Key Takeaways:
· Better than expected results. Sales growth of 2.6% in line with guidance. Estimated impact from COVID-19 on sales during the quarter was approximately -1.5%.
· They are seeing strong DIY sales (+double-digits) which aided same store sales (SSS) in their paint stores. DIY aided by stay-at-home orders. Should switch back to DIFM. In areas in the US that are less hit by Covid-19 they are already seeing a return of contractors getting estimates for projects. Positive comments on housing and new construction outlook.
· Big GM expansion (270bps improvement), driven by strong volume, improved pricing, and lower raw material cost. Raw materials expected to be down low-single-digits for the year compared to prior estimate of flat.
· Guidance: Unlike peers they gave full year guidance (more details below). For Q2 they expect sales down low to mid-teens percentage YoY. For their worst case scenario of full year guidance (which assumes economic conditions don’t improve until 1Q 2021) they could see 2020 sales down HSD. This would be partially offset by raw materials down low-single-digits.
· Dividend increase: While others are cutting their dividend, SHW just approved a 19% dividend increase on April 22, underscoring the strength of their balance sheet and resiliency of their business right now.
· DIY Business is strong: CEO John Morikis said, “Our DIY business is strong as consumers are nesting and using stay at home time to work on affordable home improvement projects such as painting.” And….”We believe we’re seeing a pause in demand in many of our end markets rather than destruction of demand. We believe the long-term fundamentals remain intact. We intend to continue strategic investments to support profitable growth.”
Additional Highlights:
· Sales increase due to higher SSS in N. American paint stores and increased sales in the packaging and coil divisions w/in their Performance Coatings Group (across all regions). This was partially offset by impacts of COVID-19, continued demand softness in some end markets outside the US and unfavorable Fx translation.
· Residential repaint customers are delaying interior work related to having painting contractors in their homes. They expect this demand to return gradually and they expect exterior repaint work to gain momentum near-term (already up double digits), which will help to offset some of the interior softness.
· They expect DIY trend to fade as stay at home orders ease and that it will return to DIFM trend. “if you look at the underlying principles that have us believing that this gradually shifts back to the Do-It For Me as opposed to DIY primarily because we think those are still intact. Those are the aging demographics, the home appreciation, aging housing stock.”
· Reassuring commentary on housing: Mgmt. gave a lot of positive commentary around the LT fundamentals of the housing market being intact. This is a positive read through for HD. “Activity should eventually improve as mortgage rates are low and the supply of homes is limited”…” in new residential, we feel there is a pause that there’s a fundamental need for housing in the country.” All top 10 of their builder customers have reached out to ensure SHW’s supply chain will be able to serve them.
· Similar to other retailers, modifying their operations for the current environment is leading to permanent change as they plan continued investment behind omni-channel. In their stores SHW shifted to curb-side pickup and delivery.
· Cost cutting: restricting travel, hiring freeze, some reductions in force, cutting some G&A expenses, cutting capex. They put a pause on spending related to their new headquarters and R&D facility projects.
· America’s Group:
o Same store sales grew 7.4% in 1Q, inclusive of a significant downturn in sales during the last two weeks of March due to COVID-19.
o Higher paint sales volume led to 140bps segment op margin expansion.
o Had a very small number of North American stores closed intermittently during the crisis related to varying government orders. The vast majority of stores remain open.
o 2Q guidance for down LDD to mid-teen. Seen improvement week-to-week. April toughest comp vs year ago.
· Consumer Brands Group:
o Decreased 4.9% due primarily to softer sales in Asia Pacific, partially due to impacts of COVID-19, and the planned exit of the ACE business, partially offset by higher volume sales through most of the Group’s retail customers in North America and Europe.
o Demand in North America continues to be strong. Stay at home mandates have increased home improvement demand. Sales to home centers and other retail channel partners continue to perform well – encouraged by growth prospects with multiple customers in this channel.
o 2Q guidance for sales up high-single-digits to low-double-digits.
· The Performance Coatings Group:
o Sales decreased -1.1%. The decrease was due to softer end market demand in some businesses in Asia Pacific and Europe, partially due to impacts of COVID-19, and unfavorable currency translation rate changes. This was partially offset by increased sales in the packaging and coil divisions.
o “We have started to see some recovery in China at a slower pace than anticipated.”
o Lower miles driven and lower oil prices weakening some end markets.
o Supporting industrial customers in mission critical areas, such as food and beverage packaging, health care equipment, food manufacturing, water treatment and energy infrastructure.
o “During the crisis, we have delivered critical coatings product to producers of ventilators, oxygen tanks and hospital bed frame. At this time, all major architectural and industrial plants and distribution service centers are in operation.”
o 2Q guidance for sales down high-teens.
· Guidance: Somewhat surprisingly and unlike peers they gave full year guidance. Competitor PPG withdrew its 2020 guidance last week, said it sees demand hurt by Covid-19 and guided aggregate sales volumes down 30% to 35% for 2Q.
· For the full year SHW said, if economic conditions begin returning to normal in Q3 2020 and continue improving through Q4 2020, they anticipate full year sales to be flat to down a low-single-digit percentage. And if economic conditions do not materially improve until the first quarter 2021, they anticipate full year 2020 sales to decrease by a mid-to-high single digit percentage. This is compared to their previous full year 2020 sales guidance of an increase of 2% to 4%.
· FY 2020 guided to a range of $19.00 to $21.00 (from prior guidance of $22.70 to$23.50, current consensus $20.26).
· The revised FY guidance is premised on the following segment performance:
o Americas Group: Flat to down mid-single-digits
o Consumer Group: +/- low single digits
o Performance Coatings: down high-single-digits to low-double-digits
o Raw Materials: down low-single-digits
· Well positioned from a balance sheet and liquidity perspective. They have $239 million in cash and $2.5B of unused capacity under their revolving credit facilities. No big near term maturities.
· Capital allocation: increased dividend by 19%, share repurchases on hold, reduced capex.
· Valuation: Stock is inexpensive, trading at >4% FCF yield.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
www.crestwoodadvisors.com
$SHW.US
[category earnings]
[tag SHW]
