The Sherwin-Williams Company

Paul Lang, Chief Accounting Officer, and Jim Jaye, Senior Vice President, Investor Relations and Communications. 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 statement, whether as a result of new information, future events, or otherwise. A full declaration regarding forward-looking statements is provided in a 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 continued to deliver strong top line growth despite persistent softness of demand across our end markets. Our above market performance reflects continued execution of our strategy, new account and share of wallet wins, and a clear return on prior growth investments. Consolidated sales grew by a high single digit percentage, inclusive of mid single digit price mix and low single digit contributions from acquisitions and volume. We have grown consolidated volume every quarter this year. Sales in the quarter grew at or above our guidance in all three segments. As we talked about at our investor day last month, our strong top line growth will be a key driver of robust earnings growth and incremental margins as the inflationary cycle ultimately moderates. Reported gross margin in the quarter was primarily impacted by higher raw material and supply chain related costs, dilution from the souvenir acquisition, and higher growth in lower margin reportable segments. Gross margin is flat year to date, excluding the dilutive impact of souvenir. Reported SG&A expense increased by a mid-single digit percentage, but decreased 50 basis points as a percent of sales. The increase was driven primarily by incremental costs related to the Souvenir acquisition and higher employee service costs to support the higher than expected year over year sales. We continue to expect full year reported SG&A to increase by a mid single digit percentage, including a low single digit contribution from Souvenir. Adjusted diluted net income per share increased by approximately 1%. EBITDA increased 3.4% while adjusted EBITDA grew 3.3% to $1.4 billion and adjusted EBITDA margin of 20.5% remained within our targeted range. Net operating cash decreased in the quarter and has grown 10% or $232 million year-to-date driven by higher year-to-date net income and lower year-to-date use of cash for working capital. We returned $749 million to shareholders in the quarter and $3 billion year to date through share repurchases and dividends. Our balance sheet remains strong and we ended the third quarter with a net debt to adjusted EBITDA ratio of 2.4 times. Let me now turn it over to Heidi who will provide some color on third quarter segment performance before moving on to our outlook and your questions.

Thank you, Jim. I want to start by thanking our more than 64,000 employees around the world. Their hard work, dedication and commitment to taking care of our customers continues to set Sherwin-Williams apart. Even in a challenging environment, our teams are finding new ways to win, grow with customers and outperform the market. Our third quarter sales performance reflects the strength of our strategy and the value customers are placing on our products and services. We continued to generate strong new account growth, deepen relationships with existing customers, and gain meaningful share across the business. At the same time, we acknowledge that the sales-to-earning conversion in the quarter was below our standards, and we will continue to act with urgency to drive greater efficiency throughout the organization. Actions taken in the third quarter, together with those we previously disclosed, are expected to deliver approximately $25 million in 2026 savings. We are pursuing additional opportunities in the fourth quarter that we expect to further strengthen our cost structure and provide incremental benefits in 2027 as we are committed to making Sherwin-Williams a faster, more responsive, and even more efficient company. As we've often said, we don't run this business for a perfect quarter. We run it to consistently outperform the market and create long-term value. And on a year-to-date basis, we are delivering on the commitments we made. We are gaining share across our end markets. We continue to implement targeted pricing and cost actions designed to mitigate inflationary pressures. Excluding the dilutive impact of the souvenir acquisition, consolidated gross margin is flat year-to-date. At the same time, we continue to make targeted growth investments that are further separating us from our competitors, while adjusted SG&A growth has moderated in each of the last two quarters. We are maintaining the midpoint of our full-year adjusted diluted EPS guidance, which we raised in July. I continue to have the utmost confidence in our team, and we are moving forward with determination and a clear focus on what we can control. Looking at our segment results in the third quarter, I'll begin with the paint stores group, which grew by a mid-single digit percentage. Price mix increased by mid-single digits and volume increased by low single digits. Our team delivered growth in all pro segments. Protective and Marine continued its momentum as sales increased by a mid-teens percentage versus a challenging prior year comparison. It was the ninth straight quarter of at least high single digit growth in this business. This team's combination of technical expertise and fast, reliable service continues to win business in multiple end markets, including AI infrastructure, energy, water treatment, manufacturing, and processing. Keep in mind that many of these wins also will create reoccurring revenue annuities related to future maintenance. In the commercial business, sales increased by high single digits against a mid single digit comparison and an underlying market that remains soft. These results continue to illustrate the exclusive contracts and new projects we have targeted and won over the last 24 months and we are confident meaningful additional gains are still ahead. Residential repaint remains our single largest growth opportunity and our targeted investments and relentless focus on new accounts continues to drive above market growth. Sales in the quarter grew by mid-single digits against a high single-digit comparison, marking 10 of the last 11 quarters that Sherwin-Williams has delivered at least mid-single-digit growth in this end market. Property maintenance grew by low single digits, as did new residential, which outperformed against a backdrop where single-family completions were down by a high single-digit percentage in the quarter. Segment profit grew by low single digits, primarily due to higher net sales partially offset by higher raw material and supply chain related costs, as well as increased costs to support higher sales, including additional stores, sales reps, and digital capabilities. We've opened 57 gross new stores year to date, which have been offset by the planned and targeted closures that are now behind us as we described last quarter. We expect to be back in our typical range of 80 to 100 net new stores starting in 2027. The 8% price increase that became effective September 1st is tracking as planned and is expected to ramp up to our historical realization range in the first half of next year. In consumer brands group, sales grew as expected, driven primarily by the souvenir and do-it-best acquisitions. Positive low single-digit price mix, where favorable mix was greater than price, and low single-digit FX were partially offset by a mid-single-digit decrease in volume. Regionally, North America sales increased by low single digits, driven by favorable mix, new product offerings, and the pro-who paints, as DIY demand remained muted. Europe grew by mid-single digits versus a high single-digit comparison, driven by share gains. Our legacy Latin America business, excluding Souvenir, increased by a low single-digit percentage. As a reminder, we have annualized the Souvenir acquisition as of October 1st. Adjusted segment profit and margin in CBG decreased primarily due to higher raw material and supply chain costs, incremental SG&A expenses associated with the Souvenir acquisition, and unfavorable foreign currency transaction gains and losses. As we've previously shared related to Souvenir, this year is focused on serving our customers while executing on our integration efforts, which are progressing as expected. Excluding acquisitions, CBG adjusted segment margin for the quarter is in the low 20s. In performance codings group, sales beat expectations with growth in every division and region. Volume increased at the high end of low single digits, reflecting new account wins and share gains, as demand remained choppy in most end markets. Price mix increased by mid-single digits, and FX was a low single-digit tailwind. For the second straight quarter, growth was strongest in the general industrial division. Sales increased by a mid-teens percentage, inclusive of robust volume growth, led by construction equipment and transportation. Packaging strength continued as sales increased by a low double-digit percentage and also included strong volume growth. This team has delivered a minimum of high single-digit sales growth in eight of the last nine quarters. Coil also grew by a low double-digit percentage driven by construction, HVAC, lighting fixtures, and roof decking. Wood and automotive refinish both grew by low single digits. Total group sales expanded in all regions, including a strong double-digit increase in Asia and a high single-digit growth in North America and Latin America. Adjusted segment profit increased due to higher net sales partially offset by higher raw material and supply chain-related costs as well as an increase in employee related costs to support higher sales. The slide deck accompanying our press release this morning provides more detail on third quarter segment results. With that, let me move on to our outlook for the remainder of this year along with some initial considerations related to 2027. The slide deck issued with this morning's press release provides specific sales guidance for the fourth quarter which reflects our normal seasonality and the full year. Given our third quarter performance, we are narrowing our earnings outlook and now expect adjusted diluted net income per share to be in the range of $11.85 to $12.15 per share, with the prior midpoint of $12 remaining unchanged. Our slide deck contains other details you may find useful for modeling purposes. You should expect us to act with discipline and urgency over the remainder of the year while remaining laser focused on our strategy of driving our customers' success. As we prepare for 2027, our teams are working through our annual planning 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, we expect a continuation of software for longer with continued choppiness across most end markets. The leading indicators we track point to few positive catalysts at this time. As a result, we will continue investing in the targeted growth initiatives that we know will bring returns, including stores, reps, services, and innovative products. From a cost perspective, we are not immune from inflation. We will continue to manage this variable through targeted pricing actions as needed, disciplined control of general and administrative expenses and simplification initiatives that drive speed and efficiency. We expect cost savings of approximately $75 million in 2027, inclusive of $25 million related to the restructuring actions taken in this year's second and third quarters, as well as cost actions currently under review in the fourth quarter. Given our current visibility, we expect raw material inflation to be in the low to mid single digit range for 2027, with the largest year-over-year impact in the first half of the year before moderating in the second half. We also expect other parts of the cost basket to inflate, including energy, fuel, healthcare, wages, and technology and software licensing. We will continue to take a thoughtful approach to any potential price increases by working closely with our customers, balancing the timing and magnitude while continuing to deliver the products, We look forward to providing you with a more detailed outlook during our January call. Sherwin-Williams is a proven share-gaining compounder built to perform through all cycles. We expect to finish the year with momentum that carries into 2027, supported by a deep and experienced team with a long track record of delivering results and navigating changing market conditions. We are confident that we are a fundamentally stronger company today than the one that entered this cycle. Through disciplined investment, we have continued to expand our capabilities, create new growth platforms, and reinforce our differentiators. Our advantage is not rooted in any single asset. It comes from the combination of our people, customer relationships, systems, scale, and investments, all reinforced by credibility and trust built over decades. That combination is difficult to replicate and only continues to strengthen. Better positioning Sherwin-Williams to serve customers, outperform the market, and create long-term value. 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.