The Sherwin-Williams Company

Good morning. Thank you for joining the Sherwin-Williams Company's review of first quarter 2024 results and our outlook for the second quarter and full year of 2024. With us on today's call are Heidi Petz, President and CEO, Al Mistesen, Chief Financial Officer, Jane Cronin, Senior Vice President, Enterprise Finance, and Jim Jay, 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 www.sherwin.com beginning approximately two hours after this conference call concludes. This conference call will include certain forward-looking statements as defined under the U.S. Federal Securities Laws with respect to sales, earnings, and other matters. Any forward-looking statement speaks only as to 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 will open the session to questions. I will now turn the call over to Jim Jay.

Thank you, and good morning. In what is a seasonally smaller first quarter and with continued demand choppiness in several end markets, Sherwin-Williams delivered consolidated sales within our guided range, gross margin expansion, and diluted earnings per share and EBITDA growth. Throughout the quarter, we continued to execute on our strategy, demonstrate our value proposition with current and prospective customers, and position ourselves to take advantage of disruptions in the market. While our results were at the lower end of our sales expectations, we remain confident in our full year outlook, and there is no change from the guidance we provided in January. We also remain highly confident in our differentiated business model, and we are well positioned as the painting season begins. While uncertainties persist in the macroeconomic environment, we see opportunity. We are encouraged by pro-architectural sentiment in April, and customers in several end markets are optimistic about an improving demand environment as the year progresses. Competitor decisions coupled with our recent growth investments are enabling us to continue penetrating our targeted end markets at multiple levels. We expect share gains and returns to become more and more evident as the year progresses. Consolidated sales in the quarter were at the low end of our range, driven by lower than anticipated volume, primarily in paint stores group against the strongest comparison we will face this year, followed by consumer brands group in North America. Contributions from price were modest, as expected, and we are now seeing our recently announced increases in paint stores beginning to ramp more fully in our second quarter. Gross margin expanded 270 basis points year-over-year to 47.2%. Higher SG&A in the quarter reflects the deliberate and accelerated investments in growth we made in the second half of last year and which have not yet annualized. EBITDA margin improved by 60 basis points to 16.7%. And adjusted diluted net income per share increased 6.4%. We also maintained our disciplined capital allocation approach and returned $728 million to our shareholders through dividends and share repurchases during the quarter, an increase of 59% year over year. Let me now turn it over to Heidi, who will provide some commentary on our first quarter results by segment before moving on to our outlook and your questions.

Thank you, Jim. We are successfully implementing our strategy, which at Sherwin-Williams, we do with a very forward-looking and aggressive approach. While market conditions are choppy and may give others in our industry a moment of pause, let me be clear, we are not pausing. So this morning, I'm going to talk as much about our results as I am about what we're doing to ensure the momentum of our company not only continues but accelerates our ability to widen the gap between us and our competition. So let me start with the results of the first quarter. As Jim mentioned, our first quarter is a seasonally smaller one, and our results do not necessarily dictate how our full year will unfold. While our sales came in within our guidance, it was at the lower end of our range. Going forward, I believe in our differentiated strategy, our deeply experienced leadership, and our team's ability to execute in lockstep with our customers to deliver above market growth. Here are several of the leading indicators that give me great confidence that we continue to strengthen our position. For example, we increased the number of exclusive national contracts we have with home builders and property management customers in the quarter. New accounts and active purchasing accounts in our stores are up significantly from a year ago. Paint Stores Group rep call activity and unique accounts calls are also up in the quarter. Foot traffic in our stores is up, and our net promoter score is at an all-time high. And we're seeing multiple share of wallet and meaningful new customer wins across our industrial businesses. These are just some of the factors we expect will translate into strong performance as the year unfolds. As far as specifics on the first quarter, I'll begin with the paint stores group, where sales increased by a half percentage against a mid-teens comparison. We are not satisfied with this level of performance, as volume was basically flat in the quarter. Exterior paint sales were pressured by challenging outdoor painting conditions in some geographies. As we've demonstrated in the past, we expect to see the benefit of our focused investments unfold throughout the balance of the year. A few strong weeks in June can more than offset first quarter challenges. Price was up modestly related to our February 1 announced increase. We are now seeing a ramp to typical effectiveness as our second quarter moves forward. Segment margin decreased to 17.2%, reflecting flat volume and the higher year-over-year planned growth investments. As a reminder, paint store sales were up by a double-digit percentage in every customer segment in the first quarter a year ago. In this year's first quarter, pro sales were led by residential repaint, where gallons were up mid-single digits. We see this above-market growth as evidence that our increased investments in this segment are already beginning to deliver a return. Commercial and protective and marine grew modestly in the quarter. New residential was down as expected, but there's momentum in single family starts that will increasingly turn to completions as the year progresses. Property management was also down, driven by delays in CapEx projects, even as apartment turns remained steady. From a product perspective, interior paint sales increased by a low single digit percentage, while exterior sales decreased modestly. Encouragingly, spray equipment sales were up mid single digits in the quarter. We opened seven net new stores in the quarter and expect to open 80 to 100 for the full year. Our doors are open. We're laser focused on the momentum we have created serving both existing and new customers. will continue to win business and take share based on our differentiated solutions. Moving on to our consumer brands group, sales decreased by 7.1% in the quarter. Lower volume and the impact of divestitures were partially offset by selling price increases, primarily in Latin America. Sales in North America decreased by a high single-digit percentage, as our strategic partners manage the timing of their seasonal inventory builds. Outside of North America, sales increased by a double-digit percentage in Europe and a low single-digit percentage in Latin America. Adjusted segment margin, which excludes acquisition-related amortization expense, expanded to 20.9%. This was primarily driven by improved manufacturing and distribution fixed cost absorption moderating raw material costs, and improved results in Latin America and Europe, partially offset by lower North America sales volume. Sales in the performance coatings group were in the range we expected, with continued choppiness across each of our businesses and regions. Lower volume was partially offset by growth from acquisitions. Sales growth in Europe and Asia was offset by decreases in North America and Latin America. Adjusted segment margin, which excludes acquisition-related amortization expense, improved to 17.1%. This is the fifth straight quarter this team has delivered year-over-year segment margin improvement and, again, reflects the disciplined strategy to growing operating margin in the industrial business to mirror that of our architectural business. Industrial wood led the growth, including the impact of recent acquisitions. Coil also delivered solid growth. Auto refinish was flat against a mid-teens comparison. We are confident recent share wins, driven by our differentiated service and technology, will begin to show up more meaningfully as the year progresses. Packaging was down as expected, with improvement expected in the back half of the year. General industrial was impacted by lower demand in all regions. Moving on to our guidance for the second quarter and full year. First, I want to talk about our global team. It always comes down to our people. Our team is highly engaged, aggressive, and acting with determination and urgency. They're focused on the right priorities, and this will become more and more visible in our results. I would bet on this team all day, every day. Second, on our January call, we acknowledged there are uncertainties in the economy. We don't expect to get material help from the macro environment this year, but a few bright spots are emerging. Single-family housing starts have improved, and this will increasingly turn to completions as the year progresses. Existing home sales are unlikely to get much softer. Last week's LIRA report from Harvard indicates that the remodeling outlook continues to improve with declines easing and momentum building later in the year. On the industrial side, the manufacturing PMI has stabilized or improved in several regions. Third, we are tilting the table in our favor by controlling what we can control. Year to date, we have signed 56 new exclusive national account agreements in Paint Stores Group, primarily in new residential and property maintenance. We also have increased sales rep call activity and unique accounts called significantly. We have a robust plan and aggressive field activity to engage customers of competitors who have recently closed their doors or are otherwise distracted. As I said earlier, our doors are open. We are not distracted. You can expect us to be very aggressive here. In addition to our stores platform and team of experienced reps and store managers, we're driving customer stickiness through our digital initiatives. In March, we had the highest number of ProPlus users ever engaging with our platform, along with a near record number of new registrations. We have opened our Tourneux France packaging plant, which will support customers converting to non-BPA coatings to meet the European Commission's 2026 mandate. We are specced on multiple new infrastructure and megaprojects that are gaining momentum. And we're introducing multiple new products in both the architectural and industrial businesses to drive our customers' success. Obviously, we're not going to share everything that we're doing for competitive reasons, but you can be certain that there's a long list of actions that we are taking in addition to these items. The key takeaway is this. At some point, the demand logjam in multiple end markets is going to break. We will be there to capitalize. We're very confident it's a matter of when, not if. As for our specific outlook, the slide deck issued with this morning's press release includes our expectations for consolidated and segment sales for the second quarter of 2024. The deck also contains our full year sales and earnings per share outlook, which again is unchanged from what we provided in January. We expect to provide an update on our 2024 full year outlook when we report our second quarter results in July. Our slide deck also provides guidance on our expectations for raw material costs and other items helpful for modeling purposes. All of these remain unchanged from our January call as well. As you can see, we have high expectations of ourselves. Our team is aggressive, determined, and focused on the right priorities. I want to be clear, we are playing to win. We know our strategy is the right one and we have demonstrated for decades that it works. We expect to outperform the market and we are confident our differentiated solutions will continue to drive our customers' success while also rewarding our shareholders. This concludes our prepared remarks and with that, I'd like to thank you all for joining us this morning. We'll be happy to take your questions.