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DATE
Tuesday, Oct. 28, 2025 at 10 a.m. ET
CALL PARTICIPANTS
Chief Executive Officer — Heidi Petz
Chief Financial Officer — Al Mistysyn
Senior Vice President, Investor Relations — Jim Jaye
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RISKS
The temporary pause of company matching contributions to the 401(k) plan began October 1 in response to "a period of prolonged demand and macroeconomic uncertainty," according to Heidi Petz, indicating employee benefit reductions stemming from cost-saving initiatives.
Management stated, "a very challenging environment will persist through the first half of [2026] and most likely beyond," signaling expectations for continued soft demand across most end markets.
The Consumer Brands Group reported volume down mid-single digits. Overall trends indicated ongoing softness in North America DIY, pressured further by unfavorable FX in Latin America.
TAKEAWAYS
Consolidated Sales -- Consolidated sales increased at the high end of the guided range, with Paint Stores Group and Consumer Brands Group exceeding expectations and Performance Coatings Group in line.
Adjusted EBITDA Margin -- Adjusted EBITDA margin expanded by 60 basis points to 21.4%.
Adjusted Diluted EPS -- Adjusted diluted EPS grew by 6.5% compared to the prior year.
SG&A Growth -- Moderated to a low single-digit percentage, driven by ongoing cost control despite restructuring and new building costs.
Paint Stores Group Sales -- Increased by a mid-single-digit percentage, with price mix up at the high end of low single digits and volume up low single digits.
Residential Repaint Sales -- Grew mid-single digits and have maintained at least this growth in every quarter since early 2022 despite consistently negative existing home sales.
Protective and Marine -- Increased by low double digits, marking the fifth straight quarter of high-single-digit or better growth in this segment.
Commercial Segment -- Delivered mid-single-digit sales growth, outperforming the market despite sector headwinds like double-digit declines in multifamily completions for the two months of available data.
New Store Openings -- 23 net new stores opened during the quarter; 61 year to date, exceeding prior year's pace.
Segment Profit in Paint Stores Group -- Increased by a mid-single-digit percentage in Q3 2025, with segment margin increased by 40 basis points and over 30% incremental margin on low single-digit volume growth.
Consumer Brands Group -- Price mix up low single digits, volume down mid-single digits, and unfavorable FX a slight headwind; adjusted segment margin rose due to favorable mix and cost control, partly offset by supply chain inefficiencies and an 85-basis-point negative impact from restructuring/severance.
Suvenil Acquisition -- Closed earlier this month and is expected to increase consolidated sales by a low-single-digit percentage in the fourth quarter, with an immaterial negative impact to EPS due to transaction and accounting effects.
Performance Coatings Group -- Volume, acquisitions, and FX each increased low single digits, offset by unfavorable price mix; regional strength in Europe and North America was set off by weakness in Latin America and Asia.
Packaging Division -- Delivered double-digit sales growth, including the impact from acquisition.
Auto Refinish -- Delivered mid-single-digit growth in Paint Stores Group sales, with North America up high single digits, attributed to share gains offsetting lower insurance claims.
Cost Control in SG&A -- Administrative SG&A (excluding restructuring and new building costs) declined low double digits.
Q4 Guidance -- Sales expected to reflect normal seasonality, include Suvenil contribution, and result in upwardly revised full-year 2025 sales guidance to low-single-digit percentage growth versus 2024.
Adjusted EPS Guidance for Full Year -- Adjusted EPS guidance for full year 2025 was narrowed to $11.25 to $11.45 per share, maintaining the prior midpoint.
2026 Cost Expectations -- Raw material costs expected to rise low single digits (including tariffs) in 2026. Healthcare inflation is expected to increase by a low-double-digit percentage in 2026, and Wages are expected to increase by a low-single-digit percentage in 2026.
Paint Stores Group Price Increase -- Announced a 7% price increase in Paint Stores Group effective January 1, 2026, and "likely will be tempered by market dynamics and segment mix," according to Heidi Petz.
Interest Expense Outlook -- Projected to rise due to new headquarters financing and debt refinancing at higher rates completed earlier this year.
Restructuring Savings -- Initiatives remain on track, expected to generate approximately $40 million in 2025 cost savings and $80 million annualized thereafter.
Capital Expenditure Outlook -- Capex expected to normalize to around 2% of sales in 2026 as the new headquarters and R&D center project completes in the spring.
SUMMARY
The Sherwin-Williams Company (SHW +5.66%) reported that consolidated sales reached the upper end of guidance, citing notable market outperformance across all major business segments, even as management identified persistent demand headwinds and macroeconomic uncertainty. Management described a deliberate strategy to combine targeted investments in growth with disciplined cost control, including the temporary suspension of company 401(k) matching, in order to defend profitability while positioning for future market recovery.
The recent Suvenil acquisition, now incorporated into 2025 and 2026 outlooks, is anticipated to be accretive to consolidated sales and Consumer Brands Group growth metrics, albeit with minimal EPS impact in the near term. Multiple end-market exposures showed differentiated performance, with continued share gains in commercial, protective and marine, and auto refinish segments driven by proactive account and wallet-share initiatives.
Management communicated updated 2025 guidance, announced a 7% Paint Stores Group price increase effective January 1, 2026, and signaled that incremental margin leverage will remain a central focus despite ongoing external challenges.
Chief Executive Officer Petz emphasized, "it appears that a very challenging environment will persist through the first half of the year and most likely beyond," signalling little expectation of near-term demand recovery.
Chief Financial Officer Mistysyn said, "we grew our operating margin, and saw strong incremental margins of 30 plus percent on that low single-digit volume gain" in the Paint Stores Group, underscoring Improved profitability despite low volume growth.
Chief Executive Officer Petz clarified that "to temporarily pause the company matching contributions to our 401(k) benefits plan" was aimed at protecting jobs and preserving resources for growth investments.
The Suvenil acquisition is expected, according to Mistysyn, to increase Consumer Brands Group sales by "a low 20% range" in the fourth quarter, highlighting the deal's immediate top-line impact for that segment.
Management expects "Capex returning to our more typical range of around 2% of sales next year" as headquarters and R&D moves conclude, normalizing prior elevated investment spending.
Segment and regional mix, as well as moderation in supply chain inefficiencies from lower factory utilization, were cited as key variables affecting gross margin outlook for 2026.
Auto refinish in North America was cited as a leading share gainer, with Heidi Petz noting, "we are confidently taking market share, especially in North America where we're up high single digits."
INDUSTRY GLOSSARY
Price Mix: A metric reflecting the combined impact of product pricing changes and sales mix shifts, used by the company to assess realized revenue gains outside of pure volume growth.
Incremental Margin: The percentage of additional profit generated from an increase in sales volume, highlighted by management as exceeding 30% in the Paint Stores Group on low-single-digit volume growth.
SG&A: Selling, General, and Administrative expenses; referenced in the context of cost control and margin leverage initiatives across segments.
CapEx: Capital expenditures, representing outlays for fixed assets such as new headquarters and R&D facilities, discussed in 2026 spending normalization.
FX: Foreign exchange movements affecting reported sales and margins, especially noted in the Consumer Brands Group performance.
Full Conference Call Transcript
Jim Jaye: Thank you, and good morning to everyone. The Sherwin-Williams Company delivered solid third-quarter results as we continued to execute our strategy in a demand environment that remains softer for longer, as we have previously described. Throughout the quarter, we continued to serve our customers, invest for success, control our costs, take advantage of a unique competitive environment, and execute on our enterprise priorities. On a year-over-year basis, consolidated sales increased at the high end of our guided range. Paint Stores Group and Consumer Brands Group exceeded expectations, and Performance Coatings Group was in line.
Gross margin and gross profit dollars expanded, SG&A growth in the quarter moderated to the low single-digit percentage level we expected, driven by ongoing control of general and administrative expenses and inclusive of restructuring costs and new building costs. We remain on track for our original guidance of a low single-digit percentage increase in SG&A for the full year, including our targeted growth investments. Adjusted EBITDA margin expanded 60 basis points to 21.4%, and adjusted diluted earnings per share grew by 6.5%. We also returned $864 million to shareholders through share repurchases and dividends.
Let me now turn it over to Heidi, who will provide some additional color on the third quarter before moving on to our outlook and your questions.
Heidi Petz: Thank you, Jim, and good morning to everyone. Let me begin by thanking our employees for delivering a solid quarter as we continue to navigate a very choppy demand environment across every one of our end markets. Our strategy continues to resonate with professional painting contractors and manufacturers who now more than ever are looking for partners that can provide them with predictability and reliability. The Sherwin-Williams Company provides customers with differentiated solutions that make them more productive and profitable. This is even more valuable at a time when competitive offerings are inconsistent. We know what works, and we are investing in it while continuing to assess, adapt, and control what we can control.
We remain confident our approach is the right one to continue winning near term, and it leaves us well-positioned for when the demand cycle eventually turns. Let me now provide some color on our third-quarter segment performance. Sales in Paint Stores Group increased by a mid-single-digit percentage with price mix up at the high end of low single digits and volume up low single digits. This solid top-line performance is not due to any market improvement in demand but rather clear evidence that our growth investments are delivering a return. Given the market data we track, we believe we outperformed the market in all segments that we serve. Protective and Marine increased by low double digits.
This was the fifth straight quarter we've delivered high single-digit growth or better in this end market. In residential repaint, sales again grew by mid-single digits. We have grown this business by at least this level in every quarter since the start of 2022, a period during which existing home sales have been negative almost every month. We also outperformed in commercial, where sales were up mid-single digits in a quarter where multifamily completions were down double digits for the two months of available data. Our systematic approach to capturing new opportunities in this segment created by recent competitive actions is working.
In new residential, sales increased by low single digits in a quarter when single-family completions were down slightly for the two months of available data. Property maintenance and DIY sales both increased by low single-digit percentages. Exterior sales were slightly better than interior sales, and both were up mid-single digits. We opened 23 net new stores in the quarter and 61 year-to-date, which is ahead of last year's pace. We've also added a commensurate number of sales reps to serve new accounts and customers through these stores. Even as we continue to make these growth investments, we continued to drive profitability. Segment profit in the quarter grew by a mid-single-digit percentage, and segment margin increased by 40 basis points.
With segment gross margin being flattish, this increase reflects leverage on SG&A with over 30% incremental margin on low single-digit volume growth. Moving on to Consumer Brands Group, sales beat our expectations with price mix up low single digits, volume down mid-single digits, and FX a slight headwind. Sales reflect continued softness in North America DIY and unfavorable FX in Latin America, partially offset by growth in Europe. Adjusted segment margin increased primarily due to a favorable product mix shift and good cost control, partially offset by supply chain inefficiencies from lower production volumes. Severance and other restructuring expenses also reduced segment margin by 85 basis points.
We're also very pleased to have closed on the Suvenil acquisition earlier this month, and I want to take this opportunity to officially welcome this highly talented team to The Sherwin-Williams Company. This business is an outstanding addition to the Consumer Brands Group Latin America portfolio, and we're excited by the many profitable growth opportunities ahead for our combined offerings. Additionally, we continued our channel optimization efforts in this region during the quarter, closing eight net Sherwin-Williams stores and shifting that volume into selected qualified dealers. In Performance Coatings Group, sales were in line with expectations. Volume, acquisitions, and FX all increased by low single-digit percentages but were partially offset by unfavorable price mix.
Regionally, segment growth in Europe and North America was partially offset by decreases in Latin America and Asia. From a division perspective, packaging remained our strongest performer with double-digit growth, inclusive of an acquisition. We're also pleased with mid-single-digit growth in auto refinish, inclusive of high single-digit growth in North America. This growth was driven by share gains that more than offset continued lower insurance claims. Sales in coil, industrial wood, and general industrial all decreased by low single-digit percentages. I would also like to note the continued good work in our function to control costs. Excluding the corporate portion of restructuring costs and the new building costs, administrative SG&A was down by a low double-digit percentage in the quarter.
Before moving on to our outlook, I want to address a topic that some of you have asked about, and that was our very difficult decision to temporarily pause the company matching contributions to our 401(k) benefits plan effective October 1. I want to be very clear. This was not a decision made lightly, nor was it made without deep appreciation for its impact on our people. It was a decision made after implementing a number of cost-saving initiatives and completing significant restructuring actions, all at a time when we have and continue to face a period of prolonged demand and macroeconomic uncertainty.
Our goal was to preserve as many jobs as possible in the near term while also protecting the company with targeted customer-facing investments at a time of unprecedented competitive opportunity. Our goal is to reinstate the match as soon as possible, just as we have done successfully in the past. We are focused on delivering the performance that enables us to do so while also building long-term value for all of our stakeholders. With that, let me move on to our outlook for the remainder of this year along with some initial considerations related to 2026. The slide deck issued with this morning's press release provides specific sales guidance for the fourth quarter, which reflects our normal seasonality.
This sales guidance includes the Suvenil acquisition, which we expect will increase the company's consolidated sales by a low single-digit percentage in the quarter, with an immaterial negative impact to diluted earnings per share given transaction closing costs and purchase accounting items. Given our third-quarter sales performance and the addition of Suvenil, we are updating our full-year 2025 sales guidance to be up by a low single-digit percentage versus 2024. Our second-half EPS is in line with what we were expecting in July, excluding the immaterial headwind of Suvenil.
We are narrowing our earnings outlook and now expect adjusted diluted net income per share to be in the range of $11.25 to $11.45 per share, with a prior midpoint of $11.35 remaining unchanged. Additionally, we remain on track to open 80 to 100 North America paint stores for the year. We will also continue to manage production and inventory closely over the rest of the year on pace with customer demand. We remain laser-focused on our strategy of driving our customers' success. As far as 2026, our teams have begun working through our annual operating plan process.
We'll provide you with a more definitive outlook in January as we typically do, but at this time, we can provide some initial expectations that may be helpful. From a demand perspective, it appears that a very challenging environment will persist through the first half of the year and most likely beyond that. In other words, softer for longer, and continued choppiness across most end markets. The leading indicators we track point to minimal positive catalysts at this time. We will continue to focus on our new account and share of wallet initiatives and driving continued returns on the growth investments we have made.
Our initial view of raw material costs is that they will be up low single digits inclusive of tariffs, with varying costs for individual commodities. We also expect other parts of the cost basket to inflate, particularly healthcare, which will increase by a low double-digit percentage, and wages, which we expect to increase by a low single-digit percentage. We also expect to continue investing in growth initiatives, including stores and reps, to win new business and existing customers and strategic retail partners as the competitive environment continues to inflect in our favor. We will continue to counter cost headwinds through efficiency and simplification initiatives and disciplined pricing actions.
Specifically, we have announced a 7% price increase in Paint Stores Group effective January 1, along with targeted increases in our other segments. Effectiveness in Paint Stores should be in our typical historical range but likely will be tempered by market dynamics and segment mix. We will continue to be very aggressive in growing the business and in controlling general and administrative expenses, so we do not see a reason to be heroic in our initial guidance. We expect interest expense will be higher given our new headquarters financing arrangement and refinancing of debt at higher rates earlier this year.
We remain on track with the restructuring initiatives we've previously called out, and we expect a total benefit in 2025 of approximately $40 million in savings. We expect our actions to result in savings of approximately $80 million on a full-year basis going forward. On a very exciting note, we've begun the move into our new headquarters and R&D center in Cleveland, and we expect the process to be completed in the spring. As a result, we anticipate our CapEx returning to our more typical range of around 2% of sales next year.
These new world-class facilities are investments in our people and our customers that we are certain will deliver strong returns, and there will be multiple chances for you to come visit in the coming year. All in, including our new and current building, we would expect a modest cost headwind next year. We'll provide more details on our January call. 2025 is not over, and we know we still have work to do. You should expect us to continue acting with discipline and urgency during the remainder of the year. Beyond that, we expect the demand environment to remain soft well into 2026.
We are not immune from these persistent challenging market conditions, which leads us to focus even more intensely on differentiated solutions that help our customers become more productive and profitable. With our success by design mindset and a deeply experienced team, we see this as a great time to continue demonstrating what makes The Sherwin-Williams Company so unique and outperform the market. And that's exactly what we plan to do. This concludes our prepared remarks. And with that, I'd like to thank you all for joining us this morning, and we'll be happy to take your questions.
Operator: Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. We do ask that participants please ask one question and one follow-up. Once again, if you have any questions or comments, please press 1 on your phone. Your first question is coming from Ghansham Panjabi from Baird. Your line is live.
Ghansham Panjabi: Thank you, operator. Good morning, everybody. Heidi, you know, a bit more color on the 7% price increase for Paint Stores Group? How did you come about that number? I mean, raw materials, like they're going to be flat this year, up low single next year. I know you have wage increases, etcetera, but the demand environment seems pretty tepid. So how do we get to this 7%, which is, I think, the highest since the COVID inflation spike.
Heidi Petz: Good morning, Ghansham. I'm gonna hand this out here in a moment, but let me start with more about our pricing philosophy in general. You and I have had discussions. You know, when we need to go to the market, our customers understand that we need to go to the market, so we work, you know, the entire year for that. Make sure that we're demonstrating value and earning the right to do that so we can continue to make the investments that I referred to in my earlier remarks. So I'll let Al give you a little bit of color on why the seven.
Al Mistysyn: Gotcha. I'm the sales physician. You know, how we got to the 7% is, you know, it's really driven because of higher year-over-year increases. You talk about our initial view of raw material costs being up low single digits, flattish the current year, and the other cost basket increases. But I think what I would like to also add to that is, you know, Heidi mentioned in her opening remarks about being effective in this being in our typical range but being tempered by market dynamics and segment mix.
You know, as she said, we're gonna, in this environment, slow growth, choppy demand environment, we're gonna be very aggressive in growing the business with new account growth and share of wallet. And, you know, why is that important to us? It's because when we look, as I talked about a year ago on this similar call, we look at price mix as one bucket, and we report on that metric quarterly. And we've got a number of pro architectural segments that perform at varying levels, and as an example, in our third quarter, we saw commercial property maintenance, new residential improve and perform better. They have similar operating margins, but they do dilute the price mix realization.
And if you look at our third quarter price mix realization, it was up at the upper end of the low single digits, which was compared to a mid-single-digit percentage in the second quarter. And as I said before, we were focused on growing operating margin. In the third quarter, our sales volume growth was better than we expected. So even though we have flattish gross margin, we experienced SG&A leverage, we grew our operating margin, and saw strong incremental margins of 30 plus percent on that low single-digit volume gain. So my point here is it's a balance. We are gonna go strong after volume.
We're gonna come out of the other end of pricing increase with our customers, but we're gonna balance both.
Ghansham Panjabi: Thank you.
Operator: Your next question is coming from Jeff Zekauskas from JPMorgan. Your line is live.
Jeff Zekauskas: Thanks very much. The thirty-year mortgage rates have come down. I think they're about 6.4% now. Do you think those rates need to go to really catalyze demand in the Paint Stores Group?
Al Mistysyn: Yeah. Jeff, I think, you know, I can go back because it sticks out in my head where mortgage rates dipped to around six in October. We saw a nice bump in applications, and, you know, so I think when you look at the pent-up demand in, you know, depending on what number you look at and how long it's been with existing home turnover being flat down and now it's starting to turn, there's a lot of pent-up demand. So when we get towards six, and certainly we've seen the ten-year dip below four for a day, which was exciting.
But I think that around six or a little bit below should drive stronger existing home turnover since the home builders have been paying down the rate to get more people and more traffic into their homes already.
Heidi Petz: Jeff, I would add to that too. 6% seems to be the magic number, but we spent a lot of time with our national and regional homebuilders, and not surprisingly, I think everybody is squarely focused on affordability. And while they're trying to reduce construction costs, redesigning floor plans, even looking at lot sizes and the actual product, the biggest impact is obviously affordability. Rates will certainly have an impact, so we are all hoping that the Fed makes some shifts here in the future.
Operator: Thank you. Your next question is coming from Vincent Andrews from Morgan Stanley. Your line is live.
Vincent Andrews: Thank you, and good morning. Heidi and Al, I wanted to ask on the investment spending. We're a bit more than two years into it. I think we can all look and see the positive results that are coming from it in terms of market share gains and how it's manifesting itself in your volume results. I think what's less clear to us from the outside is just how you define the efficiency of the spend, and you can look at it both ways. You can say, you know, could you get the same results spending less, or could you get better results if you were spending more?
And so I think it'd be helpful if you could just sort of talk to a little bit of a look-back analysis on this, you know, as we're a little bit more than two years in. And what defines and what helps you understand what the right level of spend is and what causes you to add more or presumably you've pulled back at the same time in other areas where you haven't seen the effectiveness. Some detail there would be helpful. Likewise, as we look into 2026, you know, if we don't get the help from the Fed that we all want and things remain choppy, what causes you to continue to make the incremental investments?
Al Mistysyn: Yeah, Vincent. I think it always starts and ends with how we get a return for the investment we make. We have a very disciplined process around new store ads, rep ads, and we look for stores on, you know, what's the time to get to a normal steady-state profit and how long that is, and that gives us some idea. Are we in a saturated market or not? And I would tell you that each of those stores we add, including in our densest market, get to profitability faster as we continue to invest in our least dense markets for our reps.
You know, we look at residential repaint in the mid-single-digit growth we've had in residential repaint through this year, through most of last year, investment we look at the investment we made in 2023, and we can look by territory, by sales growth, by margin growth, and I would tell you without a doubt that we are getting a return on those investments. Then what dictates how fast or slow you go? And this has been very consistent over many years. We've put a plan in place, 80 to 100 stores, similar or a little bit higher number of reps.
We look at our performance through the first half, we look at the outlook for the second half, and we think sales are gonna be stronger if we think our gross margin is going to be stronger than we had planned. We are willing and able to invest heavier, typically on the rep side. It's a little harder to invest more on the store side, but typically on the rep side, and they're more focused on res repaint.
And, again, we look very tactically and look at each of those reps, see what kind of return they're getting, but we have a ton of confidence that we are getting a return for those based on the sales performance we're seeing in a very difficult, if I would argue, down market in res repaint.
Heidi Petz: And it's a huge testament to our team. They're out every day, belly to belly with these customers. And, you know, while the market may have gotten kind of worse in some pockets here, I think Al makes a great point on res repaint. You know, we continue to outperform in what I would also call a highly unprecedented competitive environment. So in that two-year span, Vincent, obviously, as you all know, there's a lot of gallons up for grabs, and we're gonna be relentless in grabbing them.
Operator: Thank you, Vincent. And once again, everyone, we do ask that participants please ask one question. Your next question is coming from John McNulty from BMO Capital Markets. Your line is live.
John McNulty: Good morning. Thanks for taking my question. Maybe an early one on Suvenil. Can you help us to think about some of the actions that you plan on taking there? How to think about maybe some of the opportunities around synergies, and where we might be looking at profitability levels as we look to 2026. Thank you.
Heidi Petz: Yeah. Good morning, John. I'll start and then hand it over to Al to talk a bit about kind of further out. We're excited about this acquisition. I'm gonna be out with our team members all here shortly, of course, getting in front of some customers. Really proud of the team's joint effort and their laser focus on business continuity, you know, where we can create more value together, two great companies. So a lot of opportunity, both commercially and operationally. It's early days. The teams are just getting started.
I wish I had all the answers laid out, but I can tell you that the right people, the right leaders, are gonna help us to realize that value at an accelerated rate.
Al Mistysyn: Yeah. John, let me just start with the impact on the fourth quarter. It will increase consolidated sales by a low single-digit percentage and increase our consumer brand sales at a low 20% percentage. You know, Heidi talked about an immaterial headwind in the fourth quarter predominantly due to one-time transaction costs and inventory step-up. We'd be accretive in the quarter, slightly accretive in the fourth quarter.
As you look out, and we'll give you more detail on our January call, but as you recall, we talked about a $525 million business, mid-teens EBITDA, and I would expect as we implement our systems, tools, processes, and realize the synergies across both organizations, because as you recall, we talked about being somewhat of a reverse integration. You know, we'd expect to see that growth into the high teens, low twenties over a midterm.
Operator: Thank you, John. Your next question is coming from Aleksey Yefremov from KeyBanc Capital Markets. Your line is live.
Aleksey Yefremov: Thanks. Good morning, everyone. Heidi, I wanted to ask you about your comments on the second half of next year. I realize it's pretty far away, but are you seeing anything specific to sound maybe a little less hopeful about recovery? Or is this just looking at current trends and being conservative?
Heidi Petz: Yeah. I think it's more a function of our current sightline, given how far out we see relative to backlog business. Honestly, more the comment there. But I will go back to the statements regarding we are not yet seeing consistent data points that are really telling us a story that there's this catalyst coming anytime soon. So I don't believe it's conservatism. I think it's pragmatism. But I can assure you, if the market rebounds faster, we will be prepared for it.
Operator: Thank you, Aleksey. Your next question is coming from Duffy Fischer from Goldman Sachs. Your line is live. Once again, today's question is coming from Fischer. Your line is live.
Heidi Petz: Why don't we move on? We'll come back to Duffy later.
Operator: Certainly. Next question is coming from Mike Harrison from Seaport Research Partners. Your line is live.
Mike Harrison: Hi. Good morning. I was wondering, kind of piggybacking on the last question, if you could give some more detail on what you're hearing from your contractor customers about their backlogs and about visibility over the next three to six months. And I'm just curious within Paint Stores Group, what submarkets are your contractors sounding maybe a little bit more confident, and what submarkets are giving you a more cautious outlook?
Heidi Petz: Yeah. Good morning, Mike. I'll start. Let me point to the commercial segment. Within that, the multifamily starts. Again, you're seeing continued outperformance here for the company. We are seeing some improvement in starts, but I would tell you that we're looking more for trends and a sustained view of the positive signals. So we need to see more of that. This also comes over soft comps over the last two years. Our sightline in this area is more like nine to twelve months. And so when that does start to pick up, it would likely be late back half of not early '27, of that movement is accounted for in our current commercial outlook.
Any additional comment, Al, you would like to share?
Operator: Thank you. Your next question is coming from Matthew Dio from Bank of America. Your line is live.
Matthew Dio: Good morning. Can we just flesh out briefly the 4Q implied guidance and deceleration in year-over-year growth? Is that just because it's harder to grow seasonally weaker quarter? Is there a regional mix issue there? Or is there anything else that might point to higher cost of T cell?
Al Mistysyn: No, Mike. I think when you look at our fourth-quarter sales guide, our consolidated is expected to be up, and, you know, Paint Stores Group up low to mid. I think we saw, you know, we'd beat our third-quarter forecast for stores back of better exterior gallon sales. I'd say our fourth quarter is sequentially smaller, you know, and exterior is really gonna be dependent, as we talked about in the past, on Southeast and Southwest and how those pan out. You know, I don't think we're expecting anything dramatically changed. It's more of the same across each of the other segments than stores. I think consumer, you know, is similar.
Our PCG group has been in line with our expectations. So I don't see anything stronger. Quarter and then, you know, we'll see how that pans out in our...
Operator: Thank you. Your next question is coming from Mike Sison from Wells Fargo. Your line is live.
Mike Sison: Hey. Good morning. Nice quarter. You know, your pricing capture this year has been better or higher than in the past. What do you think pricing capture would be in '26? And going forward? And do you think it's, you know, structurally better than you had historically?
Al Mistysyn: Yeah. You know, Mike, I think I'll just touch on '26. You know, going further than '26 in this environment is a little hard to see. You know, we talked about market dynamics and, you know, going out with a higher rate to cover the higher cost that we're experiencing. You know, but in this softer for longer demand environment and the dynamics of the market with our competitors and some of the actions they've taken, you know, we've talked openly about this on each of our calls this year.
We're just gonna be very aggressive on gallons and balance the gallon growth with what I talked about earlier is, you know, what we report on with price mix as one bucket can be impacted by changes in segment sales like we saw in our third quarter. So if you look at our third quarter versus our second quarter, we said price mix is up low single digits. We said on our second quarter, it was up mid-single digits. Price effectiveness itself is similar quarter to quarter, but we had better performance in commercial, new res, and property. And that's what kind of tempered...
Operator: Thank you. Your next question is coming from John Roberts from Mizuho. Your line is live.
John Roberts: Thank you. Could you talk about where you think industry gallons are down in the U.S. by subsegment? Just in buckets here, which subsegments are down low single-digit percent gallon? Again, for the industry? Mid-single-digit? And are any of the subsegments down high single-digit in your opinion?
Jim Jaye: Yeah. John, this is Jim. You know, I think this is another year where gallons, obviously, we're not through the year, but I think the gallons this year are likely gonna be down again, which is what we've seen since we've come out of COVID. Not gonna get into the specifics by end markets. I would say, but if you look at the different signals that we look at, for example, existing home sales, the starts on single-family, some of the property maintenance, which has remained neutral, I think you can say that gallons are probably challenged across most of our end markets.
I think the good takeaway is, as Heidi said in her prepared remarks, we're outperforming in all of those, which is our North Star. Right? That above-market performance. So further evidence of the investments we've made delivering a return. And even in a down market, we've been able to grow our volume.
Operator: Thank you. Your next question is coming from Arun Viswanathan from RBC Capital Markets. Your line is live.
Arun Viswanathan: Thanks for taking my question. Maybe I could get, like, a little bit of an early read on next year. You do have some share gains coming to you. You've announced the price increase. So in a 7% price increase? Thanks.
Heidi Petz: Well, I'll start with what we just covered on the last question, which we don't expect any help from the market whatsoever anytime soon. We do hold ourselves to a higher expectation, as you should expect as well. You know, we don't often hold a yardstick based on what's happening in the competitive landscape. We always push ourselves to talk about what's possible and really push to think and think outside of the box. So when I think about this environment, our ability to go demonstrate value with these contractors and gain some exclusivity, I think, is a testament to our differentiation on display.
In this environment, these contractors in the stores are looking for predictability and reliability to partner, and that's exactly what we're setting out to accomplish.
Al Mistysyn: And, Arun, the only thing I would add to that is, as we've typically done, we're headed into our 2026 operating plan process where we sit down with each of the six divisions and the field sales organizations, field sales teams to talk about what's happening in their individual markets and by segment, and it gives us a much better idea of the trends that we expect. We'll be having conversations with their customers on the price increase, and we'll see how those are progressing, and that'll give us a clearer picture on what to expect full year when we look at sales volume.
Heidi Petz: And we're not immune from what's happening in the market.
Operator: Thank you, Arun. Your next question is coming from Patrick Cunningham from Citi. Your line is live.
Patrick Cunningham: Hi. Good morning. Maybe just a question on performance coatings. Can you help square the negative operating leverage despite positive sales? Maybe just some color around the mix drag and higher cost there. And then it seems like you're pretty firmly for those single-digit growth across that segment for 4Q. Should we expect similar margin declines with some of these similar mix dynamics? Just any sort of framework there would be helpful.
Al Mistysyn: Yeah. Patrick, on the adjusted segment margin, you know, we talk about unfavorable mix by region and by business. We look at North America, which is our most mature market, and, you know, our sales were only up low single digits. And when you look at Europe, which we have grown quite a bit through acquisitions, and we were up a high single digit, you know, at a differing margin operating margin performance along with Latin America being down, which is typically a better market for us. So those combinations drove that. Our gross margin down drove the profit margin down, and, you know, offset by higher volumes.
I think looking at our fourth quarter, you know, my expectation is, well, we'll, you know, we're planning to see some moderation in that mix, unfavorable mix. We're looking at, I expect to see some gross margin expansion due to sales volume. I think as we continue to maintain good cost control, and that team has done a terrific job all year controlling their costs, you know, I'd expect to see some leverage on SG&A and segment profit margin and improving in our fourth quarter. And we'll see how it goes into '26. And, again, we'll see.
Heidi Petz: We don't see any strong catalyst for market recovery, but we're not waiting for that either. I think there's some really good bright spots to point to. Mentioned in the microscope remarks, I'll point to auto refinish as a great example being up mid-single digits. And we are confidently taking market share, especially in North America where we're up high single digits. Point to, you know, certainly the direct business that our branches continue to demonstrate value. The larger shops are improving. The larger shops, some of the small and medium shops continue to see declines, but we are being very bullish right now, making sure that our collision core continues to build momentum. Adoption continues to grow.
Very proud of the team's efforts there. There are a number of different examples to point to across the portfolio, but just to reinforce our point, like, confidence in the team's focus on both growing volume and significant cost control.
Operator: Thank you. Your next question is coming from Josh Spector from UBS. Your line is live.
Josh Spector: Yeah. Hi. Good morning. This might be redundant, but I'll try again here around paint store volume. I guess if we look at the first half, you know, your organic volumes in same-store sales down maybe 3% to 4% depending on where you landed on pricing. Your second-half guide is posted to flat, maybe plus or minus 50 basis points on the volume side.
So as we think about a lower for longer environment and maybe some acceleration in share gains in commercial and multifamily, should we be thinking about a flattish volume environment for '26 as the base case, or would you go back to what we might have thought a quarter ago, which is maybe down low single digits?
Al Mistysyn: Yeah. Josh, I, you know, I don't want to give you a firm outlook today for 2026. But from quarter to quarter or half to half, you look at how, like, in our third quarter, exterior sales performed better than it did in the first half, which gives us a little bit of tailwind on volumes. So, you know, when we look at our forecasting model, you know, depending on the timing of how commercial comes in, is property maintenance CapEx gonna come back or still stay soft? You know, you're looking up or down, low single digits.
And I think, you know, initially in our first consideration is starting there and then working with our teams to see how we can accelerate the share gains both in new account activity and share of wallet and see how we can build those in to get to a sustainable up. Low single-digit volume with all the good actions they've taken as a team to control their SG&A cost while still putting in stores, still putting in reps. It's 95 more reps year over year. Our stores year over year. We have over 110 more reps year over year. And their SG&A, we got leverage in SG&A in the third quarter.
So I think there's a combination of things that we're looking at, but segment by segment, we'll look at and see where we end up. But I know, initially, right now, it's probably up or down low single digits until we get a better line of sight coming out of the year.
Operator: Thank you. Your next question is coming from David Begleiter from Deutsche Bank. Your line is live.
David Begleiter: Thank you. Good morning. Heidi, just on your price increase, given the challenges we're seeing now at Pittsburgh Paint, why would you not raise prices next year just to apply maximum pressure on Pittsburgh Paint? And really, really step on the neck while they're down. Not to be so graphic. Thank you.
Heidi Petz: That was very graphic, David. But I'll go back to the comment Al made earlier and some completely describe how we're thinking about the current operating environment, which is about balancing gallon growth with pricing increases. Effectiveness. We are going to be extremely aggressive on volume. I mentioned there's a lot of gallons up for grabs. We need to go earn that, as you know, it doesn't just come our way naturally. The team is out there across Paint Stores' organization. Every store manager, assistant manager, our reps, they're fighting tooth and nail every day to make this happen, and I'm very proud of the team achievement that allows us to kind of beat the market.
It is a balance, and I think what you'll find is we've always done historically, when we come out with price, we want to do it the right way. We want to get out in front of our customers, give them time to plan, get ahead of the bidding season. We don't want our customers stuck absorbing this. And, you know, helping them to pass that along. But the timing of the increase is of strategic importance. But we're gonna be extremely aggressive on volume. So if there's a way to thread the needle, it is going to be a little bit of art and science to balance the two.
Al Mistysyn: David, I just add. You know, I appreciate the comment on PPG, but, you know, we have a disciplined approach to how we look at pricing, how we approach our strategy, and we just aren't gonna react to each competitor's actions in the market that, you know, we can't control. We've done very well. We've been very successful in managing what we can manage and sticking to the things that we know how to do. So we're gonna stick with that. It's been a successful formula for us, and it's gonna be going forward.
Operator: Thanks, David. Your next question is coming from Kevin McCarthy from Vertical Research Partners. Your line is live.
Kevin McCarthy: Mike, you're on mute, Kevin.
Kevin McCarthy: Sorry. Can you hear me okay?
Al Mistysyn: Yes. Yes. We can.
Kevin McCarthy: Sorry about that. Do you have any price increases on the table that you would care to call out for consumer brands or across the performance coatings group? Just trying to get a sense of whether there might be potential for any price acceleration on those platforms relative to the 7% that you called out for paint stores?
Al Mistysyn: Yeah, Kevin. Based on the overall cost basket increases across each of the businesses and each of the regions, to help offset that. And, you know, keep moving us forward. And to move forward by investing in our customers' success. And so this is gonna be incumbent...
Operator: Apologies for the delay. Your next question is coming Chris Parkinson from Wolfe Research. Your line is live.
Chris Parkinson: Great. Thank you so much. Understanding there are a lot of moving parts heading into 2026. So when we think of all the dynamics between price, cost, and manufacturing, is there a scenario out there for which you see Sherwin consistently being at or above 50% gross margin, absent any material volume recovery? Have those dynamics or put and takes really changed since last year's Analyst Day? Thank you so much.
Al Mistysyn: Yeah. Chris, you know, can we sustain 50% gross margin implied volume growth, gonna be choppiness across segments, each of the businesses and regions. And one thing I will say is I believe Paint Stores Group will grow faster next year over the midterm at a higher gross margin that helps drive an overall consolidated gross margin improvement. You know, we did experience a headwind in our supply chain this year because of the lower production volumes. And I would say that this global supply chain team has done a really terrific job trying to offset, you know, these low to mid-single-digit production gallon decreases by controlling their cost and being really creative on how we control our cost.
So we're not losing people because we are confident in our strategy. We're confident that volume will return, and we want our people there when it does return, and we bring hours back, and we fill our factories back up to more efficient capacity utilization. So I don't want to commit to about 50 outside until I understand we have a consistent sustained volume growth, but certainly positioned ourselves very well to get there when volume does come back.
Operator: Thanks, Chris. Your next question is coming from Greg Melich from Evercore. Your line is live.
Greg Melich: Hi. Thanks. Maybe on following up on that point, Al, could you help us understand this year, look at the full year, or just the third quarter, how much volume hurts gross margin rate and what sort of volume growth you'd need to get, you know, 100 bps of leverage out of margin. What's the variable margin there?
Al Mistysyn: Yeah. Greg, I think you're talking gross margin impact with the supply chain and inefficiency. Inefficiencies are in the, you know, low, you know, ten, 20, 30 bps. And, you know, Greg, I'm glad you asked that follow-up question because it gives me an opportunity to talk about our focus on driving operating margin and not just the gross margin, and we saw that in our third quarter with the lever gross margin expansion, and we got leverage on SG&A to help drive the operating margin forward on an adjusted consolidated basis.
I think, you know, volume is the number one driver of operating margin expansion in all the things, the good things each of our groups and divisions have done to get their cost base down. I would tell you that a low single-digit volume growth or any volume growth will be accretive, and we'll see operating margin expansion. And I'm trying to, what I'm trying to say is it'll be less today than it would have been two years ago, if that makes sense to you. We'll get better leverage on future incremental volume than we would have had prior to coming into the cycle.
Operator: Thank you, Greg. Your next question is coming from Gerrick Schmois from Loop Capital. Your line is live.
Gerrick Schmois: Oh, hi. Thanks. Just wanted to follow-up on that last point. You said the 30% incremental margins on the low single-digit volume growth in stores that you've gotten this quarter. Just wondering if that's a good benchmark moving forward, just given what you just mentioned. Both for that segment and maybe help us think about incremental margins on volume in the other segments when demand does start to improve more consistently?
Al Mistysyn: Yeah. Gerrick, I think it's, with Paint Stores Group, what we said is we expect mid-20% incremental margins on lower volume growth, low single-digit volume growth. I think you saw the benefit of that group, all the actions they've taken throughout the year to get their costs lower while still investing. So we got, you know, SG&A leverage in the quarter, flattish margins. And that's what helped drive that. You know, I think drove the 30%. I think as we go forward, we'll consistently look at the outlook.
And if we think our volumes are higher, you know, we'll lean in like we've done in previous years and add more selling sales reps to take advantage of the market share opportunities that we have. You know, I think it's, it's Performance Coatings Group. I think it's dependent on, because of the difference in business region mix, that one's a little harder to say. You know, if you told me that our volume growth would be predominantly in North America, our largest region, our most mature region, and by definition, our highest operating margin region, then, yeah, I'd say our incremental margin will be, you know, in that twenties and that thirties.
If it's the other regions, we're gonna get varying consumer brands grew by, which is point to the strong volume we had in 2020. And the increase, strong increase incremental margins that we had there, and the stronger volume will also help supply chain efficiency to help their operating more incremental margins grow. We have examples. We just have to see sustained volume growth in as we...
Heidi Petz: Gerrick, one piece I would add to that as well. We launched a few years ago, we talked about success by design, but our sixth enterprise priority is simplification. And we've done a lot of work globally to understand where are the costs sitting that we're not getting paid for. Credit, you know, you heard the expression, don't let a downturn go to waste. Or don't let a crisis go to waste. We're saying don't let a downturn go to waste. There's a lot of self-help we can do to make sure we're continuing to improve our cost position. So I'm confident that there's good progress, but there's a lot more ahead.
Operator: Thank you, Gerrick. Your next question is coming from Eric Bosshard from Cleveland Research. Your line is live.
Eric Bosshard: Thanks. On the consumer brand side, I'm curious what organic growth you saw in that business. And then if you zoom back, I'm interested in the volume and pricing in '25 and how you think about that in '26?
Heidi Petz: I'll start us off here. Not a lot of organic growth. I mean, DIY is very much under pressure. And as a reminder, the DIY segment is a very important part of our long-term strategy. It represents about 20% of the available gallons in the market. So very, very important certainly within our stores, but absolutely our store strategic retail partners as well. The Provo Paints, we continue to see some good progress and movement here. We like how we're positioned here. It continues to be a growing segment on a smaller basis. But it is an area that we're continuing to invest in people, products, services, support our strategic partners. We're on a good trajectory.
We just need more volume.
Al Mistysyn: Yeah. Eric, the only thing I would add color around for the quarter is, you know, we did see adjusted operating margin expansion, and predominantly even though we had our volume backwards, the sales volume we had in the quarter was more skewed to exterior sales gallons and also our premium product gallons grew faster than the total. Which was a nice tailwind for us in the quarter and more than offset the chain and efficiency that we saw with the lower production volumes. So I know that team is continually pushing for driving the premium side of the business, and we saw it in our third quarter results with that.
Operator: Thank you. Your next question is coming from Chuck Cerankosky from Northcoast Research. Your line is live.
Chuck Cerankosky: Good morning, everyone. Great quarter. I'd like to ask about the portion of the res repaint market, if that sounds categorized. Just seems to be a lot more activity based on our work around doing very significant rehab of those properties and then selling them back into the existing home market. Is that how it flows through the housing numbers, and how significant is that business for Sherwin-Williams contractors?
Heidi Petz: Well, remodeling is definitely, I think, more favorable than what we're seeing relative to the new residential. There has been certainly increasing activity. By and large, the market does still continue to be choppy. So I don't believe that subsegment is enough to offset the core of the residential repaint subsegment.
Al Mistysyn: Yeah. Chuck, I think the only other thing I would highlight there is, again, we continue to invest in this growing segment, and it's our largest opportunity. And that situation you talked about would be part of that res repaint segment. And again, we're being aggressively going after it.
Operator: Thank you. Your next question is coming from Laurence Alexander from Jefferies. Your line is live.
Laurence Alexander: So good morning. In the past, you've spoken about when a recovery occurs, you expect to get an amplification effect or an acceleration rate of share gains with the delta that Sherwin has outperformed. If we do have another year or so of softer for longer and you're leaning heavily into share gains to offset in a tougher environment, are you pulling forward some of the share gains that we would normally see in a recovery? Or do you still expect that amplification effect? And do you expect it even to be larger because you're taking more share in the downturn?
Heidi Petz: So, Laurence, that was a two-part question because I answered your first question. So, no, we do not believe it's a pull forward on market share. The expectation is that regardless of where the market is, that we are at a minimum of one and a half to two times the market. So we are taking share gains. I also would point to some of the exclusive contracts that we're picking up across different end markets on the store side. We're doing that quietly. I believe that the market starts to move that you will see that we've created structural competitive advantage given some of the additional wind we have here.
Operator: Thank you, Laurence. Your next question is coming from Duffy Fischer from Goldman Sachs. Your line is live.
Duffy Fischer: Yeah. Good morning. Can you guys hear me now?
Heidi Petz: We can.
Duffy Fischer: Awesome. So question on the SBUs within paint stores. So if you look, both of the resi businesses have been pretty flat, I mean, sequentially flat as far as their improvement, so they're not accelerating. The other four businesses all accelerated in the third quarter in their growth rate. And so I was just wondering, is that delayed pricing rolling through? Is that those markets actually accelerated in demand themselves? Or is that basically where the overlap on your competitive advantage is taking share? What's driving those four with the acceleration in Q3?
Heidi Petz: Duffy, it's not the pricing piece that you referenced. It is our opportunity in this unprecedented environment to demonstrate the value that The Sherwin-Williams Company can provide. And I would tell you, across every one of our end markets, you know, our teams are out. They're responding. Our teams understand how to, in this environment, how to rapidly adapt and adjust to make sure that we are anticipating what it is that our customers and our contractors are needing. When we talk about bringing differentiated solutions, it's in these times when I think our differentiation is even more on display. We're committed to our strategy. We're steadfast in putting our customers first. And we have their success in mind.
So we're gonna continue bringing new solutions even in these times. Al used the word creative earlier, and our team's willingness to be creative in this environment is why this is such an important quarter for us, and The Sherwin-Williams Company is weathering this softer for longer environment. We're gonna continue to do that.
Operator: Thanks, Duffy. That concludes our Q&A session. I will now hand the conference back to Jim Jaye for closing remarks. Please go ahead.
Jim Jaye: Yes. Thank you again, everybody, for joining our call today, and thanks to all the employees of The Sherwin-Williams Company for all of their hard work. As Heidi said, we continue to operate here in a really challenging demand environment, and we expect that likely gonna continue well into next year. But at this same time, we see challenge as opportunity. So we've got a lot of confidence in our strategy, controlling what we can control, serving our customers, focusing on their success, making our targeted growth investments, and controlling our G&A spending. That's the recipe. That's the playbook.
So we are focused on finishing 2025 strong, and we're gonna continue to build on our momentum, and hopefully, that will propel us well into 2026. So thanks again. As always, we'll be available for your follow-up calls and appreciate your interest in The Sherwin-Williams Company.
Operator: Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.