Dear Shareholders,
The Sherwin-Williams Company delivered record sales, EBITDA and diluted net income per share in 2022. We generated these strong results in a difficult operating environment characterized by relentless inflation, less than optimal raw material availability, armed conflict in Europe and COVID-related lockdowns. Our people refused to be deterred by these challenges and did what they do best – serve our customers.
Our success stems from executing on our strategy. We provide differentiated solutions that enable our customers to increase their productivity and profitability. These solutions center on industry and application expertise, innovation, value-added services and differentiated distribution. Our growing new account and share of wallet metrics continue to demonstrate our customers’ willingness to pay for the value that we provide.
And while we maintained focus on the day-to-day needs of our customers, we also executed on continuous improvement initiatives and targeted investments that will accelerate our long-term growth, competitiveness, efficiency and profitability. Over the past year, we opened 72 new paint stores, hired 1,400 management trainees, introduced multiple new products, expanded production capacity, enhanced procurement and logistics processes, reduced SKUs and formulations, continued on our digital and sustainability journeys, and acquired businesses that fit our strategy. We remain deeply committed to widening the gap between Sherwin-Williams and our competitors through differentiation and uniqueness.
None of this happens without the determination and dedication of our greatest asset – the more than 64,000 employees of Sherwin-Williams. Together, this team delivered the following financial results in 2022:
- Consolidated net sales increased $2.2 billion, or 11.1%, to $22.1 billion. 2022 was the 12th consecutive year sales increased.
- Gross profit increased $782.4 million, or 9.2%, to $9.3 billion.
- EBITDA – or Earnings Before Interest, Taxes, Depreciation and Amortization – increased 12.3% to $3.5 billion.
- GAAP diluted net income per share increased 10.6% to $7.72 per share. Adjusted diluted net income per share, which helps illustrate our underlying performance by excluding Valspar-related acquisition-related amortization expense, restructuring expense and loss on divestiture, increased 7.1% to $8.73 per share.
- Net operating cash for the year decreased to $1.9 billion, or 8.7% of sales, and was impacted by greater use of cash to rebuild inventories following the raw material availability challenges of 2021.
We returned approximately $1.5 billion to shareholders through dividends and share repurchases. We invested $456.5 million in core capital expenditures, largely aimed at growth initiatives. We made additional capex investments of $188.0 million in our Building Our Future project, which includes construction of our new company headquarters and our global R&D innovation center. This investment will drive solutions for our customers, retain and attract the industry’s best talent, accelerate collaboration and spur future growth.
We invested $1.0 billion to acquire businesses that add to our capabilities and expand our profitable growth opportunities.
Segment Performance
The Americas Group delivered another record year on the top line as net sales increased 12.9% over the prior year to $12.7 billion, driven by strong sales volume growth and price realization. Same-store sales in our U.S. and Canada paint stores grew 11.7%. The growth was robust across our customer base, with sales increasing by a double-digit percentage in all pro end markets. Segment profit increased 8.8% to $2.4 billion. The Group continued to position itself for success with targeted investments in new stores, innovation, services, digital and people, and ended the year with a record number of active accounts.
In the Consumer Brands Group, net sales decreased by 1.1% compared to the prior year to $2.7 billion, driven by lower sales volume and the remaining impact of the Wattyl divestiture. Sales in North America increased, driven by pricing actions and double-digit percentage growth in our “Pros Who Paint” initiative, even as inflation pressured spending by DIY customers in the region. Recessionary conditions and COVID lockdowns led to double-digit percentage sales declines in Europe and Asia, respectively. Additionally, the short supply of certain alkyd resins across the industry slowed aerosol and stain product sales. Segment profit was $225.7 million, including acquisition-related amortization expense of $76.2 million and restructuring expense of $41.1 million. We are determined to improve the performance of this segment, and the restructuring and impairment costs reflect the aggressive actions we began taking late in the year. These actions will be completed in 2023 and include optimizing our aerosol and China architectural businesses and our brand portfolio. Our ongoing work to reduce SKUs and product formulations across the Group will also help drive a more efficient business model.
The Consumer Brands Group is also the home of our Global Supply Chain organization. This dynamic team produced a record-breaking number of architectural paint gallons in 2022 as our capacity expansion projects of 2021 fully came online. At the same time, we positioned ourselves for even greater growth as we broke ground in Statesville, North Carolina, on a 36,000-square-foot extension of our existing manufacturing facility and a new 800,000-square-foot distribution and fleet transportation center. We expect these projects to be completed in 2024. In addition, we continued critical strategic expansion projects to meet current and future supply needs for our Packaging division and other industrial business units. We also seamlessly integrated the Specialty Polymers, Inc. business, acquired in late 2021, which increases our internal resin-making capabilities. Finally, our trucking fleet remained a significant competitive advantage. We drove over 88.5 million miles and added 140 drivers to the fleet in a highly competitive labor market.
Performance Coatings Group sales grew 13.2% compared to the prior year to a record $6.8 billion, driven by price realization and acquisitions. Sales increased most in the Coil and Packaging divisions, followed by the Automotive, General Industrial and Industrial Wood divisions. We closed several acquisitions in the Group during 2022 and announced another that is expected to close in early 2023. These high-quality businesses add to our technology, talent, customer relationships and scale, and we are executing our integration plans. Performance Coatings is also the most global of our reportable segments, and our regional results reflected various local dynamics. Sales in North America and Latin America increased by double-digit percentages, while sales in Asia Pacific and Europe were basically flat, driven by COVID lockdowns, recession and the conflict in Russia-Ukraine. Segment profit increased 51.2% to $734.9 million, including acquisition-related amortization expense of $200.1 million and restructuring expense of $22.2 million. Excluding these items, adjusted segment margin was 14.1%, a year-over-year improvement of 250 basis points. Throughout the year, we continued to make investments and improvements that will drive future performance, including winning new accounts, commercializing new products, employing digital tools, rationalizing SKUs, leveraging our blending facilities and optimizing our manufacturing footprint.
Environmental, Social and Governance
We inspire and improve the world by coloring and protecting what matters. Responsible business practices remain at the core of all we do. In 2022, we continued to create positive impact via the three complementary pillars of our environmental, social and governance (ESG) framework. For our Environmental Footprint, we aim to reduce our carbon emissions, energy use and waste and expand our renewable energy use and recycling methods. Our Product Blueprint centers on our Sustainability by Design program and the expansion of our portfolio of sustainably advantaged products. Further, our Social Imprint focuses on employee safety, inclusion, diversity and equity, and giving back to our communities. We continued on our journey in 2022, and we’ll share specific progress and updates on initiatives within each of these pillars in our annual ESG report, which will be published later this year. You can learn more about our efforts by visiting sustainability.sherwin-williams.com.
The Company’s overall approach to ESG rests on a strong foundation of governance and ethics, with our governance structure designed to enable broad engagement and appropriate oversight across the organization. While our efforts are not aimed at winning awards, we were honored to receive the following accolades in 2022, which signal we remain on the right track: Newsweek® America’s Most Responsible Companies, Fortune® World’s Most Admired CompaniesTM, The American Opportunity Index Top 50, and Forbes® America’s Best Large Employers and Best Employers for New Graduates.
Outlook
We enter 2023 with confidence and optimism. We’ll focus on controlling what we can control. We’ll remain committed to our strategy: delivering differentiated solutions to customers to make them more productive and profitable, for which we will be rewarded. We expect to outperform the market.
We also enter the year with a clear understanding of what’s in front of us. We expect the demand environment to be challenging. We know the likelihood of recession in the U.S. is high, if it is not already upon us. We expect new residential construction to slow significantly. We see few catalysts for improvement in European economies. And we see continued headwinds across Asia related to COVID and other factors.
In anticipation of these challenges, we announced targeted restructuring actions in the fourth quarter of 2022. These actions are well underway and focused on the Administrative, Consumer Brands Group and Performance Coatings Group segments. We expect these actions to result in $50-70 million in estimated annual savings, with 75% realized by the end of 2023 and the full run-rate by the end of 2024.
We also enter this year with a higher percentage of “recession-resilient” business in our portfolio than we did in prior downturns. These include Residential Repaint, Property Maintenance, Automotive Refinish and Packaging. We have strong competitive advantages in each of these areas. In less resilient parts of our business, we expect to compensate for slowing demand with new account wins, and that is exactly where we are focused. We’ll continue to aggressively pursue growth. We expect to open 80-100 new paint stores while adding sales reps and new territories. We’ll also once again add approximately 1,400 college graduates to our Management Trainee Program. We’ll continue to introduce innovative products, expand our digital platform and leverage our fleet of delivery vehicles. On the industrial side of the Company, we will expand use of our strategic blending facilities to provide quick turnaround and small-batch, custom colors, and we will work aggressively to leverage the capabilities and talent of our recently acquired businesses.
From an operational perspective, industry raw material availability has stabilized, and we are well positioned with manufacturing capacity to make products when and where they are needed. We are also highly encouraged by raw material costs, which have begun to decrease after unprecedented inflation over the last two years. As we have seen in past cycles, we expect to maintain a significant amount of the pricing we have implemented over that time based on the solutions we provide customers, which will enable further recovery of our margins while driving the success of our customers.
Above all, we’ll keep investing in our people. Over the last three years, we’ve invested millions of dollars in wage increases, bonuses, equity awards and health benefits. We’ve enhanced vacation and leave policies. We’ve added to well-being programs. We continue to support continuous learning, training and tuition programs. We continue to drive inclusion, diversity and equity initiatives, and we’re committed to providing opportunities that drive our employees’ personal and professional success. We know they are the secret to our success.
Because of our people, I am confident we’ll be ready to meet any of the wide variety of scenarios that might unfold during the year. We won’t be immune from what will likely be a difficult operating environment in 2023, but we do expect to outperform the market and our competitors.
The challenges of the past three years have made us a better and stronger company. Our customers have developed a deeper appreciation of the value of doing business with Sherwin-Williams. We have grown and learned across many facets of our organization, and we are well positioned for 2023 and beyond. Our future is bright, and the spectrum of possibilities is immense.
While we are proud of our accomplishments, we also know the danger of complacency. We guard against this danger daily, and we know we have huge opportunities to evolve and improve. There is no finish line in our business nor in our relentless pursuit of creating shareholder value. We remain laser-focused on growing sales, expanding return on sales, driving return on net assets employed and generating cash.
As we continue our journey, I am deeply appreciative of the wisdom, engagement and support of our Board of Directors. Few CEOs have the privilege of working with such a high-quality Board.
I am also grateful to be surrounded by an incredible and dedicated leadership team, including President and Chief Operating Officer Heidi Petz and Chief Financial Officer Al Mistysyn. Their confidence, determination and steadiness are inspiring.
I also know that the employees of Sherwin-Williams will continue to separate us from our peers and competitors. I continue to be amazed and humbled by the passion and care our global team demonstrates for our customers and each other. They have my deepest respect and appreciation.
And of course, I offer my sincere thanks to you, our shareholders, for your continued trust and confidence in us. We expect to thrive for years to come.
Sincerely,
John G. Morikis
Chairman and Chief Executive Officer
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