SHERWIN-WILLIAMS STRATEGIC MEMO: THE CEO CHALLENGE IN 2030

Managing Growth Expectations and Competitive Pressure

CONFIDENTIAL | Executive Leadership Only From: The 2030 Report — Strategic Review Date: June 2030

THE SITUATION

Heidi Ueberroth, you face a challenge that few CEOs at your company have faced: managing through a down cycle in housing while maintaining shareholder confidence and organizational morale.

The stock is down 42% from 2022 peaks. Revenue is growing at 2% (versus 5-6% in prior cycles). Margins are compressing for the first time in a decade. And the narrative has shifted from "growth company" to "stable value play."

None of this is catastrophic. Sherwin-Williams is still generating $1.2B+ in annual free cash flow. The dividend is safe. The business is not in crisis. But the psychology has shifted, and that matters.

Here's what's actually happening:

THE MACRO HEADWINDS ARE REAL AND LIKELY STRUCTURAL

Housing Deflation in Key Markets:

California, Washington, Texas, and Florida—these four states represent roughly 35% of your revenue. In these markets: - Home prices are down 15-25% from 2028 peaks - Renovation demand has fallen sharply (people don't renovate when home values are falling) - Permit activity is down 18-22% - Your store productivity (revenue per store) is down 4-6% in these markets

The question your board is asking: Is this a cyclical downturn or a structural deflation?

Your CFO probably has both scenarios modeled. Let me cut through the analysis:

Structural factors suggesting continued deflation: - Tech worker salaries are down 20-30% (due to AI displacement) - Population growth is slowing (immigration restrictions, birth rate low) - Young people are moving to lower-cost cities (Austin, Phoenix, Nashville) - Remote work means less need to live in expensive coastal metros

Cyclical factors suggesting recovery: - Home prices have fallen to more "normal" valuations (7-9x household income vs. 10-12x in 2021) - At lower prices, people will buy and renovate - Fed is likely to cut rates in 2031, which could stimulate housing - Younger generations still need housing

My assessment: Probably 60% structural, 40% cyclical. Meaning: housing in tech hubs won't recover to 2022 levels, but it will stabilize and modestly grow from here. Your H2 2030-2031 revenue growth will be 1-3%, not 2-5% as previously forecast.

Commercial Real Estate Weakness:

Your Performance Coatings segment (industrial, commercial, automotive) is down 2-3% YTD 2030. This is tied to: - Office construction down 35% (remote work killed demand) - Commercial real estate values down 20-25% - Automotive production is down due to supply chain constraints and demand weakness - This segment is 25-30% of revenue and growing slower than core business

Wage Inflation in Supply Chain:

Plant workers, truck drivers, and store associates are demanding (and getting) 5-7% annual raises. Even as productivity improves (better machinery, better scheduling), wage inflation is eating into margins. This is not going away—labor is tight, AI is creating wage pressure, and you can't offshore paint manufacturing.

WHAT YOU CANNOT CHANGE (AND MUST ACCEPT)

1. You cannot reverse housing deflation

The housing market is a macro force. You can influence supply chain efficiency, pricing, and cost structure, but you cannot change the fundamental supply/demand dynamics of housing in the US. Accept that housing growth in the 2030s will be 2-3%, not 5-6%.

2. You cannot out-innovate a commodity

Paint is paint. Sherwin-Williams has better stores, better supply chain, better relationships with pros. But you cannot innovate your way out of a market that's growing 2% instead of 5%. Innovation can drive 100-200 basis points of additional growth, not 3-4%.

3. You cannot grow out of margin compression

If input costs (raw materials + labor) are rising 5-7% annually and price increases are only 2-3%, margins will compress. You have to accept this and manage it.

WHAT YOU CAN CHANGE

1. Cost Structure

You have a massive opportunity to optimize cost structure:

• Store network rationalization: You have 3,600+ stores. Some are high-productivity, some are not. Analysis suggests 200-300 stores are below-target productivity (likely due to oversupply in declining markets or poor locations). A rationalization (shutting underperforming stores, consolidating where possible) could save $80-120M annually. This would be $15-25M in EBITDA.

• Supply chain optimization: Using AI for demand forecasting, inventory optimization, and logistics could save $40-60M annually. Sherwin-Williams has started this (some AI models deployed in 2029-2030), but there's more room to go.

• Manufacturing efficiency: Automation and process optimization could save $20-30M annually. However, this is capital-intensive and requires upfront investment.

• G&A rationalization: Like most companies, Sherwin-Williams has overhead that can be trimmed. Target: $15-20M.

Total opportunity: $150-225M in annual cost savings (roughly 1.5-2.5% of EBITDA).

This is not "transformational," but it's real and achievable.

2. Pricing Strategy

You cannot sustain 6-8% annual price increases in a 2-3% growth market. But you can implement "smart pricing":

• Premium pricing for premium products: Sherwin-Williams' high-end paint lines (Duration, Emerald) have less price competition. Push volume into these higher-margin products.
• Geographic pricing: In strong markets (Florida, parts of Texas), maintain price discipline. In weak markets (California, Seattle), take measured price decreases to defend share.
• Channel pricing: Direct-to-consumer is higher margin than wholesale. Shift mix toward DTC where possible.

Target: Achieve 2-3% annual price increases in mature markets, offset by mix shift toward higher-margin products.

3. M&A Integration and Divestitures

You acquired National Coatings and Kreg Products in 2028-2029. Integration is ongoing. Two questions:

• Are these acquisitions accretive to EBITDA margin? National Coatings is performing okay (~18% EBITDA margin). Kreg Products is underperforming (~12% EBITDA margin).
• Should you exit Kreg? If Kreg is dragging on corporate margins and is not a core part of your strategy, consider divesting it. That capital could be redeployed to high-return investments or returned to shareholders.

4. Capital Allocation and Shareholder Returns

Sherwin-Williams generates ~$1.2B in annual FCF. Currently: - Dividend: ~$350M annually (rising) - Buybacks: ~$400-500M annually - CapEx: ~$400-500M annually - Debt reduction: Modest

Your current capital allocation is reasonable, but you should consider: - Increase dividend: The dividend yield is 2.1%, which is below historical norms. Increasing to 2.5-3.0% would signal confidence in cash flow stability. - Increase buybacks: At current valuations (18.5x P/E), buybacks are more attractive than they were in 2022 (24x P/E). Increase to $600-700M annually. - Maintain CapEx: Don't cut CapEx below $400M; you need it for store maintenance and manufacturing efficiency.

This signals to investors that you're confident in the 2-3% growth/18% margin scenario and comfortable returning cash.

THE STRATEGIC NARRATIVE FOR 2031-2032

Your board and investors need a clear story. Right now, the story is fuzzy: "We're navigating housing deflation." That's true but not compelling.

Better narrative:

"Sherwin-Williams is a stable, cash-generative business in the physical economy. We cannot be disrupted by software or AI. Our competitive advantages (store network, brand, supply chain) are enduring. In a 2-3% growth environment, we deliver 18% EBITDA margins and $1.2B+ annual FCF. We are deploying that FCF to maintain our market position, modernize our store network, and return capital to shareholders. By 2033, we expect to have rationalized costs, optimized capital structure, and established Sherwin-Williams as the 'Dividend Aristocrat' of industrial companies."

This narrative does three things: 1. Acknowledges reality: We're not growing 5-6% anymore. Accept it. 2. Emphasizes strength: We generate $1.2B+ in FCF in a 2% growth environment. That's powerful. 3. Positions future: We're investing for the long term, not chasing growth.

THE TOUGHEST CONVERSATION: MANAGING EXPECTATIONS

Your investor relations team has probably done a "revised guidance" call in Q1 or Q2 2030. You need to do something harder in H2 2030: manage long-term expectations downward.

Here's the conversation:

Old Narrative (2026): "Sherwin-Williams will grow 5-6% annually for a decade. Margins will hold at 19-20%. We'll continue to return capital to shareholders and make disciplined acquisitions. We're a 'growth + income' story."

New Narrative (2030): "Sherwin-Williams is a 2-3% grower in a mature market. Housing deflation is structural; we won't return to 2021 growth rates. We'll deliver 18% EBITDA margins, generate $1.2B+ in FCF, and distribute 60% back to shareholders. We're a 'income + modest growth' story. We compete on execution, not on macro tailwinds."

This is a difficult narrative to sell because it's more modest. But it's honest, and honest narratives hold up better over time.

How to sell it: 1. Acknowledge housing deflation head-on. Don't minimize it. 2. Show that you're managing cost structure to offset margin pressure. 3. Emphasize FCF generation. $1.2B in FCF in a 2% growth business is excellent. 4. Show capital allocation discipline: dividends, buybacks, modest CapEx, no financial engineering.

SPECIFIC 2H 2030 PRIORITIES

Q3 2030: 1. Announce store rationalization plan: "We are optimizing our store network for profitability. We will close underperforming stores in declining markets and consolidate where possible. Target: $50M EBITDA benefit by end of 2031." 2. Announce cost reduction plan: "We are investing in supply chain and manufacturing efficiency. Target: $100M EBITDA benefit by end of 2031." 3. Update capital allocation policy: "We are increasing dividends and buybacks as a percentage of FCF, reflecting confidence in our business model."

Q4 2030 and 2031: 1. Execute store closures and supply chain projects. Don't announce without execution capability. 2. Demonstrate margin stabilization: Show that cost actions are offsetting pricing pressure and wage inflation. 3. Build case for "income stock" repositioning: Target 2.5-3.0% dividend yield by end of 2031.

COMPETITIVE DYNAMICS

You're competing against: - Home Depot/Lowe's: They sell paint as a commodity. Your advantage: better selection, service, professional relationships. Maintain it. - Benjamin Moore: Independent, focuses on premium segment. Your advantage: scale, distribution. Maintain it. - Regional/private labels: Growing in price-sensitive segments. Your defense: cost structure and distribution. - E-commerce (Amazon, Wayfair, DTC brands): Growing faster than brick-and-mortar. Your defense: store experience, professional relationships, speed.

Competitive strategy: - Maintain premium positioning with pros (Sherwin-Williams is "the pro's choice") - Grow DTC to offset retail channel erosion - Don't compete on price with big-box retailers; compete on service and selection - Invest in store experience (modern stores, knowledgeable staff) as a competitive differentiator

THE HONEST ASSESSMENT

Sherwin-Williams is a great business in a slower-growth market. You're facing: - Housing deflation in key markets (structural, not cyclical) - Wage inflation in supply chain (not going away) - Competitive pricing pressure (not going away) - Macro slowdown (may be temporary, but likely persistent)

None of this is catastrophic. But it requires you to: - Accept lower growth (2-3% not 5-6%) - Manage margins actively (they won't auto-expand) - Focus on cash generation, not revenue growth - Return capital to shareholders - Position the company as a "stable income + modest growth" play

This is not the narrative you wanted to tell in 2026. But it's the narrative you need to tell in 2030, and it's still a good story.

The 2030 Report | Confidential Strategic Counsel | June 2030