Earnings Call Transcript
Sherwin Williams Co (SHW)
Earnings Call Transcript - SHW Q3 2025
Operator, Operator
Good morning. Thank you for joining The Sherwin-Williams Company's review of the third quarter 2025 results and our outlook for the full year of 2025. With us on today's call are Heidi Petz, President and CEO; Allen Mistysyn, Chief Financial Officer; Paul Lang, Chief Accounting Officer; and Jim Jaye, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode 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 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.
James Jaye, Senior Vice President, Investor Relations and Communications
Thank you, and good morning to everyone. Sherwin-Williams delivered solid third quarter results as we continue to execute our strategy in a demand environment that remains softer for longer, as we have previously described. Throughout the quarter, we continued to serve our customers, invest for success, control our costs, take advantage of a unique competitive environment and execute on our enterprise priorities. On a year-over-year basis, consolidated sales increased at the high end of our guided range. Paint Stores Group and Consumer Brands Group exceeded expectations and Performance Coatings Group was in line. Gross margin and gross profit dollars expanded. SG&A growth in the quarter moderated to the low single-digit percentage level we expected, driven by ongoing control of general and administrative expenses and inclusive of restructuring costs and new building costs. We remain on track for our original guidance of a low single-digit percentage increase in SG&A for the full year, including our targeted growth investments. Adjusted EBITDA margin expanded 60 basis points to 21.4%, and adjusted diluted earnings per share grew by 6.5%. We also returned $864 million to shareholders through share repurchases and dividends. Let me now turn it over to Heidi, who will provide some additional color on the third quarter before moving on to our outlook and your questions.
Heidi Petz, President and CEO
Thank you, Jim, and good morning to everyone. Let me begin by thanking our employees for delivering a solid quarter as we continue to navigate a very choppy demand environment across every one of our end markets. Our strategy continues to resonate with professional painting contractors and manufacturers who now more than ever are looking for partners that can provide them with predictability and reliability. Sherwin-Williams provides customers with differentiated solutions that make them more productive and profitable. This is even more valuable at a time when competitive offerings are inconsistent. We know what works, and we're investing in it while continuing to assess, adapt and control what we can control. We remain confident our approach is the right one to continue winning near term and it leaves us well positioned for when the demand cycle eventually turns. Let me now provide some color on our third quarter segment performance. Sales in Paint Stores Group increased by a mid-single-digit percentage, with price mix up at the high end of low single digits and volume up low single digits. This solid top-line performance is not due to any market improvement in demand, but rather clear evidence that our growth investments are delivering a return. Given the market data we track, we believe we outperformed the market in all segments that we serve. Protective and marine increased by low double digits. This was the fifth straight quarter we have delivered high single-digit growth or better in this end market. In residential repaint, sales again grew by mid-single digits. We have grown this business by at least this level in every quarter since the start of 2022, a period during which existing home sales have been negative almost every month. We also outperformed in Commercial, where sales were up mid-single digits in a quarter where multifamily completions were down double digits for the 2 months of available data. Our systematic approach to capturing new opportunities in this segment, created by recent competitive actions is working. In new residential, sales increased by low single digits in a quarter when single-family completions were down slightly for the 2 months of available data. Property maintenance and DIY sales both increased by low single-digit percentages. Exterior sales were slightly better than interior sales, and both were up mid-single digits. We opened 23 net new stores in the quarter and 61 year-to-date, which is ahead of last year's pace. We've also added a commensurate number of sales reps to serve new accounts and customers through these stores. Even as we continue to make these growth investments, we continued to drive profitability. Segment profit in the quarter grew by a mid-single-digit percentage and segment margin increased by 40 basis points. With segment gross margin being flattish, this increase reflects leverage on SG&A, with over 30% incremental margin on low single-digit volume growth. Moving on to Consumer Brands Group. Sales beat our expectations with price/mix up low single digits, volume down mid-single digits and FX, a slight headwind. Sales reflect continued softness in North America DIY and unfavorable FX in Latin America, partially offset by growth in Europe. Adjusted segment margin increased primarily due to a favorable product mix shift and good cost control, partially offset by supply chain inefficiencies from lower production volumes. Severance and other restructuring expenses also reduced segment margin by 85 basis points. We're also very pleased to have closed on the Suvinil acquisition earlier this month, and I want to take this opportunity to officially welcome this highly talented team to Sherwin-Williams. This business is an outstanding addition to the Consumer Brands Group Latin America portfolio, and we're excited by the many profitable growth opportunities ahead for our combined offerings. Additionally, we continued our channel optimization efforts in this region during the quarter, closing 8 net Sherwin-Williams stores and shifting that volume into selected qualified dealers. In Performance Coatings Group, sales were in line with expectations. Volume, acquisitions and FX all increased by low single-digit percentages but were partially offset by unfavorable price/mix. Regionally, segment growth in Europe and North America was partially offset by decreases in Latin America and Asia. From a division perspective, packaging remained our strongest performer with double-digit growth, inclusive of an acquisition. We're also pleased with mid-single-digit growth in Auto Refinish, inclusive of high single-digit growth in North America. This growth was driven by share gains that more than offset continued lower insurance claims. Sales in Coil, Industrial Wood and General Industrial all decreased by low single-digit percentages. PCG segment profit and margin decreased due to lower gross margin, primarily from unfavorable product and region sales mix and higher costs to support sales. Severance and other restructuring expenses also reduced segment margin by 30 basis points. I would also like to note the continued good work in our administrative function to control costs. Excluding the corporate portion of restructuring costs and the new building costs, administrative SG&A was down by a low double-digit percentage in the quarter. Before moving on to our outlook, I want to address the topic that some of you have asked about, and that was our very difficult decision to temporarily pause the company matching contributions to our 401(k) benefit plan effective October 1. I want to be very clear, this is not a decision made lightly, nor was it made without deep appreciation for its impact on our people. It was a decision made after implementing a number of cost-saving initiatives, and completing significant restructuring actions, all at a time when we face and continue to face a period of prolonged demand and macroeconomic uncertainty. Our goal was to preserve as many jobs as possible in the near term while also protecting the company with targeted customer-facing investments at a time of unprecedented competitive opportunity. Our goal is to reinstate the match as soon as possible, just as we have done successfully in the past. We are focused on delivering the performance that enables us to do so while also building long-term value for all of our stakeholders. With that, let me move on to our outlook for the remainder of this year, along with some initial considerations related to 2026. The slide deck issued with this morning's press release provide specific sales guidance for the fourth quarter, which reflects our normal seasonality. This sales guidance includes the Suvinil acquisition, which we expect will increase the company's consolidated sales by a low single-digit percentage in the quarter, with an immaterial negative impact to diluted earnings per share, given transaction closing costs and purchase accounting items. Given our third quarter sales performance and the addition of Suvinil, we are updating our full year 2025 sales guidance to be up by a low single-digit percentage versus 2024. Our second half EPS is in line with what we were expecting in July, excluding the immaterial headwind of Suvinil. We are narrowing our earnings outlook and now expect adjusted diluted net income per share to be in the range of $11.25 to $11.45 per share with a prior midpoint of $11.35 remaining unchanged. Additionally, we remain on track to open 80 to 100 North America Paint Stores for the year. We will also continue to manage production and inventory closely over the rest of the year, on pace with customer demand. We remain laser-focused on our strategy of driving our customers' success. As far as 2026, our teams have begun working through our annual operating plan 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, it appears that a very challenging environment will persist through the first half of the year and most likely beyond that. In other words, softer for longer and continued choppiness across most end markets. The leading indicators we track point to minimal positive catalysts at this time. We will continue to focus on our new account and share of wallet initiatives and driving continued returns on the growth investments we have made. Our initial view of raw material costs is that they will be up low single digits, inclusive of tariffs with varying costs for individual commodities. We also expect other parts of the cost basket to inflate, particularly health care, which will increase by a low double-digit percentage in wages, which we expect to increase by a low single-digit percentage. We also expect to continue investing in growth initiatives, including stores and reps to win new business and support existing customers and strategic retail partners as the competitive environment continues to inflect in our favor. We will continue to counter cost headwinds through efficiency and simplification initiatives, and disciplined pricing actions. Specifically, we have announced a 7% price increase in Paint Stores Group effective January 1, along with targeted increases in our other segments. Effectiveness in Paint Stores should be in our typical historical range, but likely will be tempered by market dynamics and segment mix. We will continue to be very aggressive in growing the business and in controlling general and administrative expenses, so we do not see a reason to be heroic in our initial guidance. We expect interest expense will be higher given our new headquarters financing arrangement and refinancing of debt at higher rates earlier this year. We remain on track with the restructuring initiatives we've previously called out, and we expect a total benefit in 2025 of approximately $40 million in savings. We expect our actions to result in savings of approximately $80 million on a full year basis going forward. On a very exciting note, we've begun the move into our new headquarters and R&D center in Cleveland, and we expect the process to be completed in the spring. As a result, we anticipate our CapEx returning to a more typical range of around 2% of sales next year. These new world-class facilities are investments in our people and our customers that we are certain will deliver strong returns, and there will be multiple chances for you to come visit in the coming year. All in, including our new and current buildings, we would expect a modest cost headwind next year. We will provide more details on our January call. 2025 is not over, and we know we still have work to do. You should expect us to continue acting with discipline and urgency during the remainder of the year. Beyond that, we expect the demand environment to remain soft well into 2026. We are not immune from these persistent challenging market conditions, which leads us to focus even more intensely on differentiated solutions that help our customers become more productive and profitable. With our success by design mindset and a deeply experienced team, we see this as a great time to continue demonstrating what makes Sherwin-Williams so unique and outperform the market, and that's exactly what we plan to do. This concludes our prepared remarks. And with that, I'd like to thank you all for joining us this morning, and we'll be happy to take your questions.
Operator, Operator
Your first question is coming from Ghansham Panjabi from Baird.
Ghansham Panjabi, Analyst
Heidi, could you just give us a bit more color on the 7% price increase for Paint Stores Group? How did you come about that number? I mean, raw materials look like they're going to be flat this year, up low single digits next year. I know you have wage increases, etc., but the demand environment seems pretty tepid. So how do we get to the 7%, which is, I think, the highest since the COVID inflation spike?
Heidi Petz, President and CEO
Ghansham, I'll pass it over to Al shortly, but let me begin with our overall pricing philosophy. We've discussed before how we approach the market; our customers recognize the need for us to enter the market. Throughout the year, we focus on demonstrating value and earning the opportunity to do so, which allows us to keep making the investments I mentioned earlier. Now I'll let Al provide some additional insight on the 7%.
Allen Mistysyn, Chief Financial Officer
Ghansham, this is Allen Mistysyn. The way we arrived at the 7% is largely due to significant year-over-year increases. You mentioned our initial forecast of raw material costs rising by low single digits compared to being relatively stable this year, along with rises in other cost categories. Additionally, I'd like to emphasize what Heidi mentioned in her opening remarks regarding our effectiveness being within our usual range but influenced by market dynamics and segment mix. As you mentioned, in this environment of slow growth and fluctuating demand, we are committed to aggressively expanding our business through new account growth and increasing our share of wallet. This focus is crucial for us because, as I highlighted in a similar call last year, we analyze price mix as a key metric, which we report on quarterly. We have several pro-architectural segments that perform at different levels. For instance, in our third quarter, we observed improvements in commercial property maintenance and new residential projects. While they share similar operating margins, they do impact the realization of price mix. In the third quarter, our price/mix realization increased to the upper end of the low single digits, compared to a mid-single-digit percentage in the second quarter. As I mentioned before, we are focused on improving operating margin. Our net sales and volume growth in the third quarter exceeded our expectations. Despite having a stable gross margin, we achieved leverage in SG&A. We increased our operating margin and realized strong incremental margins of over 30 percent from that low single-digit volume growth. The key takeaway is that we are balancing our efforts; we are committed to pursuing volume growth while managing price increases with our customers effectively.
Operator, Operator
Your next question is coming from Jeff Zekauskas from JPMorgan.
Jeffrey Zekauskas, Analyst
30-year mortgage rates have come down. I think they're about 6.4% now. Where do you think those rates need to go to really catalyze demand in the Paint Stores Group?
Allen Mistysyn, Chief Financial Officer
Yes, Jeff, I think I can go back to when mortgage rates dipped to around 6% in October of last year. We saw a nice bump in applications. So I think when you look at the pent-up demand, and depending on what number you look at and how long it's been with existing home turnover being flat or down and now it's starting to turn, there's a lot of pent-up demand. So when we get towards 6% and certainly, we've seen the 10-year dip below 4% for a day, which was exciting. I think that around 6% or a little bit below should drive stronger existing home turnover since the homebuilders have been paying down the rate to get more people and more traffic into their homes already.
Heidi Petz, President and CEO
Jeff, one piece I think I would add to that too, 6% seems to be the magic number, but we spent a lot of time with our national and regional homebuilders. And not a surprise, I think everybody is squarely focused on affordability. And while they're trying to reduce upfront construction costs, redesigning floor plans, even looking at lot sizes and the actual product, the biggest impact is obviously affordability. Rates will certainly have an impact. So we are all hoping that the Fed makes some shifts here in the future.
Operator, Operator
Your next question is coming from Vincent Andrews from Morgan Stanley.
Vincent Andrews, Analyst
Heidi and Al, I wanted to ask on the investment spending. We're a bit more than 2 years into it. I think we can all look and see the positive results that are coming from it in terms of market share gains and how it's manifesting itself in your volume results. I think what's less clear to us from the outside is just how you define the efficiency of the spend. And you can look at it both ways. You can say, could you get the same results spending less? Or could you get better results if you were spending more? And so I think it would be helpful if you could just sort of talk to a little bit of a look-back analysis on this as we're a little bit more than 2 years in. And what defines and what helps you understand what the right level of spend is and what causes you to add more or presumably you've pulled back at the same time in other areas where you haven't seen the effectiveness. So some detail there would be helpful.
Allen Mistysyn, Chief Financial Officer
Yes, Vincent, I believe it all begins and ends with how we achieve a return on our investments. We have a very structured approach to adding new stores and replications, and we evaluate how long it takes for these locations to reach a stable profit. This approach gives us insights into whether we are entering a saturated market. I can assure you that each new store we open, even in our most densely populated areas, becomes profitable more quickly as we continue to invest in regions with lower density. For our reps, we look at residential repaint in the mid-single-digit growth we've had in residential repaint through this year, through most of the last year. And we look at the investments we made in the second half of 2023, we can look by territory, by sales growth, by margin growth, and I would tell you without a doubt that we are getting a return on those investments, and what dictates how fast or slow you go, and this has been very consistent over many years. We put a plan in place, 80 to 100 stores, similar or a little bit higher number of reps. We look at our performance through the first half. We look at outlook for the second half. We think sales are going to be stronger if we think our gross margin is going to be stronger than we had planned. We are willing and able to invest heavier typically on the rep side. It's a little harder to invest more on the store side. But typically, on the rep side, and they're more focused on residential repaint. And again, we look very, very tactically and look at each of those reps and see what kind of return they're getting. But a ton of confidence that we are getting a return for those based on the sales performance we're seeing in a very difficult, I would argue, down market in residential repaint.
Heidi Petz, President and CEO
And it's a huge testament to our team. They're out every day belly to belly with these customers. And while the market may have gotten kind of worse in some pockets here, I think Al makes a great point on residential repaint, we continue to outperform in what I would also consider a highly unprecedented competitive environment. So in that 2-year span, Vincent, obviously, as you well know, there's a lot of gallons up for grabs, and we're going to be relentless to grab them.
Operator, Operator
Your next question is coming from John McNulty from BMO Capital Markets.
John McNulty, Analyst
Maybe an early one on Suvinil. Can you help us to think about some of the actions you plan on taking there? How to think about maybe some of the opportunities around synergies and where we might be looking at the profitability levels as we look to 2026.
Heidi Petz, President and CEO
Yes. John, I'll start and then hand it over to Al to talk a bit about kind of further out as we think about profitability. But I'm thrilled, I'm beyond excited on this acquisition. I'm going to be out with our team in Brazil here shortly, of course, getting in front of some customers. Really proud of the team's joint effort and their laser focus on business continuity, where we can create more value together as 2 great companies. So a lot of opportunity both commercially and operationally. It's early days. The teams are just getting started. I wish I had all the answers laid out, but I can tell you we've got the right people, the right leaders that are going to help us to realize that value at an accelerated rate.
Allen Mistysyn, Chief Financial Officer
Yes, John, let me just start impact on the fourth quarter, Suvinil will increase consolidated sales of low single-digit percentage. It increases our consumer brand sales, a low 20 percentage. How you talk about an immaterial headwind in the fourth quarter, predominantly due to onetime transaction costs and inventory step up. We expect it to be accretive in the quarter, slightly accretive in the fourth quarter. As you look out, and we'll give you more detail on our January call. But as you recall, we talked about a $525 million business, mid-teens EBITDA. And I would expect, as we implement our systems, tools and processes and realize the synergies across both organizations because as you recall, we talked about being somewhat of a reverse integration. We'd expect to see that growth into the high teens, low 20s over a midterm period of time.
Operator, Operator
Your next question is coming from Alexi Yefremov from KeyBanc Capital Markets.
Aleksey Yefremov, Analyst
Heidi, I wanted to ask you about your comments on the second half of next year. I realize it's pretty far away, but are you seeing anything specific to found maybe a little less hopeful about recovery? Or is this just looking at current trends and being conservative?
Heidi Petz, President and CEO
Yes. I think it's more about our current visibility given how far out we can see in relation to backlogs. The overall pipeline of the business is really the focus here. However, I want to reiterate that we are not seeing consistent data points indicating that a catalyst is coming in the near future. So, I don't think this is a matter of being conservative; rather, it's a matter of being pragmatic. But I can assure you that if the market rebounds quickly, we will be ready for it.
Operator, Operator
Your next question is coming from Duffy Fischer from Goldman Sachs.
James Jaye, Senior Vice President, Investor Relations and Communications
You might be on mute, Duffy. Why don't we move on? We'll come back to Duffy later.
Operator, Operator
Certainly. Your next question is coming from Mike Harrison from Seaport Research Partners.
Michael Harrison, Analyst
I was wondering kind of piggybacking on the last question, if you could give some more detail on what you're hearing from your contractor customers about their backlogs and about visibility over the next 3 to 6 months. And I'm just curious within Paint Stores Group, what submarkets are your contractors sounding maybe a little bit more confident? And what submarkets are giving you a more cautious outlook?
Heidi Petz, President and CEO
Yes. I'll start with the Commercial segment, which includes the multifamily starts. The company continues to outperform in this area. We are observing some improvement in starts, but we are more focused on trends and maintaining a positive outlook. We need to see more consistent signals. This also comes against a backdrop of soft comparisons from the past two years. Our perspective on this is around a 9 to 12-month timeframe. When we do see an uptick, it will likely occur in the latter half of this year or early 2027. Some of this anticipated movement is already reflected in our current commercial outlook. Al, do you have any additional comments to share?
Operator, Operator
Your next question is coming from Matthew Deo from Bank of America.
Unknown Analyst, Analyst
Can we just flesh out briefly the 4Q implied guidance and the deceleration in year-over-year growth? Is that because it's harder to grow a seasonally weaker quarter? Is there a regional mix issue there? Or is there anything else that might point to higher cost or deceleration?
Allen Mistysyn, Chief Financial Officer
No, Mike. I think when you look at our fourth quarter sales guidance, our consolidated sales are expected to increase in the low to mid range. The Paint Stores Group is also projected to grow in the low to mid range. We outperformed our expectations for store sales in the third quarter, thanks to improved exterior gallon sales. I would say that our fourth quarter will be sequentially smaller, and the performance of exterior sales will largely depend on how things unfold in the Southeast and Southwest regions. I don't think we're expecting any dramatic changes. It's more of the same across the other segments within our stores. I believe the consumer outlook is similar whether we include Suvinil or not, and our Paint Stores Group has aligned with our guidance for the second half. So, there's nothing significant to interpret other than the exterior performance being stronger in both stores and consumer in our third quarter, and then we'll see how that develops in our fourth quarter.
Operator, Operator
Your next question is coming from Mike Sison from Wells Fargo.
Michael Sison, Analyst
Your pricing capture this year has been better or higher than in the past. What do you think pricing capture would be in '26 and going forward? And do you think it's structurally better than you've had historically?
Allen Mistysyn, Chief Financial Officer
Yes. Mike, I think I'll just touch on '26. Going further than '26 in this environment, it's a little hard to see. We've talked about market dynamics and going out with a higher rate to cover the higher costs that we're experiencing. But in this softer for longer demand environment and the dynamics in the market with our competitors and some of the actions they've taken, we've talked openly about this on each of our calls this year. We're just going to be very aggressive on gallons and balance the gallon growth with the price increase effectiveness. And what I talked about earlier is what we report on with price/mix as one bucket that can be impacted by changes in segment sales. Like we saw in our third quarter. So if you look at our third quarter versus our second quarter, we said price/mix was up low single digits. We said on our second quarter, it was up mid-single digits. The price effectiveness itself is similar quarter-to-quarter, but we had better performance in commercial new res and property maintenance. And that's what kind of tempered the effectiveness of that price/mix bucket.
Operator, Operator
Your next question is coming from John Roberts from Mizuho.
John Ezekiel Roberts, Analyst
Could you discuss where you think industry gallons are down in the U.S. by subsegment? Specifically, which subsegments are experiencing low single-digit declines, mid-single-digit declines, and are there any subsegments that you believe are down by high single digits?
James Jaye, Senior Vice President, Investor Relations and Communications
Yes, John, this is Jim. I believe this year will see a decline in gallons, although we are not finished with the year yet. This trend has continued since the COVID era. I won't go into specific end markets, but when examining the various indicators we monitor, such as existing home sales, new single-family home starts, and property maintenance, which has remained stable, it appears that most of our end markets are facing challenges with gallons. The positive takeaway is that, as Heidi mentioned in her remarks, we are performing better than the market in all these areas, which is our main focus—achieving above-market performance. This further supports the returns from our investments.
Operator, Operator
Your next question is coming from Arun Viswanathan from RBC Capital Markets.
Arun Viswanathan, Analyst
Maybe I could get like a little bit of an early read on next year. You do have some share gains coming to you. You've announced the price increase. So in Paint Stores Group, I know you've also signed up some exclusive new contracts. So do you think a mid-single-digit comp is reasonable? Or should we push maybe to high single digits, given that 7% price increase?
Heidi Petz, President and CEO
Well, I'll start with what we just covered in the last question, which is we don't expect any help from the market whatsoever anytime soon. We do hold ourselves to higher expectations as you should expect as well. We don't often hold a yardstick based on what's happening in the competitive landscape where we really push ourselves. We talk about what's possible often in our organization and really push to think differently and think outside of the box. So when I think about this environment, our ability to go demonstrate value with these contractors and gain some exclusivity, I think, is a testament to our differentiation on display.
Allen Mistysyn, Chief Financial Officer
Arun, I want to add that we are entering our 2026 operating plan process, where we will collaborate with each division and the field sales teams to discuss developments in their specific markets and segments. This will enhance our understanding of expected trends. They will also engage with their customers regarding the price increase, and we will monitor the progress of those discussions. This will provide us with a clearer forecast for the full year concerning sales volume, and we will update you on that in January.
Heidi Petz, President and CEO
We're going to continue taking share, but we're not immune from what's happening in the market.
Operator, Operator
Your next question is coming from Patrick Cunningham from Citi.
Patrick Cunningham, Analyst
Maybe just a question on Performance Coatings. Can you help square the negative operating leverage despite the positive sales? Maybe just some color around the mix drag and higher costs there. And then it seems like you're pretty firmly guiding for low single-digit growth across that segment for 4Q. Should we expect similar margin declines with some of these similar mix dynamics? Just any sort of framework there would be helpful.
Allen Mistysyn, Chief Financial Officer
Yes, on the adjusted segment margin, we discussed the unfavorable mix by region and by business. In North America, our most mature market, sales increased only by low single digits. In Europe, which has grown due to acquisitions, we saw a high single-digit increase at a different margin, while Latin America experienced a decline, which is usually a stronger market for us. These factors contributed to a decrease in our gross margin and profit margin, despite higher volumes. In looking at our fourth quarter, I expect to see some moderation in that unfavorable mix. I anticipate that there will be some gross margin expansion due to sales volume, as we continue to maintain good cost control, thanks to the excellent job our team has done all year. I expect to see some leverage on SG&A and an improvement in our segment profit margin in the fourth quarter. We'll see how things progress into 2026, as we are currently in the planning process and will provide an update on 2026 in January.
Heidi Petz, President and CEO
We don't see any strong catalyst for market recovery, but we're not waiting for that either. I think there's some really good bright spots to point to. We mentioned in my prepared remarks, I'd point to Auto Refinish as a great example being up mid-single digits, and we are confident in taking market share, especially in North America, where we're up high single digits. I'd point to certainly the direct business, but our branches continue to demonstrate value. The large A shops are improving. The larger shops, some of the small and medium shops continue to see declines, but we are being very bullish right now, making sure that our Collision Core continues to build momentum. Adoption continues to grow, very proud of the team's efforts there. There are a number of different examples to point to across the portfolio, but just to reinforce Al's point, a lot of confidence in the team's focus on both growing volume and significant cost control.
Operator, Operator
Your next question is coming from Josh Spector from UBS.
Joshua Spector, Analyst
This might be redundant, but I'll try again here around Paint Store volumes. I guess if we look at the first half, your organic volumes same-store sales down maybe 3% to 4% depending on where you landed on pricing. Your second half guide is closer to flat, maybe plus or minus 50 basis points on the volume side. So as we think about a lower for longer environment and maybe some acceleration in share gains in commercial and multifamily, should we be thinking about a flattish volume environment for '26 as the base case? Or would you go back to what we might have thought a quarter ago, which is maybe down low single digits?
Allen Mistysyn, Chief Financial Officer
Yes, Josh, I don't want to provide a definitive outlook for 2026 today. However, if we compare quarter to quarter or half to half, our third quarter exterior sales performed better than in the first half, which gives us some positive momentum in volume. When we review our forecasting models, the outcome will depend on when commercial activity picks up, and whether property maintenance capital expenditures will return or remain soft. We're anticipating that volume will fluctuate around low single digits. Initially, we're starting with that assumption and collaborating with our teams to explore ways to increase market share through new account activity and maximizing share of wallet, aiming to achieve a consistent increase in volumes with all the proactive steps the team has taken to manage their general and administrative costs while still opening stores and hiring representatives. We have 95 more representatives and over 110 more stores compared to last year, and we experienced leverage in SG&A in the third quarter. We are considering various factors as we assess our position segment by segment. For now, we expect fluctuations around low single digits until we get more clarity as the year progresses.
Operator, Operator
Your next question is coming from David Begleiter from Deutsche Bank.
David Begleiter, Analyst
Heidi, just on your price increase, given the challenges we're seeing now in Pittsburgh Paint, why wouldn't you not raise prices next year just to apply maximum pressure on Pittsburgh Paint and really step on their neck while they were down. And sorry to be so graphic.
Heidi Petz, President and CEO
That was very graphic. David, I'll go back to a comment Al made earlier and completely this guides how we're thinking about the current operating environment, which is about balancing gallon growth with price increase effectiveness. We are going to be extremely aggressive on volume. I mentioned there's a lot of gallons up for grabs. We need to go earn that. It doesn't just come our way naturally. The team is out there across the Paint Stores organization, every store manager, assistant manager, our reps, they're fighting tooth and nail every day to make this happen, and I'm very proud of the team's achievement that allows us to kind of beat the market.
Allen Mistysyn, Chief Financial Officer
But it is a balance. And I think what you'll find, as we've always done historically, when we come out with price, we want to do it the right way. We want to get out in front of our customers, give them time to plan, get ahead of the bidding season. We don't want our customers to start absorbing this and helping them to pass that along. But the timing of the increase is of strategic importance. But we're going to be extremely aggressive on volume. So if there's a way to thread the needle, it is going to be a little bit of art and science to balance the two.
Operator, Operator
Your next question is coming from Kevin McCarthy from Vertical Research Partners.
Kevin McCarthy, Analyst
Do you have any price increases on the table that you care to call out for consumer brands or across the Performance Coatings Group? Just trying to get a sense of whether there might be a potential for any price acceleration on those platforms relative to the 7% that you called out for Paint Stores?
Allen Mistysyn, Chief Financial Officer
Yes, Kevin, based on the overall cost basket dynamics and increasing, we have targeted price increases across each of the businesses in each of the regions to help offset that and keep moving us forward.
Heidi Petz, President and CEO
And to move forward by investing in our customer success. And so it's going to be incumbent that we get that accomplished.
Operator, Operator
Your next question is coming from Chris Parkinson from Wolfe Research.
Christopher Parkinson, Analyst
Great. Understanding there are a lot of moving parts heading in 2026. So when we think of all the dynamics between price, cost, and manufacturing. Is there a scenario out with which you see Sherwin consistently being at or above 50% gross margin absent any material volume recovery? Have those dynamics or puts and takes really changed since last year's Analyst Day?
Allen Mistysyn, Chief Financial Officer
Yes, Chris, can we sustain 50% gross margin implies volume growth. And like we talked about, there's going to be choppiness across each of the segments, each of the businesses and regions. And one thing I will say is I believe Paint Stores Group will grow faster, excluding Suvinil acquisition, but will grow faster than the other segments over the next year over the midterm at a higher gross margin that helps drive an overall consolidated gross margin improvement. We did experience a headwind in our supply chain this year because of the lower production volumes. And I would say that the global supply chain team has done a really terrific job trying to offset these low- to mid-single-digit production gallon decreases by controlling their costs and being really creative on how we control our costs. So we're not losing people because we are confident in our strategy. We're confident that, that volume will return. And we want our people there when it does return and we bring hours back and we fill our factories back up to more efficient capacity utilization. So I don't want to commit to above 50% until I understand we have a consistent, sustained volume growth but we've certainly positioned ourselves very well to get there when volume does come back.
Operator, Operator
Your next question is coming from Greg Melich from Evercore.
Gregory Melich, Analyst
Could you help us understand this year, whether we look at the full year or just the third quarter, how much volume negatively impacted the gross margin rate? Additionally, what kind of volume growth would be necessary to achieve 100 basis points of leverage out of margin? What is the variable margin in this case?
Allen Mistysyn, Chief Financial Officer
Yes, Greg, you're referring to the gross margin impact from supply chain inefficiencies, which are in the range of 10 to 30 basis points. I'm glad you asked that follow-up question as it allows me to discuss our focus on improving operating margin in addition to gross margin. We observed this in our third quarter with gross margin expansion, and we utilized leverage on SG&A to advance the operating margin on an adjusted consolidated basis. I believe volume is the primary factor driving the expansion of operating margins. All the positive actions taken by our groups and divisions to reduce their cost structures have been significant. I can tell you that even a low single-digit growth in volume will positively impact us, leading to operating margin expansion. What I mean is that the impact will be less today than it would have been two years ago. We expect to achieve better leverage on future incremental volume compared to what we could have prior to entering this cycle.
Operator, Operator
Your next question is coming from Garik Shmois from Loop Capital.
Garik Shmois, Analyst
Just wanted to follow up on that last point. You said the 30% incremental margins on the low single-digit volume growth in Paint Stores that you got in this quarter. Just wondering if that's a good benchmark moving forward, just given what you just mentioned, both for that segment and maybe help us think about incremental margins and volume in the other segments when demand does start to improve more consistently?
Allen Mistysyn, Chief Financial Officer
Yes, Garik, I think with Paint Stores Group, historically, what we've said is we expect mid-20% incremental margins on lower volume growth, low single-digit volume growth. I think you saw the benefit that, that group, all the actions they've taken throughout the year to get their costs lower, while still investing. So we've got SG&A leverage in the quarter and flattish margins, and that's what helped drive that. I think drove the 30%. As we move forward, we will continuously evaluate our outlook. If our volumes increase, we will adopt the same strategy as in previous years by adding more sales representatives to capitalize on market share opportunities. For our Performance Coatings Group, it's a bit more complex due to varying business region mixes. If our volume growth is mainly in North America, our largest and most established region with the highest operating margins, then I would anticipate our incremental margins to be in the 20s and 30s. However, if growth occurs in other regions, we will experience different outcomes. For the Consumer Brands Group, I want to highlight the strong volume we achieved in 2020, along with the significant incremental margins from that period. This strong volume will also aid in improving supply chain efficiencies, contributing to growth in their incremental margins. We have proven examples; we just need to see sustained volume growth as we recover from this situation.
Heidi Petz, President and CEO
Garik, one piece I would add to that as well, we launched a few years ago, we talked about Success by Design, but our 6 enterprise priorities, one of them is simplification. And we've done a lot of work globally to understand where are the costs sitting that we're not getting paid for. So the team's credit, you've heard the expression, don't let the downturn go to waste or don't let a crisis go to waste. We're saying, don't let a downturn go to waste. There's a lot of self-help that we can do to make sure we're continuing to improve our cost position. So I'm confident that there's good progress, but there's a lot more ahead.
Operator, Operator
Your next question is coming from Eric Bosshard from Cleveland Research.
Eric Bosshard, Analyst
On the consumer brand side, I'm curious what organic growth you saw in that business. And then if you zoom back, I'm interested in the volume and pricing in '25 and how you think about that in '26?
Heidi Petz, President and CEO
I'll start us off here. Not a lot of organic growth. I think DIY is still very much under pressure. And as a reminder, the DIY segment is a very important part of our long-term strategy. It represents about 40% of the available gallons in the market. So very important certainly within our stores, but absolutely our strategic retail partners as well. The Pros Who Paint, we continue to see some good progress in movement here. We like how we're positioned here. It continues to be a growing segment on a smaller basis, but it is an area that we're continuing to invest in people, products, services to support our strategic partners. So we're good trajectory. We just need more volume.
Allen Mistysyn, Chief Financial Officer
Eric, I want to highlight that for the quarter, we experienced an increase in our adjusted operating margin. Despite some challenges with sales volume, the gallons sold were more focused on exterior sales, and our premium products grew at a faster rate than overall sales, providing a positive boost that helped to counteract the supply chain issues related to lower production volumes. The team is continuously working to enhance the premium segment of the business, and we observed the positive impact of this in our third quarter results.
Operator, Operator
Your next question is coming from Chuck Cerankosky from Northcoast Research.
Charles Cerankosky, Analyst
Great quarter. I'd like to ask about a portion of the res repaint market, if that's how it's categorized, there seems to be a lot more activity based on our work around investors buying houses and doing very significant rehab of those properties and then selling them back into the existing home market. Is that how it flows through the housing numbers, and how significant is that business for Sherwin's contractors?
Heidi Petz, President and CEO
Well, remodeling is definitely, I think, more favorable than what we're seeing relative to the new residential side and the building side. There has been certainly increasing activity. By and large, though, the market does still continue to be choppy. So I don't believe that, that subsegment is enough to offset the core of the residential repaint contractor in general. But we're certainly going to take advantage of that subsegment.
Allen Mistysyn, Chief Financial Officer
Yes. Chuck, I think the only other thing I would highlight there is, again, we continue to invest in the residential repaint segment. It's our largest segment. It's our fastest-growing segment, and it's our largest opportunity in that situation you talked about would be part of that residential repaint segment. And again, we're being aggressively going to the new account and share of wallet growth.
Operator, Operator
Your next question is coming from Laurence Alexander from Jefferies.
Laurence Alexander, Analyst
In the past, you've mentioned that during a recovery, you anticipate an amplification effect or an increase in the rate of share gains, meaning Sherwin would outperform. If we experience another year of prolonged softness and you're significantly focused on gaining market share in a challenging environment, are you accelerating some of the share gains that we would typically observe in a recovery? Or do you still anticipate that amplification effect? Furthermore, do you believe that effect could be even more pronounced because you're capturing additional market share during the downturn?
Heidi Petz, President and CEO
So Laurence, that was a 2-part question because I answered your first question. So no, we do not believe it's a pull forward on market share. The expectation is that regardless of where the market is, that we are at a minimum of 1.5 to 2x the market. So we are taking share gains. I also would point to some of the exclusive contracts that we're picking up across different end markets on the store side. We're doing that quietly. I believe that when the market starts to move that you will see that we've created structural competitive advantage given some of the additional wins we have here.
Operator, Operator
Your next question is coming from Duffy Fischer from Goldman Sachs.
Patrick Fischer, Analyst
I have a question regarding the strategic business units within Paint Stores. It appears that both residential segments have remained relatively flat in terms of improvement, without any acceleration. In contrast, the other four segments experienced growth acceleration in the third quarter. I'm curious whether this acceleration is due to delayed pricing changes, an actual increase in demand in those markets, or whether it's a reflection of your competitive advantage allowing you to gain market share. What factors are contributing to the acceleration of these four segments in Q3?
Heidi Petz, President and CEO
Duffy, it's not about the pricing aspect you mentioned. It's about our chance in this unique situation to showcase the value that Sherwin-Williams can deliver. I can assure you that in all of our markets, our teams are actively engaged and responsive. Our employees know how to quickly adapt and respond to what our customers and contractors need in this environment. When we discuss providing unique solutions, it’s during times like these that our differentiation truly stands out because we are dedicated to our strategy. We remain focused on prioritizing our customers and their success. Therefore, we will keep introducing new solutions even now. Al mentioned the word creative earlier, and our team's readiness to be innovative in this situation is crucial for us this quarter. Sherwin-Williams is managing through this prolonged softness, and we will continue to do so.
James Jaye, Senior Vice President, Investor Relations and Communications
Thank you. That concludes our Q&A session. I will now hand the conference back to Jim Jaye for closing remarks. Please go ahead. Yes. Thank you again, everybody, for joining our call today. And thanks to all the employees of Sherwin-Williams for all of their hard work. As Heidi said, we continue to operate here in a really challenging demand environment, and we expect that's likely going to continue well into next year. But at the same time, we see challenge as opportunity. So we've got a lot of confidence in our strategy, controlling what we can control: serving our customers, focusing on their success, making our targeted growth investments and controlling our G&A spending. That's the recipe, that's the playbook. So we are focused on finishing '25 strong, and we're going to continue to build on our momentum hopefully, that will propel us well into '26. So thanks again. As always, we'll be available for your follow-up calls and appreciate your interest in Sherwin-Williams.
Operator, Operator
Thank you. Everyone, this concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.