The Sherwin-Williams Company (SHW) Earnings

Management highlights

- Overall Company Performance - Consolidated second quarter 2026 delivered strong top and bottom line growth, with sales exceeding guidance on a consolidated basis and across all three segments. Adjusted EBITDA grew 10.5% to $1.5 billion, and adjusted EBITDA margin expanded 60 basis points to 21.5% of sales. Net operating cash flow increased 21% year-over-year, and free cash flow conversion reached 86%. - The company returned $1.5 billion to shareholders via dividends and accelerated share repurchases, and ended the quarter with a strong balance sheet and a net debt to adjusted EBITDA ratio of 2.4x. - Restructuring actions completed in the quarter are expected to deliver approximately $17 million in annualized savings, with half of the savings realized in the remainder of 2026. - Strategic Execution & Share Gains - Management reported consistent meaningful share gains across most business lines, driven by robust customer engagement and new account growth, widening the competitive gap against peers. The company's strategy emphasizes being its own catalyst for growth in a stagnant demand environment, rather than waiting for a broad market recovery. - An 8% price increase for PSG was announced, effective September 1, designed to offset raw material and other cost inflation. The timing was chosen to avoid disrupting customer business during the peak paint selling season, with expected price realization in the company's historical normal range. - The completed PSG store portfolio optimization closed only unprofitable locations, improving platform productivity, return on net assets, and customer alignment. The initiative is complete, and the company expects to reach the high end of its 80 to 100 annual net new store target beginning in 2027. - New product innovation includes the launch of Emerald Symmetry, the highest-performing interior paint the company has ever produced, a plant-based zero-VOC product that advances the company's sustainability agenda. - The Suvinil acquisition integration is progressing well, with additional synergies identified beyond initial expectations, and the acquisition is expected to be an immaterial EPS tailwind for full year 2026.

Guidance

- Management raised full year 2026 guidance based on a stronger than expected first half performance, maintaining the core assumption that no broad-based demand recovery will occur through the end of the year. - Full year 2026 consolidated sales are now expected to grow mid to high single digit percentage, up from prior guidance. - Adjusted diluted net income per share is now guided to a range of $11.80 to $12.20, an upward revision from prior guidance. - Full year raw material basket inflation is expected to be in the mid single digit range, with high single digit inflation in the second half of 2026. - Full year consolidated price mix is expected to increase to the mid single digit range, and full year gross margin is expected to hold at prior year levels at the guidance midpoint. - Full year reported SG&A is expected to increase by a mid single digit percentage. - PSG full year volume growth is now guided to up low single digit, up from the prior guidance range of down low single digit to up low single digit, with no expected sequential volume deterioration in the second half.

Segment performance

1. Paint Stores Group (PSG): Revenue grew by a mid single digit percentage, with low single digit volume growth and low-to-mid single digit price mix growth. Segment profit grew by mid single digits, and segment margin reached 24.6%. Key sub-segment performance: Protective and Marine grew mid teens (eighth straight quarter of at least high single digit growth); commercial grew high single digits; residential repaint and property maintenance grew mid single digits; new residential achieved low single digit growth despite broader market weakness. 45 new stores were opened year-to-date, and 57 underperforming stores (≈1% of total PSG stores) were closed as part of a portfolio optimization initiative. 2. Consumer Brands Group (CBG): Total sales exceeded expectations, with a mid teens contribution from the Suvinil acquisition, mid single digit positive price mix, low single digit negative FX impact, and a low single digit volume decrease. Excluding Suvinil, sales grew mid single digits; legacy Latin America business (ex-Suvinil) grew low double digits; North America sales grew high single digits with low single digit volume growth; Europe sales decreased double digits due to continued customer destocking. Adjusted segment margin increased 210 basis points to 24.5% (half of the improvement came from sales leverage on flat ex-Suvinil SG&A, and half from favorable nonoperating items). 3. Performance Coatings Group (PCG): Sales beat expectations with growth across all divisions and regions. Both price mix and volume grew low single digits (price mix outpaced volume), with a low single digit FX tailwind. Key sub-segment performance: general industrial grew high single digits with mid single digit volume growth, led by heavy equipment; Automotive Refinish grew high single digits; Packaging grew mid single digits; Coil and wood grew mid single digits. Regionally, Asia Pacific grew double digits and North America grew mid single digits. Adjusted segment margin increased 50 basis points to 26.4%. 4. Administrative Segment: SG&A declined 9.8% year-over-year, driven by a favorable comparison to the prior year period which included $49 million in severance/restructuring costs versus $3 million in Q2 2026.

Risks & headwinds

- Ongoing global economic uncertainty and stagnant end market demand, with no meaningful improvement expected in most end markets through the end of 2026. New residential construction remains particularly challenging, with single family starts and completions negative for 5 of the past 6 months. - Raw material cost inflation driven by higher oil and related input costs, with expected continued volatility through the balance of the year, creating price/cost balancing pressure that will moderate second half EPS growth compared to the first half. - Continued weakness in DIY demand, particularly for value-conscious DIY customers served through home center partners, with no near-term catalyst for recovery expected. - Continued customer destocking in Europe, pressuring near-term CBG sales results.

Analyst Q&A

• Q: After Sherwin-Williams made and then withdrew a bid for AkzoNobel, what was the rationale for the move, and what is the company's M&A strategy going forward? /

  A: Management follows a disciplined capital allocation and M&A approach, and passes on over 90% of assessed assets. AkzoNobel's assets were long-admired and would have been complementary to the company's strategy. However, after making two fair, premium all-cash bids without the desired level of engagement from the target, management determined there were more attractive uses of shareholder capital, so it walked away from the process. The company does not need acquisitions to grow, given strong organic scale opportunities, but will evaluate spun or separated assets if they become available at the right price and value. European decorative coatings market fundamentals do not currently support the level of capital deployment the company requires for a large acquisition.

• Q: Consumer Brands Group adjusted segment margin increased much more than other segments this quarter. What drove this improvement, is it sustainable, and have there been market share gains in the segment? /

  A: Half of the 210 basis points margin improvement came from core operating leverage: ex-Suvinil core sales grew mid single digits while SG&A stayed flat, creating significant margin leverage. The other half came from favorable nonoperating items, and stripping out these items, adjusted segment margin was flat quarter over quarter. While overall DIY demand remains muted with no material share gains in the broad DIY segment, the company is seeing continued strong share gains in its growing Pro-Hoop paint line for professional customers through retail partners like Lowe's and Menards, which remains on solid fundamental footing.

• Q: What is the expected realization timeline for the September 8% PSG price increase, and will it be enough to offset accelerating raw material inflation to deliver year-over-year gross margin growth in the second half? /

  A: The price increase will follow the company's historical glide path for realization, same as prior price actions. Some portion of the price increase will not take effect until 2027 due to existing customer contracts, so realization will be phased over time. The September timing was chosen to balance goals: it avoids disrupting customers during peak paint season, preserves customer relationships and supports continued share gains, while still allowing the company to keep pace with raw material inflation. The company remains committed to balancing price and volume priorities, and will implement pricing only when the market can support it.

• Q: What pattern drove the 57 PSG store closures this year, and how does pricing in Performance Coatings compare to the 8% PSG increase? /

  A: All closed stores failed to meet the company's profitability threshold, and the company took advantage of the current demand slowdown to proactively prune underperforming locations to improve overall platform productivity and returns for shareholders. This one-time pruning allows the company to pursue the high end of its 80-100 annual net new store target starting in 2027, aligned with growing customer locations. Pricing approach differs by segment: Performance Coatings uses more surgical, targeted price adjustments by business unit and region rather than broad segment-wide increases. PCG has already rolled out targeted price increases to offset raw material inflation, matching the segment's different go-to-market model, so all segments are actively addressing current price/cost dynamics.

• Q: Which business units have exceeded share gain expectations, and which have been more challenging than expected? /

  A: Management notes there is always room for additional share gains, but commercial segment has delivered larger share gains than initially expected, as multi-year focused efforts to win additional wallet share from contractors are now paying off in a soft market. New residential construction is the most challenging end market, due to broader industry weakness from high interest rates and falling single-family completions. Even here, Sherwin-Williams is outperforming the market: while 2026 monthly single-family completions are down high single digits year-over-year, the company's new residential sales are only down low single digits, meaning it is still taking share in a challenged market. The company targets 1.5x to 2x market growth across all segments regardless of broader market conditions.