The Sherwin-Williams (SHW)

Q4 2011 Earnings Call

January 26, 2012 11:00 am ET

Executives

Sean P. Hennessy - Chief Financial Officer and Senior Vice President of Finance

Christopher M. Connor - Chairman and Chief Executive Officer

Robert J. Wells - Senior Vice President of Corporate Communications & Public Affairs

Analysts

Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

P.J. Juvekar - Citigroup Inc, Research Division

Jeremy Ridder Brunelli - Consumer Edge Research, LLC

Brian Maguire - Goldman Sachs Group Inc., Research Division

Charles Edward Cerankosky - Northcoast Research

Unknown Analyst

Nils-Bertil Wallin - CLSA Asia-Pacific Markets, Research Division

Eric Bosshard - Cleveland Research Company

Christopher J. Nocella - Barclays Capital, Research Division

Gregory S. Melich - ISI Group Inc., Research Division

John E. Roberts - Buckingham Research Group, Inc.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Dennis McGill - Zelman & Associates, Research Division

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Dmitry Silversteyn - Longbow Research LLC

Presentation

Operator

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Good morning. Thank you for joining the Sherwin-Williams Company's review of fourth quarter and full year 2011 results and expectations for 2012. With us on today's call are Chris Connor, Chairman and CEO; Sean Hennessy, Senior Vice President, Finance, and CFO; Al Mistysyn, Vice President, Corporate Controller; and Bob Wells, Senior Vice President, 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 2 hours after this conference call ends and will be available until Thursday, February 16, 2012, at 5 p.m. Eastern Standard Time.

This conference call will include certain forward-looking statements as defined under U.S. 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. [Operator Instructions]

I will now turn the call over to Chris Connor.

Christopher M. Connor

Thank you, Jacky, and good morning, everyone. Thanks for joining us. The company finished 2011 on a very solid footing, and 2012 was off to a strong start. We're looking forward to sharing these results with you and taking your questions. But before we get to that, let me take a moment to comment on an important change in our reporting structure.

This morning, the company filed an 8-K announcing the change in our reportable operating segments. Beginning with the fourth quarter of 2011, we increased our reportable operating segments from 3 to 4 due to the continued revenue growth, geographic expansion and end-market diversity of our Global Finishes Group. The Latin American Coatings Group, previously aggregated within the Global Finishes Group, will now be reported as a stand-alone segment. The remaining Global Finish Group businesses, mainly automotive finishes, our OEM product finishes, and protective and marine coatings will make up the company Global Finishes Group reportable operating segment.

This change will provide better visibility into the operations and financial performance of these businesses. The segregation makes sense and that our Latin American Coatings Group sells primarily architectural products in a specific geography, whereas the businesses on our Global Finishes segment service industrial end markets worldwide. Information about the composition of each of our reportable operating segments is included in the 8-K filed this morning.

For comparison purposes, the 8-K filing also includes updated results for each calendar quarter of 2011, as well as full year results for these new segments for 2010 and 2009. All this information can be accessed through our company website under the Investor Relations/SEC filings tab.

I'll now turn the call over to Bob Wells to review our fourth quarter and full year results, then I'll be back to comment on our performance in 2011, as well as give our outlook for 2012. Bob?

Robert J. Wells

Thanks, Chris. In order to allow more time for questions, we've provided balance sheet items and other statistical data on our website at sherwin.com, under Investor Relations 2010 Year-end Press Release. Summarizing overall company performance for the fourth quarter and full year 2011, consolidated sales for the fourth quarter increased 9.2% to $2.07 billion due primarily to selling price increases, acquisitions and higher paint sales volume. For the full year, sales increased 12.7% to $8.77 billion. Sales from acquisitions increased consolidated net sales 0.7% in the quarter and 4.5% for the year.

Currency translation rate changes decreased consolidated net sales 1.2% in the quarter and increased sales 0.7% for the year. Consolidated gross margin in the fourth quarter decreased to 42.8% of sales from 44.6% in the fourth quarter of 2010. For the year, gross margin decreased to 42.7% of sales from 44.8% last year. The decrease in gross margins for the quarter and year was primarily due to higher year-over-year raw material costs.

Selling, general, administrative expense in dollars increased $33.6 million in the fourth quarter compared to fourth quarter last year, but decreased as a percent of sales to 36.4% from 38% in the same quarter last year.

For the full year 2011, SG&A expense increased $232.7 million but also decreased as a percent of sales to 33.8% from 35.1% in 2010. Incremental SG&A from acquisitions and new stores accounted for the majority of the SG&A increases in the year.

Our fourth quarter 2011 asset impairment charge of $5.5 million compared to a fourth quarter asset impairment charge last year of $4.5 million. Interest expense for the quarter decreased $11.8 million to $9.6 million. For the year, interest expense was $42.5 million compared with $70.6 million in 2010.

And as a reminder, fourth quarter and full year 2010 interest expense included costs associated with the repurchase of long-term debt. The incremental interest expense related to the repurchase of this debt reduced 2010 diluted net income per common share by approximately $0.04 in the fourth quarter and $0.12 for the full year.

Our effective income tax rate for the fourth quarter 2011 increased to 88.8% from 29.7% in the fourth quarter of 2010. Our fourth quarter '11 income tax expense includes a onetime after-tax charge of approximately $75 million to satisfy our settlement with the IRS. For the year, our effective tax rate was 40.4% compared to 31.8% in 2010.

Consolidated net income for the quarter decreased by $58.4 million to $14.5 million. For the year, net income decreased $20.6 million to $441.9 million. Net income as a percent of sales decreased to 70 basis points from 3.8% in the fourth quarter last year. This decrease was due entirely to the IRS settlement. For the year, net income as a percent of sales decreased to 5% from 5.9% in 2010 for largely the same reason.

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