segment sales were up in North America and Latin America, but were offset by softness in Asia and Europe, where sales decreased by high and low single-digit percentages, respectively. From a business perspective, our packaging and coil businesses remained our strongest performers, delivering growth in every region as our customers continue to value our technology and service solutions. Our automotive refinish business delivered modest growth in the quarter, led by solid performance in the Americas. Sales in the general industrial and industrial wood businesses decreased year over year, primarily due to softness in Asia and Europe. Despite the sales decline, adjusted segment margin increased 250 basis points to 14.9%, due primarily to moderating raw material costs and good cost control. Adjusted EBITDA in the quarter was $919 million, or 18.9% to sales, excluding integration costs and the lower California litigation expense. Adjusted EBITDA year to date was $2.4 billion, or 17.5% of sales. Year to date, we returned over $892 million to shareholders through cash dividends and share repurchases, an increase of 46% year over year. At the end of the quarter, we had approximately $8.9 billion of debt on the balance sheet. We've reduced debt by approximately $435 million year to date. We intend to retire a total of approximately $600 million this year. which will result in a net debt-to-EBITDA ratio below 3 to 1 by the end of 2019. During the quarter, Moody's raised our rating outlook to positive from stable, noting our strong business profile and meaningful deleveraging since the acquisition of Balspar. We paid $105 million in cash dividends and purchased 250,000 shares of common stock for $127 million in the third quarter. At quarter end, our share repurchase authorization stood at 8.8 million shares. Capital expenditures were $97 million in a quarter, depreciation was $65 million, and average amortization was $78 million. Moving on to our outlook for the fourth quarter of 2019, we expect consolidated net sales to increase by a low single-digit percentage compared to the fourth quarter of 2018. Given that our North American professional painting contractor customers continue to report solid backlogs and a positive demand outlook, we expect growth in the Americas group to be in the mid-to-high single-digit range. We expect consumer brand group sales will be flat to up slightly in the fourth quarter. We expect performance coatings group sales to be down low single digits as industrial demand remains highly variable by region and end market. Against this backdrop, and given our strong performance in the third quarter, we are increasing our adjusted 2019 full-year diluted net income per common share guidance to be in the range of $20.90 to $21.30 per share, which excludes Valspar acquisition-related costs and non-operating items. This is an increase of approximately 14% at the midpoint compared to the 1853 reported last year on a comparable basis. We've included a Regulation G reconciliation table with this morning's press release to reconcile adjusted and gap earnings per share. A few additional data points for the full year may be helpful for modeling purposes. As planned, we expect raw material costs in the fourth quarter to further moderate from the levels we saw in the third quarter, assuming stable petrochemical feedstocks and no supply disruption. We expect our 2019 adjusted effective tax rate to be approximately 19%. We expect school year capital expenditures to be approximately $320 million, depreciation to be about $257 million, and amortization to be $315 million. With that, I'd like to thank you for joining us this morning, and we'll be happy to take your questions.

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