The Sherwin-Williams Company

Good morning. Thank you for joining the Sherwin-Williams Company's review of the third quarter 2025 results and our outlook for the full year of 2025. With us on today's call are Heidi Petz, President and CEO, Al Mistician, 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 the U.S. Federal Security's 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 will open this session to questions. I will now turn the call over to Jim Jay.

Thank you, and good morning to everyone. Sherwin-Williams delivered solid third quarter results as we continue to execute our strategy in a demand environment that remains softer for longer, as we have previously described. Throughout the quarter, we continue to serve our customers, invest for success, control our costs, take advantage of a unique competitive environment, and execute on our enterprise priorities. On a year-over-year basis, Consolidated sales increased at the high end of our guided range. Paint stores group and consumer brands group exceeded expectations, and performance coatings group was in line. Gross margin and gross profit dollars expanded. SG&A growth in the quarter moderated to the low single-digit percentage level we expected, driven by ongoing control of general and administrative expenses and inclusive of restructuring costs and new building costs. We remain on track for our original guidance of a low single-digit percentage increase in SG&A for the full year, including our targeted growth investments. Adjusted EBITDA margin expanded 60 basis points to 21.4%, and adjusted diluted earnings per share grew by 6.5%. We also returned $864 million to shareholders through share repurchases and dividends. Let me now turn it over to Heidi, who will provide some additional color on the third quarter before moving on to our outlook and your questions.

Thank you, Jim, and good morning to everyone. Let me begin by thanking our employees for delivering a solid quarter as we continue to navigate a very choppy demand environment across every one of our end markets. Our strategy continues to resonate with professional painting contractors and manufacturers who now more than ever are looking for partners that can provide them with predictability and reliability. Sherwin-Williams provides customers with differentiated solutions that makes them more productive and profitable. This is even more valuable at a time when competitive offerings are inconsistent. We know what works and we're investing in it while continuing to assess, adapt, and control what we can control. We remain confident our approach is the right one to continue winning near-term, and it leaves us well-positioned for when the demand cycle eventually turns. Let me now provide some color on our third quarter segment performance. Sales in paint stores grew, increased by a mid-single-digit percentage, with price mix up at the high end of low single digits and volume up low single digits. This solid top-line performance is not due to any market improvement in demand, but rather clear evidence that our growth investments are delivering a return. Given the market data we track, we believe we outperformed the market in all segments that we serve. Protective and marine increased by low double digits. This was the fifth straight quarter we've delivered high single-digit growth or better in this end market. In residential repaints, sales again grew by mid single digits. We have grown this business by at least this level in every quarter since the start of 2022, a period during which existing home sales have been negative almost every month. We also outperformed in commercial where sales were up mid single digits in a quarter where multifamily completions were down double digits for the two months of available data. Our systematic approach to capturing new opportunities in this segment created by recent competitive actions is working. In new residential, sales increased by low single digits in a quarter when single family completions were down slightly for the two months of available data. Property maintenance and DIY sales both increased by low single digit percentages. Exterior sales were slightly better than interior sales, and both were up mid-single digits. We opened 23 net new stores in the quarter and 61 year-to-date, which is ahead of last year's pace. We've also added a commensurate number of sales reps to serve new accounts and customers through these stores. Even as we continued to make these growth investments, we continued to drive profitability. Segment profit in the quarter grew by a mid-single-digit percentage and segment margin increased by 40 basis points. With segment gross margin being flattish, this increase reflects leverage on SG&A with over 30% incremental margin on low single-digit volume growth. Moving on to consumer brands group, sales beat our expectations with price mix up low single digits, volume down mid-single digits, and FX a slight headwind. Sales reflect continued softness in North America DIY and unfavorable FX in Latin America, partially offset by growth in Europe. Adjusted segment margin increased primarily due to a favorable product mix shift and good cost control, partially offset by supply chain inefficiencies from lower production volumes. Severance and other restructuring expenses also reduced segment margin by 85 basis points. We're also very pleased to have closed on a souvenir acquisition earlier this month, and I want to take this opportunity to officially welcome this highly talented team to Sherwin-Williams. This business is an outstanding addition to the consumer brands group Latin America portfolio. and we're excited by the many profitable growth opportunities ahead for our combined offering. Additionally, we continued our channel optimization efforts in this region during the quarter, closing eight net Sherwin-Williams stores and shifting that volume into selected qualified dealers. In Performance Codings Group, sales were in line with expectations. Volume acquisitions in FX all increased by low single-digit percentages but were partially offset by unfavorable price mix. Regionally, segment growth in Europe and North America was partially offset by decreases in Latin America and Asia. From a division perspective, packaging remained our strongest performer with double-digit growth, inclusive of an acquisition. We're also pleased with mid-single-digit growth in auto-refinish, inclusive of high single-digit growth in North America. This growth was driven by share gains that more than offset continued lower insurance claims. Sales in coil, industrial wood, and general industrial all decreased by low single-digit percentages. BCG segment profit and margin decreased due to lower gross margin, primarily from unfavorable product and region sales mix and higher costs of port sales. Severance and other restructuring expenses also reduced segment margin by 30 basis points. 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 low double-digit percentage in the quarter. Before moving on to our outlook, I want to address a topic that some of you have asked about And that was our very difficult decision to temporarily pause the company matching contributions to our 401K benefit plan effective October 1st. I want to be very clear. This was not a decision made lightly, nor was it made without deep appreciation for its impact on our people. It was a decision made after implementing a number of cost-saving initiatives and completing significant restructuring actions, all at a time when we have and continue to face a period of prolonged demand and macroeconomic uncertainty. Our goal was to preserve as many jobs as possible in the near term, while also protecting the company with targeted customer-facing investments at a time of unprecedented competitive opportunity. Our goal is to reinstate the match as soon as possible, just as we have done successfully in the past. We are focused on delivering the performance that enables us to do so while also building long-term value for all of our stakeholders. With that, let me move on to our outlook for the remainder of this year along with some initial considerations related to 2026. The slide deck issued with this morning's press release provides specific sales guidance for the fourth quarter, which reflects our normal seasonality. This sales guidance includes the souvenir acquisition, which we expect will increase the company's consolidated sales by a low single digit percentage in the quarter with an immaterial negative impact to diluted earnings per share given transaction closing costs and purchase accounting items. Given our third quarter sales performance and the addition of souvenir, we're updating our full year 2025 sales guidance to be up by a low single digit percentage versus 2024. Our second half EPS is in line with what we were expecting in July, excluding the immaterial headwind of Souvenir. We are narrowing our earnings outlook and now expect adjusted diluted net income per share to be in the range of $11.25 to $11.45 per share, with the prior midpoint of $11.35 remaining unchanged. Additionally, we remain on track to open 80 to 100 North America paint stores for the year. We will also continue to manage production and inventory closely over the rest of the year on pace with customer demand. We remain laser focused on our strategy of driving our customers' success. As far as 2026, our teams have begun working through our annual operating plan process. We'll provide you with a more definitive outlook in January as we typically do, but at this time we can provide some initial expectations that may be helpful. From a demand perspective, it appears that a very challenging environment will persist through the first half of the year and most likely beyond that. In other words, softer for longer and continued choppiness across most end markets. The leading indicators we track point to minimal positive catalysts at this time. We will continue to focus on our new account and share of wallet initiatives and driving continued returns on the growth investments we have made. Our initial view of raw material costs is that they will be up low single digits inclusive of tariffs with varying costs for individual commodities. We also expect other parts of the cost basket to inflate, particularly healthcare, which will increase by a low double-digit percentage, and wages, which we expect to increase by a low single-digit percentage. We also expect to continue investing in growth initiatives, including stores and reps, to win new business and support existing customers and strategic retail partners as the competitive environment continues to inflect in our favor. We will continue to counter cost headwinds through efficiency and simplification initiatives and disciplined pricing actions. Specifically, we have announced a 7% price increase in paint stores group effective January 1, along with targeted increases in our other segments. Effectiveness in paint stores should be in our typical historical range but likely will be tempered by market dynamics and segment mix. We will continue to be very aggressive in growing the business and in controlling general and administrative expenses, though we do not see a reason to be heroic in our initial guidance. We expect interest expense will be higher given our new headquarters financing arrangement and refinancing of debt at higher rates earlier this year. We remain on track with the restructuring initiatives we've previously called out, and we expect a total benefit in 2025 of approximately $40 million in savings. We expect our actions to result in savings of approximately $80 million on a full-year basis going forward. On a very exciting note, we've begun the moves into our new headquarters and R&D center in Cleveland, and we expect the process to be completed in the spring. As a result, we anticipate our CapEx returning to our more typical range of around 2 percent of sales next year. These new world-class facilities are investments in our people and our customers that we are certain will deliver strong returns, and there will be multiple chances for you to come visit in the coming year. All in, including our new and current buildings, we would expect a modest cost headwind next year. We'll provide more details on our January call. 2025 is not over, and we know we still have work to do. You should expect us to continue acting with discipline and urgency during the remainder of the year. Beyond that, we expect the demand environment to remain soft well into 2026. We are not immune from these persistent, challenging market conditions, which leads us to focus even more intensely on differentiated solutions that help our customers become more productive and profitable. With our success by design mindset and a deeply experienced team, We see this as a great time to continue demonstrating what makes Sherwin-Williams so unique and outperform the market, and that's exactly what we plan to do. This concludes our prepared remarks, and with that, I'd like to thank you all for joining us this morning, and we'll be happy to take your questions.