The Sherwin-Williams Company (SHW) Earnings Call Transcript & Summary

Good morning, Jim.

Can you hear me okay?

We are good. How are you?

I'm very good. Glad to be with you this morning.

So it is now -- 3 minutes late, sorry about that. It is now my pleasure to introduce a very knowledgeable team from Sherwin-Williams, with whom we will have another fireside chat. Jim Jaye is the Senior Vice President of Investor Relations and Corporate Communications. As such, he is responsible for leading the company's communication function and engages with multiple stakeholder groups. But importantly, Jim has a profound knowledge of the coatings industry and the end markets within which the company operates. Also with us, I believe, is Eric Swanson, VP of Investor Relations, with whom I had the pleasure to work when he was at PolyOne, now Avient. Sherwin-Williams is a leader manufacturer and marketer of paints and coatings. These are sold to professional, industrial, commercial and retail customers via company-owned stores as well as through mass merchandisers, home centers and industrial distributors, among other channels. Sherwin-Williams has 260 million shares outstanding, a stock price of around $243; market cap, $63.1 billion; net debt is $9.2 billion for an enterprise value of $72.3 billion. So I will now start with the questions if it is okay with Jim.

Yes. Absolutely.

So if we could begin with some industry data. Jim, can you bring us up to date as to the state of the overall coatings industry, starting with the current environment, the trends you see which I believe are positive for the foreseeable future of both the industry and Sherwin-Williams?

Yes, absolutely. And thanks again for giving Eric and I the opportunity to be part of this. I would say on the overall coatings industry, the state of the coating industry is strong, but we've got some very interesting things going on, as you are probably all aware of. I'd start with demand. Everywhere that we are operating, we are seeing strong demand, whether it's on our architectural side of the business or the industrial side of our business. I think the coatings industry in general, demand, we're seeing strong trends really across all regions. Obviously, the other thing that's happening in the coatings industry is cost inflation. We've seen a very significant cost environment last year, raw materials and other costs. I know that's -- no company is immune from that. The flip side to that is Sherwin-Williams has been very aggressive on pricing actions and implementing prices to combat that inflation. We do expect, at some point, as some of these costs moderate, that we will hold that price and we'll see corresponding margin expansion. Availability. We've talked about that, raw material availability coming out of last year for the industry was a challenge with some of the winter storms that swept through Texas and hurricanes that swept through Louisiana. I would tell you availability is moving in a better way, getting sequentially a little bit better. Not quite out of the woods yet, but that is moving in the right way. So I'll tell you that. And we are, we believe, very well positioned. As this moves forward, we've continued to invest throughout this period, and we feel very good about where we're heading despite some of the macro headwinds.

All right. Now given Sherwin's unique insight into the architectural paint market, you have, after all, 4,850 company-owned store in the U.S. and the Caribbean. Can you talk about what you see in the residential and commercial end markets? Do you see any sign of an impact from rising interest rates, for example? Or is it too early to see anything like that?

Yes, Rosemarie. I would say on new residential, we're seeing very strong activity. As you know, we've talked about we are the exclusive paint supplier to 18 of the top 20 national homebuilders, and we have regular engagement with them, as you would imagine. They are very bullish on what's happening the rest of this year and into next year. From a mortgage rate perspective, what they've told us is they could see mortgage rates rising 1 point, 1.5 points, and they don't believe it would have any real fundamental impact on demand. That's how strong it is. And I think the reason for that is we continue to see strong household formation. And for a long period of time, we've underbuilt the number of houses that are needed. So there's not a lot of inventory out there and there's strong demand. So new residential feels very good to us. The commercial construction side, what I'd say there is a number of projects got delayed during the COVID time frame. Those projects have come out of -- post COVID, they were delayed or coming out of that right now. So many of those jobs that were delayed, the painting phase is now upon us. But encouragingly, we're also seeing new commercial starts as well, which will bode well for us down the road as painting is some 12 to 18 months after a start is really when you start to get to that paint. So feel good about both residential and commercial right now.

Going back for a second to the PRO having strong demand, strong backlog, et cetera. Are they having any labor issues? And is there any way Sherwin-Williams is helping?

Yes. Rosemarie, labor has been something we've talked about on and off over several years, and that's one of the main areas that Sherwin-Williams actually provides value to our customers. If you think about the painting contractor, really 85% of his costs are labor. So anything that we can do to alleviate that and make his labor more productive, we're doing this. So whether it's products that work better, apply better, drive faster, can be applied in a wider range of temperatures or it's the convenience of a sales rep that really is an extension of your staff or delivery to job site or e-commerce tools, whatever it may be, we're trying to help alleviate those labor challenges. I would tell you the cost of labor has certainly gone up. So this becomes even more critical for our customers. But we're -- part of our value proposition is to help them get the most out of their labor.

That is very helpful, Jim. I believe that we may have a question from the audience, not certain. But...

Yes, I'll read it for you. What steps has the company taken to combat the raw material availability challenges?

Yes. We've taken a lot of steps actually. It's a great question. First of all, what I would say is we continue to have really deep engagement with our current suppliers, our current arrangements with them, prioritizing Sherwin-Williams there, but we've also qualified some new suppliers as well. So we think those arrangements and agreements with both the current and new suppliers should help. We talk about really sort of trying to bend the curve in our way to help us with availability. That's one of the things we're doing. Say another thing that we're doing or have done is prioritizing certain products, right? So when you have a limited supply of raw materials, you focus on those most important products near term. So our portfolio is focused on the most important near term. The benefit of that is going to be some SKUs that maybe we're not making now are not going to come back, and they probably needed to go. So this actually accelerated our process of optimizing the portfolio. Another thing that we've done, and many of you may be aware of it, we made a small acquisition in -- closed in December. We call it Specialty Polymers, which is a resin manufacturer, a specialty resin manufacturer. This will help give us some capacity to make our own resins, especially those specialty or proprietary resins where we might be less dependent on a third party for that. So controlling a little bit of our destiny there. Making certain raw materials is not new for us. We have a business that we acquired with Valspar several years ago that does that. And even before Valspar, Sherwin did make a portion of its specialty resins. So I think that will help as well. And then really taking actions to maintain our employees that are making the products and delivering those products. Even if you get better availability, you have to have the people in place to do this. We've been taking care of our people. Even when we had some lulls last year, where we weren't getting all the raw materials that we needed, we kept our people in place, kept them occupied with other tasks so that when raws started to come back, we would be first to go out and be running very quickly. We wouldn't be trying to call people back. We have them ready to go. So -- and along those lines as well, we've not necessarily an availability per se, but we've added 50 million gallons of capacity architecturally to our operations. So when those raws do turn on more fully, we believe we're really well positioned to convert those raws to paint very quickly.

Wayne, I believe you have a question.

Yes. I was going to jump in with a few and I just want to reiterate I, Jim and Eric, really appreciate having you guys. I was lucky enough to go on one of our first in-person meetings post pandemic, and it was actually to visit you guys in Cleveland last August. I saw the soon-to-be-old headquarters and visited a couple of stores with Eric. And I just wanted to use that as a jumping-off point to see if you guys could talk about the company-owned store strategy in the Americas Group and how important that is to Sherwin and how it differentiates the company.

Yes. I'll let Eric chime in on this because I know you did take the tour with him, Wayne, but I'll just lead it off by saying the stores are part of what we call really an ecosystem of a lot of different things that we bring to our customers. So Eric, why don't you kind of talk about the role of the store and all those other things that we bring to bear?

Thanks, Jim. And Rosemarie and Wayne, thanks again for letting us join the conference here today. It's nice to speak to both of you. Yes, Wayne, the stores remain an absolute integral part of our current strategy. To provide a little bit of background, we have about 4,500 stores in the U.S. and Canada. And in total, there's around 12,000 specialty paint stores. We see a clear path to continue to open up on average between 80 to 100 net new stores a year. And those stores are important to our customers. As Jim indicated, they're part of that ecosystem of services and solutions that we offer to those customers. The stores ramp up to profitability very quickly. Typically, around months 9 to 12, they reach their first profitable month. They are breakeven life to date around months 18 to 22. And then in year 3, they're earning above the cost of capital. So it's a relatively minimal investment of typically around $300,000 or so. The stores ramp up to profitability very quickly. We see a really clear path to get to that 6,000 store number. And we don't think the total number is going to necessarily go higher than 12,000. But what's going to happen is we're going to see both our larger competitors and the smaller independent mom-and-pop hardware stores continue to close as both we and the big-box retailers continue to take share. Our customers love to come into the store every day. They often start their day in the store. They have strong relationships with the sales managers. So in addition to just the stores, I would point out, our associates, our Sherwin-Williams associates are absolutely the differentiators relative to our competitors. They have deep relationships with the store managers. We have over 3,000 sales reps that are out in the field organized by market segment that are designed to help our customers and make them more profitable and make them more efficient. So we still continue to think our store platform is the right platform. We also do invest in our e-commerce platform as well, where we think an omnichannel approach is the right approach where our customers have that brick-and-mortar in-store experience, but they also have an e-commerce platform that they can use to run their business.

Well, you answered my next question, which is going to be if the store strategy has changed at all and where you reach saturation. But that 6,000 target, is that the end goal? Or do you reassess once you get there?

I think we will reassess when we get there. I would tell you, Wayne, that we've got tremendous opportunities in both our more dense markets but also our less dense markets. So thinking about where we're less dense, I would tell you, west of the Rockies. We see tremendous opportunities in Arizona and the Southwest, certain areas where a lot of the population shifts are happening. At the same time, in our more dense markets like a Cleveland, like an Atlanta, like a Houston or Dallas, we also see tremendous opportunities. As areas change with regards to demographics as -- once there's residential, you might start to see more commercial and there might be opportunities for a more commercial store. So yes, we see opportunities throughout the United States and Canada and absolutely going to continue to -- we'll reevaluate that when we get to 6,000 stores.

And then it's been much discussed, the shift during the pandemic from professional to DIY. Can you just discuss the trends there? Is there a category showing prefers? And is there a difference in profitability in those areas?

Yes. I'll take a swing at that one. Certainly, if you think about Sherwin-Williams, our 2 big architectural segments, The Americas Group, about 90% or so of that segment is PRO. 10% of it is DIY. Our Consumer Brands is really the flip side of that with more DIY. We did see a pretty significant spike in DIY during COVID. It looks like Rosemarie might have bought some of our blue products there and [ get ] her done there, hopefully. But a lot of people were at home doing DIY projects, and that has sort of returned back to a more normal pace. Our expectation, Wayne, is that the PRO would continue to grow, and there's a number of reasons for that. It's number one, you're seeing people who -- stock market aside, the last couple of months here, people have gained a tremendous amount of wealth and feel good about investing in their home. Home price appreciation has continued to go up, so they feel good about investing and hiring a PRO to do it. Houses have changed, and there's more open structures. It's harder to get up on a ladder and do ceilings and things yourself. And so PROs continue to be preferred there. And then this huge generation that is coming in right now. They're not all created alike for sure, but there have been trends that we've been watching closely that show many of them prefer to spend their time on experiences and doing other things rather than spending the weekend say doing a DIY project. All that aside, we're really well positioned no matter what happens. So whether it's -- and we demonstrated that in 2020, right, when our partnership with Lowe's and Menards and other leading retailers really helped us drive the DIY business. We feel very good about it. Both of them are very -- the PRO and the DIY are very profitable areas for us, and we certainly feel that we can continue to grow in both.

Jim, following up on the big box and the consumer retail brands, one of your main competitor, namely PPG, recently announced what appears to be a similar partnership you have with Lowe's but theirs is going to be with Home Depot. Is this changing the dynamics of your relationship and your strategy in that space?

No. That partnership that's been announced, it's gotten some press and attention. I would say, in some cases, I'm not sure there's a whole lot that is new there. PPG, as you mentioned, has been a supplier to Home Depot previously. I'd rather focus on what we're doing and why I think our -- why we're so well positioned. And a big difference for us is with Lowe's, we are the exclusive supplier there. We're not sharing the shelf with the competitive brands. So I think that gives us some real advantages in terms of focus. Together with our partner, Lowe's, we're focused on going after the end customer, growing that business. We're not focused on whose brand are we selling, who has the most shelf space, who's being promoted, any of those other things. So we feel good about Lowe's. Menards, another great customer of ours that we'll continue to grow with. So I like where we are headed. We are in our -- I believe it's our third year of the exclusive with Lowe's, and we're extremely well positioned there on the DIY side, we've talked about it. On the PRO side at Lowe's, we're doing a number of things. So one, we've invested in reps to support this PRO who shops in a big-box channel. And that's a different kind of PRO than the one that shops in the Sherwin store, but we're investing with reps to pursue that PRO in the channel. We have focused on improving and completing an offering that the PRO in that channel is really looking for. So we feel good about what we're doing there. Certainly, working with -- Lowe's has a business called Lowe's Pro Supply, which is an extension of their stores. We feel good about what's happening there. From a digital perspective, marketing perspective, very strong partnership there. And Lowe's itself, I would say, is making great strides, connecting their pro desk with the paint department and other areas such as that. So we feel really good about what we're doing and where we're headed. We continue to build on this partnership with Lowe's and others and have confidence in where we're heading.

Now that is very helpful. If we could shift to the industrial coatings arena. Can you touch on the current trends, both in the U.S. and globally? And as long as we are touching -- talking about that, if you could talk about your exposure in Russia and Ukraine.

Yes. I'll touch real quickly on Russia and Ukraine because it's a short story, then maybe Eric can give a quick rundown on industrial. And I know we're starting to run up against time here. I can't believe how fast this time has gone. Russia and Ukraine.

[ Just when we are ] having fun.

Yes. Russia and Ukraine for us, I'd point out is well below 1% of Sherwin-Williams' sales. 80% of our revenues are U.S. and Canada. Of the remaining 20%, about 10% is Europe. It's largely the U.K., Germany, Italy and some other countries. Very minimal operations in Ukraine or Russia, a handful of employees. We're currently working through what all these circumstances mean for us, but it's not a material impact. So Eric, do you want to talk about the broader rundown of kind of what's happening?

Absolutely. And I'll keep it somewhat brief here just in the interest of time. Our largest industrial business is our general industrial business. That business was up strong double digits in the fourth quarter. I would tell you what -- they're seeing benefits is really related to infrastructure spending. And I think they're going to continue to benefit from infrastructure spending as well. They also have strong exposure to shipping containers which, of course, we're seeing favorable trends there. The next largest business is our Packaging Coatings business, and we're really, really encouraged with our Packaging Coatings business. We continue to take share. That business is benefiting from secular trends as consumers are shifting away from plastic and glass food and beverage containers towards metal, food and beverage containers. So think about hard seltzers, carbonated waters, beer, canned wine, canned water. We've seen very strong trends there as well as we've got the most efficient non-BPA coating in the market, which is gaining strong traction. Next largest business would be our industrial wood business. That also was up double digits in the fourth quarter. Industrial wood is very heavily tied to residential, both new and residential remodel. So industrial wood is tied to wood flooring, wood cabinetry and wood furniture. We've seen really good strength there. A lot of similarities from the demand drivers to what we're seeing in our new residential and residential repaint businesses in our TAG business. Next largest business would be our Automotive Refinish business. I think Automotive Refinish has been a little choppy as we've seen a little bit of a more slow recovery as miles driven have taken a little bit longer to get back to pre-pandemic levels. We'll see how things shake out as people typically are returning to the office maybe 3 days a week rather than the 5 days the week that they were prior to the pandemic or working from home entirely. And then lastly, Coil Coatings. Coil Coatings has held up exceptionally well. They've had a lot of new account wins and a lot of share of wallet growth heavily tied to commercial construction as well as appliance end markets.

If my memory serves me right, the industrial wood came from Valspar, I mean the majority of it. And they -- China was a very strong partner for that particular business. What are you seeing there?

That was the business, Rosemarie, that it was impacted by the Trump administration's tariffs on Chinese imports. And what we saw was for a certain period of time, we saw a lot of the manufacturers shift their production out of China towards other areas of Southeast Asia. We're very well positioned in Asia across the entire spectrum. So that served our strategy -- our strategy served that trend very well. I think we're seeing strong growth continue in industrial wood and would expect that growth to absolutely continue here in the near term.

Well, this was really, really very informative. We appreciate it. Jim and Eric, it was a pleasure to have you with us. And as usual, your input was very valuable. Many thanks for your participation. We look forward to seeing you in person in New York at your Investor Day in June. Thanks a lot.

I can't wait for that.

Bye.

Yes. Thank you so much.