The Sherwin-Williams Company

Good morning. Thank you for joining the Sherwin-Williams Company's review of second quarter 2026 and our outlook for the third quarter and full year of 2026. With us on today's call are Heidi Petz, Chair, President, and Chief Executive Officer, Ben Meisenzahl, Chief Financial Officer, Paul Lang, Chief Accounting Officer, and Jim Jaye, Senior Vice President in Arrested Relations and Communications. This conference call has been 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 securities laws with respect to sales, earnings, and other matters. Any forward-looking statement speaks only as of the date of which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statements, 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 Jaye.

Good morning to everyone and thank you for joining our call. Sherwin-Williams delivered strong top and bottom line growth in the quarter amid ongoing global uncertainty and without any meaningful improvement in demand. Our sales outperformance reflects continued execution of our strategy, new account wins, and a clear return on prior growth investments as sales exceeded guidance on a consolidated basis and in all three reportable segments. Consolidated sales grew by a high single-digit percentage, inclusive of a low single-digit contribution from the Souvenir acquisition. Reported gross margin decreased slightly but increased, excluding the dilutive impact of Souvenir. Targeted pricing actions during the quarter enabled us to offset raw material inflation. Reported SG&A expense increased by a mid-single-digit percentage, but decreased 90 basis points as a percent of sales. The increase was driven primarily by non-annualized souvenir acquisition costs and higher employee service costs related to the greater than expected year over year sales and profit improvement in the quarter. We expect full year reported SG&A to increase by a mid single digit percentage. Adjusted diluted net income per share increased approximately 10%. Adjusted EBITDA grew by 10.5% to $1.5 billion. And adjusted EBITDA margin expanded 60 basis points to 21.5% of sales. Net operating cash improved by 21%, or $235 million in the quarter, driven by an increase in net income and working capital being a higher source of cash year over year. Free cash flow conversion was 86%. Consistent with our disciplined approach to capital allocation, we took advantage of volatility in the market to accelerate share repurchases in the quarter and combined with dividends, returned $1.5 billion to shareholders. We ended the second quarter with a strong balance sheet and a net debt to adjusted EBITDA ratio of 2.4 times. Based on our strong first half performance, as well as our assumptions for the remainder of the year, we are increasing our full year consolidated sales and EPS guidance. Let me now turn it over to Heidi, who will provide some color on second quarter segment performance before moving on to our outlook and your questions.

Thank you, Jim. I want to begin by thanking our more than 64,000 employees for their relentless focus on executing on behalf of our customers. In an environment that remains challenging, our employees continue to work hard and find new ways to deliver the reliability, consistency, and customer-focused solutions that set Sherwin-Williams apart. The strength of our strategy is evident in our performance. We are continuing to widen the gap between Sherwin-Williams and the competition through meaningful customer engagement, robust new account growth, and meaningful share gains across the business. At the same time, we continue to focus on optimizing the enterprise and controlling our costs as evidenced by the restructuring actions taken during the quarter. We expect these actions will result in approximately $17 million of annual savings with about half realized over the remainder of this year. Looking at our segment results in the second quarter, I'll begin with Paint Stores Group, which grew by a mid single digit percentage. Price Mix grew at the low end of mid-single digits and volume increased by a low single-digit percentage. Our team delivered growth in all pro segments. Protective and Marine continued its momentum as sales increased by a mid-teens percentage versus a high single-digit comparison. It was the eighth straight quarter of at least high single-digit growth in this business. Data centers, semiconductor infrastructure, and manufacturing onshoring are among several drivers of this growth, where customers continue turning to Sherwin-Williams for a suite of solutions that can be delivered quickly and consistently. In the commercial business, the gains we have been targeting over the past 24 months are now evident, as sales increased by high single digits in an underlying market that remains soft. These efforts have also resulted in the mid-single digit increases in residential repaint and property maintenance, New residential remained very challenging, as single-family starts and completions have been negative for five of the last six months. But meaningful account wins propelled us to low single-digit growth in the quarter. Segment profit grew by mid-single digits, and segment margin was 24.6%. As planned, we have opened 45 new stores year-to-date, and also as planned, closed 57, or about 1%, of total PSG stores. As we have done for decades, we continually assess and optimize our store portfolio to drive profitability, strengthen operational flexibility, drive improvement in return on net assets employed, and ensure that we maintain the highest level of service for our customers. Sales are not being negatively impacted by this targeted surgical approach, as our mid-single-digit growth year-to-date is meaningfully outpacing the markets. We are still on pace to open 80 to 100 new stores for the year, though the net number will be approximately 30. The cost of closing stores year-to-date is immaterial, and the store footprint optimization initiative is behind us. We fully expect to be at the high end of 80 to 100 net new stores beginning next year, given the trimming we have completed this year. We also announced an 8% price increase effective September 1st to offset raw material and other cost inflation. Because of our strong supplier relationships and disciplined supply chain execution, we were able to delay this increase for customers and avoid disrupting their business during the height of the paint selling season. We expect effectiveness of this increase to be in our typical range, though we will continue to be opportunistic in pursuing additional volume. Consumer Brands Group sales exceeded our expectations, driven by a mid-teens contribution from the Souvenir acquisition. Mid single digit price mix and low single digit FX were partially offset by a low single digit decrease in volume. Group sales, excluding Souvenir, increased by mid single digits, and our legacy Latin America business, excluding Souvenir, increased by a low double digit percentage. North America sales increased by high single digits against a soft comparison and included low single-digit volume growth. The North America growth was driven by new product offerings, favorable mix, and the pro who paints, as DIY demand remained muted. Sales decreased in Europe by a double-digit percentage against a high teens comparison, driven by customer inventory management and destocking. adjusted segment margin increased 210 basis points to 24.5%. Leverage from mid-single-digit sales growth and flat SG&A, excluding Souvenir, drove half of the improvement, with the other half coming from favorable non-operating items. In Performance Codings Group, sales beat expectations with growth in every division and region. These results reflect the strong new account focus that we continue to drive as demand largely remains unchanged in our underlying core business. Price mix and volume both grew by low single digits in the quarter with price mix greater than volume. FX was a low single digit tail end. Growth was strongest in the general industrial division led by strength and heavy equipment as sales were up high single digits inclusive of mid single digit volume growth. Automotive refinish also grew in the high single digit range Driven by price mix and favorable effects. Packaging continued its strong performance as sales increased by mid-single digits against a low teens comparison. Coil and wood also delivered mid-single digit growth. Group sales expanded in all regions, including a strong double-digit increase in Asia Pacific and mid-single digit growth in North America. Adjusted segment margin increased 50 basis points with strong incremental margin of 26.4%. Within the administrative segment, SG&A declined 9.8%. As a reminder, this improvement largely reflects a favorable year-over-year comparison with the prior year period, including approximately $49 million of severance and other restructuring expenses versus approximately $3 million in the current quarter. The slide deck accompanying our press release this morning provides more detail on second quarter segment results. Now, moving on to our guidance. Our better than expected first half performance gives us increased confidence in our ability to deliver growth through the balance of the year. Importantly, our updated outlook assumes there is not a broad-based demand recovery. Customer feedback and the leading indicators we track continue to show limited signs of meaningful improvement in most end markets. In this environment, we continue to focus on the levers within our control. Securing incremental volume while maintaining the products, services, and supply solutions which drive productivity and profitability for our customers. Inflation remains a variable we are actively managing. Our supplier relationships are strong and continue to be a competitive advantage, and we do not expect raw material availability to be an issue for us. At the same time, we are not immune from inflation. We are seeing the impact of higher oil and related cost pressures and we expect continued volatility throughout the balance of the year. We expect inflation in our raw material basket to be up in the high single digit range in the second half, moving our full year outlook to the mid single digit range. We have taken a thoughtful approach to balance the timing and amount of price increases for our customers and we are taking actions to keep pace with inflation while continuing to deliver the products, services and solutions that our customers value. We expect consolidated price mix for the year to increase to the mid-single digit range, and we expect to maintain full year gross margin at last year's level at the midpoint of our guidance. The slide deck issued with this morning's press release includes our expectations for consolidated and segment sales for the third quarter and full year 2026. Based on our strong first half performance and the momentum that we are carrying into the second half, We are raising our full-year sales and adjusted EPS guidance. Consolidated sales are now expected to increase by a mid to high single-digit percentage, and adjusted diluted net income per share is now expected to be in the range of $11.80 to $12.20 a share. Our guidance reflects stronger execution versus our initial January expectations, continued share gains, Discipline price cost management and ongoing productivity actions. Our slide deck contains other details you may find useful for modeling purposes. We are encouraged by our second quarter performance and proud of what our teams accomplished during the first half of the year. Their execution demonstrates the strength of our business, the durability of our strategy, and the advantages that continue to differentiate us in the marketplace. Our mindset has not changed. In this environment, we know growth will need to come from what we do, not from what the market gives us. We remain focused on being our own catalyst for growth, which means taking share, serving customers better than anyone else, and creating opportunities regardless of the demand backdrop. That's exactly where Sherwin-Williams excels, and we intend to continue leaning into these strengths. At the same time, we are not satisfied as we know there is more business to earn, more productivity to unlock, and more value to create. Our employees are the key to our success and I want to take a moment to speak directly to them and express my deep respect and appreciation. As we have just demonstrated, we will continue approaching the many opportunities ahead of us with urgency, discipline and confidence in our ability to deliver. This concludes our prepared remarks. As a reminder, we will be hosting our financial community presentation at our new global headquarters and global technology center I look forward to seeing many of you there. Please reach out to our investor relations team if you have not registered as space is limited. With that, I'd like to thank you for joining us this morning and we'll be happy to take your questions.