# Letter to
Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NYSE_SHW_2019/NYSE_SHW_2019.mmd` · pages 1-7_

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Letter to
Shareholders

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We are pleased to report that 2019 was another outstanding year for The Sherwin-Williams Company. We reported record sales for the ninth consecutive year and record cash from operations for the fifth consecutive year.

Net income and net income per diluted share increased by double-digit percentages over 2018. Total return to shareholders in 2019 was 49.7 percent, and our average annual return over the last five years was 21 percent.

We continue to drive our success by executing on the four pillars of our strategy: customer focus, industry-leading innovation, value-added service and expertise, and differentiated distribution. The pages of this annual report provide examples of this solutions-based approach across our business. We aim to create the right experience for all our stakeholders by supporting our strategy with a strong culture of winning built on trust, respect, execution and inclusion; a global team that develops and retains the right talent; and an organizational structure that supports our teams.

Creating shareholder value drives our decision-making process. Our key indicators of success are sales growth, return on sales, return on net assets employed and cash generation. We improved in each of these areas in 2019 compared to 2018. Specific highlights from the year include:

• Sales increased $366 million, or 2 percent, to a record $17.9 billion.

- Gross margin improved 260 basis points to 44.9 percent of sales.

- EBITDA – or Earnings Before Interest, Taxes, Depreciation and Amortization – increased 25 percent to a record $2.9 billion.
- GAAP diluted net income per share increased 41 percent to $16.49 per share. Adjusted diluted net income per share, which helps illustrate our underlying performance by excluding acquisition-related costs and other adjustments \( ^{9} \) , increased 14 percent to $21.12 per share.

- Return on Sales, or net income divided by sales, increased 230 basis points to 8.6 percent.

- Return on Assets, or net income divided by total assets, improved 170 basis points to 7.5 percent.

- Net operating cash for the year increased $378 million to $2.3 billion, or 13 percent of sales.

- We continued to execute on our disciplined capital allocation strategy, including returning approximately $1.2 billion to our shareholders in the form of dividends and share buybacks, an increase of 28 percent over the prior year. We also reduced debt by $660 million, invested $329 million in our business through capital expenditures, and deployed $77 million for three acquisitions.

Reflected within these results is the strong progress we've made on the integration of Valspar since the transaction closed in 2017. While there is still much to be accomplished, particularly outside the U.S., I want to thank our teams for their tremendous hard work to date in bringing our two businesses together and for increasing the value we deliver, and will be able to deliver, to our customers and shareholders. To put it in perspective, Sherwin-Williams has generated $6.1 billion in net operating cash, or 12.2 percent of sales, since the beginning of 2017. We've used that cash to invest approximately $800 million back into the business, reduce debt by nearly $3 billion, and return approximately $2.5 billion to shareholders, including $1.1 billion in dividends and $1.4 billion in share buybacks.

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All three of our reportable segments contributed to our strong performance in 2019.

Also noteworthy this year was the resolution of the nearly 20-year-old California lead litigation. An agreement among 10 California cities and counties, Sherwin-Williams and two other companies dissolved the residential lead paint abatement program that plaintiffs sought from the court and represented a significant reduction in their recovery. Without this mutual resolution, the litigation would have continued for many more years, and additional appeals and rulings would have had uncertain outcomes for all parties. While Sherwin-Williams continues to believe that the litigation was unfair, unwarranted and unwise, the resolution enables all parties to move forward and is in the best interests of the Company and its shareholders. We will continue to vigorously and aggressively defend against any similar current or future litigation.

## Segment Performance

All three of our reportable segments contributed to our strong overall performance in 2019. The success of our segments is underpinned by the efforts of our global supply chain.

The Americas Group delivered record performance in 2019 as net sales increased 5.7 percent to \(10.17 billion and segment profit grew 8.3 percent to \)2.06 billion, or 50 basis points, to 20.2 percent of sales. Volume leverage, good cost control and moderating raw material costs drove the profit improvement. Innovative products, our 4,758 Company stores and a premium customer experience driven by our highly trained store and field sales personnel continued to differentiate us in the market. Sales grew in all U.S. and Canada paint store customer segments this year, led by double-digit growth in residential repaint, followed by protective and marine, new commercial, new residential, property maintenance and DIY, respectively. Same-store sales grew 5.3 percent. Latin America sales decreased due to the negative impact of unfavorable foreign currency translation in Argentina, though profitability improved as we executed on productivity initiatives and optimization of our dedicated dealer and Company store footprint in Brazil and Mexico.
Consumer Brands Group sales decreased 2.3 percent in the year to \(2.68 billion, primarily related to the impact of the divestiture of the Guardsman furniture insurance business and the negative impact of unfavorable foreign currency translation. Solid top-line growth with our strategic channel partners in North America and Europe was partially offset by channel and competitive pressures in other regions. Segment profit increased to \)373.2 million from \(261.1 million, and segment margin increased to 13.9 percent from 9.5 percent of sales. Synergies, improved supply chain efficiencies, pricing initiatives, moderating raw material costs and lower acquisition-related amortization expense drove the year-over-year improvement. Excluding acquisition-related amortization expense and a trademark-impairment charge \( ^{*} \) , segment profit increased to \)469.5 million from \(372.0 million, and segment margin increased to 17.5 percent from 13.6 percent of sales.

Performance Coatings Group sales decreased 2.3 percent from the prior year to \(5.05 billion. Currency translation rate changes reduced sales in the year by 2.3 percent. Segment sales reflected a very choppy industrial demand environment over the past year, with considerable variability by region and business. Geographically, total segment sales grew in North America and Latin America but were offset by softness in Asia and Europe. These near-term headwinds did not deter us from investing in products and services that will drive growth over time. We also resumed disciplined and selective acquisition activity this year. Watson Standard, Novatic and Ulfar/Nivapol bring technology, people and selected assets to our packaging, general industrial, and protective and marine businesses, respectively, and while not large transactions, they add to our capabilities. Segment profit decreased to \)379.1 million from \(452.1 million, and segment margin decreased to 7.5 percent from 8.8 percent of sales. Excluding acquisition-related amortization expense and a trademark-impairment charge \( ^{*} \) , segment profit increased to \)711.6 million from \(667.9 million, and segment margin increased to 14.1 percent from 12.9 percent of sales. Pricing, synergies and good cost control drove the profit improvement.

## Sustainability

Corporate responsibility has long been embedded in our values and our business, and we continued to improve in this area in 2019. It starts with our products. We follow a set of guiding principles regarding the safe use of chemicals in our formulations and manufacturing processes. We recognize and address the potential impacts of our products throughout their life cycle, from design and development through use and disposal. We assess each ingredient

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in a product formulation in terms of human health, environmental impact, physical and chemical properties, and other information reflecting current best practices. This has resulted in a broad and deep portfolio of architectural products that meet some of the most stringent environmental and life cycle standards such as the U.S. Green Building Council LEED criteria and UL GREENGUARD \( ^{®} \)  certification.

We continue to grow with innovative and sustainable products such as valPure \( ^{®} \)  v70 non-BPA epoxy packaging coatings, Ultra 9K \( ^{®} \)  waterborne systems for automotive refinish, and Harmony \( ^{®} \)  Zero VOC interior acrylic latex architectural coatings. We also support the recycling of unused paint products through the industry's PaintCare program.

From a social perspective, we give back to the community through the Sherwin-Williams Foundation and extensive employee volunteerism. Our nationally recognized HomeWork Program provides professional painter training for low-income housing residents, job placement assistance and EPA Renovate, Repair & Painting (RRP) Certification instruction. We're also pleased to highlight that in 2019 Forbes named us among America's Best Employers for Diversity, Best Employers for Women and Best Employers for New Graduates.

We are proud of our track record, but consistent with our continuous improvement culture, we always seek to be better. Given the changes to our global business related to the Valspar acquisition, we initiated a sustainability materiality assessment in 2019 which we expect to complete in the first half of 2020. Informed by shareholders, employees, customers and suppliers, this assessment will help guide our sustainability priorities and goals in the years ahead.

## Outlook

As we begin 2020, we currently see a similar business environment to last year, with North American architectural demand remaining solid and industrial demand remaining variable by geography and end market. We have many opportunities to grow share in all of our businesses, and we remain highly confident in our ability to provide customers with solutions based on innovation, value-added service and differentiated distribution. We remain well-positioned and focused on what we can control.

Consistent with our history, we'll continue making investments across the enterprise to enhance our capabilities. These

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Consistent with our history, we'll continue making investments across the enterprise to enhance our capabilities.

investments include new stores and sales reps, capacity and productivity improvements, systems, and product innovation in both our architectural and industrial businesses. We also plan additional incremental investments in our digital platform and the home center channel. We will remain disciplined in our approach, with all investments carefully vetted to drive value for our customers and returns for our shareholders.

We'll also remain focused on driving efficiencies throughout our operations. With regard to the Valspar integration specifically, we have identified another approximately $100 million in synergy opportunity beyond the $315 million in savings we have already realized. This opportunity is largely related to our supply chain optimization efforts in Europe and Asia. As previously communicated, we expect to realize a small portion of this benefit in 2020, with the majority being realized in 2021 and 2022 as projects are completed.

For our full-year outlook for 2020, we expect total Company sales to increase by 2 percent to 4 percent, led by The Americas Group, which we expect will be at or above the high end of this range. In terms of inputs, we currently see the market rate of inflation for our raw material basket being flat in 2020 compared to 2019, assuming stable petrochemical feedstocks and no supply disruptions. With volume growth, a stable raw material environment and further operating efficiencies, we expect to drive very solid earnings growth and strong cash generation in the year.

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2019 marked a return to our traditional capital allocation policy following a focus on debt reduction in 2017 and 2018 related to the Valspar acquisition. We expect to continue this approach in 2020. Capital expenditures will remain modest, at approximately 1.7 percent of sales. We expect our net-debt-to-EBITDA ratio to remain below 3 times. At its February 2020 meeting, our Board of Directors approved a quarterly dividend increase of 18.6 percent to \(1.34 per share, up from \)1.13 last year. This increase is consistent with our longstanding philosophy not to hold excess cash on the balance sheet. We expect to use this cash to make open market purchases of Company stock in 2020 at a level beyond what is necessary to offset dilution from option exercises. On December 31, 2019, we had remaining authorization to acquire approximately 8.45 million shares. We will also continue to evaluate acquisitions that fit our strategy.

I close this letter by thanking the more than 60,000 employees of Sherwin-Williams for their hard work and dedication. Your commitment to integrating and leveraging every aspect of our organization is inspiring. We have clarity of mission. We have a winning culture built on trust, respect, execution and inclusion. We develop and retain the right talent. And we have the right organizational structure to drive our success. Together, we are ONE SHW, focused on providing our customers with the right experience every day.

I also offer my sincere thanks to you, our shareholders, for your continued trust and confidence in us. We expect to deliver strong performance in 2020 and in the years to come.

Sincerely,

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John G. Morikis

Chairman and Chief Executive Officer