The Sherwin-Williams Company

Good morning. Thank you for joining the Sherwin-Williams Company's review of fourth quarter and full year 2024 results and our outlook for the first quarter and full year of 2025. With us on today's call are Heidi Petz, President and CEO, Al Mestician, Chief Financial Officer, Paul Lang, Chief Accounting Officer, and Jim Jay, Senior Vice President, Investor Relations and Communications. This 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 of the date to 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 to everyone. Sherman Williams delivered strong fourth quarter results that concluded a record year for the company. In what remained a very choppy demand environment, full year consolidated sales increased slightly, driven by our deliberate and targeted investment to gain share and overcome softness in core accounts. Our gross profit dollars and margin expanded, EBITDA dollars and margin expanded, and adjusted earnings per share grew by a near double-digit percentage to $11.33 a share. Consolidated sales in the fourth quarter increased by a low single-digit percentage, and gross margin improved slightly over a very strong level a year ago. As we expected and previously described, year-over-year growth in SG&A moderated to a low single-digit level. Adjusted earnings per share in the quarter increased by 15.5%. In terms of our segments in the fourth quarter, paint stores' group sales increased in the range we expected, led by high single-digit growth in residential repaint and protective and marine. Consumer brands' group sales decreased in the range we expected, all related to unfavorable effects, as volume and price mix were slightly positive. Within Performance Coatings Group, sales were slightly below expectations as strength in packaging and coil was offset by softness in other divisions. Adjusted margin expanded year over year in all three operating segments. The slide deck accompanying our press release this morning provides more detail on fourth quarter segment performance. Let me now turn it over to Heidi who will provide a few full year 2024 highlights before we move on to our 2025 outlook and your questions.

Thank you, Jim, and Happy New Year to all those that are listening. I hope you had a wonderful holiday season and are geared up for the year ahead. I know you're eager to get to our 2025 outlook, but first I want to take a moment to reflect on what our 64,000 dedicated global employees have achieved over the last year. I am proud of what our team has delivered in 2024. We entered the year amidst an extremely choppy demand environment that, quite frankly, never improved meaningfully. We knew this was a possible scenario, and we doubled down on controlling what we could control. We stayed true to our strategy. We made targeted investments, focused on share gains, and executed on our enterprise priorities. We continued to deliver innovative solutions for our customers And in a disruptive competitive environment, Sherwin-Williams stood out by being a consistent, reliable, and dependable partner. In addition to the strong margin expansion and earnings growth that Jim described a moment ago, it was another very good year of cash generation, which was $3.2 billion, or 13.7% of sales. We continued to execute our disciplined approach to capital allocation during the year. including $2.5 billion, which we returned to shareholders for share repurchases and dividends. In terms of CapEx, we invested $1.1 billion, including approximately $532 million for our new headquarters and R&D center, which we expect to begin occupying this year. We ended 2024 with a net debt to adjusted EPSA ratio of 2.2 times, Looking at our reportable segments on a full year basis, paint stores grew by a low single-digit percentage. Residential repaint drove the segment growth and increased by a mid single-digit percentage. This was strong performance given anemic existing home sales and is the clearest example of a return on our prior investments. New residential and commercial both increased by low single-digit percentages in a challenging rate environment. Flattish year-over-year segment margin reflects our continued growth investments, which we are confident will continue to drive above market sales over the long term. Consumer brands had a challenging year on the top line with lower sales resulting from soft DIY demand and unfavorable FX. Adjusted segment margin expanded back to our target level due to higher fixed cost absorption in the manufacturing and distribution operations within the segment. At the same time, we maintained our investments to support our customers, despite weaker-than-expected volume in North America. Performance coding sales varied by division and geography. Acquisitions added a low single-digit percentage in the year, but was offset by unfavorable price mix and effects. Coil was the strongest performer, driven by new account wins. We're also pleased with packaging, which returned to growth as we won new accounts and recaptured the majority of previously lost share, just as we indicated we would. Industrial wood was up mid-single digits, driven by an acquisition. Accelerated share gains and auto refinish were not enough to overcome softness in core accounts, driven by lower insurance claims. General Industrial, our largest division, remained under the most pressure during the year with softness and heavy equipment demand. Adjusted segment margin expanded to 18%, the highest level since the Valspar acquisition in 2017. Throughout 2024, we continued to operate from a position of strength. In fact, our confidence in our strategy, along with our team's ability to execute, led us to increase several of our midterm financial targets at our investor day this past August. I am confident we will achieve those targets over time given a more consistent demand environment. As we begin 2025, I am also highly confident that nobody is better positioned than Sherwin-Williams. During our October earnings call, we were among the first to describe the demand environment as softer for longer. with an expectation that the first half of 2025 would likely remain choppy. Three months later, we have seen little evidence to change that view. And given the indicators that we do see, several end markets may not improve until 2026. On the architectural side of the business, residential repaint demand has become slightly more encouraging as existing home sales have begun to show modest signs of recovery And Harvard's Lira Index shows a return to very slight growth. Residential repaint remains our single largest share gain opportunity. And we significantly outperformed the market in 2024, given our targeted investments in sales reps, training, and digital tools, just to name a few. We would expect similar outperformance in 2025. Looking at new residential, year-over-year growth in single-family starts has been choppy over the last several months. rate cuts have had little impact, and mortgage rates remain well above 6%. We would expect to continue strengthening our homebuilder customer relationship to outperform the market. In commercial, we've been clear that we expect completions to be soft in 2025, as year-over-year multifamily starts have been mostly down by double-digit percentages since the middle of 2023. Even if commercial starts do pick up in 2025, which seems unlikely given a consistently soft architectural billing index, they won't turn into painting and completions until well into 2026. Property maintenance spending still appears to be idling and neutral. On the DIY side, we do not currently see a macroeconomic catalyst driving meaningful improvement in consumer demands. On the industrial side, the PMI numbers for manufacturing in the U.S. and Europe have been negative for multiple months, with Brazil and China being slightly positive. We expect COIL to grow again, driven by significant new account wins over the past year and a continued focus on new accounts this year. We're also confident in packaging growth as we gain share and support customers' conversion to our industry-leading non-BPA coatings by 2026, to comply with European Commission mandates. In protective and marine, the project pipeline remains solid, though the timing of starts remains variable. We expect auto-refinish demand to remain choppy, driven by continued softness of insurance claims, though our share gains should become more evident. Industrial wood will likely track with new residential, given the furniture, flooring, and cabinetry end markets it serves. We expect general industrial demand to remain soft throughout the year. In summary, the market is not going to give us a lot of help this year. We'll continue to remain very aggressive with a focus on helping our existing customers grow as well as focusing on targeted share gains. Against this backdrop, we are providing guidance that we believe is very realistic. Should the market be better than we are currently assuming, we would expect to outperform the guidance we are providing to start the year. Moving on to our specific outlook, the slide deck issued with this morning's press release includes our expectations for consolidated and segment sales for the first quarter of 2025. The deck also includes our expectations for the full year, where consolidated sales are expected to be up a low single-digit percentage and diluted net income per share is expected to be in the range of $10.70 to $11.10 per share. Excluding acquisition-related amortization expense of approximately $0.80 per share and restructuring expense of approximately $0.15 per share, adjusted diluted net income per share is expected in the range of $11.65 to $12.05. This is a mid-single-digit percent increase at the midpoint compared to 2024's adjusted diluted net income per share of $11.33. We've provided a gap reconciliation in the Reg G table within our press release. Our slide deck contains several additional data points that provide important context that I'd like to touch on here. Any comparisons described are year-over-year. From a sales perspective, I'll remind you that the paint stores group implemented a 5% price increase effective January 6th. We would expect this to ramp up to typical 50 to 60% effectiveness over the next quarter. We also are implementing very targeted price increases in specific areas within our other two reportable segments. We expect the market basket of raw materials to be up a low single digit percentage in 2025. We expect to overcome these raw material headwinds and deliver full-year gross margin expansion. Driven by incremental 2025 pricing, simplification efforts across our supply chain, as well as our paint stores group, which is our largest and highest gross margin segment, growing sales faster than the other two segments. We expect SG&A dollars to grow by a low single-digit percentage in 2025. This is a more typical level for us and less than last year's 5% increase. This year's increase includes $80 million of operating expenses for our new building, which will be weighted to our second half. We'll also continue to have some operating expense for our current building until we have fully completed our move. As always, we plan to control costs tightly in non-customer facing functions. and we have a variety of levers that we can pull depending on a material change to our outlook, up or down. As we've previously described, interest expense will be up this year. This increase includes $40 million related to refinancing of debt at higher rates, including $850 million in 2024, and approximately $1 billion expected to be refinanced in 2025. It also includes $20 million of interest related to financing activities of our new building. We expect to end the year within our current long-term target debt to EBITDA leverage ratio of two to two and a half times. Other general expense items are expected to return to more historic levels in 2025 and increase approximately $75 million due to a gain on sale or disposition of assets. of approximately $50 million in 2024 that we do not expect to repeat in 2025, and an increase in our environmental provision of $25 million. We expect to open 80 to 100 new stores in the US and Canada in 2025. We'll also be focused on sales reps, capacity and productivity improvements, systems, and product innovation. Next month at our Board of Directors meeting, we will recommend an annual dividend increase of 10.5% to $3.16 per share, up from $2.86 last year. If approved, this will mark the 47th consecutive year that we've increased our dividend. We expect to continue making opportunistic share repurchases. We'll also continue to evaluate acquisitions that fit into our strategy. In addition, our slide deck provides guidance on our expectations for currency exchange, expected tax rate, CapEx, depreciation, and amortization. Finally, I'll remind you that our first quarter is a seasonally smaller one. For that reason, we will not be making any updates to full-year guidance up or down until our second quarter is completed, and we have a better view of how the paint and coating season is unfolding. Our team is operating with great confidence and accountability as we begin 2025. As we have consistently said, it is only a matter of when the demand environment returns to greater strength, not if. And when that shift occurs, we expect to significantly outperform the market. In the meantime, we are not waiting. We often talk about how we operate, success by design. We have a clear and winning strategy, We have the best team in the industry, and we've made the right investments targeting specific markets and subsegments. We know how to deliver solutions for our customers that will make them more productive and more profitable. We continue to have significant new account and share of wallet opportunities in every business and region. We expect to continue winning more than our fair share of these opportunities. I also am highly confident that our enterprise-wide efforts related to talent, simplification, digitization, supply chain responsiveness, and sustainability will continue to deliver above market growth. We get rewarded by overcoming obstacles, finding solutions for our customers, and delivering results. We are extremely well positioned to continue delivering shareholder value. And that's exactly what we intend to do in 2025. This concludes our prepared remarks. With that, I'd like to thank you all for joining us this morning, and we'll be happy to take your questions.