Sherwin-Williams: Brushstrokes of Success - [Business Breakdowns, EP.183]

27:00Prior to the Valspar acquisition, the consumer brands group sold non -Sherwin -Williams brands such as HDTV by Sherwin -Williams and Dutch Boy Paint, Minwax, Thompson's Water Seal, Krylon, and Purdy Paint Brushes at home centers and hardware stores. This business more closely resembled the way many of Sherwin's competitors sold their paint in other people's stores with other people's employees. And the business had modest sales growth, but healthy high teens margins and low capital intensity. Valspar had a subscale, decently profitable consumer brands business, which sold Valspar paint and Cabot Stains to home improvement retailers, most notably at Lowe's, where it had a longstanding partnership, much like Bear Paint does at Home Depot.

27:46So this business was quite similar to Sherwin's own consumer brand segment. A few years prior to the Valspar acquisition, Sherwin had begun selling paint at Lowe's under this newly created HDTV by Sherwin -Williams brand. Whereas Masco's Bare Paint is the dominant paint brand at Home Depot, the Lowe's paint department was a bit of a jump ball with Valspar, PPG's Olympic brand, and Sherwin's HDTV brand. Not less than one year after the Valspar deal closed, Sherwin and Lowe's announced an agreement whereby Sherwin will become the exclusive paint supplier to Lowe's, effectively booting PPG from Lowe's' stores.

28:23Therefore, whereas Sherwin's paint store group was already the dominant paint supplier to professional painters, the Valspar acquisition allowed Sherwin to capture an even greater share of the DIY paint market, and thus the overall paint market. While the DIY market is not as attractive as the professional paint market for the reasons we discussed earlier, every additional gallon of paint that Sherwin can produce comes through at high incremental margins, so it is an accretive and strategic move. I would not expect much more than low single -digit sales growth from this division going forward.

28:55And Sherwin has been rationalizing the portfolio, selling off subpar brands and geographies. I also would not expect Sherwin to commit much more capital to this segment going forward, whereas that's not the case at the Performance Codings Group. On that Lowe's deal, it's such an interesting strategic move, which you mentioned, with the jump ball and then winning that business. Do you have any sense of what that looked like from a financial perspective, whether there was some type of an agreement on price or some type of sacrifice made on the margin just because you know you're going to see significant volume if you are the exclusive provider to Lowe's?

29:32Was there any context given just in terms of what that looked like? Sherwin never discussed particular financials related to something like that. But I think it really was a win -win. As I mentioned, for Sherwin, obviously, they captured even more share of the DIY paint market in additional paint gallons. But Lowe's now then got the best paint retailer in the country and the best paint manufacturer exclusively selling paint in their paint stores, using their own staff, helping them sell paint. So it really did benefit Lowe's as well to have a singular partner controlling their paint department.

30:09Whereas in most hardware stores, you're going to have competing brands. So you're not only trying to get one customer in the door to sell paint, you're then trying to sell them on which paint to buy. So it results in a little more of a confusing sale. And you mentioned that there is a difference here between the DIY side of the business and maybe the opportunity set there versus performance coatings, which could be more of an opportunity. Just describe more what performance coatings is. I'm picturing my outdoor furniture, which could require a coat of some type of paint and special stain, but let me know if there's more to it than that.

30:48And maybe some more examples would be helpful. Yeah. As I joked earlier about the ubiquity of coatings, it really shows up here in the industrial coatings industry where the end markets are incredibly diverse. Coatings on planes, trains, automobiles, ships, beverage cans, furniture, floors, appliances, metals, oil and gas, and infrastructure assets, and on and on. And unlike the US paint market, the global industrial coatings market is far more fragmented with many smaller players. However, industrial coatings categories vary significantly by quality, some great, some good, some close to commodities.

31:26It really depends on customer concentration, the price versus cost mix that we talked about with a professional painter, and then also the specifications of the paint. I imagine it can be an incredibly lucrative or highly specialized market to what you described. So where does Sherwin fit into that? Are they considered a real player in some of these sub -segments? Would you say they're still very much getting their feet wet? Just position them there. Prior to the Valspar deal, Sherwin's performance coding segment sold industrial coding to various end markets, such as automotive refinish, general industrial OEM, and industrial wood.

32:08At that time, the business was subscale, growing low single digit, mid single digit sales, and had less than 10 % segment margins, less than half to have the paint stores group. So Sherwin was really just another player in the industrial coding space. At that same time, Valspar had a large and highly profitable performance codings business, specifically in attractive higher growth end markets such as packaging and coil, where Sherwin did not have exposure. Therefore, the acquisition allowed Sherwin to gain significant scale in performance codings, expand into other end markets and geographies, and become one of the largest industrial codings companies globally, behind only PPG and Axo Nobel.

32:49And that gap in margin, it's interesting to hear. Is that largely just determined by having certain subsegments which are very fragmented? You have a lot of competition versus others where it's highly specialized and there's less competition. Is there anything else that's driving the margin difference between the two? Yeah, if you think about what makes the architectural coatings business such a great business on the Sherwin -Williams side, you have this extremely fragmented end customer base in the form of hundreds of thousands of professional painters across the country. You also have this extreme labor versus cost mix where the service element is so crucial.

33:33So therefore, the professional painter is willing to pay up for superior brand, superior service, and that results in the higher margins you see on the architectural coding side, not to mention the immense scale that Sherwin has. When you move to the performance coating side, the margin profile really will depend on that end market customer concentration, that mix between labor versus cost, and also how highly technical the paint is or the coatings are. It really does depend. In many instances, the coating suppliers are working closely with the manufacturers. They're almost specced in on the performance of the products.

34:16In some instances, these things are closer to commodities. Since the Valsper acquisition, Sherwin has been clear that they are interested only in end markets and customer groups that value differentiated products and services, much like how the professional painter does in the paint stores group. So I would expect to see more M &A from Sherwin in this space in the future. But I also expect management to be disciplined as well. Would something like automotive be commoditized in terms of the providers? I think of that as being a natural, interesting market. It's big. There's obvious differences between what you see there versus elsewhere.

34:55But how would that fit in that description that you just gave? Auto OEM is certainly close to the description you just described. There are consolidated customer bases. There are consolidated manufacturing bases. The labor versus cost mix is far more skews to the cost of paint. So the price of paint and coatings matters a lot more. But if you're talking about automotive refinish, which is where Sherwin is involved, that business looks a bit more similar to the professional paint market. Cars all over the country getting into accidents, having to be refinished at local auto body shops. So that business actually looks more similar to the professional paint business, fragmented end customers, more of a labor versus cost mix.

35:43And also the service element is a more crucial component. It's funny you bring that up. I've always wondered about the auto refinish market because it is so challenging. It's not like you nick something on your wall and you could just paint over it DIY. This requires a lot more. When you start to put all this together, I think we've described the segments. But when you put Sherwin together, can you just give some overview of how you think about top line just as a whole today? And I think you hit on growth rates a little bit. But if you have some type of equation for how you think about that volumes times price equation or anything else, that will be helpful to hear as we move into the financial model.

36:25So in 2023, the paint stores group generated nearly $13 billion in sales. As I mentioned earlier, that represents roughly 65 % of the total U .S. architectural paint market and perhaps closer to 75 % of the professional paint market. Over the last 10 years, the paint store group has compounded sales growth at 8 % per year. and that breaks down as roughly 6 % same -store sales growth and 2 % annual store growth. Sherwin's 8 % annual sales growth compares to the rest industry growing at a low single -digit rate and that Sherwin same -store sales growth breaks down as roughly 1 % to 2 % volume, 2 % price, and 1 % to 2 % share gains.

37:04And those 4 ,700 stores generate about 2 .7 million in sales per store. So these are highly productive stores comparing favorably to some of the best QSRs. I mean, for context, last year, Chipotle did about the same in sales per store as a Sherwin paint store. When you consider that a paint store costs about a million dollars to open, makes $600 ,000 in annual profit per store, the payback and returns are very attractive. So Sherwin's been opening about 80 to 100 stores per year for decades. And the runway for growth is still quite long, as we discussed. and it's always growing as new square footage is constantly added.

37:41And those share gains have been consistent over many years as Sherwin relentlessly outgrows the competition, who's mostly tied to other stores, while Sherwin adds new stores and sales reps every single year. Sherwin does not have a store base. It has a store network, drawing in painters with over 3 ,800 sales reps, nearly one per store, serving them with long -tenured store managers, sales reps, and delivery drivers. So as Sherwin's store network continues to grow, the value of the entire store network to pro painters also increases. This in turn draws in more painters and more of their spend and retains them with Sherwin's relentless focus on customer service.

38:24As a result, it leaves little incremental demand for competitors. Sherwin used to say for every two stores they opened, they forced the closure of three independent paint stores. And that stat bears out. Prior to the housing downturn, Sherwin had 3 ,000 stores out of 12 ,000 dedicated paint stores. When it had 4 ,000 stores in 2015, the rest of the market shrunk to 9 ,000 stores in the aftermath of the housing recession. And now as Sherwin closing in on 5 ,000 stores, the rest of the market is maybe around 8 ,000. In fact, earlier this year, PPG announced its intention to sell its U .S. and Canadian architectural coatings business.

39:04Despite being one of the larger and more tenured competitors in the industry, PPG revealed that its architectural paint business has been shrinking for years and is essentially break -even. This compares to Sherwin's paint store's group margin of over 20%. Also this year, another smaller paint manufacturer and retailer, Kelly Moore, filed for bankruptcy. So it does feel like we're reaching a tipping point in the industry, where it is Sherwin and no one else, at least as it relates to serving professional painters. Would Sherwin ever buy the PPG portfolio? Given their size in the market, I don't think it would be realistic from an antitrust standpoint.

39:44But that being said, I don't think Sherwin needs to buy PPG. Given their store base, given their employee base, they discuss on the call that they're going out and targeting all of that business that they know is now up for grabs. Yeah, they're doing this charade where the rest of the market is shrinking and everyone's just replacing it, which is interesting. And I guess they could do with PPG as well. Certainly interesting to track that development there. And on the actual store count itself, it sounds like the trend line has just gone in one direction. I'm curious, during the housing crisis, was there any type of pullback in the store count specifically where they actually had a net decrease in the number of stores?

40:27Or has that ever happened over the history where there's been a prolonged shrinkage of the footprint? No. Even during the Great Housing Recession, Sherwin kept opening stores, kept adding sales reps. So it really took advantage of the downturn and took advantage of weakened competitors. So really, it's never been nothing but constant new store growth. I guess during that recession too, if you're not going to buy a new house, You want to repaint your existing house. So you can always make the case for more paint. And combining that with the other segments or looking at the other segments and their potential growth rates, how did those fit?

41:04And do they add juice or dilute the growth rate of the overall business? The paint stores group will likely continue to be the fastest growing segment, growing at a mid to high single digit rate. Performance coding should grow at about a mid single digit rate, albeit with more volatility, given that many of the markets are linked to global industrial production, which can be more cyclical. But this is also the segment where Sherwin has the most white space to grow organically and also via M &A. So I would expect to see acquisitions add to overall sales growth here. And the consumer brands is likely a low single digit grower, growing below the rate of overall home improvement spend, given that exposure of the DIY categories.

41:46So adding it all up, I would expect Sherwin to continue to grow sales at a mid to maybe high single digit rate, barring any economic or housing downturn. And you mentioned M &A a few times. Beyond Valspar, have they been highly acquisitive over their history? Is that part of their DNA? With the exception of the large Valspar acquisition, Sherwin has grown mostly organically with small tuck -in acquisitions from time to time. But as I mentioned earlier, I would expect most future M &A to be in that performance coding segment, with Sherwin looking to gain greater scale in existing categories or geographies, or perhaps buy into a new attractive end market.

42:24Yeah, it seems like when there's an opportunity to do it, they have done it. But it's not necessarily the only route to growth. There's a huge organic history here. On the margin profile of the business, can you talk about how much it actually does fluctuate, how quickly they can pass on that pricing to customers and anything else you think is relevant in terms of the margins? Comedy gross margins are nearly 50%, which more closely resemble margins for some of the best known consumer brands rather than a building products or a chemicals company. And it speaks to the painter's willingness to pay up for Sherwin's superior brand and service.

43:0085 % of cogs are raw materials such as resins, latex, pigments, additives, solvents, and other products derived from various upstream petrochemical and related commodity feedstocks. So Sherwin's COGS can be volatile. As a result, there tends to be a lot of focus on this raw material basket, especially from sell -side analysts, many of whom cover the materials or chemicals industries. I believe Sherwin's shown time and time again that it has the ability to quickly and successfully pass through cost increases when necessary. Because paint represents only 10 % of a painting project, price increases do not have a meaningful impact on the total cost of a project.

43:40I mean, even a sizable 10 % price increase only adds 1 % to the total cost of a job. Whereas other paint suppliers need to haggle with their retail partners over price increases, Sherwin can just, with the press of a button, instantly change prices at its stores. Now, price negotiations with larger customers are not as simple as that. But since Sherwin's entire business model is dedicated to helping these paint contractors save money on the other 90 % of a project that is their own time and labor, Sherwin's earned the right to pass through price when necessary. So Sherwin truly has pricing power.

44:17And since paint represents a small percentage of a paint project, when raw materials fall, there's little incentive for any one supplier to cut price because it'll have little impact stimulating demand for new paint projects. Therefore, the industry, already highly consolidated, is also quite rational when it comes to pricing. And actually, highly inflationary cost environments tend to be catalysts for Sherwin to move gross margins structurally higher after cost inflation subsides. In such time periods, you'll usually see gross margins decline initially as higher costs are realized, followed quickly thereafter by price increases from Sherwin, which stabilize and begin to recover gross margins.

44:57And then inevitably, raw material increases subside, if not outright decline, while Sherwin then never lowers the price of a can of paint, allowing gross margins to rise even higher and set new baselines. This happened in the previous two inflationary environments in the 2010s. And it's what's happening right now after the latest highly inflationary environment during COVID. And that volatility, obviously, the trend line is still moving up and to the right. But from a 50 % as the baseline, how much of a swing do you see? Is it 45 %? Is it sub 40? Whether it's year to year, quarter to quarter, I know there's going to be a lot of noise, but how much volatility is there?

45:37There can be considerable volatility. If you look during the more recent COVID period, gross margins declined by about 400 basis points from peak to trough. And now they're recovering that and likely will march even higher. So the volatility in this line can be quite volatile, but it tends to correct fairly quickly over shorter periods of time. And then as you get into EBIT margins, profit margins, we've talked about R &D a bit here. I am curious about R &D. How much is there going on in paint? How much has paint evolved over the years? I know there's chemicals, there's all types of things, but how much is actually going on behind the scenes here?

46:21Is it a big budget? And how core is R &D to this story? It's a relatively small part of total sales. There is always R &D going on, improving paint performance, coatings performance. They're always coming up with new paint products that save time for professional painters, get them off the job sooner, make their projects look nicer. But really, when you think about the differences between paint, if you talk to a professional painter. Some like Sherwin -Williams a little better for this. Some like Benjamin Moore a little better for that. When you think about them preferring Sherwin -Williams by a margin of five to one, it's not because the paint is that much different.

47:03It's because the service is that much different. That makes sense. Yeah, I think a five to one difference. I don't know what the paint would have to do, but it would have to be pretty amazing. So I think that's one of those lines that I can certainly see the case for that. Anything else from a cost perspective or just general capital intensity? It sounds like new store buildouts are a big piece of this. What does it look like when you actually flow everything through the business and look at free cash flow and returns for Sherwin? Well, SG &A as a personal sales is around 30%, which is high relative to many peers.

47:40And that's because of Sherwin's controlled distribution model and its willingness to invest heavily in service for its professional painters. But these costs and investment are what distinguishes Sherwin from its peers, generates the intense loyalty from professional painters, and forms a moat around its business, so it's money well spent. As a result, total company operating margins are in the high teens, with the paint stores group being the most profitable at over 20%. The performance coding segment is next highest in the high teens. And if you recall, this segment pre -Valspar had margins in the high single digits.

48:15So Sherwin's benefit tremendously from increased scale, exposure to higher quality end markets, as well as synergies between the two businesses. And they think this business can also have 20 % margins as well. And lastly, margins at the consumer brands group have been more volatile, hovering around the mid -teens due to the fact that they sell through other stores with weaker sales growth and greater international exposure. Over time, total incremental margins have averaged around 25 to 30%. And I would expect share -in to continue to drive margins higher over time as it's done in the past. And then when you look at that margin profile profitability, what does the capital intensity look like for this business?

48:56The capital intensity of the business is rather low, with CapEx under 2 % of sales. CapEx is primarily for new store openings, which are about $8 ,200 per year, and also periodic expansion of manufacturing capacity. networking capital is around 11 % of sales. So with strong margins and low capital intensity, the business generates attractive tangible returns on invested capital at over 40%. And that's up from the mid 20s 10 years ago. So incremental returns on invested capital have been attractive. And free cash flow conversion has averaged over 100 % of net income over time. Impressive to have that.

49:34And I think when you were describing the new store openings and what the average store does in terms of cost versus profitability. It speaks to that. There's more to the business than that, but I think it's a very good proxy for it. On the margins point, that high teens, how does that look versus competitors? Are they sacrificing a bit on margin, but obviously having the market share gains from that? I'm just curious if you have context on where they rank versus peers. If we stick with architectural coatings and look at Masco's decorative architectural group. That is bare paint sold exclusively at Home Depot.

50:12On the surface, the margins don't look too different. Masco has high teens operating margins, which compares to Sherwin's paint stores group in the low 20s. And Masco has equally low capex, of course, without even the need to open stores. Although we get to the operating margins in a different way, with lower gross margins for Masco in the mid -30s versus over 50 % at Sherwin's paint stores because Masco is selling paint through someone else's store. But of course, lower SG &A as a percent of sales for Masco because they don't have to operate their own stores with their own employees. So the end result in terms of operating margins doesn't look too different.

50:52And actually, the last time we got a look at Ben Moore's financials prior to Berkshire acquiring them, They also had high teens operate margins by selling paint through other stores. But I think this is where a simple comparison of some financial metrics has tripped up investors in the past. The margin profiles aren't that different. Capital intensity, similarly low. They both sell paint. It's a mature industry. How different could the growth rates possibly be? Why not just buy the one trading at the cheaper valuation? Well, the key missing point is what we've discussed today. Sherwin's controlled distribution model, which allows it to control its brands, its customer relationships, pricing, and the pace and place of its stores and employees.

51:36So while the margins and even returns look somewhat similar, the growth rates have been anything but similar. As I mentioned earlier, Sherwin's paint stores have CAGR sales at 8 % for a decade, whereas Masco has grown at 3%. But even a CAGR understates those share gains over time. In those 10 years, Sherwin has added almost $7 billion in sales, whereas Masco has added under $1 billion. That's a 7x difference in 10 years. When Benmore went private in 2000, it had under a billion dollars of sales compared to $3 billion at Sherwin's paint stores. Over the next 20 plus years, Sherwin's paint stores have had $10 billion in sales versus what appears to be less than a billion at Ben Moore.

52:20So a 10x difference over the second most preferred brand by professional painters. So similar margins for Sherwin's peers, but much different growth rates. Yeah. Interesting to see what the trade -offs are and obviously much less capital intensity, but I'm surprised. I mean, 2 % of sales for CapEx is incredibly impressive. It suggests that there's not a ton that has to go into store maintenance and new store openings. Obviously, you're doing that on a much larger store count. So impressive free cash flow conversion begs the question, what happens with that free cash flow? Is it coming back to shareholders, dividends, buybacks?

52:57What's the general philosophy for the business? In terms of the use of free cash flow, with the exception of the large Valspar acquisition, Sherwin's grown mostly organically with small token acquisitions from time to time. As I mentioned earlier, I would expect most future M &A to be in the performance coding segment. Was Sherwin looking to gain greater scale in existing categories or geographies, or perhaps buy into a new attractive end market? After M &A, Sherwin's always had a consistent policy that it will not hold excess cash, choosing to return it to shareholders in the form of both dividends and buybacks.

53:30Sherwin's raised his dividend each of the past 45 years. And Sherwin's also been a consistent repurchaser of its own shares, with share count declining by 2 % per year on average. It's also shown the ability to be more opportunistic at times. During the post -GFC housing recession, Sherman retired roughly 15 % of its shares over a three -year period. Share cannibals we love on this podcast. So very interesting to hear. And on the balance bar acquisition, general M &A, when they're doing that, are they taking out a lot of leverage to acquire these business? Are they using cash on the balance sheet?

54:05Sounds like they haven't made a ton of huge acquisitions. So maybe there's not a specific philosophy. but what would you point to there just in terms of their willingness to add leverage to the balance sheet? So one other noteworthy attribute of the Valspar deal was that it also led to a more efficient capital structure at Sherwin -Williams. Prior to the Valspar deal, Sherwin always managed a balance sheet with less than a turn of leverage, below that of industry peers, which frustrated many investors and analysts who thought the business could support more leverage given the superior quality and consistency of its cash flows.

54:38While they're not wrong per se, I think management always knew there was a potential to acquire Valspar and didn't want to have to issue highly valuable equity in such a transaction. And rightfully so, Sherwin was able to purchase Valspar for over $11 billion entirely with debt. When you consider that Sherwin was a $30 billion market cap company at the time, this was a substantial deal to complete without having to issue stock. And lo and behold, not long after the deal, Sherwin committed to a more appropriate capital structure with leveraged targets of two to two and a half times. And of course, it didn't have to issue equity, which at the time was worth about $100.

55:15And today is closer to $360. So this was a clear sign that management is long -term focused, willing to be patient and ignore the market's short -term demands in order to create substantial long -term value for shareholders. I respect that. Yeah, that's an impressive number, impressive willingness to take on leverage and navigate through that and re -architect the capital structure there. Shifting a little bit, talked about the runway. There's obviously this historical precedent of how this business is run. It is a name that I think is loved. It's a cult compounder for many investors. When you think about approaching valuation as an investor, it's always tricky with these names where there's these long histories, but the valuation can just jump off a screen in terms of feeling expensive.

56:03So what's your general philosophy without having to take a view on the actual stock itself? How do you think about it for a business like Sherwin? Sherwin's always been a bit of a tweener. It's either viewed as a building products company or a chemicals company. I think both of those industries contain a lot of average to below average businesses. So when viewed through either one of those lenses, Sherwin's always seemed quote unquote expensive, relative to those peer groups, having traded around 20 times earnings for most of the last 15 years since the housing bust. I'd often hear, yeah, it's a better business, but its value is such.

56:39Investors can tend to homogenize things they don't totally appreciate. As a result, I think those comparisons have grounded Sherwin's multiple a bit and discounted the superior quality and durability of its growth and returns. Therefore, paying a modest premium to the market or peers for far superior growth in returns with less risk, it seemed like a bargain. And as such, Sherwin stock has compounded well in excess of the market and those peers over time, suggesting that its quote -unquote premium valuation was actually a discount. Today, I do think the market has developed a greater appreciation for some truly superior businesses such as Sherwin.

57:18And as such, perhaps future stock returns may be more modest given a higher starting point with regards to valuation, which is now close to 30 times earnings. Yeah. It's funny when you mentioned the 20 times being the premium, it feels like so long ago where that was the case. So it's a much different time now, but much different time for the overall market. And always interesting to hear, it's very hard to put a multiple on these businesses that are premium in nature because of the way that they operate and some of the financial characteristics. So I thought that was well laid out just in terms of your own philosophy.

57:52And always interesting to hear from investors on how they think about things. Talking on the risks of this business, I guess just to start out, the housing exposure in general, you've talked in a few different ways, whether it's new builds, whether it is existing home sales, but how much of a driver is just housing and how correlated is Sherwin to just the housing market in general? Yeah. So for all the reasons we discussed earlier, I think the competitive position of the paint stores group is close to unassailable. So you're right, the greatest risk factors for Sherwin are those outside of its control, most notably the overall health of the U .S.

58:29housing market, given the importance of the paint stores group to the overall company, as well as similar exposures within the consumer brands and performance codings group. With housing -related companies, you don't have to look too far back to consider worst -case scenarios in the form of the post -GFC housing bust. So from peak to trough 2007 to 2009, Sherwin's paint store sales declined by 15 % and paint store profits dropped by 20%. Total company profits dropped by closer to 30%. But as we discussed earlier, because there's a sizable maintenance element to the massive installed base of homes and buildings, and also the low cost, high value nature of paint projects, paint tends to be a more resilient home improvement category.

59:13So to put the paint store's 15 % sales decline in context, Home Depot sales, which are a better barometer of overall home improvement spend, declined by roughly 25 % over a similar period of time. Many other building products companies saw sales declines of 50%. And of course, Home Builders saw sales declines by 75 % on average. So in the context of the 100 -year flood for housing, Sherwin results were fairly resilient from an overall housing standpoint. However, I do think Sherwin benefited from outside share gains during that period, as it was able to continue to invest throughout the downturn, taking advantage of weakened competitors.

59:53Given that share of the professional paint market has become so large, at some point, its results will start to more closely mirror that of the broader paint market. While I think the long -term outlook for new home construction and home improvement spend is positive, as others have discussed in previous breakdowns of DR Horton and Home Depot. We are in a bit of a soft patch at the moment. And to the extent where you'll see continued softness in the broader housing market or a more severe downturn, Sherwin would not be immune, but I think it would once again prove more resilient than many other housing categories.

1:00:27That certainly makes sense. And are there other things beyond housing that you look at as risks for the business? What stands out to you? Yeah, outside of the housing market, could there be some substitution risk in the form of wallpaper making a comeback? It would only be a risk for the interior portion of residential repaint. So it'd be confined to a third of the market. And of course, it'd only recapture a small share of it. So its overall impact would be modest. And lastly, while I don't see this as a risk necessarily, and it might be just as much of an opportunity, but I do think it's something that bears watching, there is new management at Sherwin.

1:01:09As I mentioned earlier, the prior two CEOs who managed the company for the last 20 years not only came from the paint stores group, but came up through the ranks of the paint stores group. Sherwin's newly appointed CEO not only has not come from the paint stores group, but comes from outside the company, having joined from the Valspar acquisition. With the paint stores group already so dominant and a well -oiled machine at that, the hiring of someone not from the paint stores group likely signals to me that a bit more of management focus and capital allocation will be directed towards performance coatings, where I mentioned there's more white space in terms of organic and inorganic investment.

1:01:47And while I do not think incremental returns at performance coatings are as high or as much of a sure thing as opening another paint store, I'm sure when shown that it can still be attractive and a creative shareholder value, but this is something investors should monitor. Yeah, it's at least an interesting evolution for the business. And to your point on wallpaper, the Russell household has certainly leaned into the new wallpaper trend that is going on. But to your point, definitely not a DIY project, or if it is a lot more room for error than paint. So it feels like it would be small, but I certainly hear a point on it being a substitutable product.

1:02:21This has been great, Todd. We close these conversations out, as you know, with the lessons that you can pull away? Feels like there's quite a few for Sherwin, but I wonder what stands out to you as an investor in terms of lessons that could apply elsewhere. So Boeing has been in the news a lot the last few years as the poster child for what can go wrong when you outsource too much of your business to others, among other things. Unlike all of Sherwin's competitors who have also taken an outsourced approach, selling their paint through other stores, with others' employees. Sherwin's willingness to own and operate all critical aspects of its business through its controlled distribution model, with all of the associated operating capital expenses that come with it, shows that operators should think carefully about what aspects of their business they outsource to others.

1:03:10While it might make a business more profitable and are less capital intensive in the near term, you might be tying the fortunes of your business to others more than you appreciate. Sherwin's business model has always allowed it to control its own destiny. And I think that's been one of the most important factors in success over time. Great answer. Honestly, I've been looking for a counterexample to Boeing. And I just sat through this conversation and hadn't come to it. But it has become so popular to outsource. And I think vertical integration has become less and less popular, conglomerates less and less popular for obvious reasons.

1:03:43But we have a great example here of what the long -term view can do. So thank you for pulling that lesson out. Thank you for sharing the knowledge on Sherwin. It's been a pleasure. Matt, thanks for having me. This was fun. To find more episodes of Breakdowns ranging from Costco to Visa to Moderna, or to sign up for our weekly summary, check out joincolossus .com. That's J -O -I -N -C -O -L -O -S -S -U -S .com.