US Sherwin-Williams to emerge stronger from supply crisis – CEO

HOUSTON (ICIS)–US paint and coatings major Sherwin-Williams will emerge stronger from the current raw materials supply squeeze and prices spikes as “we leverage adversity into an opportunity”, CEO John Morikis and other company executives said in a conference call on Wednesday.

The supply issues and price inflation prompted the company to lower its 2021 earnings guidance.

While Sherwin-Williams performed well in 2020 amid the worst of the coronavirus pandemic, raw material supplies suddenly tightened in February 2021 when winter storm Uri hit Texas, and Hurricane Ida in late August “didn’t help at all”, Morikis said.

DEMAND IS NOT THE ISSUE
Morikis stressed that the issue was not demand, which remains “robust” in the company’s architectural and industrial end markets and is expected to continue to be strong well into 2022.

He pointed to key demand indicators, which remain positive – including housing starts, the architecture billings index, and the manufacturing purchasing managers’ index (PMI).

At the same time, Sherwin’s customers report “strong backlog” and the company’s new account activity is “elevated”, he said.

Sherwin, for its part, is ready to meet the demand by investing in stores and its digital platform, and it is hiring new sales representatives.

Furthermore, Sherwin will be bringing 15m gal/year of architectural production capacity online over the coming two quarters, he said.

He did not disclose what percentage the additional capacity represents in terms of Sherwin’s current capacity.

“We are growing market share, we are going to come out of this aggressively, with more customers, and a larger share of the wallet of existing customers,” he said.

“Demand is not the issue, our capabilities are not the issue,” the CEO added.

A Sherwin executives on the call drew a parallel with the 2008/2009 global financial crisis, when the company invested and saw sales and profits grow rapidly following that crisis.

SUPPLY SQUEEZE
The issue that is currently hindering Sherwin’s ability to make enough paint and coatings continues to be the “persistent and industry-wide” raw material availability constraints that began with Uri in February, Morikis said.

In fact, raw material suppliers recovered slower from Uri than expected, with some not back to pre-Uri production seven months later, he said.

Then, in August, Hurricane Ida exacerbated the supply situation, prompting Sherwin in early September to cut its Q3 sales guidance.

Suppliers are now reporting that the impacts of Ida are more severe and will last longer than initially expected, the CEO said.

While production of key resins, additives and solvents had been expected to resume by late September, those timelines have been pushed out to the end of October and even longer, in some cases, he said.

As the supply situation did not improve over the course of September, Sherwin on Tuesday cut its full-year sales and earnings guidance, as well.

“With raw material supplies so constraint, and October being the largest month of the fourth quarter, there is simply not enough time to make up the sales shortfall by the end the year,” he said.

Sherwin is confident, however, that as raw material availability improves in future quarters it will be able to recover the majority of the sales currently delayed because of the raw material scarcity, he said.

INFLATION
Along with the raw material scarcity, pricing for materials such as propylene, high-density polyethylene (HDPE), and epoxy resins remains “highly elevated”, prompting Sherwin to increase its full-year 2021 raw material inflation outlook to be up by “high-teens” from 2020, he said.

Looking only at Q4, the raw material price inflation could rise above 20%.

The company is seeking to offset the sharply higher raw materials costs with “pricing actions” across its business, he said, but added that Sherwin “fights like crazy” to keep its price hikes to a minimum.

While “we rarely receive a thank you note as we raise prices”, for the most part customers understand that “the situation is what it is”, he added.

For 2021, Sherwin does not expect its price hikes to fully offset higher raw materials costs. Rather, the company would be “chasing” the raw material  cost increases into the first half of 2022, in particular in performance coatings, he said.

CERTAINTY OF SUPPLY, M&A
As a key step to strengthen and diversify its supply chain and reduce the impact of future hurricanes and other natural disasters, the company this week agreed to acquire Specialty Polymers Inc (SPI), a manufacturer of water-based polymers used in architectural and industrial coating and other applications.

SPI’s production facilities would help Sherwin to expand its resin manufacturing capabilities over the longer term, whereas any capacity increase would be “modest” in the short term, Morikis said.

Also, the location SPI’s plants – Oregon and South Carolina – would help reduce Sherwin’s “heavy reliance” on suppliers in the hurricane-prone Texas and Louisiana Gulf Coast region, he said.

“We see the opportunity to add millions of pounds of additional capacity to [SPI’s] footprint, with relatively minimal investment,” he added.

SPI, with 150 employees, had revenues of about $112m in 2020. Morikis did not disclose SPI’s 2020 earnings or the acquisition price.

Beyond SPI, Sherwin will continue to evaluate other acquisitions to strengthen its supply chain, he said.

However, he ruled out back-integration into titanium dioxide (TiO2). Sherwin had been looking at TiO2 but found that that the financial and operating metrics of TiO2 did not fit in with the company’s operating model.

Meanwhile, Sherwin will continue to work with its existing suppliers, but it will also “broaden our global reach” to secure supplies, he said.

“We evaluated and looked at our entire portfolio of suppliers, obviously we want to work with those that have been good suppliers of ours, that are capable and willing to supply us – but we have a commitment to our customers and we are going to take the steps necessary to secure the supply needed to serve our customers,” he said.

Thumbnail image shows paint. Photo by imageBROKER/Shutterstock