The Sherwin-Williams Company

Good morning. Thank you for joining the Sherwin-Williams Company's review of the fourth quarter 2021 results and our outlook for the first quarter and full year of 2022. With us on today's call are John Marikis, Chairman, President, and CEO, Al Mastician, CFO, Jane Cronin, Senior Vice President, Corporate Controller, and Jim Jay, 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 two 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 earnings release transmitted earlier this morning. After the company's prepared remarks, we'll open the session to questions. I will now turn the call over to Jim Jay.

Thank you, and good morning, everyone. While our fourth quarter sales were within our guidance, Earnings results fell short of our expectations, ending our year on a disappointing note. As we described on our January 14th call, raw material availability did not improve as meaningfully as anticipated in the quarter, and the Omicron variant put additional pressure on our company, particularly in the Americas Group and our global supply chain organization, as well as on our suppliers and our customers. We also face the highest inflation of the year in the fourth quarter, which we are combating with continued pricing actions. These are near-term headwinds. The good news is that demand remains strong across our end markets. We are seeing raw material supply issues improve sequentially. We also continue to strengthen our customer relationships and take actions during the quarter that strongly position us for the long term. And we remain very confident in our strategy and above all, our people. Let me briefly summarize the quarterly numbers before turning to John Marikis, who will provide commentary on the full year and our outlook for 2022. Starting with the top line, fourth quarter 2021 consolidated sales increased 6.1% to $4.76 billion. Raw material availability negatively impacted sales by an estimated high single-digit percentage, with about 65% of the impact in the Americas group. The remaining impact was largely in the consumer brands group, with an immaterial impact to performance coatings group. Pricing in the quarter was in the high single-digit percentage range. Consolidated gross margin decreased to 39.5%, driven by lower sales volume, raw material cost inflation outpacing our price increases near term, and supply chain inefficiencies. SG&A expense decreased to 30.2% of sales. Consolidated profit before tax decreased to $308.9 million. The quarter included $70.1 million of acquisition-related amortization expense. Diluted net income per share in the quarter decreased to $1.15 per share. The quarter included acquisition-related depreciation and amortization expense of 19 cents per share. Excluding these items, fourth quarter adjusted diluted earnings per share were $1.34 per share. Moving on to our operating segment. Sales in the Americas group increased 3% as high single-digit pricing offset lower volume related to raw material availability. Segment margin decreased to 15.1%, resulting primarily from lower sales volume and higher raw material costs, partially offset by selling price increases. Segment SG&A was up slightly as a percent of sales as we continued investing in strategic growth initiatives. Sales in the consumer brands group decreased 7.8% against a double-digit comparison a year ago. Sales were flat, excluding the impact of the Waddle divestiture. Adjusted segment margin decreased to 6.3% of sales. resulting primarily from lower sales volume and higher raw material costs and supply chain inefficiencies, which were partially offset by selling price increases and good cost control. Sales in the performance coatings group increased 18.7%, driven by price and volume increases. Adjusted segment margin decreased to 8.9% of sales, as operating leverage from the higher volume selling price increases, and good cost control were more than offset by higher raw material costs, where inflation was the highest among the company's three operating segments. Let me turn the call over to John now for additional commentary on 2021, along with our outlook for the first quarter and full year 2022.

Thank you, Jim, and good morning, everyone. I'll provide some additional color on the fourth quarter in a moment, but first I'd like to summarize our full year. For the second year in a row, we faced a series of challenges that no one could have predicted. The natural disasters of Winter Storm Yuri and Hurricane Ida crippled the industry's raw material supply chain for most of the year. The lack of raw material availability coupled with strong demand led to a rapid and unprecedented raw material cost inflation. Labor and transportation costs also escalated throughout the year. And through it all, we continued to battle various complications brought on by the continuation of the pandemic, especially in the fourth quarter. The 61,000 dedicated employees of Sherwin-Williams, our greatest asset, responded with determination. We did not use any of these challenges as an excuse, but as an opportunity to get even closer to our customers. We focused on supporting our customers' businesses through innovation, value-added services, and differentiated distribution. This solutions-based approach resulted in our customer loyalty metrics and new account activity growing significantly during the year. These trends bode well for years to come. While we focused on meeting customers' needs, we also attacked rising costs with aggressive pricing actions in all businesses. Near-term pressure on our margins was significant, but we remain highly confident they will recover just as they have in past cycles as we grow the business and see commodity costs moderate over time. We also continue to invest in multiple long-term growth initiatives during the year. I'll mention just a few full-year metrics. Consolidated sales increased 8.6%. including a mid-single-digit headwind related to raw material availability to a record $19.9 billion. It was the 11th consecutive year we have grown the business. Pricing for the year was in the mid-single-digit range. On a segment basis, the Americas Group delivered 8% sales growth and 20% PBT margin for the full year. Solid performance given the challenging operating environment. Pricing was in the mid-single-digit range. Our largest customer segment, residential repaint, grew by a double-digit percentage for the sixth year in a row. Sales in all other customer segments, with the exception of DIY, grew mid to high single digits in a year. We also opened 85 net new stores during the year. Consumer brand sales were down 10.9% for the year, including a four-percentage point impact from the divested wattle business. This was against a mid-teens comparison that was driven by DIY projects related to consumers nesting during the pandemic. Pricing was a little less than what we saw in TAG. Performance coating sales were up 22% for the year. Every region and every business unit increased by a double-digit percentage. Price realization was in the mid-single-digit range. Amidst the highest cost inflation in the company, this segment preserved the vast majority of adjusted profit before tax dollars, which decreased 18.1 million, or 2.5% from the prior year. Even with the increase in consolidated sales, we were not able to fully overcome the impacts of raw material and other cost inflation, raw material availability, and the Omicron variant in the year. As a result, net income and diluted net income per share were below last year's levels. Adjusted EBITDA for the full year was $3.27 billion, or 16.4% of sales. Net operating cash for the year was $2.2 billion, or 11.3% of sales. We put our cash to work, returning a little over $3.3 billion to our shareholders in the form of dividends and share buybacks. We invested $2.8 billion to purchase 10.1 million shares at an average price of $273.18. We distributed $587 million in dividends, an increase of 20.3%. We also invested $372 million in our business through capital expenditures, including approximately $56 million for our Building Our Future project. We ended the year with a net debt to adjusted EBITDA ratio of 2.9 times, Additionally, we announced three acquisitions that will add to our capabilities, the coatings business of the Tenant Company, the European industrial coatings business of Sika AG, and Specialty Polymers Inc. Total return to shareholders in 2021 was 44.9%, which outpaced the S&P 500 and our peer group. Finally, I'd also like to mention our ESG efforts. We announced and made good progress on our next generation targets this year. We were recognized for various aspects of our program this year by Newsweek, Forbes, and Investors Business Daily. Given the volatility of the macroeconomic environment over the past two years, our combined results over the period are perhaps a better illustration of the underlying strength of our business. Since the end of 2019, consolidated net sales grew $2 billion, or 11.4%. Gross profit increased $507 million, or 6.3%. Adjusted EBITDA increased $211 million, or 6.9%. Gap diluted net income per share increased 26.9% to $6.98 per share. And adjusted diluted net income per share increased 15.8%, to $8.15 per share. Over the two-year period, we've returned approximately $6.3 billion to shareholders in the form of dividends and share buybacks. As far as our fourth quarter, I'll keep my comments brief in order to get to our 2022 outlook. The key themes remain the same as in our third quarter. Demand was strong in nearly all of our end markets. Raw material availability remained a challenge. There was some improvement, but recovery was not as quick as we would have liked. Commodity and other costs remained elevated, and we continued to implement price increases. The new wrinkle was the impact of the Omicron variant, which was meaningful, as we discussed on our call earlier this month. In the Americas group, sales growth in the fourth quarter was led by protective and marine, which was up by a double-digit percentage. New residential and property management were up in the mid-single-digit range. Res repaint and commercial were up in the low single-digit range. DIY was down double digits against an extremely strong double-digit comparison. From a product perspective, exterior paint sales performed better than interior sales, with interior being the larger part of the mix. We realized a high single-digit increase in price in the fourth quarter resulting from our February 1 and August 1, 2021 price increases in our mid-September 2021 surcharge. As we mentioned, a new 12% price increase is effective February 1 of this year. We opened 35 net new stores in the fourth quarter. Along with these new stores, we continued to make investments in sales reps, management trainees, innovative new products, e-commerce, and productivity-enhancing services. Moving on to our consumer brands group. Fourth quarter sales were basically flat to last year, excluding the impact of the Waddle divestiture. Sales were up low single digits in North America. That was offset by softer sales in Europe and Asia, where COVID restrictions were more pronounced. Pricing was positive in the quarter, and in the high single-digit range. Last, let me comment on the fourth quarter trends in our performance codings group. We continue to see momentum, as this is the sixth straight quarter of growth for this business. Group sales increased by a high teens percentage in the quarter. Price realization was in the low double-digit range, and all regions and all divisions generated growth. Regionally, Sales in the quarter grew fastest in North America, followed by Europe, Latin America, and Asia. Every division in the group grew, with nearly all by double digits, driven by robust underlying demand, new customer wins, share of wallet gains, and pricing. Packaging was strongest, followed by coil, general industrial, industrial wood, and auto refinish, respectively. Turning to our 22 outlook, we see an operating environment with strong demand across architectural and industrial end markets. Customer labor will likely continue to be a governor on growth in some areas. We expect raw material availability to continue improving sequentially, though the trajectory remains uneven. As supply improves, we stand ready with ample capacity to quickly convert those raw materials to paint. We believe the impact of the Omicron variant on the supply chain should moderate through the first quarter. Any additional impacts from COVID over the remainder of 2022 are hard to predict. What's not hard to predict is our determination. Our role is to influence results, not to simply report them. Looking ahead, we expect to bend the curve in our favor through the very deliberate steps we've been taking. These include arrangements and agreements with existing and new suppliers, prioritizing our product offering to our customers, investments in additional capacity, the acquisition of a resin supplier, and actions to retain employees to produce and distribute products. As the year goes on, we expect to be talking less and less about raw material availability and supply chain issues, and more and more about volume growth, sequential gross margin improvement, and sequential margin improvement in each of our operating segments. Our outlook also assumes that the market rate of inflation for our raw material basket will be up by a low double-digit to mid-teens percentage in 2022 compared to 2021. We expect to see year-over-year inflation in all four quarters, with the largest impacts likely occurring in the first quarter and gradual reductions each quarter as the year progresses. We expect all commodity categories to be meaningfully elevated. We expect other costs, including wages and transportation, to be up in the mid to high single-digit range. We are currently implementing additional price increases in all businesses and will continue to do so as necessary. For the first quarter of 2022, We anticipate our consolidated net sales will increase by a low to mid single-digit percentage compared to the first quarter of 2021, inclusive of a low double-digit price increase partially offset by ongoing raw material availability issues. We expect the Americas Group to be up low to mid single digits with North America paint stores at or above the high end of that range. We expect consumer brands to be down by a high single-digit to low double-digit percentage, and we expect performance codings to be up by a mid to high teens percentage. Our full-year guidance is heavily second-half weighted due to stronger volume, the impact of pricing action, and weaker second-half 2021 comparison. As you'll recall, we began 2021 with great momentum, including first-half sales growth of 14.7% and adjusted EPS growth of 26.4% before the natural disasters, supply chain, and COVID issues derailed the second half of the year. For the full year 2022, we expect net sales to increase by a high single digit to low double digit percentage. We expect the Americas Group to be up a mid to high single digit percentage, again, with North American paint stores at or above the high end of the range. We expect consumer brands to be up a low to mid single digit percentage and performance coatings group to be up a high single digit to low double digit percentage. We expect diluted net income per share for 2022 to be in the range of $8.40 to $8.80 per share compared to $6.98 per share earned in 2021. Full-year 2022 earnings per share guidance includes acquisition-related amortization expense of approximately $0.85 per share. On an adjusted basis, we expect full-year 2022 earnings per share of $9.25 to $9.65, an increase of 16% at the midpoint over the $8.15 we delivered in 2021. Let me close with some additional data points and an update on our capital allocation priorities. Given volume growth, pricing actions, and our ongoing continuous improvement initiatives, we would expect full-year gross margin expansion. We expect to see SG&A leverage in 2022 by controlling costs tightly in non-customer-facing functions. We will continue to make investments across the enterprise, that will enhance our ability to provide differentiated solutions to our customers. We expect to open between 80 and 100 new stores in the U.S. and in Canada in 2022. We'll be focused on sales reps, capacity, and productivity improvements, systems, as well as product innovation. We also plan additional incremental investments in our digital platform and the home center channel. These investments are embedded in our full year guidance. We expect currency exchange will be a headwind of about 1.5% on consolidated sales. We expect our 2022 effective tax rate to be in the low 20% range. Our core CapEx guidance for the year is approximately $415 million. In addition to this core CapEx, we expect to make investments of approximately $450 million in 22 related to our new headquarters and our R&D facility project. Both depreciation and amortization should be about $300 million each. Interest expense should be about $330 million. We have $260 million of long-term debt due in 2022. Historically, we've targeted dividends at about 30% of prior year gap earnings. Next month at our Board of Directors meeting, We will recommend an annual dividend increase of 9.1% to $2.40 per share, up from $2.20 last year. We expect to continue making opportunistic share repurchases. We'll also continue to evaluate acquisitions that fit our strategy. As we begin 2022, we remain confident in our strategy, our capabilities, and the differentiated product and service solutions we bring to customers. Above all, my confidence in our people has never been higher. Our business remains extremely well positioned and we're emerging as an even stronger Sherwin-Williams following the challenges that we've faced the last two years. We remain steadfast in our focus on creating shareholder value. That concludes our prepared remarks. With that, I'd like to thank you for joining us this morning, and we'll be happy to take your questions.