The Sherwin-Williams Company is reviewing their fourth quarter 2023 results and outlook for the first quarter and full-year of 2024. The call is being webcast and will include forward-looking statements. Sales and earnings have grown, and the company has made investments in the business.

Sherwin-Williams is making investments to drive the success of their customers and achieve above-market growth. Adjusted earnings per share decreased due to higher non-operating costs. Sales in all three segments were within or better than guidance, with the strongest performance in the architectural business. The Paint Stores Group saw a 2.3% increase in sales, driven by volume and a 210 basis point improvement in segment margin. The Consumer Brands Group saw a 7.1% decrease in sales, but it was better than expected.

In the fourth quarter, sales for the company increased in Europe and Latin America, but decreased in North America due to lower demand for paint. The adjusted segment margin also decreased due to lower volume and higher costs. However, the Performance Coatings Group saw a slight increase in sales and an improvement in adjusted segment margin, thanks to acquisitions and lower raw material costs. Overall, the company has seen growth in some areas, but also faced challenges in others, such as lower demand in the general industrial sector. Looking back at the full year, the company has faced macroeconomic uncertainty but has managed to improve their performance in certain regions and segments.

The company provided guidance and stated that if conditions improved, their performance would be better, which is exactly what happened. They achieved record sales, adjusted EBITDA, and net operating cash, while also reinvesting in the business and returning $2.1 billion to shareholders. The company also invested in R&D labs and ended the year with a low debt ratio. In terms of segments, Paint Stores and Performance Coatings saw sales growth and margin expansion, while Consumer Brands had lower sales but improved margin due to portfolio adjustments.

The speaker expresses confidence in their company's success in 2023 and their ability to continue outperforming competitors in 2024. They attribute their success to their unchanged strategy of providing differentiated solutions and focusing on industry expertise, innovation, and value-added services. They also mention their momentum in enterprise strategic priorities and their commitment to seizing profitable growth opportunities in targeted end-market segments. While there are uncertainties in the macro environment, the speaker remains optimistic about the company's outlook, citing improvements in U.S. New Residential sentiment and expected moderation in mortgage rates. However, they acknowledge challenges in the residential repaint market, but express confidence in their investments and business model to continue growing market share. They also mention the impact of slowed commercial starts on future completions.

The commercial lending standards have tightened and the Architectural Billing Index has been negative for five consecutive months. On the DIY side, there is no expected improvement in consumer demand, but the industrial side may benefit from recent share gains. The Automotive Refinish business is expected to be the most resilient. The industrial wood and Coil businesses are also expected to see growth, while the Protective & Marine business will face challenging comps. In packaging, there may be a short-term impact due to a production plant incident, but the company remains bullish on its packaging business and has new account and share-of-wallet opportunities. The company has made growth investments and is confident in pursuing these opportunities.

In 2024, the company expects a low-single digit decrease in raw material costs, with the largest benefit in the first half of the year. Other costs such as wages, healthcare, energy, and transportation are expected to increase in the mid- to high-single digit range. The company plans to implement a 5% price increase in February and may have targeted pricing activity in other segments. The outlook for the first quarter of 2024 includes a low to mid-single digit increase in sales and diluted net income per share in the range of $10.05 to $10.55. Adjusted diluted net income per share is expected to increase over 7% compared to 2023. The company also provided an update on capital allocation priorities.

Sherwin-Williams expects to see gross margin expansion in 2024 due to incremental pricing, raw material deflation, and growth in their Paint Stores Group. They anticipate a mid-single-digit increase in SG&A expenses and plan to control costs in noncustomer-facing functions. The company plans to open new stores, focus on sales reps and productivity, and continue making dividend increases and share repurchases. They also have manageable debt and expect to maintain their target leverage ratio. The team is confident in their ability to deliver shareholder value and thank their outgoing CEO for leaving a strong foundation.

The speaker is grateful for the executive leadership team and believes their initial outlook for 2024 is appropriate, with the potential for better results if the demand environment improves. They will not update full-year guidance until the second quarter. The company's strategy, priorities, and people are all ready for success. They expect meaningful earnings growth in 2024. During the question-and-answer session, an analyst asks about the top line guidance for the Paint Stores Group, which includes low to mid-single-digit growth and 3% net pricing. The speaker and another executive provide an answer, mentioning the significant growth investments made in 2023 and the potential impact on sales.

The company has made significant investments in various segments, including Residential Repaint. Despite the current market challenges, they are still gaining market share and are confident in their ability to continue doing so. They have a strong position in the market and are able to help contractors with marketing, customer acquisition, and expanding into different surfaces. The contractors are receptive to the company's offerings and appreciate the consistent store experience and support from highly trained reps.

The speaker is discussing the importance of accessibility and lists off specific items that are yielding positive results. They hand the conversation over to Al to provide more details on the numbers. Al explains that the 2024 volume number is expected to be up low-single digits, with investments in Res Repaint leading to mid-single digit volume growth. The next question is about the increase in SG&A and Al breaks it down, stating that 70% of the increase is attributed to operating segments, with the majority in Paint Stores Group.

The company has added 35 new stores in the quarter and 76 for the year, as well as hiring additional reps. The increase in expenses is evenly split between the Consumer Brands and Pro Paint reps, as well as Performance Coatings Group sales and tech service reps. The remaining increase is related to the admin segment, primarily driven by compensation and stock-based compensation. These expenses are expected to annualize in the first half of next year, and the company expects to return to more typical investments in 2024. The company sees these investments as necessary to maintain their growth and outpace the market.

Mike Sison asked about the expected growth in residential repaint market for the first quarter of 2024 and how it compares to the overall market growth. He also inquired about any indicators that could affect the market growth.

During a recent conference call, Heidi Petz clarified that the mid-single-digit reference was in relation to 2023 and that they expect the market to be flat this year. However, the company has made investments to position themselves to take advantage of the market and are confident in their ability to gain market share. Allen Mistysyn added that indicators such as existing home turnover and home price appreciation could potentially drive the market in the second half of the year. Ghansham Panjabi from Baird was the next to ask a question.

The speaker asks about the time frame for price increases in the Paint Stores Group and the expected productivity in 2024. The response is that the 5% increase in February will likely take a couple of quarters to be fully effective. The company is also facing headwinds from customers on contracts with index pricing and the raw basket is down low-single digits. The company did not increase prices in 2023 and is facing mid- to high-single digit inflation in wage, healthcare, energy, and transportation costs. The Property Maintenance subsegment is currently experiencing negative low-single digit growth, down from double-digit growth earlier in the year.

The speaker is discussing a segment of their business that is expected to be exciting to watch. They have been able to grow their share through agreements with customers of all sizes. There has been an increase in capacity in the market, which benefits them during construction and becomes an annuity for their business. They are also benefiting from the upgrading of properties and investing in keeping them current. The team is focused on both CapEx projects and maintenance, as well as color and design support to make their customers successful. Despite the current economic environment, they are confident in their ability to take share. In the fourth quarter, property maintenance was down low-single digits compared to a strong fourth quarter last year, but for the year, property management was up mid-to-high single digits. The company is making investments to continue growing their position in the property maintenance segment.

The speaker is discussing the 2024 EPS outlook and mentions that they are expecting low-to-mid single digit top line growth. They also mention the potential for gross margin expansion and a good amount of cash flow to deploy. However, there is variability in volume across different segments and regions, with some expected to be stronger in the first half and others in the second half. The speaker also discusses the potential for growth in property maintenance and industrial sectors.

The speaker discusses the impact of volume on operating margin and EPS, stating that if volume exceeds expectations, EPS will also improve. They also mention the impact of under-absorption on earnings in 2023 and expect a better performance in 2024 due to improved scheduling and inventory management. No specific numbers are given.

The speaker is addressing a question from a caller named Mike Harrison about the company's expectations for customer order patterns in the spring paint season. The speaker, Heidi Petz, states that they are expecting a normal seasonal improvement and that the partnership with their customers has never been better. Another speaker, Allen Mistysyn, adds that they have been taking share and growing faster than the market in the Pros Who Paint side of the business. The operator then moves on to the next caller, Greg Melich, who is initially on mute. The next caller, Chuck Cerankosky, asks about the contrast between the weakness in the DIY business at the Paint Stores and Consumer Brands. Heidi Petz responds that it is an interesting environment right now.

The speaker begins by discussing the company's stores, which cater to a higher-end customer. They mention that the current market conditions may affect sales during the paint season. They then move on to talk about the Consumer Brands Group and their focus on different price points. The speaker also mentions that the company beat guidance in the fourth quarter, with positive growth in Latin America and Europe. The next speaker talks about the importance of gross margin expansion and how it is expected to increase by 100 bps this year.

Heidi Petz and Allen Mistysyn discussed the importance of volume versus price raws and mix for improving their company's performance this year. They emphasized the significance of volume and specifically their pro architectural volume in their Paint Stores Group. They also mentioned their goal of consistently achieving or exceeding their targets and potentially raising them in the future. The question was asked about which end markets they have the greatest ability to drive a mix shift, and it was noted that their stores have a wide range of price points.

The speaker discusses the potential for their investments to not only drive volume share gains, but also a mix shift up in price. They mention that there is opportunity to drive improvement through segment targeting, particularly in the Residential Repaint segment. The speaker emphasizes the importance of premium products and helping contractors be more productive and profitable. They also mention their efforts to simplify the New Residential segment. In response to a question about pricing and potential risks, the speaker explains that they typically do not see contractors shift down in quality during inflationary periods.

Steve and Heidi discuss how they have been successful in converting contractors to a higher quality product, which has made them more efficient and effective. They also address the potential impact of a decline in existing home sales on their Resi Repaint business, but are confident that their access to leading indicators and data on their contractors will allow them to continue to provide value and outperform competitors.

Heidi Petz, CEO of Sherwin-Williams, does not see any downside in the current environment. She brings a different perspective to the role compared to her predecessor, John, but shares the same values and is determined to continue the company's successful strategy. Analysts are curious about the magnitude of share gains in the Paint Stores Group, especially with the strong growth in Residential Repaint.

The speaker discusses the company's share gains in the last couple of years and their sales guidance for the future. They mention their success in securing agreements in the New Residential and Property Management sectors, as well as their ability to penetrate in the Commercial and Protective & Marine segments. They believe that their position will become even more significant as the cycle progresses and housing starts accelerate.

The company is confident in its position in the commercial market and expects to intercept contractors even if the market shifts. The consolidated forecast is for low-to-mid growth, with volume expected to be flat to up low-single digits. The timing of the recovery in New Residential and Commercial projects will determine the second half outlook. SG&A growth has changed in the past year, but it is expected to revert back to positive leverage in the future. The current negative leverage may be due to the high pricing of raw materials. The company expects to return to positive leverage in 2025 and 2026.

The trade press recently reported that one of Sherwin-Williams' competitors, Kelly-Moore, is going out of business. This may present an opportunity for Sherwin-Williams to gain more market share on the West Coast. The company is considering allocating resources differently and making operational changes to take advantage of this void before their competitors do.

Heidi Petz and James Jaye discuss the opportunity presented by a recent announcement and assure Kevin that they will be competitive. They plan to aggressively pursue opportunities and have already been competing with other companies. Garik Shmois asks for clarification on the Paint Stores price increase and the pacing of gross margin expansion throughout the year. Allen Mistysyn confirms the price increase and explains that there will be more expansion in the first half due to raw material deflation and pricing, with less in the second half due to tougher comps. Adam Baumgarten asks a question.

In response to a question about the new residential market, Heidi Petz and Allen Mistysyn of Sherwin-Williams discuss the typical lag time between a start and the sale of paint, which has elongated due to labor shortages. They also mention that the company expects to continue taking share in the market and will see a stronger second half as new single-family starts come to completion. Additionally, they clarify that the price increase will impact Paint Stores and other segments.

Heidi Petz discusses the implementation of a price increase and the feedback from customers. She mentions the importance of focusing on premium products and having conversations with customers to ensure they understand the reason for the increase. Allen Mistysyn adds that there is a mix shift towards higher quality products due to labor shortages and the efficiency improvements they offer. They both emphasize the value of their products and the opportunities for growth for painting contractors.

The speaker discusses how they approach pricing with customers and emphasizes the importance of holistic understanding. They also mention the benefits of their access to representatives and consistency in stores, which sets them apart from others in the industry. The speaker then addresses a question about contractor backlogs and repair and remodel activity, stating that they are normalizing but there is limited visibility for the future. They express confidence in their strategy and their ability to increase sales and earnings despite a challenging environment.

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