- Revenue: Consolidated sales within guided range.
- Gross Margin: Expanded sequentially and year over year in all three reportable segments.
- Diluted EPS: Grew by double-digit percentages.
- EBITDA: Grew by double-digit percentages.
- Capital Allocation: $613 million returned to shareholders through dividends and share repurchases, an increase of 57% year over year.
- Paint Stores Group Sales: Increased by mid-single digits; volume and price both up low single digits.
- Paint Stores Group Margin: Increased to 25.1%.
- Pro Sales: Residential repaint up mid-single digits; new residential returned to growth.
- Commercial Sales: Grew by a low single-digit percentage.
- Property Management Sales: Down less than 1%.
- Protective and Marine Sales: Up mid-single digits.
- DIY Sales: Increased low single digits.
- Store Openings: 26 net new stores year to date; expect 80 to 100 for the full year.
- Consumer Brands Group Sales: Decreased by a high single-digit percentage in North America.
- Consumer Brands Group Margin: Adjusted segment margin expanded to 26.1%.
- Performance Coatings Group Sales: Modest growth driven by an acquisition.
- Performance Coatings Group Margin: Adjusted segment margin improved to 19.4%.
- Full-Year Sales Guidance: Expected to be up a low single-digit percentage.
- Full-Year Earnings Guidance: Adjusted diluted EPS in the range of $11.10 to $11.40, an increase of 8.7% at the midpoint over the prior year.
Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sherwin-Williams Co (SHW, Financial) delivered a strong quarter with consolidated sales within the guided range, gross margin expansion, and double-digit growth in diluted earnings per share and EBITDA.
- The company returned $613 million to shareholders through dividends and share repurchases, marking a 57% increase year over year.
- The Paint Stores Group saw sales increase by mid-single digits, with segment margin rising to 25.1%, driven by higher sales and moderating raw material costs.
- Sherwin-Williams Co (SHW) opened 26 net new stores year to date and expects to open 80 to 100 for the full year.
- The Performance Coatings Group achieved an adjusted segment margin improvement to 19.4%, reflecting strong margin performance and customer success in end markets that value differentiation.
Negative Points
- Sales in the Consumer Brands Group underperformed expectations due to a softer market, lower volume, and unfavorable currency translation.
- North American sales in the Consumer Brands Group decreased by a high single-digit percentage, impacted by weak existing home sales, inflation, depleted savings, and household debt.
- Sales outside North America in the Consumer Brands Group decreased by a high single-digit percentage in Latin America and a double-digit percentage in Europe.
- The company acknowledged project delays in the Protective and Marine segment, although they feel positive about the pipeline.
- Sherwin-Williams Co (SHW) reduced its Consumer Brands Group guidance meaningfully following a softer-than-expected first half and continued weak demand in the North American DIY market.
Q & A Highlights
Q: Heidi, could you talk to us a little bit about the quarter in Paint Stores? It seems like 2Q had some challenging weather conditions that probably pushed some volume out. What are your customers saying in terms of their backlogs, and what are you baking in for the back half of the year?
A: Yes, good morning, Vincent. There were some challenges, but we don't hide behind weather. We're focused on controllables. Residential repaint is up mid-single digits in a down market, showing we're taking market share. New residential is growing, and we're confident in our positioning. Property management is on pause due to interest rates, but we're securing additional exclusive agreements. Overall, we exited the second quarter at our targeted run rate, leading to similar expectations for the second half.
Q: Let me take a step back and think about your longer-term gross margin opportunity. How should the investment community be thinking about that, not even for the second half of '24, but '25, '26 onwards based on all the initiatives including investments you've already been doing?
A: Yes, Chris, this is Al. We're not going to talk specifically about long-term targets today. FCP within the next 30 days will be a good opportunity to discuss financial metrics and targets longer term. Today, we want to focus on the strong second quarter and our full-year beat and raise for adjusted EPS.
Q: Congrats on the strong results. How do you frame the share gain opportunity as you look into '25 and '26? What does the margin profile look like for new customers?
A: Yes, Arun. New customers tend to value the premium experience we provide, which is positive for our mix. We're confident in our strategy and investments, which are paying off. For example, res repaint has been up mid-single digits each of the last three quarters in a down market. We're seeing positive signals from market share gains and are well-positioned for future growth.
Q: Could you talk about your regional performance in paint stores? And once you're done with your R&D capital expenditures and some plant expansions, should your normal capital expenditures be under $500 million?
A: Yes, Jeff. After the building our future projects, we'll target CapEx below 2%. We may have years where we need to add capacity, but we'll keep the dividend at approximately 30% of prior EPS and buy back stock absent acquisitions. Regionally, our Southwest division led in the current quarter, partly due to a competitor closing their doors.
Q: On the gross margin front, you put up a high number despite some soft volumes. Was the bulk of this price versus raws in terms of the improvement?
A: Yes, John. Moderating raw materials, better price realization, and mix drove our better gross margin performance. We also had global supply chain efficiencies. Paint Stores Group growing faster than other segments helped our mix. We expect gross margin expansion in the second half, driven by higher Paint Stores Group sales and moderating raw material costs.
Q: Just curious, I think your outlook for the stores was market demand not getting better in the second half. What do you think happens if demand gets worse?
A: We have to be prepared for any environment. In res repaint, we've continued to take share in a down market. We'll be thoughtful about growth indicators by segment and pace our investments accordingly. Our second half guide for Paint Stores is in line with our expectations, with res repaint outperforming.
Q: Can you give some color on how the Pros paint business performed relative to the overall segment in the quarter?
A: Pros Who Paint continues to be important. We're investing in reps and partnering with retailers. Leading indicators like LIRA suggest improvement in the fourth quarter. DIY is under pressure, but we're confident in our Pro Who Paint strategy and investments for long-term growth.
Q: On your income statement, you recorded a $32 million other income net in the quarter. What is that?
A: That line includes FX, environmental credits, and gain on sales. Year-over-year, it's about a $0.12 tailwind. We had a higher effective tax rate, which was a $0.07 headwind. We don't expect similar credits in the second half, but we do expect a beat on non-operating costs year-over-year.
Q: I'm curious about your outlook for key performance coatings verticals. Where do you see underlying markets trending in the back half?
A: Packaging is gaining share outside the US, and we expect progress to continue. Coil is winning and taking share. Auto refinish and industrial wood are also showing positive signals. We're confident in our strategy and investments for future growth.
Q: Can you speak in general terms about how you would expect your professional contractor sales versus DIY sales to trend in the stores moving forward?
A: DIY in our stores is more resilient due to the specialty paint store experience. The DIY consumer in home centers is more value-conscious and feeling pressure from inflation and debt. We're focused on ensuring we're well-positioned with strategic partners for long-term growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
