SHW Q4 2021 Earnings – Crestwood Advisors

Current price: $285 Price target: $330

Position size: 3.65% TTM Performance: 23%

Key Takeaways:

Results being weighed on by supply chain constraints – Q4 sales in-line with expectations but earnings fell short. Positive demand commentary. Second half weighted outlook for FY22 due to near term headwinds.
They will benefit from strong demand trends, pricing actions and improving margins when current headwinds recede – Raw material availability, Omicron variant, inflation pressures, and supply chain constraints meaningfully impacted revenue growth and margins across all segments. Strong consumer demand, increase in volume, and pricing action will address these concerns and help push the company past these short-term headwinds. Management sees raw material supply issues receding in FY22 which will help drive growth and margins back to historical levels. A moderation in commodity prices will also help fundamentals recover.

“Raw material availability remained a challenge. There was some improvement, but recovery was not as quick as we would have liked. Commodity and other costs remained elevated and we continue to implement price increases. The new wrinkle was the impact of the Omicron variant which was meaningful.”
“We see an operating environment with strong demand across architectural and industrial end-markets.”
“Our outlook also assumes that the market rate of inflation for our raw material basket will be up by a low double-digit to mid-teens percentage in 2022 compared to 2021″
“We expect to open between 80 and 100 new stores in the U.S. and in Canada in 2022. We’ll be focused on sales reps, capacity and productivity improvements, systems as well as product innovation.”

Additional Highlights:

Disruptions are acting as a short-term headwind – Natural disasters (winter storm Uri and Hurricane Ida) destroyed the industry’s raw material supply chain, which led to poor availability and unprecedented cost inflation due to high demand. Labor and transportation costs also became elevated throughout the year. Lastly, the new COVID variant (Omicron) added to operational complications.
They’re taking action (all of which is aided by their scale & pricing power) – continued price increases, vertical acquisition (specialty polymers) that will aid supply, and they continue to invest in growth initiatives – they have significant production capacity available today and are bringing 50 million gallons of incremental architectural production capacity. “We’re leveraging all of our assets, including our store platform, our fleet, our distribution centers and more, to let us come up with unique and creative customer solutions that others simply can’t.”
Gross Margins will improve – w/ price increases, higher volumes and falling inflation through FY22. “We expect to see year-over-year inflation in all four quarters with the largest impacts likely occurring in the first quarter in gradual reductions each quarter as the year progresses.”

A decrease in segment margin was caused by lower sales volume and higher raw materials costs, but were slightly offset by selling prices increases.
35 net new stores opened in Q4 2021, and they are expecting to open an additional 80-100 new stores in 2022 (U.S. and Canada, specifically).

The Wattyl divestiture played a material part in this – when adjusted for this, sales growth was flat.
A decrease in segment margin was caused by lower sales volume, higher raw material costs, and supply chain inefficiencies detracted, but were partially offset by good cost control and increases in selling price.

Strong growth driven mainly by price and volume increases.
Segment margin decreased largely due to increasing raw material costs (inflation was the highest for this segment), but somewhat offset by strong operating leverage from higher volume, selling price increases, and good cost control.

FY Guidance: expect high single-digits to low double-digit percentage sales increase – heavily weighted in the second half of FY22.

TAG: up mid-to-high sing-digit percentage.
CBG: down mid-teens percentage – includes negative 4% related to Wattyl divestiture.
PCG: up low-to-mid single-digit percentage.
Expecting continued margin headwinds, especially in the first half of FY22, but a recovery in the second half of FY22 across all segments.

“…’10, ’11, ’12, we saw that big run up in titanium dioxide, we saw our margins get to contract and then we saw growth from ’13 to ’16 of almost 600 basis points. We expect to see a similar environment today.”

Strong macro indicators that point to strong recovery for the company and overall industry

Continued choppiness for raw material availability, especially in the first quarter of FY22.

Balance sheet remains strong – leverage ratio is between 2-2.5x. Debt is 92% fixed rate.
Strong history of returning capital to shareholders continues – In 2021, they increased their dividend over 20%, marking the 43rd consecutive year they increased their dividend.
Valuation – trading at ~3.1% forward FCF yield; inflation is negatively impacting margins and working capital.