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Sherwin-Williams CEO Discusses Q3 2010 Results - Earnings Call Transcript

Sherwin-Williams CEO Discusses Q3 2010 Results - Earnings Call Transcript

Sherwin-Williams Co. (

SHW

)

Q3 2010 Earnings Call

October 26, 2010 11:00 am ET

Executives

Bob Wells - SVP, CC and Public Affairs

Chris Connor - Chairman and CEO

Sean Hennessy - CFO, SVP - Finance

Analysts

Kevin McCarthy - Bank of America Merrill Lynch

Jeff Zekauskas - JPMorgan

PJ Juvekar - Citi

Dennis McGill - Zelman & Associates

TheStreet Recommends

John Roberts - Buckingham Research

Douglas Chudy - Keybanc Capital

Dmitry Silversteyn - Longbow Research

Eric Bosshard – Cleveland Research

Matt McGinley - ISI Group

Chuck Cerankosky - Northcoast Research

Carly Mattson - Goldman Sachs

James Ainley - Citigroup

Paul Mann - Morgan Stanley

Presentation

Operator

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Previous Statements by SHW
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» Sherwin-Williams Q3 2009 Earnings Call Transcript

Good morning. Thank you for joining The Sherwin-Williams Company’s review of the third quarter 2010 financial results and expectations for the full year. With us on today’s call are Chris Connor, Chairman and CEO; Sean Hennessy, Senior Vice President of Finance and CFO; Al Mistysyn, Vice President, Corporate Controller; and Bob Wells, Senior Vice President Corporate Communications and Public Affairs.

This conference call is being webcast simultaneously in listen-only mode by Vcall via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com beginning approximately two hours after this conference call concludes and will be available until Monday, November 15, 2010 at 5:00 pm Eastern Time.

This conference call will include certain forward-looking statements as defined under US federal securities laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the company’s earnings release transmitted earlier this morning.

After the review of third quarter results, we will open the session to questions. I will now turn the call over to Bob Wells.

Bob Wells

Thank you Claudia. In order to allow more time for questions we provided balance sheet items and other selected information on our website at sherwin.com under Investor Relation's third quarter press release. Summarizing overall company performance for the third quarter 2010 versus third quarter '09, consolidated net sales increased $175.4 million or 8.8% to $2.172 billion due primarily to acquisitions, selling price increases, higher sales volume and favorable foreign currency translation rate changes. Favorable currency translation increased consolidated net sales 0.6% in the quarter and acquisitions increased net sales by 3.4%. Consolidated gross profit dollars increased $42.6 million to $971.6 million.

Gross margin decreased 180 basis points to 44.7% of sales from 46.5% in the third quarter last year. The decrease in gross margin was primarily due to higher year-over-year raw material prices which included certain spot market material purchases tied to supplier plant shut down. Selling, general and administrative expenses for the quarter increased 7.6% to $703.7 million due primarily to incremental SG&A from acquisitions, currency translation rate changes, higher service costs resulting from increased sale and higher freight and distribution costs to maintain customer service levels.

As a percent of sales, SG&A decreased to 32.4% in the third quarter this year from 32.8% last year. Net interest expense increased $2.8 million compared to the third quarter last year. Consolidated profit before taxes in the quarter decreased $3.3 million or 1.3% to $255.4 million. Profit before tax decreased as a percent of sales to 11.8% from 13% last year.

Our effective tax rate in the third quarter this year was 31.4% compared to 32.3% in the third quarter of 2009. For the full year 2010, we expect our effective tax rate to increase slightly to 32% compared to last year's rate of approximately 30%.

Consolidated net income was essentially flat at $175.3 million compared to $175.2 million in the third quarter of 2009. Net income as a percent of sales declined to 8.1% from 8.8% in the third quarter last year. Diluted net income per common share for the quarter increased $0.09 or 6% to $1.60 per share from a $1.51 per share in 2009. Acquisitions reduced diluted net income for common share by $0.02 per share in the quarter which was partially offset by favorable currency fluctuation rate changes which increased diluted net income for common share by $0.01 per share.

Looking at our results by operating segment, sales for our Paint Stores Group in the third quarter increased 5.4% to $1.286 billion. Improving architectural paint sales to residential repaint contractors and DIY customers and selling price increases more than offset continued weakness in new residential and commercial markets.

Comparable store sales that is sales by stores open more than 12 calendar months increased 5.1% in the quarter compared to the third quarter last year. Regionally in the third quarter 2010, our south eastern division led the sales performance followed by mid west division, south west division and eastern division.

Sales by all four paint store divisions increased in the third quarter compared to last year. Segment profits for the group decreased $5.1 million or 2.2% to $225.1 million in the quarter, as higher year-over-year raw material costs and selling, general and administrative expenses more that offset selling price increases.

Operating margin decreased to 17.5% from 18.9% in the third quarter last year. During the quarter, Paint Stores Group opened 12 new stores and closed four redundant stores.

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