Sherwin Williams : Quarterly Reporting Document

NEWS

The Sherwin-Williams Company

• 101 W. Prospect Avenue

• Cleveland, Ohio 44115

•

[phone]

The Sherwin-Williams Company Reports 2022 Year-End and Fourth Quarter Financial Results

CLEVELAND, January 26, 2023 - The Sherwin-Williams Company (NYSE: SHW) announced its financial results for the year and fourth quarter ended December 31, 2022. All comparisons are to the full year and fourth quarter of the prior year, unless otherwise noted.

SUMMARY

• Consolidated net sales increased 11.1% in the year to a record $22.15 billion
• • Net sales from stores in U.S. and Canada open more than twelve calendar months increased 11.7% in the year
• Diluted net income per share increased to $7.72 per share in the year compared to $6.98 per share in the full year 2021
• • Adjusted diluted net income per share increased to $8.73 per share in the year compared to $8.15 per share in the full year 2021
• Fourth quarter consolidated net sales increased 9.8%; diluted net income per share was $1.48 per share and adjusted diluted net income per share increased 41% in the quarter to $1.89 per share
• Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) increased 10.4% in the year to $3.61 billion or 16.3% of consolidated net sales
• Full year 2023 diluted net income per share guidance in the range of $6.79 to $7.59 per share, including acquisition-related amortization expense of $0.81 per share and restructuring expense of $0.25 to $0.35 per share

CEO REMARKS

"Sherwin-Williams delivered strong fourth quarter results compared to the same period a year ago, including high single-digit percentage sales growth, significant year-over-year gross margin improvement, expanded adjusted operating margins in all three segments, strong double-digit adjusted diluted net income per share growth and strong EBITDA growth," said Chairman and Chief Executive Officer, John G. Morikis. "Our strong fourth quarter performance led to record full year sales, which increased 11.1% to $22.1 billion. Full year adjusted diluted net income per share also increased to a record level. Additionally, we generated strong net operating cash in the year, which enabled us to invest $883 million in share repurchases, pay $619 million in dividends and deploy $1 billion to complete five acquisitions that will add to our solutions and capabilities.

"Our more than 61,000 employees delivered these results in another year of difficult operating conditions, including relentless cost inflation, less than optimal raw material availability, slowing economies, a war in Europe and COVID lockdowns in China. We refused to be deterred by these challenges and continued to do what we do best - serve our customers.

"Looking at our reportable segment performance in 2022, The Americas Group delivered double-digit sales growth in all customer segments, including the seventh consecutive year of double-digit growth in residential repaint. Consumer Brands Group faced extremely difficult conditions in Europe and Asia that impacted sales but continued to take actions that will drive enhanced future profitability. In Performance Coatings Group, sales increased in nearly all business units, and adjusted segment margin improved 250 basis points year-over-year."

FOURTH QUARTER CONSOLIDATED RESULTS
		Three Months Ended December 31,
		2022			2021			$ Change	% Change
Net sales	$	5,230.5		$	4,762.1		$	468.4			9.8 %
Income before income taxes	$	494.9	$	308.9	$	186.0			60.2 %
As a % of sales		9.5%			6.5%
Net income per share - diluted	$	1.48	$	1.15	$	0.33			28.7 %
Adjusted net income per share - diluted	$	1.89	$	1.34	$	0.55			41.0 %

Consolidated net sales increased primarily due to selling price increases in all segments and higher architectural sales volume in The Americas Group, partially offset by lower sales volumes outside of North America in the Consumer Brands and Performance Coatings Groups. Acquisitions increased consolidated net sales by approximately 1.5%, while currency translation rate changes decreased consolidated net sales by 2.0%.

Income before income taxes increased primarily due to selling price increases in all segments and higher sales volume in The Americas Group. These factors were partially offset by higher raw material costs across all three segments, increased SG&A spending in The Americas Group and Performance Coatings Group, costs associated with our previously announced targeted restructuring actions including non-cash trademark impairment charges and higher interest expense.

Diluted net income per share included a charge of $0.21 per share for acquisition-related amortization expense and charges totaling $0.20 per share related to restructuring actions including non-cash trademark impairments.

FOURTH QUARTER SEGMENT RESULTS
The Americas Group ("TAG")
		Three Months Ended December 31,
		2022			2021			$ Change	% Change
Net sales	$	3,071.1		$	2,653.5		$	417.6			15.7 %
Same-store sales (1)		15.5%			1.0%
Segment profit	$	526.7	$	400.3	$	126.4			31.6 %
Reported segment margin		17.2%			15.1%

1. Same-storesales represents net sales from stores in U.S. and Canada open more than twelve calendar months.

Net sales in TAG increased due primarily to selling price increases and higher architectural sales volume in most end markets. TAG segment profit increased due primarily to higher paint sales volume and selling price increases, partially offset by increased raw material costs and higher SG&A costs related to continued investments in long- term growth strategies.

Consumer Brands Group ("CBG")
		Three Months Ended December 31,
		2022			2021			$ Change	% Change
Net sales	$	551.5		$	565.3		$	(13.8)			(2.4)%
Segment profit	$	2.4	$	16.1	$	(13.7)			(85.1)%
Reported segment margin		0.4%			2.8%
Adjusted segment profit (1)	$	62.3	$	35.4	$	26.9			76.0 %
Adjusted segment margin		11.3%			6.3%

1. Adjusted segment profit excludes the impact of restructuring costs (including non-cash trademark impairments) and acquisition- related amortization expense. In CBG, restructuring costs were $41.1 million in the fourth quarter of 2022 and acquisition-related amortization expense was $18.8 million and $19.3 million in the fourth quarter of 2022 and 2021, respectively.

Net sales in CBG decreased primarily due to lower sales volume, partially offset by selling price increases in all regions. Currency translation rate changes decreased net sales by 1.7%. CBG segment profit decreased primarily due to the lower sales volume, increased raw material costs and supply chain inefficiencies, and the costs associated with targeted restructuring actions including non-cash trademark impairments. These factors were partially offset by selling price increases and good cost control. Restructuring costs reduced segment profit as a percent of net external sales by 750 basis points, and acquisition-related amortization expense reduced segment profit as a percent of net external sales by 340 basis points compared to 350 basis points in the fourth quarter of 2021.

Performance Coatings Group ("PCG")
		Three Months Ended December 31,
		2022			2021			$ Change	% Change
Net sales	$	1,607.4		$	1,542.5		$	64.9			4.2 %
Segment profit	$	157.3	$	87.2	$	70.1			80.4 %
Reported segment margin		9.8%			5.7%
Adjusted segment profit (1)	$	229.0	$	138.0	$	91.0			65.9 %
Adjusted segment margin		14.2%			8.9%

1. Adjusted segment profit excludes the impact of acquisition-related amortization expense and restructuring costs. In PCG, acquisition-related amortization expense was $49.5 million and $50.8 million in the fourth quarter of 2022 and 2021, respectively, and restructuring costs were $22.2 million in the fourth quarter of 2022.

Net sales in PCG increased due primarily to selling price increases in all end markets, partially offset by lower sales volumes in the APAC and EMEAI regions. Acquisitions increased PCG's net sales by approximately 4.5% in the quarter, while currency translation rate changes decreased net sales by 4.3%. PCG segment profit increased due primarily to selling price increases, partially offset by increased raw material costs and higher costs to support increased sales levels. Acquisition-related amortization expense reduced segment profit as a percent of net external sales by 310 basis points compared to 320 basis points in the fourth quarter of 2021, and restructuring costs reduced segment profit as a percent of net external sales by 130 basis points.

LIQUIDITY AND CASH FLOW

The Company generated $1.92 billion in net operating cash during the year. This strong cash generation, along with an increase in our short-term borrowings and long-term debt, allowed the Company to return cash of approximately $1.50 billion to our shareholders in the form of dividends and share repurchases, and close five acquisitions during the year. The Company purchased 3.4 million shares of its common stock during the year. At December 31, 2022, the Company had remaining authorization to purchase 45.2 million shares of its common stock through open market purchases.

2023 GUIDANCE
	First Quarter			Full Year
	2023			2023
Net sales	Flat to up mid-single digit %		Down mid-single digit % to flat
Effective tax rate			Low twenty percent
Diluted net income per share		$6.79	-	$7.59
Adjusted diluted net income per share (1)		$7.95	-	$8.65

1. Excludes $0.81 per share of acquisition-related amortization expense, and $0.25 to $0.35 per share of restructuring expense.

"We enter 2023 with confidence and energy. We have clarity of mission, the right strategy and a focus on solutions for our customers," said Mr. Morikis. "Above all, we have the right people, and we expect to outperform the market in 2023 just as we have in the past.

"At the same time, we will not be immune from what we expect to be a very challenging demand environment in 2023. Visibility beyond our first half of the year is limited. On the architectural side, U.S. housing will be under significant pressure this year. Slowing existing home sales and continued high inflation also will be headwinds. On the industrial side, we have already seen a slowdown in Europe, and the same is beginning to appear in the U.S. across several sectors. In China, COVID remains a factor and the trajectory of economic recovery is difficult to map. The U.S housing slowdown also will impact some of our industrial businesses, namely Industrial Wood and Coil. Our team is focused on winning new accounts and growing share of wallet in this challenging environment, while leveraging our exposure in more resilient end markets, including residential repaint, property maintenance, auto refinish, and packaging.

"Against this backdrop, we expect 2023 first quarter consolidated net sales growth to be flat to up a mid-single digit percentage compared to the first quarter of 2022. For the full year 2023, relying on indicators we see at this time, we expect consolidated net sales to be down a mid-single digit percentage to flat compared to 2022. With annual sales at this level, we are introducing diluted net income per share guidance in the range of $6.79 to $7.59 per share, including acquisition-related amortization expense of $0.81 per share and restructuring expense of $0.25 to $0.35 per share. Full year 2023 adjusted diluted net income per share is expected to be in the range of $7.95 to $8.65 per share compared to $8.73 per share in 2022.

"We expect raw material costs to decrease by a low to mid-single digit percentage, while other costs, including wages, are expected to increase by a mid-to-high single digit percentage. We will continue to execute the targeted restructuring actions we announced last quarter, while investing in growth initiatives and maintaining our balanced capital allocation strategy. The slide deck accompanying our press release provides other assumptions underlying our guidance. Should we see the year playing out differently than our current assumptions, we will adjust expectations and leverage opportunities to drive improved performance. I am highly confident in our leadership team, which is deep and experienced and has been through many previous business cycles. We remain steadfast in our focus on creating shareholder value."

CONFERENCE CALL INFORMATION

The Company will conduct a conference call to discuss its financial results for the fourth quarter and full year 2022, and its outlook for the first quarter and full year 2023, at 11:00 a.m. EST on Thursday, January 26, 2023. Participating on the call will be Chairman and Chief Executive Officer, John G. Morikis, along with other senior executives.

The conference call will be webcast simultaneously in the listen only mode by Issuer Direct. To listen to the webcast on the Sherwin-Williams website, click on https://investors.sherwin-williams.com/financials/quarterly- results/, then click on the webcast icon following the reference to the Q4 webcast. An archived replay of the webcast will be available at https://investors.sherwin-williams.com/financials/quarterly-results/ beginning approximately two hours after the call ends.

ABOUT THE SHERWIN-WILLIAMS COMPANY

Founded in 1866, The Sherwin-Williams Company is a global leader in the manufacture, development, distribution, and sale of paint, coatings and related products to professional, industrial, commercial, and retail customers. The Company manufactures products under well-known brands such as Sherwin-Williams®, Valspar®, HGTV HOME® by Sherwin-Williams, Dutch Boy®, Krylon®, Minwax®, Thompson's® WaterSeal®, Cabot® and many more. With global headquarters in Cleveland, Ohio, Sherwin-Williams® branded products are sold exclusively through a chain of more than 5,000 Company-operated stores and facilities, while the Company's other brands are sold through leading mass merchandisers, home centers, independent paint dealers, hardware stores, automotive retailers, and industrial distributors. The Sherwin-Williams Performance Coatings Group supplies a broad range of highly- engineered solutions for the construction, industrial, packaging and transportation markets in more than 120 countries around the world. Sherwin-Williams shares are traded on the New York Stock Exchange (symbol: SHW). For more information, visit www.sherwin.com.