The Sherwin-Williams (SHW)

Q4 2010 Earnings Call

January 25, 2011 11:00 am ET


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

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

Christopher Connor - Chairman and Chief Executive Officer


Gregory Melich - ISI Group Inc.

Stephen East - Ticonderoga Securities LLC

Deandis McGill

Brian Maguire

Andrew Dunn

Donald Carson - Susquehanna Financial Group, LLLP

Jeffrey Zekauskas - JP Morgan Chase & Co

Dennis McGill - Zelman & Associates

John Roberts - Buckingham Research Associations

Kevin McCarthy

Eric Bosshard - Cleveland Research

Dmitry Silversteyn - Longbow Research LLC

P.J. Juvekar - Citigroup Inc

Charles Cerankosky - Northcoast Research



Good morning. Thank you for joining the Sherwin-Williams Company as we review our full quarter and full year 2010 results and expectations for 2011. 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 via Vcall via the Internet at An archived replay of this webcast will be available at beginning approximately two hours after this conference call ends and will be available until Tuesday, February 15, 2011, at 5 p.m. Eastern 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. After the review of our fourth quarter and full year results and 2011 expectations, we will open this session to questions. I will now turn the call over to Bob Wells.

Robert Wells

Thanks, Claudia. In order to allow more time for questions, we've provided balance sheet items and other statistical data on our website,, under Investor Relations, 2010 Year-End Press Release.

Summarizing overall company performance for the fourth quarter and full year 2010, consolidated sales for the fourth quarter increased 18.6% to $1.9 billion due primarily to acquisitions, higher paint sales volume and selling price increases. For the full year, sales increased 9.6% to $7.78 billion. Sales from acquisitions increased consolidated net sales 8.7% in the quarter and 3.4% for the full year. Currency translation rate changes increased consolidated net sales 4/10 of 1% in the quarter and 1.2% for the year. Consolidated gross margin in the fourth quarter decreased to 44.6% of sales from 47.4% in the fourth quarter of 2009. For the year, gross margin decreased to 44.8% of sales from 46% last year. The decrease in gross margin for the quarter and [Audio Gap] year was primarily due to higher year-over-year raw material costs.

Selling, general and administrative expense in dollars increase $101.7 million in the fourth quarter compared to fourth quarter last year, a decrease as a percent of sales to 38% from 38.7% in the same quarter last year. For the full year 2010, SG&A expense increased $193.3 million but also decreased as a percent of sales to 35.1% from 35.7% in 2009. Incremental SG&A from acquisitions, higher service costs resulting from increased sales and higher freight and distribution costs accounted for the majority of the SG&A increase in the quarter and year.

A fourth quarter asset impairment charge of $4.5 million was offset by a reduction in environmental expenses related to the disposition of closed manufacturing sites in the quarter. As a reminder, in the fourth quarter last year, asset impairment charges and a loss on the dissolution of a foreign subsidiary reduced diluted net income per common share for the quarter by approximately $0.13 per share.

Interest expense for the quarter increased $12.4 million to $21.4 million, reflecting costs associated with the repurchase of $51.6 million in long-term debt. For the year, interest expense was $70.6 million, an increase of $30.6 million over 2009. The incremental interest expense related to the repurchase of long-term debt reduced diluted net income per common share by approximately $0.04 in the quarter and $0.12 for the full year. Our effective income tax rate for the fourth quarter 2010 increased to 29.7% from 19.5% in the fourth quarter of 2009. Our fourth quarter tax rate last year was reduced by the tax effect of the dissolution of a foreign subsidiary. For the year, our effective tax rate was 31.8% in 2010 compared to 30% in 2009.

Consolidated net income for the quarter increased by $7.6 million, or 11.6%, to $72.9 million. For the year, net income increased $26.6 million, or 6.1%, to $462.5 million. Net income as a percent of sales decreased to 3.8% from 4.1% in the fourth quarter last year. This decrease was due primarily to lower gross margin and the dilutive effect of the acquisition. For the year, net income as a percentage of sales decreased to 5.9% from 6.1% in 2009, largely for the same reasons. Diluted net income per common share for the fourth quarter of 2010 increased to 15.5% to $0.67 per share from $0.58 per share in the fourth quarter last year. Acquisitions reduced diluted net income per common share in the quarter by $0.05 per share. Currency translation rate changes had no material impact on fourth quarter diluted net income per common share. For the year, diluted net income per common share increased 11.4% to $4.21 from $3.78 per share in 2009. Acquisitions reduced full year diluted net income per common share by $0.10 per share, and favorable currency translation rate changes increased full year diluted net income per share by $0.05 per share.

Now I'd like to review our performance by segment. Sales for our Paint Stores Group in the fourth quarter 2010 increased 8.6% to $999.3 million. For the year, net sales increased 4.1% to $4.38 billion. Sales increases in the quarter and year resulted primarily from selling price increases and gradually improving architectural paint sales volume to residential repaint contractors and DIY customers.

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