Sherwin Williams Co Q2 FY2023 Earnings Call

Good morning. Thank you for joining the Sherwin-Williams Company Review of Second Quarter 2023 results and our outlook for the Third Quarter and Full Year of 2023. This conference call is being webcast simultaneously in listen-only mode... 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 on 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 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, Senior Vice President, Investor Relations and Communications.

Thank you and good morning to everyone. Joining me on the call today are John Morikis, Chairman and CEO; and Heidi Petz, President and Chief Operating Officer; Al Mistysyn, Chief Financial Officer; and Jane Cronin, Senior Vice President of Enterprise Finance. Sherwin-Williams delivered excellent second quarter results compared to the same period a year ago. These results, coupled with a similar strong performance in the first quarter led to an excellent first half that exceeded the expectations we laid out back in January. Given the strong first half and current visibility into our second half, we are significantly increasing our full year guidance, which John will talk about in just a few minutes. But first, let me touch on a few second quarter highlights. Consolidated net sales in the quarter exceeded our expectations and grew by a mid-single-digit percentage. Sales in all three reportable segments came in above our guided range...

Thank you, Jim. I’ll begin with the Paint Stores Group. Second quarter Paint Stores Group sales were ahead of our expectations and increased 10%, driven by mid-single-digit volume growth and continued effective pricing. Segment margin improved 280 basis points to 24.3%. Growth was led by our protective & marine business, which was up strong double digits and was driven by industrial flooring infrastructure and oil and gas applications. In our pro-architectural end markets, the strongest performers were commercial and property maintenance, both of which increased by double-digit percentages. Residential repaint was close behind with sales up by a high single-digit percentage. Demand in this market is being somewhat tempered by the extended period of weak existing home sales....

Thank you, Heidi. As we said in January, we expected to have a strong first half of the year. Our team exceeded those expectations, and I want to thank all 64,000 of our employees for their relentless focus on serving our customers and for driving continuous improvement across the organization. We also understand that a good first half does not make a good year. We know we have work to do, and that’s exactly where we are focused. On our April call, we said we would have a much better idea of how the year might unfold as we got deeper into the painting season. Here’s what we’re seeing as we begin the second half along with our plans for seizing the opportunities in front of us....

Yes, Greg, this is Al Mistysyn. And we’re really pleased with the performance of our gross margin. As a reminder, our target is midterm, 45% to 48%. As we have talked about in the past, we – in our raw material inflationary environment, we put price in to offset those dollars. And then as raw materials moderate, we start seeing the benefit of that pricing to increase our gross margin and helps us cover the continued investments we make to help our customers drive value in their business. So I’d expect the sequential gross margin to be similar to what I saw in this – what we saw in the second quarter....

Hi, thanks and congrats guys on a great quarter. I’d love to go a little bit into that, the deceleration that you still expect into the third quarter. I think it sounds like volume total sales are kind of flattish, that we would expect volume to be down kind of low to mid-singles? And maybe give us a little more color on why you expect that deceleration in what you’re seeing?

Yes, hi, Greg, I think it’s a great question. I think if you look across our entire enterprise right now, I would just qualify this or characterize this as choppy. I think that’s true both by division, by region. When you break it down, our volume is down low to mid-single digits. If you look at Paint Stores Group alone down low single-digits, I would say that’s primarily due to the new residential slowdown but confident in the increasing starts that we’re seeing....

Yes. Greg, this is Al Mistysyn. And we’re really pleased with the performance of our gross margin. As a reminder, our target is midterm, 45% to 48%....

Yes. So I’d say we refer to that as our current range. And I’d say in addition to every point that Al just made, the additional steps that we’re taking on a regular basis and reviewing the programs that we have, the investments that we’re making, the mix of our products, everything that we’re doing goes into driving that margin. It’s not simply just a price. There’s a lot of activity on the operations side to drive inefficiency....

Thank you. I got two questions on SG&A. I guess, first, if you could just help us understand – I know we’ve talked about this in the past, but the incremental spending for this year, what details can you give us in terms of what it targets? And then secondly, should the back half of the year play out better than you forecast? Do you have more SG&A activities that you could get into in the back half of the year than you’re already guiding to or is this SG&A guidance done for the year?

Yes, Vincent, let me kick it off kind of my thinking on it and then I’ll ask Al to get into some of the details. First, we are going to adjust our investments to market conditions. And these are things that we monitor closely. We reminded the trends in the market, as you just mentioned, activities and opportunities, cost, even the activities of our competitors....

As you know, we’re all about managing operating margin growth and operating margin growth over the long term. So your comment about will we be done with SG&A commentary as the second half goes on. I would say, no...and as they’re at or above our expectations, we’ll look at that....

Yes. I think that’s a challenge answer. I’d say if you look at new residential, we’re suggesting that we’ve outperformed, for example, in new residential and that we expect the balance of the year to be a little bumpier....

Thank you. Good morning. John, Al, how should we think about second half earnings in terms of the cadence between Q3 and Q4?

Yes. David, I mean, when you look at the earnings, as John and Heidi talked about, our visibility and demand, which is going to drive our performance through the second half is limited....

Yes. I think that’s a challenge answer. I’d say if you look at new residential, we’re suggesting that we’ve outperformed, for example, in new residential and that we expect the balance of the year to be a little bumpier....

Yes, Duffy, I mean it starts with that sales outlook down mid-single digit from – for second half versus first half. Less price would be in that, so we have got a nice tailwind in the first half for price that helped drive our operating – our gross margin....

I want to thank everybody again for joining our call today. I hope you heard come through loud and clear. Our team is aligned and committed to growing our business profitably, but we are also going to invest in growth and customer-facing initiatives....