The operator welcomes participants to the Sherwin-Williams Company's review of third quarter 2023 results and discusses the availability of a webcast replay. The call will include forward-looking statements and the company's executives will provide prepared remarks before opening the session to questions. The Senior Vice President of Investor Relations and Communications, James Jaye, introduces the other executives, including Chairman and CEO John Morikis. Sherwin-Williams had excellent third quarter results and is increasing their full year guidance. Consolidated net sales were within their guidance range and gross margin expanded due to pricing discipline and moderating raw material costs.

The company is committed to investing in and growing the business while also focusing on profitability. The increase in SG&A reflects deliberate investments being made to take advantage of market uncertainty and drive success for customers. Operating margin and adjusted diluted net income per share both saw double-digit growth, and the company returned a significant amount of money to shareholders. The Paint Stores Group saw a 3.6% increase in sales, with strong growth in the Protective & Marine segment and moderate growth in Pro architectural end markets.

The company's property maintenance sales and new residential sales saw low single-digit and mid-single-digit growth respectively, with the latter being affected by softness in single-family starts. DIY business was down low single digits due to a difficult comparison. Interior paint sales were up, while exterior paint sales were flat. Sales in the Consumer Brands Group decreased by 4%, mainly due to the divestiture of the China architectural business and softer DIY demand in North America. Sales in North America decreased by a mid-single-digit percentage, while sales in Latin America and Europe saw high single-digit and low double-digit growth respectively. Adjusted segment margin was lower than a year ago due to lower sales volume and lower fixed cost absorption. Sales in the Performance Coatings Group decreased by 1%.

The paragraph discusses the performance of the company's PCG division, which saw a decrease in volume but an increase in adjusted segment margin due to pricing discipline and moderating raw material costs. Sales varied by region, with strong growth in Europe and Latin America, a decrease in North America, and weak demand in Asia. The Industrial Wood business showed the strongest growth, while the Coil and General Industrial businesses saw a decrease. The company also recently acquired a coatings business in Germany. Sales in the Auto Refinish business increased, but Packaging sales decreased due to destocking by brand owners and a fire at a plant in Texas.

In the longer term, the company is confident about its growth prospects and plans to increase capacity at its France plant by 2024. The CEO, John Morikis, thanks the employees for their hard work and discusses the company's performance in the third quarter. The demand for Paint Stores Group is stable, but Performance Coatings remains variable. The company is focused on gaining market share and expects raw material costs to decrease in 2023. Other costs are expected to increase in the mid- to high single-digit range.

The company sees the current market uncertainty as an opportunity to invest in solutions for their customers, leading to above-market growth and strong returns. They expect a low single-digit increase in net sales for the fourth quarter and full year, with volume remaining flat or slightly down. The full year 2023 diluted net income per share is expected to be in the range of $9.21 to $9.41, with adjusted earnings per share in the range of $10.10 to $10.30. This is a 16.8% increase compared to last year's adjusted earnings per share. A GAAP reconciliation is provided in the press release.

The speaker discusses their slide deck and the company's expectations for the fourth quarter. They mention the potential for choppiness in different regions and markets, but express confidence in their strategy and unique capabilities. They also mention their focus on growth, talent development, and simplifying operations. The speaker concludes by thanking the audience and opening up for questions. A question is asked about the strength of the contractor market, particularly in residential repaint, and the speaker acknowledges its strength and offers some perspective on the matter.

The speaker discusses the company's strong performance and gaining share in the res repaint market. They mention the variability in demand depending on the experience and marketing efforts of contractors, but see this as an opportunity for their stores and reps to provide value and support. The company is prepared for potential challenges and has made investments to continue driving res repaint in the future.

The speaker discusses the company's model and how it stands out in gaining market share. They also mention the need for further pricing due to increasing costs, such as raw materials and other operational expenses. They are currently reviewing their operating plans and looking for offsets before potentially raising prices. The speaker also mentions that they will inform customers first before informing the Street. One analyst asks about the company's SG&A expenses and the speaker mentions that they are working on reducing them this year.

During an earnings call, a question was asked about how the company's investments will impact their performance in the coming years. The CEO expressed confidence in their strategy and stated that the investments will lead to increased market share and profitability. The CFO added that these investments will be reflected in the P&L and that the company has already seen sequential growth in SG&A despite ongoing investments in various areas.

The company has been able to offset increases in costs by reducing G&A expenses and will continue to do so in order to invest in key initiatives. Although year-over-year price comparisons are less positive, prices were still up in the third quarter and the company has not given back any price increases. The company's gross margins have improved and the team has been effective in demonstrating value to contractors.

In this paragraph, Jeffrey Zekauskas asks Allen Mistysyn about the impact of raw materials on the company's performance. Mistysyn explains that raw materials were down high single digits for the year and may continue to decline in the fourth quarter. However, he cautions that market demand and supply will ultimately drive raw material pricing in the future. When asked about the impact of volume decline on gross margins, Mistysyn notes that while it did have an effect, it was not as significant due to the mix of where the decline occurred. The discussion then shifts to the architectural segment, but this is not summarized in the paragraph.

In response to a question about the backlog in the residential repaint market, Heidi Petz, the CEO of the company, explains that they have seen a decrease in backlog by 2-3 weeks. She also mentions that the size and experience of contractors play a role in backlog. The next question is about the impact of rising interest rates on the company's six verticals within PSG, to which CEO John Morikis responds that they are focused on outpacing the market and have confidence in their approach and services. They are also taking advantage of opportunities in the market, such as competitors changing models.

Sherwin-Williams is taking advantage of market conditions and investing in their stores to add value for painting contractors. They are seeing an increase in customers seeking guidance on advertising, and believe that the current interest rate environment presents opportunities for growth. The company is focused on taking disproportionate shares and has exclusive contracts with national homebuilders.

The team's ability to demonstrate value in the current environment is a testament to their performance. They are closely managing working capital and helping partners in the New Residential space streamline and standardize their processes to increase profitability and productivity. With higher interest rates, the company plans to keep total debt flat and maintain a net debt-to-EBITDA leverage ratio of 2 to 2.5x.

The operator introduces a question from Arun Viswanathan about the markets within Industrial. Viswanathan asks about Protective, Wood, Refinish, and Packaging, and Petz responds by stating that their strategy is working and they are not trying to be all things to all people. She mentions that they have had success against regional competitors in Industrial Wood and have recently completed key acquisitions. She also notes that gallons per day have bottomed out in all regions and expects Industrial Wood to improve as the New Residential market swings back. In Automotive Refinish, they have gained market share.

In North America, there has been strong growth in installs and core users for the company. The Collision Core technology and business are gaining momentum and adoption. The Paint Stores Group has a similar footprint and helps to provide a consistent customer experience. The heavy equipment market, particularly in agriculture, is doing well. The building products market is soft, but the team is adapting. The Coil side is also soft, but there are new business wins and nearshoring in Mexico is creating demand. There is also potential for growth in China with their coaters running at 50% capacity. The P&M team is focused on high-value projects such as EV battery and semiconductor plants, offshore wind, and water infrastructure.

The speaker is reminding investors of the company's successful long-term approach in the Protective & Marine business, even during tough times. They are proud of the leadership team and their ability to deliver on operating margin goals. The company does not see the need for M&A to grow, as they are confident in their ability to take share organically and are strategic about capacity. All decisions are made with a 10-year plan in mind.

The company is willing to invest in areas where they need to build capacity, such as packaging. The gross margins in the current quarter are near the long-term target and may exceed 50%, but this may not be the case in the fourth quarter due to seasonal slowdowns and other factors. The company is consistently achieving their current range of 45% to 48% and will adjust the range as needed, but there is no specific ceiling for the gross margins.

Morikis and Heidi discuss the current DIY cycle weakness and what it would take to see a reversal. Morikis mentions that consumers are feeling pressure from inflation and there may be some normalization in spending patterns or wage increases. He also points out that paint is a relatively inexpensive and impactful option for homeowners looking to improve their homes. As the population ages, there may be more opportunities for repainting projects. In terms of macro trends, there may be regional differences in completion data for New Res.

The delay in housing starts is impacting the painting industry, but Sherwin-Williams' position is strong and getting stronger due to exclusive arrangements with builders. As new homes continue to rise, Sherwin-Williams will see growth. On the other hand, the industry has not fully digested the decrease in turnover from the peak a few years ago, but this has already been reflected in current orders.

The current state of the residential repaint contractor market has become more normalized, with less delays and better response times. This presents an opportunity for Sherwin-Williams to gain market share aggressively. The company's strategy and control distribution platform are working well, providing a consistent and valuable experience for contractors. The company is confident in its ability to differentiate and add value for its customers.

During a conference call, a representative from Seaport Research Partners asks about the company's plans for opening new paint store locations and any potential delays. The company's representative confirms their commitment to opening new stores and states that there have been no delays. The representative also declines to comment on specific customer sales, but mentions their focus on helping customers optimize their working capital.

The company's CEO and CFO discuss their strategy of working with customers to manage their working capital, which has resulted in a decrease in inventory and a strong cash flow. They expect their working capital to trend towards 11-11.5% and have returned over $1.4 billion to shareholders. This strategy has also allowed for flexibility in paying down debt and returning cash to shareholders.

Heidi Petz and Al have intentionally designed a capacity to work closely with partners to manage and optimize working capital and inventory. John Morikis mentions that spray parts sales are typically a good leading indicator for store sales, but currently, as the season is ending, it is not the best tool to gauge confidence in contractors. However, they have confidence in their position in the market and are seeing a solid backlog of projects for commercial contractors. Heidi also mentions that the company's gallons per day have bottomed, specifically in the Wood division.

During a conference call, Kevin McCarthy from Vertical Research asked about the increase in administrative costs in the third quarter. Allen Mistysyn, the operator, responded that the increase was due to environmental expenses and costs related to a plant fire. He also mentioned that there was a sale last year that benefited the company's third quarter, which is not expected to happen this year. Mistysyn then provided some insight into the company's fourth quarter guidance, stating that they are expecting flat operating margins compared to a strong fourth quarter last year. He also mentioned that there will be an increase in SG&A expenses due to long-term investments, and a $60 million increase in nonoperating costs, primarily in the administrative segment.

The speaker discusses the impact of credits received in the fourth quarter of last year on environmental and other income, and how they do not expect to see a repeat of this in the future. They also mention the volatility in raw material costs and other factors that may affect costs in the upcoming year. The speaker refrains from giving specific guidance on raw material costs and plans to provide an update in January. The speaker also mentions that the decrease in sales due to seasonality will be the main driver of the sequential decrease in EPS.

The speaker discusses the company's performance in the past four years, noting that it has been choppy and expects the gross margin to be higher year-over-year but sequentially lower due to less tailwind in price. They also mention higher SG&A growth in the fourth quarter due to investments in paint stores and long-term initiatives. The speaker also mentions a competitor's shift in strategy and the company's consistent strategy as a competitive advantage. They express confidence in their team's ability to adapt and help customers be successful.

The speaker discusses the current market conditions and how they present an opportunity for Sherwin-Williams to demonstrate their consistent service and support to customers. They are working closely with customers to help them navigate through the complexity and come out successful. The speaker also mentions the strength of the company's position in the commercial segment and their focus on gaining market share and supporting customers through the duration of projects. They attribute the strength in commercial to a normal cycle and their long visibility and lead time in this segment.

The company is feeling confident about their completion projections for the first half of 2024, but they may see some softness in the second half. They are prepared to fill any gaps with other business opportunities. The decline in margins in their Consumer Brands segment is due to a decrease in volume and a focus on maintaining targeted inventory levels. The company has seen improvement in their European operations, particularly in the PCG segment where they are focused on increasing operating margins.

In Q3, the team delivered a 19% margin and will benefit from recent acquisitions. Four out of six businesses had double-digit sales gains in Europe, and the team is taking a disciplined approach to decision making and investments. The company is focused on bringing value to customers and rewarding shareholders. When it comes to residential repaint volumes, the company targets the contractor as the main decision influencer, but also works on color specification and appealing to homeowners.

The homeowner typically relies on the professional contractor as the expert when it comes to choosing paint brands. The company believes that their strong relationships with residential repaint contractors will continue to drive their growth. They see opportunities for share gains in all segments, including residential repaint, property management, and commercial, and are focused on achieving a decisive victory in each one.

The speaker is not going to specify which opportunities are the best, as they are determined to pursue all of them. The next question is about the company's investments in 2023 and the current thinking for 2024. The company manages operating margin, not just SG&A, and this year's performance allowed for more investments. Next year, there will still be growth in investments, but back to a more normal level. The approach to working capital and simplification efforts are also important considerations for the company's value proposition.

The company's value proposition cannot include idle assets or excessive working capital, as customers are not willing to pay for them. They are focused on managing operating margins closely and believe they will see growth despite a difficult macro environment. In terms of raw materials, the biggest benefit in the third quarter came from the petrochemical side, while TiO2 prices have been more stable. However, the impact of oil price fluctuations on these commodities is yet to be determined for next year.

The company is seeing relief in the petrochemical side, but TiO2 is still a bit challenging. They are confident in their ability to maintain pricing and are closely monitoring the demand environment. There is some destocking happening, but as their capacity increases, they will be able to offer solutions to customers. They are also seeing share gains in their stores business.

Heidi and the company are pleased with the strong comparisons to last year and expect continued organic growth. They are making investments to accelerate growth even faster and are committed to helping their partners in the consumer business. They are introducing new products and believe there is an opportunity to convert shoppers into buyers. They are also simplifying their products and reducing the number of SKUs.

Heidi Petz and John Morikis discuss the progress of their company's simplification efforts, which involve SKU and formula rationalization, as well as streamlining processes and operations across the enterprise. They acknowledge that this is an ongoing effort and will take time, but they are committed to constantly looking for opportunities to simplify and improve their business. Morikis praises Petz for her leadership in driving this initiative and her respectful approach to challenging traditions and norms within the 157-year-old company.

The CEO of Sherwin-Williams believes that the company will emerge from the current situation stronger and more efficient, with better customer responsiveness and new opportunities for business. The company's digital approach, led by Heidi, is expected to further differentiate Sherwin-Williams. In terms of the commercial vertical, the company is seeing solid demand and is confident in its ability to serve the property management segment and increase market share.

Heidi Petz, President and COO, concludes the conference by expressing confidence in the company's momentum and growth. She acknowledges there may be challenges in the future, but is confident in the team's ability to execute their strategy and deliver shareholder value. She invites further questions and looks forward to discussing their plans and outlook in January. The operator then thanks everyone for their participation and ends the call.

This summary was generated with AI and may contain some inaccuracies.