# Letter to Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NYSE_SHW_2021/NYSE_SHW_2021.mmd` · pages 2-8_

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Letter to Shareholders

The Sherwin-Williams Company delivered record sales in 2021, a year marked by unprecedented and industry-wide raw material shortages, relentless and historic cost inflation, and a resurgence of the COVID-19 virus late in the year. The 61,000 employees of Sherwin-Williams, our greatest asset, responded to these challenges with great determination. Rather than using the year's obstacles as an excuse, we used them as an opportunity to get even closer to our customers, focusing on supporting them through innovation, value-added services and differentiated distribution. While the difficult operating environment impacted our profitability near term, we remain undaunted and expect to emerge from these trials as an even stronger Company. We remain highly confident in our strategy, our business model and our people going forward.

In February, Winter Storm Uri swept through Texas and devastated our industry's complex petrochemical and raw material supply chain. At the peak of the crisis, nearly 170 suppliers were offline, many for extended periods. In August, Hurricane Ida ripped through Louisiana, taking additional raw material suppliers offline for an extended period. The resulting shortages, coupled with strong demand in nearly every end market we serve, drove sustained raw material cost increases. Full-year inflation for the industry basket of raw materials exceeded 20%, far above the mid-single-digit range we anticipated at the start of the year. Labor and transportation costs also escalated during the year. The emergence of the COVID-19 omicron variant in the final quarter of the year further impacted the operations of our customers, our suppliers and our Company.
Our global team battled admirably through these challenges, leveraging all of our Company's assets to focus on meeting customer needs. We also attacked rising costs with pricing actions in all businesses. Near-term pressure on our margins was significant, but we remain highly confident they will recover just as they have in past cycles, as sales grow, disciplined pricing actions take hold and commodity costs moderate. We also remained committed to our long-term success, investing in multiple growth initiatives including new stores, new products, capacity expansions, approximately 1,400 management trainees, our digital platform and targeted acquisitions.

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Over the last two years, we've returned approximately $6.3 billion to shareholders through dividends and share buybacks.

Selected 2021 financial results include:

- Consolidated sales increased 8.6%, including an estimated mid-single-digit percentage headwind related to raw material availability, to a record \(19.9 billion. It was the 11 \( ^{th} \)  consecutive year we have grown the business. Pricing for the year was in the mid-single-digit range.

- Gross margin decreased to 42.8%, driven by lower sales volume, raw material cost inflation outpacing our price increases near term, and supply chain inefficiencies.

- GAAP diluted net income per share was \(6.98 per share. Adjusted diluted net income per share, which excludes acquisition-related amortization expense and a loss on the Wattyl divestiture, was \)8.15 per share.

- Adjusted EBITDA \( ^{1} \)  – or Earnings Before Interest, Taxes, Depreciation and Amortization – was \(3.27 billion, or 16.4% of sales.

- Net operating cash for the year was \(2.2 billion, or 11.3% of sales.

- We returned cash to shareholders by investing \(2.8 billion in share repurchases and paying \)587 million in dividends. We have raised our annual dividend per share for 43 straight years.

- We invested \(372 million in our business through capital expenditures, including approximately \)58 million for our Building Our Future project.

- We also announced three acquisitions that will add to our capabilities: the coatings business of the Tennant Company, the European industrial coatings business of Sika AG, and Specialty Polymers, Inc.

- Total return to shareholders in 2021 was 44.9%, which outpaced the S&P 500 and our peer group.

Given the volatility of the macroeconomic environment over the past two years, our combined results over the period are perhaps a better illustration of the underlying strength of our business. Since the end of 2019, consolidated net sales grew \(2.0 billion or 11.4%, gross profit increased \)507 million or 6.3%, adjusted EBITDA increased \(211 million or 6.9%, GAAP diluted net income per share increased 26.9% to \)6.98 per share, and adjusted diluted net income per share increased 15.8% to \(8.15 per share. \( ^{2} \)  Over the two-year period, we've returned approximately \(6.3 billion to shareholders in the form of dividends and share buybacks.

## Segment Performance

The Americas Group delivered another record year on the top line as net sales increased 8.0% to \(11.2 billion. Raw material availability negatively impacted sales by an estimated mid-single-digit percentage. Same-store sales in our U.S. and Canada paint stores grew 6.0%. Segment profit decreased 2.4% due primarily to limited raw material availability, and increased raw material costs, partially offset by multiple selling price increases. Our team worked tirelessly and creatively to help customers prioritize their jobs and match limited supplies of paint to where and when they were most needed. Sales growth was highest in residential repaint, which increased by a double-digit percentage for the sixth consecutive year. Sales were up mid-to-high single-digit percentages in commercial, new residential, property maintenance and protective and marine. DIY (do-it-yourself) sales returned to more normal levels compared to the elevated pandemic-related sales of a year ago. In Latin America, sales grew by a double-digit percentage and return on sales improved. Across the Group, we remained committed to long-term success with continued investments in new stores, innovation, services, e-business and people.

In the Consumer Brands Group, net sales decreased 10.9% to \(2.72 billion against a very challenging prior-year comparison, as DIY demand moderated to a more normal pace following the easing of COVID-19 lockdowns, consumers returning to work, and fewer home "nesting" projects. Sales also were negatively impacted by an estimated high-single-digit percentage related to raw material availability and by approximately 4 percentage points due to the divestiture of the non-strategic Wattyl business in Australia and New Zealand. Adjusted segment profit, which excludes acquisition-related amortization expense, decreased 34.2%. \( ^{3} \)  The decrease resulted from the lower sales, increased raw material costs and supply chain inefficiencies, partially offset by multiple selling price increases and good cost control. Despite the year's challenges, we continued to see long-term opportunity here, and we

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continued to invest with key retail partners on multiple initiatives, including the rapidly growing "Pros Who Paint" remodeler space.

Kudos also must be given to our Global Supply Chain organization, which is managed within the Consumer Brands Group. Throughout the year, these dedicated professionals worked tirelessly to provide customer solutions to our commercial groups while also focusing on safety and continuous improvement.

Performance Coatings Group sales grew 22.0% to a record $6.0 billion. Sales increased by a double-digit percentage in every business and every region. Sales grew fastest in the General Industrial and Industrial Wood divisions, followed by the Packaging, Coil, Automotive Refinish and Protective & Marine divisions, respectively. Adjusted segment profit, which excludes acquisition-related amortization expense, decreased 2.2%. \( ^{3} \)  The decrease was due primarily to increased raw material costs, where the rate of inflation was the highest in the Company, partially offset by higher volume and multiple selling price increases. 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 further optimizing our operations.

## Sustainability

Sustainability is ingrained in Sherwin-Williams' values and how we conduct business. In 2021, we took another large step forward on our environmental, social and governance (ESG) journey by unveiling an exciting new framework for our efforts and committing to new goals – all designed to accelerate our progress and expand our positive impact on the world around us.

Our new framework consists of three complementary pillars. Our environmental footprint sets goals for reducing greenhouse gas emissions, increasing renewable energy use, improving energy efficiency, and reducing waste. Our product blueprint centers around further implementing our Sustainability by Design product development process, expanding our portfolio of "sustainably advantaged products," and developing a consistent process for measuring and assessing Scope 3 emissions. Our social imprint focuses on employee safety, inclusion, equity and diversity, talent acquisition, employee engagement, and continuing to give back to our communities. The Company's overall approach to ESG rests on a strong foundation of Governance and Ethics to ensure broad engagement and appropriate oversight.

Our efforts have not gone unnoticed. Investor's Business Daily \( ^{®} \)  recognized us as one of the 100 Best ESG Companies of 2021, including number 17 overall and number 3 among industrials. Newsweek \( ^{®} \)  noted us as one of America's Most Responsible Companies. And Forbes \( ^{®} \)  named us one of the World's Best Employers overall, in particular as a best employer for diversity, new graduates, women and veterans.

We're proud of our progress, and we will provide an in-depth ESG update in our annual sustainability report later this year. You can also learn more about our efforts by visiting sustainability.sherwin-williams.com.

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Sustainability is ingrained in Sherwin-Williams' values and how we conduct business.

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## Outlook

Our team has demonstrated remarkable resilience in fighting through the pandemic and supply chain challenges of the past two years. We've become a stronger company with even stronger customer relationships. We are battle-tested, and we begin 2022 with great confidence in our strategy, our capabilities and our people. There are so many reasons to believe our future is bright.

We are encouraged by the demand environment, which remains robust across our end markets. Many external indicators, and more importantly our customers, remain highly positive. Backlogs remain strong, and jobs delayed by raw material availability issues in 2021 are expected to be completed in the quarters ahead rather than canceled.

We brought on 50 million gallons of incremental architectural paint production capacity in 2021 to meet this demand. We also expect to add 80-100 paint stores this year.

We expect raw material availability to continue improving, though the pace will remain choppy. We maintain close working relationships with our suppliers, and they are excited by the opportunity to grow with us. At the same time, we're exploring ways to reduce future supply risk, including qualifying new suppliers, acquiring resin manufacturer Specialty Polymers, Inc., and pursuing other diversification initiatives.

We are implementing additional price increases in response to sustained cost inflation. We are committed to continue along this path as necessary. As we have seen in past cycles, we expect raw material costs will ultimately moderate, which will enable recovery of our margins over time.

We are adding and investing in talent. We again expect to add approximately 1,400 college graduates to our management trainee program this year. And in the current hyper-competitive job market, we continue to take the steps to ensure Sherwin-Williams retains our best and brightest. Over the last two years alone, 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've continued to support continuous learning, training and tuition programs. We've established more employee resource groups, and we continue to drive inclusion, diversity and equity. We've also broken ground on our new Building Our Future headquarters and global R&D center projects. We're committed to driving our employees' personal and professional success.
We expect to generate solid full-year growth in consolidated net sales and earnings in 2022 while executing on initiatives that will drive long-term success.

Across the business, we'll continue our solutions-based approach for customers through innovation, value-added service and differentiated distribution. We expect to generate solid full-year growth in consolidated net sales and earnings in 2022 while executing on initiatives that will drive long-term success. We will remain disciplined in our capital allocation approach, focused on driving value for our customers and returns for our shareholders. Core capital expenditures, which excludes costs for our Building Our Future project, will remain modest at approximately 2% of sales. In terms of dividends, our Board of Directors recently approved a 9.1% increase to our quarterly dividend. This increase follows 43 consecutive years of dividend increases. We also will continue to pursue acquisitions that fit our strategy. We expect to use any excess cash to make open market purchases of Company stock. Our balance sheet remains strong, and we expect debt to EBITDA to approach the high end of our target 2.0 to 2.5 times range.

The last two years have been challenging in so many respects. But I am truly convinced that Sherwin-Williams has navigated these near-term pressures better than anyone else. I believe nobody is better positioned as we look ahead. The growth opportunities in front of us are extensive, and we expect to continue outperforming the market. The dedicated employees of Sherwin-Williams will continue to be the difference. 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.

I am also grateful to be surrounded by an outstanding and diverse Board of Directors. Their continued partnership, wisdom and support remain invaluable.

Finally, I offer my sincere thanks to you, our shareholders, for your continued trust and confidence in us. The best is ahead.

Sincerely,

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John G. Morikis

Chairman and Chief Executive Officer