Sherwin Williams Company Q1 2010 Earnings Call Transcript

Sherwin Williams Company Q1 2010 Earnings Call Transcript
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Sherwin Williams Company (SHW)

Q1 2010 Earnings Call

April 22, 2010, 11:00 AM ET

Executives

Christopher Connor - Chairman and CEO

Sean Hennessy - Sr. Vice President, Finance and Chief Financial Officer

John Ault - Vice President, Corporate Controller

Bob Wells - Vice President, Corporate Communications

Analysts

Kevin McCarthy - BoA/ML

PJ Juvekar - Citigroup.

Dennis McGill - Zelman & Associates

Jeff Zekauskas - JP Morgan

Sergey Vasnetsov - Barclays Capital

Chuck Cerankosky - Northcoast Research

Don Carson - UBS

Dmitry Silversteyn - Longbow Research

John Roberts - Buckingham Research

Eric Bosshard – Cleveland Research Company

Steve O'Neil - Hilliard Lyons

Mike Sison – Keybanc Markets

Presentation

Operator

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

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 has concluded and will be available until Wednesday, May 12 at 5:00 pm Eastern standard time.

This conference call will include certain forward-looking statements as defined under U.S. federal securities law 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 first quarter results, we will open the session to questions. I will now turn the call over to Bob Wells.

Bob Wells

Thanks Jackie.

In order to allow more time for questions, we have provided balance sheet items and other selected information on our website at www.sherwin.com under investor relations, first quarter press release.

Summarizing overall company performance for the first quarter 2010 versus first quarter 2009, consolidated net sales increased 1% to $1.565 billion due primarily to favorable foreign currency translation rate changes partially offset by declines in domestic paint sale volume.

Consolidated gross profit dollars increase $11.4 million for the quarter to $692 million. Gross margin increased 30 basis points to 44.2% of sales from 43.9% in the first quarter last year.

Selling general and administrative expenses for the quarter were essentially flat compared to first quarter 2009 at $612.9 million. As a percent of sales, SG&A decreased 39.1% in the first quarter this year from 39.3% last year. Interest expense decreased $600,000 compared to first quarter last year. Consolidated profit before taxes in the quarter increased $8.6 million or 16.8% to $59.5 million.

Our effective tax rate in the first quarter this year was 45.2% compared to 26.7% in the first quarter of 2009. The first quarter rate this year reflects the one time increase in income tax expense of $11.4 million related to the Health Care And Education Reconciliation Act passed by Congress in March of this year, which raised our effective rate by 19.2% for the quarter.

For the full year 2010 we expect our effective tax rate would be approximately 35% including the effect of the health care legislation. Last year's rate was 30%. Consolidated net income decreased $4.7 million to $32.6 million from 37.3 million in the first quarter of 2009 due to the health care tax effect. Net income as a percent of sales was 2.1% compared to 2.4% in the first quarter last year.

Diluted net income per common share for the quarter decreased to $0.30 per share from $0.32 per share in 2009. The tax impact of the health care legislation reduced diluted net income per common share by $0.10 in the quarter. Looking at our results by operating segment, sales for our paint stores group in the first quarter 2010 decreased 5.3% to $850.9 million. Comparable store sales or sales by stores opened more than 12 calendar months declined 5.4%. The decrease in sales for the segment was due primarily to a decline in paid sales volume and non-paid sales volume.

Regionally in the first quarter, our mid-west division led all divisions followed by eastern division, southeastern division and southwestern division. Segment profit for the group decreased 15.6% to $47.8 million in the first quarter 2010 due primarily to lower volume. Segment operating margin decreased to 5.6% from 6.3% in the first quarter last year due primarily to lower volume and raw material cost increases that were partially offset by reductions in SG&A.

Turning to our consumer group, sales in the first quarter increased 1.4% to $292.1 million. The increase was due primarily to new product introductions partially offset by soft DIY demand at some retail customers. Segment profit for the consumer group increased 24% in the quarter to $37.5 million. Segment profit as a percent of external sales increased to 12.8% from 10.5% in the same period last year. The improvement in operating margin was due primarily to continued stringent expense control and cost reductions related to facility closings completed during the past year that were partially offset by raw material cost increases and reduced fix cost absorption from lower manufacturing and distribution volume.

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