The Sherwin-Williams Company

Thank you for joining the Sherwin-Williams Company's review of fourth quarter and full year 2025 results and our outlook for the first quarter and full year of 2026. With us on today's call are Heidi Petz, Chair, President, and Chief Executive Officer, Ben Mizenzahl, 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 website 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 on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement, whether it is 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. Sherwin-Williams ended the year with strong fourth-quarter results, driven by solid core performance and inclusive of the first full quarter of the Souvenir acquisition. Consolidated sales in the fourth quarter increased by a mid-single-digit percentage, inclusive of a low single-digit contribution from Souvenir. Reported gross margin was flattish year over year, but expanded, excluding the dilutive impact of the Souvenir acquisition. SG&A as a percent of sales decreased year over year, including severance and other restructuring expenses and souvenir, reflecting our disciplined ongoing cost control measures. Adjusted diluted net income per share in the quarter increased by 6.7%. Adjusted EBITDA in the quarter grew 13.4% and expanded 120 basis points to 17.7% as a percent of sales. Free cash flow conversion in the quarter was 90.1%. 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 protective and marine against a high single-digit comp. Residential repaint remained solid, and growth was just slightly below the mid-single-digit range and also against a high single-digit comp. Group sales included positive low single-digit price mix partially offset by a low single-digit decrease in volume. Segment margin expanded 90 basis points to 20.8%. Consumer brands group sales exceeded our expectations. Sales from the souvenir acquisition and positive low single-digit FX were partially offset by price mix and volume. both of which were down less than a percentage point. Sales in the underlying business, excluding Souvenir, were essentially flat, which was better than we expected and drove the top-line beat. Adjusted segment margin decreased, including a negative impact from Souvenir and related transaction closing costs and purchase accounting items. Adjusted segment margin increased, excluding these impacts. Within Performance Codings Group, sales were at the high end of expectations, led by strengthened packaging and auto-refinish. Adjusted segment margin improved 150 basis points to 19%, driven by new business wins as well as good control of SG&A, which was down mid-single digits. We also continued our strong cost control efforts within the administrative segment, where SG&A was down a low single-digit percentage in the quarter, including one-time restructuring costs of approximately $2 million. Excluding these restructuring costs and the non-annualized new building operating costs, administrative SG&A was down by a low teens percentage, improving on third-quarter results that were down low double digits, demonstrating our continued tight management of G&A costs. The slide deck accompanying our press release this morning provides more detail on fourth quarter segment results. Let me now turn it over to Heidi, who will provide a few full-year highlights before moving on to our 2026 outlook and your questions.

Thank you, Jim, and good morning. I want to start by thanking our 65,000 global employees for their dedication and determination to deliver a solid year during one of the more challenging operating environments our company has seen. Sherwin-Williams celebrates 160 years in 2026, and it's because of our employees and our culture that we're able to deliver sustainable results through all types of cycles. Our team continues to execute our playbook while finding new ways to help our customers become more productive and more profitable. I'm proud of what our team accomplished in 2025. At this time last year, we talked about the potential for a softer for longer demand environment, and that is exactly what we saw play out, as there was no meaningful improvement in demand across our end markets. Our team refused to wait for the market and instead focused on creating opportunities and controlling what we could control. We stayed true to our strategy, 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. Our success by design approach resulted in our team delivering record full-year consolidated sales and record adjusted diluted earnings per share. Gross profit dollars and gross margin expanded. Adjusted EBITDA dollars and adjusted EBITDA margin also expanded. It was also another very strong year for cash generation, with net operating cash growing 9.4% to $3.5 billion, or 14.6% of sales. This percent of sales is right in the middle of the most recent target range that we've previously announced. Free cash flow was $2.7 billion, and free cash flow conversion for the year was 59%. In terms of capital allocation, our policy remains consistent. We returned $2.5 billion to shareholders through share repurchases in our dividend, which we raised for the 47th consecutive year. We completed the acquisition of Souvenir, and we continued to make strategic CapEx investments, including our new global headquarters and global technology center, which opened at the end of the year. We've been talking about these buildings for years, and we are thrilled that we are here. The move-in is going extremely well, and I'm confident that this will continue to strengthen our culture of collaboration, innovation, and winning together. All in, we ended 2025 with a strong balance sheet and a net debt-to-adjusted EBITDA ratio of 2.3 times. Looking at our reportable segments on a full-year basis, paint stores grew sales by a low single-digit percentage. Protective and Marine increased by high single digits. Residential repaint increased by mid-single digits, and for the third year in a row, meaningfully outperformed the market, where existing home sales remained soft. Low single-digit growth in commercial reflects share gains and above-market performance, as multifamily completions were down significantly during the year. Share gains are also evident in property maintenance and new residential, both of which were flattish in a down market characterized by muted capex spending high rates, and affordability challenges. Segment margin increased, reflecting operating leverage and solid returns on our investments. We also added 80 net new stores and 87 net new sales territories. Consumer brands' full-year sales grew by a low single-digit percentage, driven by the Souvenir acquisition, as underlying sales decreased by low single digits, resulting from soft DIY demand in North America and unfavorable effects. Adjusted segment margin decreased, including a negative impact from Souvenir, as we previously described, as well as lower production in the segment's manufacturing operations to match softer demand, resulting in lower fixed cost absorption. Performance coding's full-year sales varied by division and geography and were flat overall, which outpaced a very challenging industrial demand backdrop. Acquisitions added a low single-digit percentage in the year, and FX was a slight tailwind, but these were offset by unfavorable price mix. Packaging grew at the high end of high single digits as we continued to win new business globally, including those complying with new non-BPA coding requirements. Auto refinish was flat for the year, with share gains becoming more evident in the second half, where sales were up mid-single digits. Coil sales decreased by low single digits as meaningful new account wins were not enough to offset steel tariff impacts. Industrial wood and general industrial each decreased by low single digits, driven by soft housing and industrial markets, respectively. Adjusted segment margin remained in our high teens target range, but was impacted by unfavorable geographic mix as Europe grew by mid-single digits while other regions were down low single digits. As we close out 2025, I'm also pleased to share that we are reinstating our 401 matching program for eligible U.S. employees effective February 1st. We'll also be restoring the matching contributions that have been paused since October 1st by the end of our first quarter. As I described last quarter, the decision to pause the company match was made after we had implemented multiple cost savings initiatives and significant restructuring actions. driven by multi-year demand and macroeconomic uncertainty. Given what we anticipated back in July, and with the prospect of additional risks materializing, we faced a difficult decision, either pursue further workforce reductions or temporarily pause the 401k company match. While many companies chose widespread layoffs, we chose a different path. We chose to protect jobs, retain talent, and invest in the long-term health of the organization by keeping our teams intact. We also committed to restoring the match as soon as performance allowed, just as we have done in the past. Our teams responded exactly as strong teams do. We elevated our performance and focused on controlling what we could control, including winning new business, growing share of wallet, pricing discipline, and accelerating further cost reductions. We demonstrated what truly differentiates Sherwin-Williams. At the same time, some of the risks that we saw in July did not materialize or were less severe than expected, including the delayed realization of some tariff impacts. The combination of all these factors is enabling us to both resume and retroactively restore the match sooner than originally anticipated. Now, moving on to our 2026 guidance, the demand environment feels much like it did a year ago. The softer for longer dynamic we described again back in October remains intact. While some conditions are gradually becoming more stable, many of the indicators we track, along with cautious consumer sentiment, provide little support for any broad-based or accelerated recovery at this time. This environment is likely to persist well into 2026. The slide deck issued with our press release lays out our key economic assumptions for 2026. I'd also like to provide you with some additional color that informs our outlook. On the architectural side of the business, residential repaint remains our single biggest growth opportunity, and we have and will continue to make investments to win here. Demand remains difficult to predict, with industry forecasts for existing home sales growth varying widely. from slightly down to up double digits. The mortgage rate lock-in effect remains real. Harvard's Lira Index is projecting very modest growth, and select retailers have forecasted flattish home improvement growth as a base case. Additionally, consumer sentiment remains muted. These same dynamics also signal another potentially challenging year for DIY. We expect the new residential market to be down at least in the mid-single-digit range this year, given negative single-family starts over the back half of 2025 and many forecasters' expectations for further softening in 2026. National Association of Home Builders sentiment levels were notably negative exiting 2025, and mortgage rates remain in the six-plus range. We welcome meaningful economic and policy proposals to address affordability and increase supply, though these will take time to finalize, implement, and take effect. We expect to outperform the market as we continue strengthening our homebuilder-customer relationships. In the commercial segment, the Architectural Billings Index has continued its long run of negative readings. We do see a bright spot in multifamily starts, which were positive for most of the second half of 2025. However, these starts won't turn to completions and painting until late this year and into 2027. We are pleased with the share gains we are making here, as demonstrated by our above-market growth over the second half of 2025, and which we expect will continue throughout 2026. Property maintenance capex spending still appears to be idling and neutral, though we are well-positioned to capture pent-up demand when rates moderate. We expect flattish sales as we continue to grow our account base to help offset core softness. In protective and marine, the project pipeline remains solid, though the timing of starts and completions remain variable. We expect this business, along with residential repaint, to be the best sales performers in PaintStore's group this year. On the industrial side, the U.S. manufacturing PMI ended at its lowest point in the year in December after 10 months of contractions. Brazil and the Eurozone PMIs are also contracting. Optimism is easing in China, and the PMI there remains below its historical average. We see a 2026 backdrop where our core business remains flat at best, but strong new account wins from last year and this year, along with positive price mix, should drive low single-digit sales growth in Performance Codings Group. We expect modest growth in auto refinish, driven by share gains and price mix. with the industry remaining flattish to down, given pressure on consumers and related softness of insurance claims. In COIL, we expect flattish sales as the market remains under pressure related to steel tariffs. In packaging, share gains and our industry-leading non-DPA coatings should drive flattish sales against a tough double-digit comparison. Our industrial wood and general industrial divisions had the strongest new account growth in the group last year, We expect these wins to drive low single-digit growth in both of these divisions, even as core demand remains very weak. In summary, for the third year in a row, the market is not going to give us much help. And for the third year in a row, we expect to outperform the market and grow sales and earnings per share. We'll continue to remain extremely aggressive with a focus on helping existing customers grow, as well as winning new business and converting share gains. I want to be very transparent here. We're providing guidance that we believe is very realistic given this backdrop. We are also confident that if the market is better than we're currently seeing, we would expect to outperform the guidance that we are providing to start the year. The slide deck issued with this morning's press release includes our expectations for consolidated and segment sales for the first quarter of 2026. The deck also includes our initial expectations for the full year, where consolidated sales are expected to be up a low to mid-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, adjusted diluted net income per share is expected in the range of $11.50 to $11.90, an increase of 2.4% at the midpoint compared to 2025 adjusted diluted net income per share of $11.43. I'll note that at the $11.70 midpoint, earnings growth will outpace the midpoint of our core sales growth, excluding the impact of souvenir sales. Our slide deck contains several additional data points that provide important context that I'd also like to briefly address. Any comparisons described are year-over-year. From a sales perspective, I'll remind you that the paint stores group implemented a 7% price increase effective January 1st. Realizations should be in the low single-digit range given market dynamics and segment mix. We are also implementing targeted price increases in specific areas with our other two reportable segments. We expect the market basket of raw materials to be up a low single-digit percentage in 2026, driven by tariffs along with select commodities also inflating. We expect to overcome these raw material headwinds and deliver full-year gross margin expansion, given both incremental 2026 pricing and accelerated simplification efforts across our supply chain. We expect GAAP SG&A dollars to grow by a low single-digit percentage in 2026, inclusive of a low single-digit contribution from Souvenir. As we pointed out last quarter, interest expense will be up this year. This increase includes approximately $40 million related to the lease payments for our new global headquarters and approximately $35 million of interest related to the $1.1 billion one-year delayed draw term loan that we executed in September. It also includes approximately $15 million in increased interest expense related to refinancing at higher rates. We expect to end the year within our current long-term target debt-to-EBITDA leverage ratio of 2 to 2.5 times. We expect to open 80 to 100 net new stores in the U.S. and Canada in 2026. We'll also continue adding sales reps in territories, accelerating innovation, and expanding our digital capabilities. Next month at our Board of Directors meeting, we will recommend an annual dividend increase of 1.3% to $3.20 per share, up from $3.16 last year. If approved, this will mark the 48th consecutive year we've increased our dividend. We expect to continue making opportunistic share repurchases. We'll also continue to evaluate acquisitions that fit and accelerate our strategy. In addition, our slide deck provides guidance on our expectations for currency exchange, effective tax rate, capex, depreciation, and amortization. Finally, I'll remind you that as our first quarter is a seasonally smaller one, we do not plan to make any updates to full-year guidance up or down until our second quarter is completed, at which point we will have a better view of how the paint and coating season is unfolding. Sherwin-Williams is extremely well-positioned as we enter 2026. Again, while we expect little if any help in terms of end market demand, our teams refuse to be discouraged by these near-term trends. We know stronger demand will return at some point, driven by powerful demographics and enduring market fundamentals. But we're not waiting for that moment. We're focused on winning today and securing our long-term future. We know the playbook. stay true to our proven customer-first strategy, control what we can control, and turn volatility into opportunity. That means relentlessly pursuing new accounts and share of wallet, innovating in and out of the can, investing where returns are clear, maintaining price-cost discipline, advancing our enterprise priorities, and driving accountability to ensure flawless execution. This is how we grow and create value regardless of market cycles. We're proud of what we've accomplished, but we're even more energized by the opportunities ahead. Across every business, we see room to grow, innovate, and lead. Our focus remains sharp. Grow sales, drive returns on sales and assets, and generate cash. We'll continue to deliver unique solutions for customers and outperform the markets. This is a great time to continue demonstrating what makes Sherwin-Williams so unique. We win when our customers win, and that is exactly what we plan to do. I'd like to end where I started by thanking our team for being truly the best in the industry. This concludes our prepared remarks, and with that, I'd like to thank you for joining us this morning, and we'll be happy to take your questions.