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Sherwin Williams Company (NYSE:SHW)

Q2 2010 Earnings Call

July 22, 2010 11:00 am ET

Executives

Christopher Connor - Chairman and CEO

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

Bob Wells - Vice President, Corporate Communications

Al Mistysyn - Corporate Controller

Analysts

Kevin McCarthy - BoA/ML

PJ Juvekar - Citigroup.

Jeff Zekauskas - JP Morgan

Chuck Cerankosky - Northcoast Research

John Roberts - Buckingham Research

Eric Bosshard – Cleveland Research Company

Steve O'Neil - Hilliard Lyons

Eugene [Saltalz] – Longbow Research

Amy Zang – Goldman Sachs

Douglas [Chetti] of Key Bank

Ivy Zoman [Scott] – Zoman & Associates

Saul Ludwick – Northcoast Research

[RonViswanahan] – Susquehanna

Robert Gooch – Mac Capital

Robert Court – Goldman Sachs

Operator

Good morning. Thank you for joining the Sherwin Williams Company Review of the Second Quarter 2010 Financial Results and Expectations for the Third Quarter and Full Year.

With us on today’s call are Chris Connor - Chairman and CEO; Sean Hennessy - Sr. Vice President, Finance and CFO; Al Mistysyn, Corporate Controller; and Bob Wells – Sr. Vice President, Corporate Communications and Public Affairs.

This Conference call is being webcast simultaneously in listen-only mode by the VCall, via the internet at www.sherwin.com. An archive briefly of this webcast will be available at www.sherwin.com, beginning approximately two hours after this conference call concludes and will be available until Wednesday, August 11, 2010 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 of 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 Second Quarter results, we will open this session to questions. I will now turn the call over to Bob Wells. (Operator Instructions)

Bob Wells

Thanks, Jackie. In order to allow more time for questions, we’ve provided balance sheet items and other selected information on our website at sherwin.com, under Investor Relations Second Quarter Press Release.

Summarizing overall company performance for the Second Quarter 2010 verus Second Quarter 2009; consolidated net sales increased $195.2 million, or 10% to $2.14 billion to primarily to improve architectural sales, acquisition, and favorable foreign currency translation rate changes.

Acquisition increase net sales by 1.9% in the quarter, and favorable currency translation rate increased consolidated net sales 1.3%. Consolidated gross profit dollars increased $76.5 million for the quarter to $971.9 million.

Gross margin decreased 60 basis points to 45.4% of sales from 46% in the Second Quarter last year. Selling, general and administrative expenses to the quarter increased 5.9% to $691.2 million.

At the percent of sales, SG&A decreased to 32.3% in the Second Quarter this year from 33.5% last year. Interest expense, increased $16 million compared to the Second Quarter last year. Consolidated profit before taxes in the quarter increased $27.1 million or 11.7% to $259.2 million.

Our expected tax rate in the Second Quarter this year was 29.9% compared to 31.9% in the Second Quarter of 2009. For the full year of 2010, we expect our effected tax rate to be approximately 33%.

Consolidated net income, increased $23.7 million to $181.7 million from $158 million in the Second Quarter of 2009. Net income at the percent sales was 8 1/2 % compared to 8.1% in the Second Quarter last year. Diluted net income for common share for the quarter increased 21 1/2% to $1.64 per share, from $1.35 per share in 2009.

Looking at our results by operating segments, sales for our paint store group in the Second Quarter, 2010 increased 6.4% to $1.24 billion. Comparable store sales, sales by stores open more than 12-calender months, increased 5.9%. The increase in sales for the segment was due to improved domestic architectural paint sales, primarily to residential repaint contractors and improving protective and marine product sales.

Regionally in the Second Quarter, our Eastern Division led all division, followed by Southeastern Division, Midwestern Division, and Southwestern Division.

Sales by all four paint stores divisions increased in the Second Quarter compared to last year. Segment profit for the group, increased 9 1/2% to $212 million in the Second Quarter 2010. Segment margin, increased to 17% from 16 1/2 % due primarily to higher sales volume and effective SG&A control.

During the Second Quarter, paint store group opened seven new stored and closed four redundant store locations.

Turning to our consumer group, sales in the Second Quarter increased 11.9% to $410.2 million. The increase was due primarily to improving demand at some of the segment’s retail, industrial, and institution customers.

Segment profit for the consumer group increased 22.1% in the quarter to $80.7 million. Segment profit at the percent of external sales, increased in 19.7% from 18% in the same period last year, due primarily to effective cost control and cost savings realized from previous year’s site rationalizations that were practically offset by raw material cost increases.

For our global finishes group, sales in U.S. dollars increased 18.8% to $486.5 million in the quarter, due primarily to acquisition, favorable currency, translation, rate changes, and higher paint sales volume.

For the quarter, acquisition increased global finishes group net sales by 9.2%, and favorable currency translation rate changes, added 5% to net sales in U.S. dollars.

Second Quarter segment profit, increased 28.2% to $40 million, due to higher sales volume, good expense control, and currency translation. The combined effect of positive foreign currency rate changes, and a negative impact of acquisition’s, including all transaction cost, slightly reduced global finishes group, segment profit in the quarter.

Turning to the balance sheet, our total debt, on June 30, 2010, was $908.6 million, including total short-term borrowing of $199.5 million. Total debt on June 30, 2009 was $800.7 million. Our cash balance at the end of the quarter was $48.4 million, compared to $49.3 million at the end of the Second Quarter 2009.

Total borrowing capitalizations were 37.2% at the end of the quarter verus 31.6% at the end of the Second Quarter last year. Long-term debt capitalization, with 29.1% at the end of the Second Quarter this year, compared to 11.9% last year.

In the Second Quarter 2010, we spent $22 million on capital expenditures. Depreciation expense was $33.1 million and amortization expense was $6.5 million.

For the full year of 2010, we anticipate capital expenditures for the year will be approximately $100 to $115 million, depreciation will be about $147 million, and amortization will be about $26 million.

I’ll conclude my remarks on the quarter with a brief update on the status of our lead pigment litigation.

In California, State Supreme Court will decide whether it is permissible for cities and counties to retain contingency council to aid them in their suit against former manufactures of lead pigment. Briefing is completed, oral argument was held on May 5, 2010, and we expect a decision sometime this summer.

The Gains Case, a single-plaintive, personal injury suit, was tried to a jury in Jefferson County, Mississippi, beginning in June 2009. The jury returned a verdict in favor of the plaintive. The Company has filed a notice of appeal with the Mississippi Supreme Court and briefing has now begun.

We recently filed our opening brief. We expect plaintive to file their brief within the next 60 days, at which time we’ll have an opportunity to file a reply brief. No hearing date has been set yet, and a decision is not expected until at least late 2010 or early 2011.

That concludes our review of results for the Second Quarter 2010. So I’ll turn the call over to Chris Connor who will make some general comments and highlight our expectations for Third Quarter and Full Year. Chris.

Chris Connor

Thanks, Bob. And good morning everybody. Thanks for joining us today.

Second Quarter of 2010 was a solid quarter for Sherwin Williams, in many respects. It was our strongest quarter in terms of sales growth, in the last four years, dating back to the First Quarter of 2006. After backing out acquisition’s and positive currency translation, revenues increased nearly 7% verus the Second Quarter of last year. Our domestic Architectural paint business improved across all end-user segments, led by particularly strong volume gains and residential repaint market.

Domestic and international sales of automotive finishes, OEM product finishes, and protective and marine coatings also rebounded nicely in the quarter compared to the Second Quarter of last year. It was a solid quarter in terms of earnings improvement as well. Although, we did experience some year-over-year gross margin compression resolving from a rapid increase in raw material cost, primarily a acrylic latex and titanium dioxide, and higher operating cost we incurred to compensate for the poor service performance of a major raw material supplier.

These included the cost of transferring raw materials between manufacturing plants, moving finished goods between distribution centers, and between stores, lower plant productivity due to raw material outages and higher-cost spot by to compensate for poor service levels.

Although, these raw material supply problems are being resolved as we speak, many of these higher cost will continue to pressure our margin in the near term.

We have been responding to the mounting raw material cost pressures by appropriately tightening SG&A expense control and raising prices where necessary. SG&A as a percent of sales for the quarter, decreased 120 basis points, compared to last year, which is noteworthy considering the incremental service expense required to support double-digit sales growth.

All three of our reportable segments, posted strong, operating margin increases in the quarter. Combined profits for the three segments, increased by $42 million, more than 14%, and combined segment profit margin increased 60 basis points at 15 ½ %.

Our interest expense for the quarter increased by $16 million over last year as we took advantage of an opportunity to repurchase $85 million in long-term debt. In this particular case, long term means bonds maturing in 2097.

The financial metric were favorable and it’s repurchased allows for greater flexibility for our balance sheet going forward. The decision to take advantage of this opportunity impacted our earnings performance for the quarter by $0.08, it will be reflected in our guidance estimate for our total year earning as well.

In spite the gross margin pressure I mentioned earlier, and the higher interest expense, our consolidated net income for the quarter rose 15% and diluted earnings per common shares increased 21 1/2 %.

In the first 6 months of 2010, we generated $211 million in net operating cash. This was down slightly from the 260 million range in the first half of last year, due primarily to a $78 million increase in accounts receivable as a result of higher sales.

We’ve continue to invest this company’s cash to expand our control distribution platform, complete suitable acquisition as well as purchase shares of stack for treasury.

During the first six months of the year, our paint stores group opened 13 new store locations, and consolidated seven redundant stores. We finished the quarter with 3,360 stores in operation, compared to 3,340 this time last year.

Once again, for the full year, we expect to open between 40 and 50 new stores, and slow the pace of redundant store closings. Over the past 2 ½ years, our net store count has increased by 35 stores, but it was 35 the hard way. During this time, we’ve opened 166 store locations in new markets, and closed 131 redundant locations. Primarily stores we’ve acquired over the past six years that were located in close proximity to existing Sherwin Williams Stores.

The exposure to new markets we achieve, would be 166 new store openings, it’s giving a significant advantage in receiving new customers as well as servicing existing ones.

On April 1, we completed the acquisition of Arch Chemical’s Industrial Wood Coatings business, which trades under the Sayerlack brand name. In late May, we announced a definitive agreement to acquire Becker Acroma, one of the largest global manufactures of industrial wood coatings.

These two European-based companies with combined annual sales of approximately $450 million, serve the joinery, kitchen cabinet, furniture, and wood flooring industries worldwide. They represent another important step in our efforts to strengthen our growing, global-industrial coatings platform, to better serve our customers around the world with outstanding assets, technology and people.

During the quarter, we used the companies cash to buy back 1.5 million shares of our common stock on the open market, bringing our year-to-date total of 2.35 million shares. On June 30, we had remaining board authorization to purchase 8.4 million shares of stock. We remain cautiously optimistic about the resilience of the architectural repaint market in the America’s, and global demand for most industrial coatings.

Our outlook for the Third Quarter for 2010 is for consolidated net sales to increase in the mid-to-high single digit percentage, compared to last year’s Third Quarter with sales at this level. We expect diluted net income for common share to be in the range of $1.55 to $1.70 per share, compared to $1.51 per share in 2009.

For the full year of 2010, we expect consolidated net sales to increase in the mid-to-high, single-percentage range, compared to last year. With annual sales of that level, we are updating our diluted net income per common share expectation to be in the range of $4.12 to $4.52 per share, compared to $3.78 per share last year.

As a reminder, our full year guidance include the $0.08 per share charge for the higher interest expense in the Second Quarter as well as the $0.10 per share charge taken in the First Quarter related to the healthcare legislation.

Finally, earlier this week, our board of directors declared a regular quarterly dividend of $0.36 per share, up from $0.35 ½ per share last year, keeping us on track to achieve our 32nd consecutive year of increased dividends.

Again, thanks for joining us this morning and we’d be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and Gentlemen, at this time we will be conducting a question and answer session. (Operator Instructions) Your first question is coming from Kevin McCarthy of Bank of America.

Kevin McCarthy – BoA/ML

Yes, good morning. How are you? Chris, you mentioned you had to take a number of special actions, given poor service levels from some vendors. What was the accurate cost to Sherwin from those special actions? And perhaps you could comment more broadly on your raw material cost inflation expectations for 2010 versus ‘09, given the TIO2 in acrylic pressure that you referenced.

Chris Connor

Okay, I’d be happy to do that. Kevin. First of all, regarding the cost, we haven’t disclosed that. We indicated that our margins were backwards about 60 basis points, most of that was relative to the cost associated with these actions. In terms of our outlook for the year, Bob, you may want to comment on what we’re guiding at this point.

Bob Wells

Yeah, Kevin. We think that for the industry, the whole raw material basket for paint and coatings is probably up mid-single digits. By year end we expect that to push maybe a little higher to the mid-to-high single range for full year.

Kevin McCarthy – BoA/ML

And did the constraints restrain your sales volumes across any product lines through the company?

Chris Connor

I think there’s been some indication regarding some shortages in particular products. I think there’s been some comments regarding the traffic-marking paint industry, as one case in point where there’s been some shortages. For the most part, our higher-demand, architectural paint products have remained in stock. And through the actions that we’ve talked about, we’ve been able to keep our customers in business. So, very well a constraint at that end of the scale.

Kevin McCarthy – BoA/ML

And, final question if I may. What is your outlook for pricing in companies stores for the back half of the year, please.

Chris Connor

And here again, Kevin, we’ve been very consistent about our pricing philosophy here at the company. When facing raw material pressures, just as a reminder for the entire audience, we first pushed back against the supplier, secondarily looked internally to see what efficiencies we could gain and finally, take pricing to the market as the last resort.

We’ve been very open with the investing community group regarding those pricing actions, after we’ve announced them to our customers, in terms of timing and percentage. At this point in time, we’re not commenting on any pricing activities plan in any of our segments for our second half.

Kevin McCarthy – BoA/ML

Thank you very much.

Chris Connor

Thanks, Kevin.

Operator

Thank you. Our next question is coming from Jeff Zekauskas of JP Morgan.

Jeff Zekauskas – JP Morgan

Hi. Good morning.

Chris Connor

Good morning, Jeff.

Jeff Zekauskas – JP Morgan

Hi. In the quarter, were your average prices, did they increase above 2% or below?

Chris Connor

Above, but not much over 2%.

Jeff Zekauskas – JP Morgan

Your estimating 173 million in D&A for the year, but the first two quarters are about 80 million, so that’s 93 in the second half, or 46 ½ per quarter. Why so high? Is that correct?

Chris Connor

Yeah, I think that – when you look at that forecast, we’re looking at different things with our fixed assets and what we think is happening with amortization, but you’re right, that’s probably at the high end of where we’ll be.

Jeff Zekauskas – JP Morgan

Right. And what was the tax rate on the debt charge?

Chris Connor

37%

Jeff Zekauskas

Okay. Then lastly, if you compare your over-year volumes in April, May, and June versus the previous year, what was the variance? I mean, my general impression for coatings is that April was tremendously strong, and so it was a little bit weaker in May, and a little bit weaker in June. Is that correct, and what’s your impression of the reason for the change?

Chris Connor

Yeah, I think that would be fairly accurate to what we’re seeing in the industry. Jeff As all of us are aware, the first-time home-buyer tax credit expired in April. I think that drove a lot of energy in our particular segment. As that passed through, we saw lower housing numbers come out, as an example. Another retailer is commenting about it slowing in the quarter from the beginning to the end. I think that was clear with our numbers as well.

Jeff Zekauskas – JP Morgan

Okay. Thanks very much.

Chris Connor

Thank you, Jeff.

Operator

Thank you. Our next question is coming from Chuck Cerankosky of Northcoast Research

Chuck Cerankosky – Northcoast Research

Good morning, everyone.

Chris Connor

Good morning Chuck.

Chuck Cerankosky – Northcoast Research

Sean, are you done the repurchasing debt? Is there more to go on this strategy?

Sean Hennesy

No. I think for the remainder of the year that – you know – we’re looking at 100-year note there’s an opportunity to bring some of that in at pretty favorable rates, but for the current year, I don’t think you’re going to see it do that and bring anymore in.

Chuck Cerankosky – Northcoast Research

Did you say how much you actually bought that?

Sean Hennesy

84.9 million is the exact number but we said approximately 85 earlier today I think.

Chuck Cerankosky – Northcoast Research

I think 85 will work. I missed the CapEx number you gave in the guidance for the year.

Sean Hennesy

One-hundred and fifteen.

Chuck Cerankosky – Northcoast Research

Okay. And then, when we look at the interplay between volume, growth in the quarter, the gross margin decline and the SG&A ratio decline, could you talk about what was going on there, including benefits [inaudible], leverage, and some of the cost reductions you’ve taken over the past 18 to 24 months.

Sean Hennesy

I think the gross margin is, as you indicated when we take a look at the kind of benefits we’ve had from taking the right size of our footprints, I think we’re down 6/10ths of our gross margin. But [inaudible], when you take a look at the [inaudible] selling price, and the whole mixture, we feel pretty good about how our conversion cost came in.

And the SG&A in the Second Quarter was up, right around $38 million, but we did have the acquisition in there. And without the acquisition we feel pretty good because our SG&A grew last time half of what our sales rate did. So when you take a look at it, our SG&A was down 1.2%, and I think that’s really what the strength shows, the strength of the leverage when we get a 10% sales gain that we can drive that PBT up 21%.

Chuck Cerankosky – Northcoast Research

Sean, how does the volume growth help the cost of goods line? Obviously, you had the cost pressure, but can you get into it a little bit with the volume.

Sean Hennessy

Yeah, you know, we’ve always said that the incremental volume really helps the consumer and when you look at the consumer group operating margins, which were up tremendously, were up fairly strong in the Second Quarter and year-to-date. With the plants running at full capacity that helps us.

We’ve never gotten into the metric of what our conversation cost is on an incremental gallon, but if you can think about that incremental gallon, the gross profit over 40%. And you know – when you take a look at it, the incremental cost of SG&A and admin, especially in admin is basically zero. Those incremental gallons really slow down to the bottom line.

Chuck Cerankosky – Northcoast Research

All right, thank you.

Operator

Thank you, and our next question is coming from Robert Court of Goldman Sachs.

Mr. Court, you may now ask your question. If you’re on a speaker phone, please pick up the hands, we’re unable to hear you into the [inaudible]

Robert Court – Goldman Sachs

Yep, sorry about that. Chris, I think the last quarter you talked about maybe the clouds are starting to lift a little bit, now you’ve talked about deceleration here in May and June, do you think that’s directly contributed to the tax issues, or something broader that might extend that bit of Malaysia or lul if you will into the second half?

Chris Connor

Yeah, Bob. Obviously, while that was a piece of it, I don’t think that explains the entire slowing and. We’ve commented about the skittish consumer in this economy that any little bit of bad news tends to see some bit of a pull back in some of it’s discretionary spending.

We had commented at the beginning of the year about the increasing headwind that we’re going to face on the new construction, and not residential businesses, and those are continuing. I think that new housing numbers came out and they’ve been adjusted down a little bit as well too. So there’s a broader base slowing we see, to the demand for end products here in the United States, across a lot of segments.

Robert Court – Goldman Sachs

How will you adjust it with all your plans for store count next year as these trends play out.

Chris Connor

Yeah, we’ve always taken a long-term view of that, Bob. We’ve talked repeatedly to the investing community that our next short-term horizon goal, which is to get 4,000 paint stores in North America.

We’re on a continuous path to do that. The 40 to 50 net new stores, 40 to 50 gross new stores we’re planning for this year has been the low end of our range. I don’t see us dropping below the low end of that for next year, and as the economy improve, we’ll probably ramp back up to our more normalized run rate of about 100 new stores per year.

Robert Court – Goldman Sachs

And one last one, I appreciate your time. Was there a difference in the typical approach to pricing, timing of price increases this year, or was 2010 a normal sequence in terms of when you institute those prices.

Chris Connor

Absolutely normal in terms of the sequence of the process we go through, the only abnormal part of that was that we raised them April 1 for architectural businesses as opposed to the beginning the year. And the reason was because we were following the very disciplines approach we take here, which is to make sure we have clear visibility and the cost, that we’ve done everything we can mitigate it. We didn’t see that late in the Fourth Quarter of last year which took a path in the First Quarter pricing. By the time the First Quarter stiffened, we realized we needed to go out. So that was very much the processes that we went through to get this earlier price increase announced, and all future price increases will follow the same mind set.

Robert Court – Goldman Sachs

Got it, thank you very much.

Chris Connor

Thanks Bob.

Operator

Thank you. Our next question is coming from John Roberts with Buckingham Research

John Roberts – Buckingham Research

It looked like you had queued a several-cents dilution in the quarter from the recent acquisitions. How does that change over the rest of the year?

Chris Connor

Yeah, I think when we take a look at it for the full year, we said that it would be slightly dilutive. I think you could see the dilution in the second quarter. I would say that we’re going to be relatively flat for the acquisitions in the third and fourth quarter.

John Roberts – Buckingham Research

So the third and fourth quarter will have minimal or no dissolution from those?

Chris Connor

True.

John Roberts – Buckingham Research

Okay. And then you’ll have the positive swing next year versus this year in those business, I guess, 2011 versus 2010.

Chris Connor

That’s the idea, John.

John Roberts – Buckingham Research

Okay. Thanks.

Operator

Thank you. Our next question is coming from Eugene [Saltalz] of Longbow Research

Eugene [Saltalz] – Longbow Research

Good morning. Today’s raw material shortages that you’ve experienced in the quarter, are they getting better or worse in the third quarter? Can you provide a bit more color on that?

Chris Connor

I think we made the comment that these issues are getting resolved. The raw material chain of monomers is strengthened during the quarter. Our suppliers are catching up. We’re seeing improvement, although catching up in the middle of the paint season is a difficult thing to accomplish. So we think we’re going to feel the tightness for the remainder of the year, probably catching up significantly back to normal run-rates in the fourth quarter, or really first quarter of next year. The point that there will still be some tightness in the third quarter, the company will continue to take the remedial actions that we’ve been taking to maintain service to our customers. And we’ll just hope to see that improve as time goes on.

Eugene [Saltalz] – Longbow Research

And just following on Sol’s question, inventories in the sales channel, how would you describe the levels that you see right now?

Chris Connor

In terms of our own storage, Eugene, or through our customers?

Eugene [Saltalz] – Longbow Research

Through the customers.

Chris Connor

I think that they’re in the appropriate shape. These are excellent business people who have sophisticated programs and systems in place to keep inventory at appropriate levels. I don’t think there’s any overstocking or destocking that’s been occurring. I’d say it’s pretty much as it should be at this point in time.

Eugene [Saltalz] – Longbow Research

Okay. Can I ask on your M&A program and focus of your M&A activity?

Chris Connor

Yeah, obviously, with the announcement of these two industrial wood activities in Europe, a little stronger for the company the past couple of years. We have indicated that we continue to have an interest in using cash for appropriate acquisitions where we can strengthen our control distribution architectural store model, both domestically and around the world as well as building out our industrial coatings service capabilities. There are a number of those opportunities that we’re looking at as we speak, and it would be inappropriate to comment on them at this point in time.

Eugene [Saltalz] – Longbow Research

Thank you very much.

Operator

Thank you. Our next question is coming from PJ Juvekar of Citigroup.

PJ Juvekar – Citigroup

Yeah. Hi. Good morning.

Chris Connor

Morning PJ.

PJ Juvekar – Citigroup

You know, Chuck, are you able to gain share in the stores business? Is that what’s driving your growth year because some of your competitors, smaller competitors seem to be less focused on their store business.

Chris Connor

Well, as you know, we’ve talked a great deal about the importance of that distribution platform for our story, PJ. And as you also know, our focus, primary customer segment is through the professional painting contractor. I think the improving trends that we’re seeing are the result of the contractor cutting back a little bit this year. We see them hiring painters and lining us more work. Their schedules are more robust than they have been. The residential repaint market is, as we indicated at the beginning of the year, would be the driver for this group to share and that’s proving to be the case as the year’s unfolding. So the extent that we remain focused on the contractor, we’re enjoying a little bit of a bounce back on that business this year.

PJ Juvekar – Citigroup

And can you split your business incomes into volumes, the new segments and how does it sort of beg down these days between new construction, repaint, and maybe commercial activity?

Chris Connor

I can do that for the industry, PJ, and we’re not too far.

PJ Juvekar – Citigroup

Okay.

Chris Connor

Off industry numbers. We think that new construction in total in the US in terms of architectural volume is down probably in the low teen now. So it’s 12%-13% of total-gallon volume goes to new construction and that’s roughly half and half non-residential and residential. Residential may be a little bit higher than non residential.

In the repaint market, you know, the other 87%-88%, residential is probably 70% of that non-residential 30%. Relative to the market, we’d probably skew a little heavier towards new construction and a little heavier towards non-residential.

PJ Juvekar – Citigroup

Thank you. That’s helpful. And secondly, you know, you talked about price growth of average of about 2%. Is it fair to say that maybe consumer channel is kind of flat and maybe stores pick it up 5% and it averages out to 2%? Is that in the ballpark?

Chris Connor

Yeah. You know, that’s why a lot of times we never have tried to give you a total because when consumer, they have aerosol cans, they have F-style cans, brushes, rollers, and so forth. So that’s a tough one to give to you. That’s why we’ve never gone to the full – but in general, I would say that the price increases that the stores groups typically goes in faster and are more effective earlier than we realized in the consumer group. Since we went out April 1st, that’s probably still true to this day also.

PJ Juvekar – Citigroup

And just lastly, Chuck, you talked about second quarter being hit hard by raw materials. Can you just give us some idea about what kind of raw materials [inaudible] do you get as far as shortages and all that stuff?

Chris Connor

I think the comment was that we’ve been working hard to mitigate some tightness in the supply chain in getting through that. We are looking for the leads to come primarily in the latexes. That’s where a lot of the tightness has been and some of the additives that come off of that chemical change. I think that was pretty broadly discussed in the industry in the second quarter, and as those raw materials that supply those industries have caught up, we’re seeing some catch up as well.

In terms of the other core raw materials, packaging, other types of solvents, etcetera, we’re in fine shape there.

PJ Juvekar – Citigroup

Thank you.

Chris Connor

Thanks, PJ.

Operator

Thank you. Our next question is coming from Amy Zang of Goldman Sachs. Ms. Zang, you may go ahead and ask your question. If you’re on a speaker phone, please pick up your handset.

Thank you. We’ll go to the next question coming from Douglas [Chetti] of Key Bank.

Douglas Chetti of Key Bank

Hi. Good Morning.

Chris Connor

Good morning, Doug.

Douglas Chetti of Key Bank

First off, you know, the new construction data has remained pretty weak here. Roughly speaking, you know, what level of new homes starts is currently assumed in your full-year guidance?

Chris Connor

Doug, we started the year thinking that if the industry, in terms of starts, if we saw more than 600,000 starts, that it would be a pretty strong year. And you know, we’re still assuming right in that range, maybe high fives to low sixes.

Douglas Chetti of Key Bank

Okay. Thanks. That’s helpful. And then secondly here, if raw material costs stay constant, do you have enough in the way of price increases already out there on a go-forward basis to offset that? Or would you need to implement more? I know the expectations would be raw materials moderate. But if they don’t, is there enough price increases in there now to fully offset that?

Chris Connor

I think the answer on that question gets too close to disclosing what pricing activities we may or may not take in the second half. So Doug, I’m just going to respectfully decline to answer that.

And once again, when we take pricing to the field, we’ll be happy to keep you updated.

Douglas Chetti of Key Bank

Okay. Fair enough. And then just finally here, can you talk about have you been doing anything in terms of store lease negotiations? I mean, the market conditions here are pretty weak. Have there been opportunities to renew at favorable rates, or get any sort of concessions?

Gus

Yeah. I think we’ve been doing that for the last two years now. And we’ve had different things, and instead of just – we call it a standard lease, I think we’ve looked for different aspects of a contract and lease language that we can get that can help us for long term. Sometimes that’s longer, that’s more options. Sometimes that’s options at a lower price, or renewing an option at a lower price than what was in the lease.

And then also looking for terms, favorable terms such whether it’s commentary maintenance or other types of aspects that we can get. We’ve done fairly well over the last two years.

Douglas Chetti of Key Bank

Okay. Thanks, Gus.

Gus

Thanks Doug.

Operator

Thank you. Our next question is coming from Gregory Mulish of ISI Group.

Gregory Mulish – ISI Group

Thank guys. Can you hear me?

Chris Connor

Yeah, Greg.

Gregory Mulish – ISI Group

So two questions. I don’t want to know anything about any future price increases, but just to fully understand, you did April 1st with a price increase. You saw just over 2% in this quarter. Is it fair to say with the normal lag that we should expect to see something more than that into the third and fourth quarters if everything else is constant?

Chris Connor

Yes. I think that as each quarter goes by, we’ll get a higher and higher percentage of what we went up with.

Gregory Mulish – ISI Group

And how much have you gotten it so far?

Chris Connor

Well, we went out with 3 to 5, and if you sit there and take a look at the 2%, you’re talking the midpoint being four, we’re over 50 percent.

Gregory Mulish – ISI Group

Great. And then second is, we’ve seen DIY take a bigger shift of the market the last couple of years and you guys, that obviously isn’t a great trade. But do you see any trends there that this time you started to pick up your DIY business, or was that still underperforming?

Chris Connor

Are you asking, Greg, about the shift between DIY and the Pro, or more our DIY performance inside –

Gregory Mulish – ISI Group

Actually both. The market shift between DIY and Pro, and then within your own business how you think you’re doing in DIY.

Chris Connor

Yeah, I think the market shift as we indicated will start to come back towards the Pro as markets improve, certainly as new construction would come back a little bit. And we do expect, as Bob just answered in an earlier comment, that when the year is said and done, the new residential construction market will be slightly positive for the year. So we’re going to start to see a little rebound in those areas.

And as we’ve also commented on these discussions, that the anecdotal evidence of contractors in our stores with more work, buying equipment, and hiring folks, etcetera would indicate that that’s starting to come back a little bit.

So we remain bullish on this contractor segment. We think the 60/40 range that it’s been bounding around in the last couple of years is probably a pretty reliable number to count on going forward, and it should strengthen as new construction comes back, certainly in the coming years on the commercial side as well.

Regarding our own DIY performance, I think we’ve been pleased. You see the numbers on our consumer segment this quarter, which have a lot of DIY presence there, so that’s been strong for them as well as the DIY performance at our own stores. We’re getting our comp stores running at a 5-plus percent performance, all customers moving in the right direction so we’re getting some luck from DIY as well.

Gregory Mulish – ISI Group

Great. Thanks.

David Mackey

Thanks, Greg.

Operator

Thank you. Our next question is coming from Steve O’Neil of Hilliard Lyons.

Steve O’Neil – Hilliard Lyons

Good morning. My questions have been answered. Thank you.

David Mackey

Thanks, Steve.

Operator

Thank you. Our next question is coming from Ivy Zoman of Zoman & Associates.

Ivy Zoman [Scott] – Zoman & Associates

This is Scott, I’m in for Ivy. I just have a quick question. Last quarter you guys spoke about benefit from targeting contractors going after foreclosed homes. I was wondering if you could give an update on that and the incremental change you saw this quarter?

Chris Connor

Scott, I think our comments in the past has been that the nature of the pro doing the work on foreclosed homes, the foreclosed homes that are being purchased by investors probably benefits the multiline warehouse home center more than the specialty paint store because their needs for materials are much broader than the assortment offered by a specialty paint store.

That doesn’t mean that there’s no professional painting contractors working on those properties, it’s just that generally the contractor working on those properties also does some floor coverings, some electrical, some plumbing, etcetera.

So we think that that channel has probably seen the benefit disproportionate to the paint store’s channel.

Ivy Zoman [Scott] – Zoman & Associates

Thank you very much.

Operator

Thank you. Our next question is coming from Eric Bosshard of Cleveland Research.

Eric Bosshard – Cleveland Research

Good morning.

Chris Connor

Good morning, Eric.

Eric Bosshard – Cleveland Research

A couple of questions. First of all, Bob, I think you commented that the input cost inflation for the industry, I thought you said was mid-single digits in the second quarter and it would be higher by the end of the year. Can you just explain what the input cost year over year was for the industry in the second quarter. And what the expectation is that that would look like in the second half, if you can do it that way?

Bob Well

Well, it’s a timing issue, Eric. The input costs rolls through the second quarter. So on average, if you start out at the beginning of the second quarter, most of these raw materials categories were lower than they were by the end of the second quarter.

So we saw them rise through the second quarter, and you know, where they plateau is hard to predict. Even if they stayed at the level they are now, you’d be in the mid-to-upper single-digit range. Does that make sense?

Eric Bosshard – Cleveland Research

Yeah. I guess more directly, the input cost inflation will be greater in the second half than it was in the second quarter. Is that right?

Bob Wells

The answer to that is yes. And when you sit there and take a look at year over year though, because the [inaudible] were at the low point in the second quarter of 2009 on a year-over-year basis. The second quarter was hard.

Eric Bosshard – Cleveland Research

Great. That’s helpful. Secondly, in terms of the momentum of sales, if you can just talk about the excluding currency, excluding acquisitions, what that number was again for the second quarter and what the expectations is that that number will look like in the second half so we can just see the underlying business excluding these other things?

Bob Wells

I think when you take a look at it, what we said in our guidance last quarter was that the acquisitions would be about [inaudible] and then the second, and third, and fourth quarter, but only 1 ½ for the full year because we had only three months, or three quarters against four quarters. So acquisition came in at 1.9% of our increase. And we still think, in the guidance, we have around 2% for the acquisition.

We have not put the next acquisition into the guidance yet. We’re waiting to see – it’s hard for us to forecast when that will close. When we look at the currency, we have very little currency in the second half of the year. When you take a look at the [inaudible] or the Mexican Paso, really the currencies that drive us, when you start looking at that third quarter and fourth quarter, we think that the currency is going to be relatively flat.

So when we give our guidance, I would say less than 2/10ths of a percent will be currency in 2% each quarter, but 1 ½ of those for a full year will be for acquisitions.

Eric Bosshard – Cleveland Research

Great. And then lastly from a tax rate, I think you had talked about mid-30s coming out of the last quarter was a little bit lower. Apparently some of that may have been influenced by the charge or not. Can you update us on what the tax rate assumption should be?

Bob Wells

Yeah. When you take a look at it, you know, we had some discreet items that hit us in the second quarter. It’s hard to really predict when discreet items will hit. But when we take a look at our full-year forecast, we think, you know, last quarter we think we were talking about the low-to-mid 30s for that tax rate.

We think probably for the full year, the tax rate will be back in that 33% range.

Eric Bosshard – Cleveland Research

And then lastly, within the slightly softer second half growth versus the second quarter, can you just specifically talk about where you’re seeing or expecting that difference to be as adjusted new residential due to the expiration of the tax credit? Or can you talk about what else you’re seeing?

Bob Wells

I don’t know that we have any specific in-market segments, Eric, it’s more prominent than others. Obviously the commercial markets as we’ve talked about are still lagging and facing a lot of headwind.

And I think there’s just been a little bit of a slowdown in some demand in the residential markets. Guidance in the mid-to-upper single-digits range is still robust given the last four-year track record we’ve been on. And with that number, Sean just went through them. I mean, while we’re seeing a little bit of a slowdown here, we’re still fairly bullish on this revenue stream.

Eric Bosshard – Cleveland Research

Great. Thank you very much.

Operator

Thank you. Our next question is coming from Jeff Zekauskas of JP Morgan

Jeff Zekauskas – JP Morgan

Hi. Just a few quick followups. How much did you spend to repurchase your shares in the quarter?

Bob Wells

Well, let’s see, the average price was $76.48, and so $73.00 year to date, and I just had it here because I pulled it out for that. Give me ten seconds here and I’ll find it. Sorry it’s taking me so long.

We spent $149.7 million in the second quarter; $76.78. Year to date we’ve bought 2.35 and at $74.68.

Jeff Zekauskas – JP Morgan

Okay. Did you by any shares in June?

Bob Wells

Yes, we did.

Jeff Zekauskas – JP Morgan

In the consumer business you were up roughly 12% for the quarter versus up a percent in the first quarter. And I know April volumes were really strong, so I take it that that’s an unrepresented number going forward. So should we expect that to diminish?

And likewise in stores, given that probably there was a real bump up in April, I mean, are the growth rates in those two businesses for the next couple of quarters likely to be lower than what they were in the second quarter, all things being equal?

Bob Wells

Yeah. I think when you take a look at it, when we came out with our guidance for the second quarter, we said high single digits. We didn’t give a range. And now when you look at the third quarter, we’re saying mid-to-high and we still the acquisition in there. And for the full year, we’ve stayed the same.

So I think that, you know, it’s pretty easy to assume that different segments are going to be not as high because of the high single digits versus the mid.

Chris Connor

I think on the consumer specifically, Jeff, you’re a real wordsmith. You saw on Bob’s comments here that we talked about the segments retail, industrial and institutional customers. And this is a part of business we don’t talk a lot about, but on this segment we have a significant product line of aerosols and coatings that we sell into other types of distribution channels beyond the typical retail partners. And it was in that space that we saw some really unique and strong performance in the quarter.

And I think your comment about is this sustainable, this is probably more of a blood [inaudible] and consumer segment will probably come back down in the single-digit range going forward.

Jeff Zekauskas – JP Morgan

Was there not sequential volume growth in global?

Bob Wells

Slightly. But you have to remember, Latin America is in there and they’re going through winter right now. So they have the opposite. So when you take a look at the different segments, it was higher. But when you look at sequential because of going into winter, the Latin America group in that global group did not have any.

Jeff Zekauskas – JP Morgan

What was your cash flow from operations in the quarter?

Bob Wells

Cash flow for operations in the quarter. Hang on one second. I’ll pull that out. I don’t have that.

Jeff Zekauskas – JP Morgan

Okay.

Bob Wells

Well have to get back with you on that, Jeff.

Jeff Zekauskas – JP Morgan

Okay. And lastly, does your sales guidance for the year include Becker?

Bob Wells

No.

Jeff Zekauskas – JP Morgan

It does not. Okay. Great. Thank you very much.

Bob Wells

Thank you, Jeff.

Operator

Thank you. Our next question is coming from Saul Ludwick of Northcoast Research.

Saul Ludwick – Northcoast Research

A couple quickies. The interest number, how much did that include? I mean, that is where you took the hit for the debt repurchase. How much was that?

Bob Wells

That was just about $15 million, Saul.

Saul Ludwick – Northcoast Research

And so interest expense going forward is going to be $11.5 million?

Bob Wells

Yes. I would say that, yeah, you’re looking at, without it, it would be about flat to where we were this quarter.

Saul Ludwick – Northcoast Research

Okay. And is there any inclusion in your guidance, Sean, for asset impairment, goodwill? I mean, last year in the fourth quarter you had a big chunk in the stores, there was a big chunk in global group. Does your guidance include recurrence of those either asset impairment, goodwill write offs? You know, things that are not of an operating nature, but hit the income statements?

Sean Hennessy

Yeah. Not a material number.

Saul Ludwick – Northcoast Research

But some?

Sean Hennessy

Yeah. But I mean, [inaudible]. There’s always some [inaudible] number with the way we value the goodwill and we have goodwill from many, many acquisitions and so forth. But it’s going to be deminimious.

Saul Ludwick – Northcoast Research

Okay. And then this is a trivial question, but you know, in the first quarter you had $110 million diluted shares, and in the second quarter you had almost $110 million. But the six-month diluted shares was less than either the first quarter or the second quarter.

Sean Hennessy

I’ll have to get back to ou on that, Saul. I don’t have the calculation in here with me.

Saul Ludwick – Northcoast Research

Okay. Very good. Thank you very much.

Sean Hennessy

Thank you.

Operator

Thank you. Our next question is coming from Amy Zang of Goldman Sachs

Amy Zang - Goldman Sachs

Thanks, guys. Can you hear me now?

Chris Connor

Yep.

Amy Zang - Goldman Sachs

Two quick follow-up questions. The first one is the consumer segments, obviously. You mentioned several times you delivered very strong results in the quarter. But one of your major competitors in the retail channel reported the month less robust in trends last week.

So I’m just wondering what contributed to your volume of performance relative to competitors in that channel. Is that because some market-share wins, or some new contracts, or something like that?

Chris Connor

Amy, I think, again, the significant less in the quarter for our consumer segment was more on the segments industrial and institutions business. Our retail traditional business in that segment probably performed close to market, maybe slightly better.

Amy Zang - Goldman Sachs

Okay. And the a follow-up question in consumer business. I know on April 1st, you guys roll out price hikes across the paint stores, and I’m wondering, did you take any actions on the consumer segment as well by implementing price hikes?

Bob Wells

We announced a price increase to our architectural businesses across all channels, with consumer and storage groups. So absolutely.

Amy Zang - Goldman Sachs

Okay. So if you [inaudible] from the pricing actions, I guess that’s a trend, and that’s the same trend for the consumer business as well?

Chris Connor

As Shawn commented on the earlier portion, you know, our track record here, and this price increase has been coming in pretty much consistent with cash price increases. It takes a little while for us to get announcements out to negotiate and start to see the effectiveness. And some time on the consumer side with that lag, stores start early by full implementation.

Typically, across all segments we see somewhere in the 70 to 80% implementation.

Amy Zang - Goldman Sachs

Got you. And my final follow-up question is, the guidance, just a clarification. The guidance you issued in April, that guidance didn’t include the $0.08, the charges relative to the [inaudible], right?

Chris Connor

That’s absolutely correct. That was an opportunity that presented itself in the quarter that was on any previous guidance.

Amy Zang - Goldman Sachs

So on the actual basis, you actually didn’t lower your underlying guidance, you just included that $0.08. That means that $0.08 is a rare occurring item? Is there –

Chris Connor

That’s correct. You’ve got it correct.

Amy Zang - Goldman Sachs

Okay. Thank you so much.

Bob Wells

Thanks, Amy.

Operator

Thank you. Our next question is coming from [RonViswanahan] of Susquehanna

[RonViswanahan] – Susquehanna

Hey guys. Thanks for taking my question. How are you guys doing?

Chris Connor

Doing great. How are you?

[RonViswanahan] – Susquehanna

Good. Just a couple quick questions. First off, I guess a little bit more high level. It looks like, as everyone said, you’ve kept the guidance the same, but expectations for top line seem to be moderating both from you guys and the rest of the market. And existing was out today and it was slightly worse than expected.

What gives you the confidence, I guess, that you can keep the guidance the same? Is it mainly just the cost side and so on?

Bob Wells

Well, you know, if you went back to our full-year guidance on sales for the full year, three months ago we gave guidance for the year. It was mid-to-high single digits. So we really haven’t changed the sales guidance for the year, nor the EPS guidance.

So we feel our sales are going to come in pretty much where we thought we would be three months ago.

[RonViswanahan] – Susquehanna

Okay. But why are you confident of that, I guess is my question given the recent moderation in the market information that we’re seeing?

Bob Wells

Well, I think the other leverage that are played here, Ron, are in good shape. We commented about the SG&A control, the company, the improved efficiency as a result of the top things we did a year or so ago to get some of our plants down. The margin performance, while down 60 basis points in this rapid raw-material environment with more pricing implementation from previously announce pricing, we’re confident that we’ll be in that range.

[Ron Viswanahan] – Susquehanna

Okay. I guess similarly along those lines, you did see the margins expand, you know, as you noted in consumer as well as slightly in paint stores just on the segment side. How much further can those go from a segment basis?

Bob Wells

Yeah. I think when you sit there and take a look at improvement in operating margins, you know, two, three years ago our storage group was over 15 ½%. Consumer is not as consistent as store, but it’s actually been as high as 19 at one time.

So you know, our thoughts are that eventually we’re going to get back those levels and go higher. When you look at the global group, now we believe that eventually we’ll be around 80% of where stores can be, which would tell you that we think it’s going to be in the low double-digits, low teens. So when you think about it, that’s what we’re looking for for the segment.

[Ron Viswanahan] – Susquehanna

And you feel like you can do that in this kind of moderate sales growth environment even, or even declining?

Bob Wells

Over long-term when we look at those types of things, we believe that there will be some sales growth. But we still think we can get a margin improvement in moderate sales growth.

[Ron Viswanahan] – Susquehanna

Right. Okay. Thanks.

Operator

Thank you. Our last question is coming from Robert Gooch of Mac Capital

Robert Gooch – Mac Capital

Hi. Good afternoon I think you guys said that on the new home sales, you’re sort of looking at 500,00 to 600,000. Could you comment on both existing size as well as on the non-resi side?

Chris Connor

Yeah. Let me deal with non residential first. In non-residential, square footage put in place through June were down in the mid-20% range. We think that that rate of decline has moderated somewhat from last year. We don’t think we’re on bottom yet. We think that’s probably a good number for the balance of the year, is we’re going to finish the year down in the 20%, 20-plus percent range.

In terms of sales of existing homes, it certainly softens somewhat also after the expiration of a tax credit because that was driving some resales as well. What is important to us Robert, in looking at those numbers is not just the sheer volume, but the quality of the transaction.

Foreclosed and distressed properties being acquired out of foreclosure by investors really doesn’t drive our end markets as well as existing home sales by an owner-occupant to a new owner-occupant.

So to the extend that we can – I mean, if volume is flat from last year, and the quality improves because of the decline in foreclosure transactions, that’s good for us. We know that there’s certainly more pain to come in the foreclosure market, but it’s been fairly orderly and we’ve seen a steady rise in the quality transactions.

But a flat number in existing home sales with improving quality would benefit our business.

Robert Gooch – Mac Capital

I got you. Just one followup on that very point. I mean, with the modifications that have been going on on the mortgage side, and I think it’s mixed results. Maybe people were thinking a little further out, they’re just going to fail again.

My last question pertains to the previous question. You mentioned your key margins were in both the consumer groups as well as the store group. And that was also a very high [inaudible] and a good quality on the existing, and certainly on the new stuff.

I guess, I’m just thinking about this, I guess you’re looking more on the cost side, whether SG&A initiatives or others to offset what’s going to be sort of – seems to just a lower volume than what took place three or four years ago.

Chris Connors

You know, I would say it’s cost, but it’s also productivity. It think when you think about the stores group, Bob mentioned that we opened over 160 stores in new markets. When we take a look at that we had to close some redundant stores.

As we continue to get more pentitration in markets we get more productivity in markets. And so when you take a look at the makeup of our store’s organization two or three years from now versus three years ago, we’ll have higher store counts and we’ll be more productive. And we can probably hit the peak margins at weaker sales. That’s what we believe.

We also believe the same thing in consumer group. We think that as we continue to get more productivity, what we have said is that we think we can hit our peak margins without hitting our peak sales.

And then you look at the global group. It’s the same thing. As we continue to get more mass in individual countries, we’re going to be able to get that margin up.

And on the first part of your question ,clearly there is more pain to come in the housing markets and we haven not called the bottom on the housing markets. We think that foreclosure activity to come is going to keep pressure on home values and that won’t right itself for a while yet.

We should point out thought that a lot of the vitality we’re seeing in the residential repaint markets are not so much driven by the traditional drivers, which are existing home turnover, but they’re being driven by pent-up demand from postponed maintenance activity by people who are staying in their house. And we think that that’s what’s driving some of the goodness in the market today.

Robert Gooch – Mac Capital

Got you. Thank you. Thank you very much for answering my question.

Operator

Thank you. I’d like to hand the floor back over to management for any closing comments.

Chris Connor

Great. We’d like to thank you all once again for joining us this morning. And as always, we’ll be available over the balance of the day to answer any follow-up questions you have. We appreciate the time you’ve spent with us this morning and your continued interest in Sherwin Williams.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time.

Thank you all for your participation.

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