The Sherwin-Williams Company 2026 Q3 Earnings Call

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 Suvinil acquisition, and higher growth in lower margin reportable segments. Gross margin is flat year to date, excluding the dilutive impact of Suvinil. 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 Suvinil acquisition and higher employee service costs to support 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 Suvinil. 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've 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. 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 Suvinil 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 & 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 in 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 Suvinil 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 Suvinil, increased by a low single-digit percentage. As a reminder, we have annualized the Suvinil 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 Suvinil acquisition, and unfavorable foreign currency transaction gains and losses. As we've previously shared related to Suvinil, 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 Coatings 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.