The Sherwin-Williams Company

With us on today's call are Heidi Petz, Chair, President and Chief Executive Officer, Al Mastician, Chief Financial Officer, Paul Lang, Chief Accounting Officer and Jim Jay, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode by Access Newswire 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 of which the 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 this session to questions. I will now turn the call over to Jim Jay. Sir, the floor is yours.

Thank you, and good morning to everyone. Sherwin-Williams continued to execute our strategy in a demand environment that remained choppy as we expected. We also continued to take aggressive and deliberate operational and commercial actions in response to, number one, a softer for longer demand environment, and number two, a rapidly changing and opportune competitive environment, which we are taking advantage of by accelerating our strategic intensity in the short term to favor Sherwin-Williams over the long term. On a year-over-year basis, consolidated sales were within our guided range, with growth in Paint Stores Group offset by softness in our other two segments. Gross margin and gross profit dollars expanded. It was the 12th quarter in a row of year-over-year gross margin expansions. SG&A in the quarter increased for the reasons described in our press release. Despite the higher level in the quarter, we remain on track for our original guidance of a low single digit percentage increase in SG&A for the full year. The decrease in adjusted earnings per share in the quarter reflects the anticipated higher non-operating costs year over year, sooner than expected new building expenses, and targeted growth investments we continue to make. From a capital allocation perspective, we continue to execute our discipline strategy, returning $716 million to shareholders through share repurchases and dividends. Looking ahead, the macroeconomic indicators we track, along with real-time customer sentiment, point to continued turbulence and a slowdown in demand across various segments, businesses, and regions over the remainder of 2025. As a result, we are reducing our adjusted earnings guidance for the full year. This is based on softer architectural sales volumes than anticipated coming into 2025 and supply chain inefficiencies due primarily to a reduction in production gallons within our global supply chain. partially offset by a reduction in SG&A spending. Despite the softening market conditions, we remain committed to delivering above-market growth. Let me now turn it over to Heidi, who will provide some additional color on the second quarter, before moving on to our outlook and your questions.

Thank you, Jim, and good morning to everyone. I want to begin by acknowledging that this was not a perfect quarter. I also want to remind you that we don't run the company to achieve perfect quarters. We run the company with a disciplined strategy to deliver significant long-term outperformance of the market. And that is exactly what we're doing, especially in this opportune competitive environment. More specifically, I want to address head-on some of the larger dynamics and actions that played out in the quarter and give you reassurance and, importantly, confidence in what we are doing and why. First, We began the year by telling you that we were operating in a very choppy demand environment. As a result, we also told you we would be responding proactively and aggressively on the cost side, including guiding to approximately $50 million or 15 cents per share and restructuring initiatives for the year. As the quarter progressed, demand momentum remained stalled and in some areas deteriorated further, notably in new residential, DIY, and coil coatings and markets. We told you we had additional levers available to us, and as you would expect, we did not wait to pull those levers, and we are pulling other levers now. Specifically, we are going broader and deeper in our restructuring initiatives and more than doubling our full-year target to approximately $105 million, or 32 cents per share. We expect these actions to result in savings of approximately $80 million on an annual basis. Second, building a new global headquarters and our R&D center is not an exact science. It is not always possible to predict timing with precision on a multi-year project of this scale. Frankly, our construction partners and teams made more progress on the project in the quarter than we expected. That's a good thing. We want to begin operating in our new facilities sooner rather than later. As a result, we incurred costs in the quarter that we didn't expect to see until the second half of the year. Third, one of the many advantages of our direct distribution model is that we have several thousand team members in our stores and in the field that are partnering with our contractors every single day, providing us with real-time market intelligence. Specifically, we've learned of recent and significant reductions in customer-facing positions and assets among our largest architectural competitors. We've also learned of a competitor implementing a high single-digit minimum price increase in the heart of the paint selling season, which can be highly disruptive to customers. We believe these competitive actions are signals that our strategy is working. We continue to believe we are at a major inflection point in the North American architectural coatings industry. and we refuse to miss this once-in-a-career opportunity that's unfolding before us. This is why we will continue investing aggressively in PaintStore's group with customer-facing growth initiatives in the quarter and throughout the second half of 2025, while maintaining discipline around G&A costs. We are highly confident that these actions will drive significant above-market growth when the demand environment improves. Professional painting contractors are looking for predictability and reliability. They need partners that are committed to providing solutions that drive their success. That is what Sherwin-Williams provides, especially in the heart of the painting season. Let me now provide some color on our second quarter segment performance. In the interest of time, I will keep my comments brief in order to focus on our full year outlook and provide time for your questions. Sales in paint stores grew increased by a low single-digit percentage, with price mix up by mid-single digits and volume down low single digits. As expected, the price mix component was slightly below the level of our first quarter, which included the residual impact of our February 2024 increase. Protective and marine increased by high single digits for the fourth straight quarter. Residential repaint sales again grew by mid-single digits, significantly outpacing the market. We also outperformed in new residential where sales increased by low single digits in a quarter when single family completions were down by double digits. Similarly, commercial sales grew low single digits in a quarter with multifamily completions down mid-teens. Property maintenance and DIY sales decreased. Even with the heightened growth investments I mentioned, Segment profit increased and segment margin decreased only slightly. We opened 20 net new stores in the quarter and 38 year-to-date, which is ahead of last year's pace. Consumer Brands Group sales were below expectations with volume, price mix, and FX all down by similar low single-digit percentages. Sales reflect continued softness in North America DIY and unfavorable effects in Latin America, partially offset by growth in Europe. Segment SG&A decreased by low single digits with continued discipline in controlling general and administrative expenses while maintaining investments to support our customers' sales. Adjusted segment margin decreased primarily due to the lower sales and impact of lower production volumes in our supply chain. Performance coatings group sales were in line with expectations. Volume, acquisitions, and FX were all up by low single-digit percentages, but slightly offset by unfavorable price mix. Regionally, segment growth in Europe, Asia, and Latin America was offset by a decrease in North America. From a division perspective, packaging continued to be a bright spot with double-digit growth inclusive of an acquisition. Coil sales were up low single digits, also inclusive of an acquisition, but the outlook for this business has become murkier with uncertainty related to steel tariffs. Industrial wood and general industrial sales were down as expected. Auto refinish also remained under pressure and was down slightly, although the industry is beginning to annualize lower insurance claims. We are encouraged by meaningful new account wins in this business, which are currently being more than offset by softness in core accounts driven by lower insurance claims. TCG segment profit and margin decreased primarily due to increased costs, support sales, higher foreign currency transaction losses, and a prior year gain on a sale of assets which did not repeat in the quarter. Severance and other restructuring expenses also reduced segment margin by 50 basis points. And before moving on to our outlook, I would also like to note the continued good work in our administrative function to control costs. Excluding the corporate portion of restructuring costs and the new building costs, administrative SG&A was down by a high single-digit percentage in the quarter. As we enter the second half of the year, it is clear we continue to be in a softer-for-longer demand environment with further deterioration possible. Our slide deck describes several of the demand indicators we tracked. None of these are particularly encouraging at this time. Customer sentiment reflects continued uncertainty and hesitancy to invest, and consumer confidence remains mixed. To be clear, we expect no help from the market over the remainder of the year. However, we continue to focus our efforts on market share gains across each of our businesses and segments. As a result, we are revising our full-year sales expectations downward in our consumer brand segment while maintaining our performance coding segment sales guidance. We are only minimally adjusting downward paint stores segment sales guidance as the January price increase realization is not enough to offset the adjustment downward in full year volumes. The lower architectural sales volumes are requiring a reduction in our full year production gallons in our supply chain, which is also pressuring bottom line results. Specific third quarter and full year ranges are provided in our slide deck. Accordingly, we are also revising our diluted earnings per share guidance downward. On a slightly more positive note, the software demand is resulting in a more favorable commodity backdrop. We now expect slight deflation of our raw material basket in the back half of the year, resulting in slattish full-year costs. While welcome, these benefits are not enough to fully offset the impact of the software demand environment. Tariffs also remain a variable in this outlook. While we cannot control the demand environment, what we can control is our commitment to a winning strategy, a team that knows how to pivot in uncertain times, and our ability to execute to help our customers be successful. You have seen evidence of that by the actions we've taken year to date. We will continue to act with discipline and urgency during the remainder of the year. Here is what you can expect to see. We will continue to focus on differentiated solutions that help our customers become more productive and more profitable. We will continue to invest in growth initiatives in a time of unprecedented competitive opportunity in our industry. We will fund these growth investments by continuing to focus relentlessly on controlling general and administrative spending. And we expect SG&A to be in our low single digit target range for the year. We are going deeper and broader in our restructuring initiative. As I mentioned earlier, we are doubling our initial target. We are reducing our CapEx spending for the year by $170 million, or approximately 20%. Total CapEx moves downward from $900 million to $730 million, inclusive of $300 million for our building project. We are accelerating completion and transition to our new buildings as quickly as possible. As we seek to begin getting a return on this project, more activity in the current year will result in a pull forward of certain transition and operating expenses. We now estimate total investment in the year to be $115 million, inclusive of $95 million of SG&A and $20 million of interest expense, with approximately 50% of SG&A expenses non-repeatable. We will continue to opportunistically repurchase our shares and pursue targeted acquisitions that accelerate our strategy. We expect the Souvenir acquisition to close before the end of the year. And we will continue to focus on our enterprise priorities. Talent continues to drive us. Simplification and digitization will make us more productive and our supply chain more responsive. Profitable above market growth over the long term remains our North Star. Let me conclude by reminding you that because of our success by design mindset and deeply experienced team, we are highly confident that our current course is the right one. While others in this space are abandoning their strategies and are unclear of their direction, we see this is a time for certainty and stability and an opportunity to demonstrate what makes Sherwin-Williams so unique. We will continue to navigate near-term pressures appropriately and with the discipline that you've come to expect from us. And we will be aggressive and targeted as we expand our competitive moat in the short and long term. You should fully expect that we will extend our strong track record of delivering for our customers and ultimately for our shareholders. This 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.