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

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 and 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 webcast will be available at www.sherwin.com beginning approximately 2 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 3 reportable segments. Consolidated sales grew by a high single-digit percentage, inclusive of a low single-digit contribution from the Suvinil acquisition. Reported gross margin decreased slightly but increased excluding the dilutive impact of Suvinil. 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 nonannualized Suvinil 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 2.4x. 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 5 of the last 6 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 market. We are still on pace to open 80 to 100 new stores for the year, though the net number will be approximately 30. 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 1 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 Suvinil 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 Suvinil increased by mid-single digits and our legacy Latin America business, excluding Suvinil 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 Pros Who Paint as DIY demand remained muted. Field decreased in Europe by a double-digit percentage against the 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 Suvinil drove half of the improvement, with the other half coming from favorable nonoperating items. In Performance Coatings 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 tailwind. Growth was strongest in the General Industrial division, led by strength in 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 FX. 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, disciplined 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 on September 24. 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.

[Operator Instructions] Your first question is coming from John McNulty from BMO Capital Markets.

Congrats on some really solid results, especially in a tough environment. So I wanted to ask, maybe you can unpack a little bit. Mid-quarter, you and DuPont made a bid for Akzo and then relatively quickly thereafter, pulled that bit. I guess, can you walk us through the rationale for both moves and how we should be thinking about M&A going forward in terms of the opportunities that you may see out there?

Yes, I'll take that. We take a very disciplined approach, not only to our capital allocation philosophy that remains unchanged. But as it relates specifically to M&A. As you can imagine, we are constantly looking and assessing assets that would be a fit or an accelerator to our strategy. And so we probably pass -- we pass well over 90%, I would say that across our desk. But when we look at those specific assets, those were very premium targeted assets that we had long admired and there was an opportunity at the right price at the right time if the right value that would have been something that would absolutely have been complementary to our strategy. Having said that, I think timing is everything. Value is everything. And when we get to a point where we're 2 bids in and which I think was a very fair, reasonable and premium all-cash offer without the level of engagement that we wanted it was a simple decision that there was absolutely more attractive uses of our shareholders' cash. And so the decision to walk away and put that cash to use was in our and our shareholders' best interest.

Your next question is coming from Vincent Andrews from Morgan Stanley.

Can I ask for a little more color on the Consumer Brands margins, obviously, very strong improvement. How should we expect those margins to move on a go-forward basis? I also sort of noticed versus the other 2 segments there. There wasn't really a call out here on market share gains or anything. Obviously, some other nice call-outs, but nothing on the share gain. So what drove these margins to be so much better than the other 2 segments? And what is the sustainability of it?

Vincent, it's Ben Meisenzahl. On the margin piece, it really comes from probably 2 parts. First, you look about half of it is coming from just the core operating performance. You look at the stronger sales that Consumer Brands had in the quarter. And if I strip out Suvinil and just look at the core business, which was up about mid-single digits, the result in SG&A was flat. And so you think about the leverage that you get in a situation like that. And then the other half of the margin expansion was from more favorable nonoperating items that also impacted the sequential first quarter to second quarter. So if you back out those nonoperating items, we're more flattish first quarter to second quarter. So that's what's driving the adjusted segment margin there.

Vincent, I'll add in from a market share standpoint, DIY, obviously, there's not been any meaningful improvement in that particular segment. Pros Who Paint, however, we are seeing continued share gains there. And that's a testament to the team successfully executing on our strategy. We've got, obviously, our very strategic partnerships, Lowe's and Menards and others, but this is a growing segment, still a small base but the fundamentals are intact there. So a lot of credit to the team for continued focus.

Your next question is coming from Duffy Fischer from Goldman Sachs.

Just a question around kind of the implied guidance at the midpoint. So in the first half year-over-year, you guys were up about $0.40 of EPS. And at the midpoint in the second half, you're up a little more than $0.10, even though you have a pretty big price increase rolling through in September. So, one, just wanted to see what is it that might slow down when you're looking at it year-over-year that would have a smaller increase. And then second part of that, between Q3 and Q4, should Q4 be seasonally bigger than normal because of that price increase when you look at it versus history?

Duffy. Yes, if you look at the year-over-year, I mean there's 2 things really that impact the first half versus the second half. If you look first at the comps, last year's first half, were more difficult than the second half. And so if you look at that phasing and what we're going against this year here, that does have an impact. But if you do look at the second half of this year and that slower growth of EPS. As we've talked about, we still expect that ramp-up of raw material costs. We've taken our guide up a little bit for the back half or for the full year, and that's coming on the back half. And so even though we have pricing that we're still laying in and our commitment to staying in front of that with balanced management of the price cost environment. It is still an economic headwind that we're facing here. And so that's probably the biggest reason why you would see maybe a little less of the group growth in the second half that you [indiscernible] in the first half.

Your next question is coming from Ghansham Panjabi from Baird.

Heidi, going back to your comments on the outlook and just given the steady increase in interest rates recently, specific to the PSG segment, are you embedding any sort of volume deterioration sequentially for the back half of this year, which will be offset by share gain initiatives on your end? Just sort of sum to that low single-digit volume growth. Is that the right way to think about it?

No. I look at this cash, we don't expect that to happen. We don't expect a material change, and I'll see if Ben is going to give some color commentary to give you a little bit more perspective. But -- and I'll ask him to touch base in a minute. I just want to take a moment though and give you a little bit of segment perspective to reinforce my point. You look broad strokes and obviously, we talk a lot about what's going on for residential standpoint. New residential, I would say the exact opposite, obviously, very confident. And the backlogs are stable, but the team is really standing tall. We continue to take share here, our new account activity continues to be very strong as our active accounts where we're growing our current customers' share of wallet. And so even though it's a challenging market, we're still continuing to be very aggressive out there. We talk a lot about innovation with this segment, and we talk about innovating in and out of the can. Something I want to highlight here, this is really exciting. We just launched a product called Emerald Symmetry and it's the best performing interior product that we've ever produced. So not only with the right performance characteristics, but it's going to be a great plant-based Zero VOC products, so helping to really advance our sustainability agenda. So we're doing a lot of work here in this current macro to certainly favor growth in square footage for these res repaint contractors. So volume certainly positive there. New Residential continues to be under pressure. We are outperforming as monthly, single-family completions are down an average of high single digits in 2026, while our sales were down low single digits, so demonstrating that we're taking share there. I certainly can touch on property maintenance. Our year-over-year rent growth remains weak with some sequential improvement. I would underscore some. But our outperformance with low single-digit growth is also evidence of share gains. So the market is not going to help us in any regard. But I do want to take a moment here on protective and marine because it's been a fantastic highlight I said this in the call earlier, but it's our eighth straight quarter of at least high single-digit growth. So we are exceptionally and uniquely well positioned, I would say, for some of these tailwinds. We talk a lot about data center build-out infrastructure, the semiconductor infrastructure. The team is really going to market very effectively here with a very unique suite of solutions. And so again, back to the comments earlier, we know the market is not going to help us. We're not waiting. We have a lot of time ahead of us this year. We know we can control what we can control, but we're going to expect that we outpace the market.

Ghansham, I'll add to what Heidi said there and going back to the original part of your question. I mean if you look at the phasing of volume year-over-year half over half in the guidance it's relatively consistent. And if you go back to our original guidance in January, our assumptions were the same. What's different is the level of volume is higher than what we would have expected, and you see that in our original January guidance, down low single digit to up low single digit stores group volume and now we're guiding to that up low single-digit volume. And so that supports all the things that Heidi talked about there. But again, the quarter-over-quarter volume, you're going to see consistent and what changes is the pricing as we try to balance that against the inflation.

Your next question is coming from Gregory Melich from Evercore ISI.

I guess I'd follow up on that last point. I think you mentioned in the prepared comments the price increase in September, you expect realization to be in the historic range. Can you just -- is that the range that we're seeing this year, I think they're more like 40%? Or is it the historic more 60% to 70%? And then the second part of that question is, would that be enough for gross margins to grow year-over-year in the back half given the raw material still accelerating?

Yes, Greg, I mean starting with the back part of your question there, I mean our expectation is that we're balanced with pricing, and our commitment has been to stay in front of that. And so you'll continue to see that there. Again, going back to your September price increase question, we normally see a glide path. And to Heidi's point, the this pricing will be at that same historical trend. And as you know, we have customers that have contracts. There are probably some things that go into 2027 as well. But we would expect that over time that we're really, really able to capture that the same way. And I'll remind you as well, I mean our -- the goal here has been to implement pricing when the market can support it. And we can do it in a way that preserves our customer relationships and manages our ability to get share gains. And so we felt that September provided the best balance between those objectives, and that's why you see us going right now.

Your next question is coming from Patrick Cunningham from Citi.

I was hoping you could just give a little bit of detail beyond -- behind the drivers for both the commercial and Protective segments. And what sort of multi-quarter or multiyear visibility do you have there from some of your share gains, new product wins, anything that we should think about across those 2 strong segments?

Yes. Patrick, it's Jim. I'd say on the commercial side, you're seeing this is a couple of quarters in a row where we're outperforming. We've talked about some of the market share opportunities that we've been targeting over the last 24 months or so, I think you're starting to see those come through in a more prominent way now, a lot of credit to the team that's driving the commercial side there. The other part of your question, Patrick, just again, was which other segment? The P&M piece? Yes. So the P&M piece is -- I think, touched on it, the data center build-out, the infrastructure build-out semiconductor fabs. There's others that maybe aren't getting as much of a headline, but water treatment, pharmaceutical, the onshoring, all of that is opportunity for us. A great suite of solutions, flooring, structural steel, and there's also an architectural element of the office space in all of those applications as well.

Patrick, one other piece to add, and Jim mentioned this, but we talk about AI, data centers and the build-out. You think of the race of these hyperscalers and speed matters, and we can provide speed. We can provide a comprehensive one-shop solution for many of their coatings needs across the board that Jim just mentioned. So we're -- we love the tailwind, and we're ready for it.

Your next question is coming from John Roberts from Mizuho.

Back to the original M&A question. Sherwin didn't appear to be interested in the #1 European deco business. Why was that?

Well, we've looked at that, John, for a long time. And one of the things that we love about our controlled distribution model certainly is the backdrop, the market dynamics in which we sit here in North America. We've absolutely are proud of help the playbook that we've created. Obviously, there's a lot of agility within that playbook. But the market fundamentals outside of North America simply don't support that level of capital deployment. So we do think there are, again, other very attractive alternatives of shareholders' cash and we're going to put that to good work.

Your next question is coming from Arun Viswanathan from RBC.

I was hoping to ask just on 2 segments, resi repaint and packaging. I think both of those are in the mid-single-digit range, if I'm not mistaken. Could you just elaborate? It sounds like resi repaint, obviously, you've been at higher ranges before. But is that kind of plateauing? Is there anything else that you could do to drive higher growth there? And then similarly, in packaging, are you still working on some share gains there? And where are we in kind of the European PPA transition?

Yes, you bet. Well, let me start with resi repaint is a plateauing. Absolutely not. In fact, I would say we're just getting started there. I'll remind you that this is the segment where we have the largest share gains ahead, and we are continuing to be agile and deploy resources and make sure that, that team is well prepared. There's a lot of share available for grabs right there. And so we're going to continue not only with our dedicated stores, our residential repaint reps, the product launches, the innovation that we're providing in the can, all of the digital suite of tools that we're innovating and continue to innovate for these residential repaint contractors regardless of their size to help them with their economics, be better planners, make sure that we're helping them leveraging our store -- multiple stores and helping them grow and travel. So we're in a really good place. Also a testament to the team. We've got an organization that we've long been focused on not just selling but shifting to more of a consultative selling approach. And so our team, I'm very proud of what our folks in the stores are doing day in and day out to help our customers succeed here. And it's evident in our numbers, and we continue to expect that outsized growth. I'll touch on packaging. You mentioned mid-single-digit volume. That certainly was by strength in beverage cans. We're clearly outgrowing the market here. I think the FCP piece you mentioned, the ban on DTA taking effect in Q2, obviously, of this year that will continue to drive customer conversion back half of this year and into next year. So we expect that to be good news heading our way.

Your next question is coming from Matthew DeYoe from Bank of America.

I just wanted to ask kind of a clarifying question a little bit on the consumer business. You'd mentioned some nonoperating tailwinds absent that, things would have been flat quarter-over-quarter. Is that a [indiscernible] would have been flat? Or was that EBITDA would have been flat. Can you just tie that up then.

Yes. Matt, that would have been -- the adjusted segment margin would have been flat. And so again, roughly half of the improvement that you saw quarter-over-quarter if you adjusted that for what we saw in the first quarter, you would have seen more flattish adjusted segment margins in CBG.

Okay. I appreciate that. That's helpful. And then to jump back a little bit on John's earlier question and I guess maybe both John's, but -- and I don't know if I want to drag this conversation too much. But like ultimately, what changed between your first 2 attempts on AkzoNobel and then the release of the slide deck and then your decision to walk away? Like I appreciate the price discipline comment. But conceptually, you kind of already you had to come up in a more material way. And then the slide deck comes out and then a few days later, you walk. Is that -- am I reading too much into what was a couple of days lapse? Or is there something else there? Because, I mean, that deal isn't necessarily done, though, I think the market expects, but just wondering how it relates to your appetite? And then conceptually, I would assume any spin-offs or a fair game for Sherwin to consider? [indiscernible] asset right?

Right. So Matt, let me attack your question here. I think there's basically 3 parts of it. First, I do think you're signing too much weight to the days. And if you look at the discipline in which we think about capital allocation deployment, we've been looking at those assets for years. And so we're not desperate for those assets. I want to be very clear. And we've said we don't need acquisitions to grow. We have a lot of organic scale opportunity. The team is doing a fantastic job demonstrating that. we're not going fast enough, we'll happily take more. But you asked about what's changed kind of between bid 1 and bid 2. And it was what I stated earlier as we talked about putting a very -- what we thought was not only fair and reasonable, but superior all-cash offer forward. at some point without getting the level of engagement that you want. What we're not going to do is negotiate against ourselves if we're not desperate for these assets. We're going to be laser-focused on growing these businesses with or without. But I think your third point, and it's a very fair point, should these assets fall out of the sky at the completion of the MOE at the right value, then we would absolutely take a look at those. But it would have to be at the right value at the right time. I will take a moment, Matt, just to point to the success of Suvinil is a great example of capital being put to great use. And just a moment on this, while you didn't ask about it, I think it demonstrates the discipline of how we think about M&A. We've long admired that asset down in Latin America and have been looking at that for over 10 years. We were very thoughtful in our approach, not just in terms of the deal, but in terms of the integration. Coming from the Valspar side and playing a big role on integration, it's extremely important that when we're thinking about success here. It is customer and employee first, and I'm very pleased with the success that the team is having. The business continuity continues to be our North Star, making sure that we're providing stability, not only in our relationships with our customers, but in our service levels. I think the cultural compatibility. It's also worth noting. You've got 2 great teams coming together. We say 1 plus 1 equals 3 here and the compatibility of strong teams and what we're able to do to leverage a strong asset of the market leadership and certainly the strong ability to provide innovation from Sherwin-Williams, we are really just getting started there.