# Letter to
Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NYSE_SHW_2020/NYSE_SHW_2020.mmd` · pages 2-8_

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Letter to
Shareholders

The Sherwin-Williams Company delivered record performance in 2020. While none of us anticipated the severity of the year's challenges, our people responded as they always do when facing adversity – with extraordinary effort, determination and resiliency.
My deepest appreciation and respect go to all 61,000 members of our incredible global team. As the pandemic unfolded, we never wavered. As pressures mounted, we stood together. As others retreated, we leaned forward. We prioritized each other's safety and well-being, served our customers when they needed us most, delivered record results for our shareholders and gave back to the communities where we live and work. We also continued to position ourselves for ongoing success in all areas of our strategy: customer focus, innovation, value-added service and differentiated distribution.

Our 2020 financial results demonstrate the strength of our team, our business model and our solutions-based approach to meeting customer needs. We generated record sales despite the impacts of COVID-19. Cash from operations, net income and net income per diluted share also were records and increased by double-digit percentages over 2019.
Specific financial highlights from the year include:

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• Sales increased $460.9 million, or 2.6%, to a record $18.36 billion.

• Gross margin improved 240 basis points to 47.3%.

- EBITDA increased 18.4% to \(3.44 billion, or 18.7% of sales.

- GAAP diluted net income per share increased 33.9% to a record \(22.08 per share. Adjusted diluted net income per share \( ^{2} \)  increased 16.4% to \)24.58 per share.

- Net operating cash increased $1.09 billion to a record $3.41 billion, or 18.6% of sales.

- Return on Sales, or net income divided by sales, increased to 11.1% from 8.6%.

• Return on Assets increased to 10% from 7.5%.

- We returned approximately $2.93 billion to our shareholders in the form of dividends and share buybacks, an increase of 145% over the prior year. We also reduced debt by $400 million and invested $303.8 million in our business through capital expenditures.

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## Segment Performance

Backed by our Global Supply Chain, all reportable segments contributed to the Company's outstanding 2020 performance.

The Americas Group delivered another record year as net sales increased 2.1% to \(10.38 billion, segment profit grew 11.6% to \)2.29 billion, and segment margin expanded 190 basis points to 22.1% of sales. Favorable customer and product mix and raw material procurement benefits primarily drove the profit improvement. These results are especially remarkable given the impact of COVID-19, most notably in our second quarter, where sales were down by a high-single-digit percentage in what is traditionally the start of the painting season. Our ability to adapt and respond to rapidly changing customer needs drove our success. Same-store sales in our U.S. and Canada paint stores grew 2.7%. The largest percentage increase in sales was in the do-it-yourself (DIY) segment, where stay-at-home mandates drove a surge in home improvement projects. Sales in the professional residential repaint and new residential segments also were strong. Demand was softer in the commercial, property management and protective and marine segments. Across the Group, we continued to make strategic investments in new stores, innovation, services, e-business and people.

Like The Americas Group, Consumer Brands Group delivered record results in 2020 as net sales increased 14.1% to \(3.05 billion, segment profit grew 55.3% to \)579.6 million, and segment margin grew to 19% of sales. Excluding acquisition-related amortization expense of \(90.5 million, segment profit grew to \)670.1 million, or 21.9% of sales. Our ability to meet unprecedented demand with our retail partners in the DIY segment drove our performance. The strength and flexibility of our Global Supply Chain remained a differentiator during the year, as we repeatedly
Our 2020 financial results demonstrate the strength of our team, our business model and our solutions-based approach to meeting customer needs.

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pivoted to serve our customers, including rapidly expanding our single-gallon DIY can filling capacity. While the higher-volume sales were the largest driver of the Group's improved profitability, favorable product mix, raw material procurement benefits and actions taken over the past year to improve our international operating margins also contributed to our performance.

Performance Coatings Group overcame pandemic-related challenges to return to growth in the second half of the year and deliver improved full-year profitability. While net sales decreased 2.5% to \(4.92 billion, segment profit grew to \)500.1 million, and segment margin expanded 270 basis points to 10.2% of sales. The improvement was primarily due to the recognition of \(117.0 million of impairment charges in the prior year related to recently acquired trademarks, raw material procurement benefits, good cost control and favorable currency translation rate changes. Excluding acquisition-related amortization expense of \)213.1 million, segment profit grew to \(713.2 million, or 14.5% of sales. The pandemic's impact on end market demand varied widely across this Group's diverse businesses. The Packaging and Coil divisions were the Group's best performers and delivered strong top-line growth for the year. Full-year sales decreased in the Automotive, General Industrial and Industrial Wood divisions, as COVID-related impacts on first-half demand offset second-half momentum. We made significant progress across the business in gaining new accounts, commercializing products, employing digital tools, rationalizing SKUs and optimizing our manufacturing footprint.

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## Sustainability

We continued to move forward on our sustainability journey in 2020. Working with a leading global provider of sustainability services, we completed a robust materiality assessment to identify, prioritize and validate the Company's most significant Environmental, Social and Governance (ESG) topics. These topics include Product Stewardship, Life Cycle Assessment, Talent Acquisition & Employee Engagement, Climate & Environmental Footprint, and Occupational Health & Safety. Embedded within these topics is our ongoing commitment to Business Ethics, Financial Performance, Innovation and Corporate Culture. Based on the assessment, we are developing our next set of goals and we plan to publish these in our 2020 Sustainability Report later this year.

## We continued to move forward on our sustainability journey in 2020.

In many ways, the assessment also validated that we have been on the right track all along. We've long followed rigorous principles regarding the safe use of chemicals in our product formulations and manufacturing processes. We address the potential impacts of our products throughout their life cycle. We are leaders in meeting stringent environmental and life cycle standards such as USGBC \( ^{®} \)  LEED \( ^{®} \)  and UL GREENGUARD. And we continue to grow with a wide array of sustainable products.

Regarding our environmental footprint, we've focused on reducing electricity consumption and  \( CO_{2} \)  emissions, treating and disposing waste, and reducing and recycling materials. We have numerous ISO Standard 14001-certified sites.

Safety remains our top priority, with an emphasis on reducing recordable case rates. We have a growing number of facilities recognized under the Occupational Safety and Health Administration's Voluntary Protection Program domestically and the Occupational Health and Safety Assessment Series' 18001 designation internationally.

In support of our people and achieving Company goals, we continue to implement programs to drive awareness, inclusion, engagement and accountability. These include CEO Forums on Inclusion, conscious inclusion training, strategic partnerships to build a diverse pipeline of talent and employee resource groups.

## Our Comprehensive
Response to
COVID-19

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## Employees:

• Provided enhanced paid sick/family leave and other benefits.

• Implemented premium pay for select front-line employees.

• Implemented remote and flexible working arrangements.

• Enhanced employee and visitor screening protocols.

• Moved to a curbside pickup model to safely serve our customers.

## Customers:

• Provided essential products to create and maintain clean living environments.

- Supplied critical coatings to producers of ventilators, oxygen tanks, hospital bed frames and other health care equipment.

- Delivered performance coatings for food & beverage packaging, water treatment and energy infrastructure applications.

- Launched enhanced digital tools and provided virtual technical and production support.

- Directed small business owners to relief programs and resources.

## Communities:

• Donated hundreds of thousands of masks, gloves and other personal protective equipment.

- Manufactured and donated hand sanitizer to hospitals across the United States.

• Provided hundreds of donations from our local paint stores to local first responders.

• Provided financial support to the Cleveland COVID-19 Rapid Response Fund.

Visit https://covid-19-update.sherwin-williams.com for the full story.

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## Our team enters 2021 moving forward aggressively with optimism, momentum and commitment.

We're also focused on supporting the communities where we live and work through The Sherwin-Williams Foundation and extensive employee involvement. Our community response to COVID-19 is highlighted elsewhere in this report. Other examples of giving back include our nationally recognized HomeWork Program, which provides professional painter training for low-income housing residents, job placement assistance and EPA Renovate, Repair & Painting (RRP) Certification instruction.

We encourage you to learn more about our efforts by visiting sustainability.sherwin-williams.com.

## Outlook

The trials of the past year have made us a stronger company. They provided us with opportunities to further differentiate ourselves in the marketplace and to strengthen our relationships with our customers.

Our team enters 2021 moving forward aggressively with optimism, momentum and commitment. We expect to generate solid full-year growth in consolidated net sales and earnings while executing on initiatives that will drive sustained long-term success.

By design, our Company is well-positioned to take advantage of any number of demand scenarios. Last year, we demonstrated our ability to meet the unprecedented surge in DIY architectural paint demand as several other customer segments lagged. In 2021, we see an operating environment with very solid North American new residential and residential repaint demand. The trajectory of recovery in commercial and property maintenance is likely to be choppy, and comparisons in DIY will be challenging. We anticipate industrial demand will continue to improve as the year progresses. The impact of variables such as the availability and effectiveness of COVID vaccines, the new U.S. administration and proposed stimulus and infrastructure spending are hard to gauge at this point. That said, our team is skilled at adapting to any number of conditions, and we have many opportunities to grow share in all of our businesses. We'll continue to target growing at a rate that outpaces the market through customer-driven solutions based on innovation, value-added service and differentiated distribution.
As we did in 2020, we'll continue making investments across the enterprise to enhance our capabilities. These investments include new stores and sales reps, capacity and productivity improvements, systems, product innovation and our digital platform. We also expect to drive continuous improvement throughout our supply chain.

We will remain disciplined in our capital allocation approach, focused on driving value for our customers and returns for our shareholders. Core capital expenditures will remain modest in 2021, at approximately 1.9% of sales. Additionally, we'll invest in our previously announced new global headquarters and R&D center project. After more than 90 years in our current location, we're excited to create a next-generation workplace that supports serving our customers at the highest level, retains and attracts top talent and ignites creativity, collaboration and industry-leading innovation. Early in 2021, our Board of Directors approved a 23.1% increase in our quarterly dividend, along with a three-for-one stock split in the form of a stock dividend to make the stock more accessible to employees and a broader base of investors. We also will continue pursuing acquisitions that fit our strategy, and we expect to use any excess cash to make open market purchases of Company stock. We exited the year with a debt-to-EBITDA ratio of 2.4 times, and we have no significant long-term debt due until 2022.

I close this year's letter as I began it – by thanking the wonderful employees of Sherwin-Williams. While we reflect on the remarkable accomplishments of the past year, I am even more excited by what is ahead. Together, we have clarity of mission. We have a winning culture built on trust, respect, execution and inclusion. We have the products, services and solutions to provide our customers with the Right Experience every day. In so many ways, I truly believe we are just getting started!

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

Finally, I offer my sincere thanks to you, our shareholders, for your continued trust and confidence in us. We expect to thrive in 2021 and in the years to come. We hope you and your families remain safe and healthy during these unprecedented times.

Sincerely,

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John G. Morikis

Chairman and Chief Executive Officer