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Sherwin-Williams Co. (NYSE: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

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

Operator

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.

Turning to the consumer group, sales in the third quarter increased 3% to $340.4 million reflecting moderately higher demand at some of the segments retail, industrial and institutional customers. Segment profit for the consumer group increased $3.2 million or 5.7% in the quarter to $59.7 million due primarily to good expense control and savings from manufacturing site rationalization completed the previous year that was partially offset by raw material cost increases.

Segment profit as a percent of external sales increased to 17.5% from 17.1% in the same period last year. For our Global Finishes Group, sales in US dollars increase 22.6% to $544.5 million in the quarter to due primarily to acquisitions, higher paint sales volume in favorable currency translation rate changes. In the quarter, acquisitions increased Global Finishes Group net sales in US dollars by 15.1% and favorable currency translation rate changes increased sales in US dollars by 2.5%.

Third quarter segment profit increased $2.3 million or 7.6% to $31.9 million. Higher paid sales volumes, favorable currency rate changes and good expense control were mostly offset by higher raw material costs and the negative affect of acquisitions. Currency rate changes increased segment profits by $1.4 million while acquisitions reduced segment profit by $2.8 million. Global Finishes Group opened or acquired 20 new branches and closed two branches in the third quarter.

Turning to our balance sheet, our total debt on September 30, 2010 was $1.066 billion compared to $711 million in the third quarter 2009. Our cash balance at the end of the quarter was $64.9 million compared to 32.8 million at the end of the third quarter last year. Total borrowings to capitalization were 39.4% at the end of the quarter versus 29.5% at the end of the third quarter 2009.

Short term borrowings decreased to $57 million to $354.6 million compared to third quarter last year. And the long-term debt to capitalization was 26.3% at the end of the third quarter this year compared to 12.4% last year.

In the third quarter of this year, we spent $28.7 million on the capital expenditures, depreciation expense was $34.5 million and amortization was $8.6 million. For full year of 2010, we anticipate capital expenditures for the year will be approximately 100 million to $115 million, depreciation will be about a $140 million and amortization will be about $35 million.

That concludes my review of our results for third quarter 2010. So I will turn the call over to Chris Connor who will make some general comments and highlights, our expectations for the remainder of the year. Chris.

Chris Connor

Thank you, Bob. And good morning, everybody thanks for joining us today. You know from the demand perspective the third quarter actually started to feel a little bit more normal to us. We posted solid revenue and volume growth in the quarter, including a 5% in comp store sales gain, even though many segments of our end markets continue to struggle. We did not feel normal to the fact that we failed to general earnings leverage on this revenue growth.

Our sales in the third quarter came in about as we had expected, when you back out revenue from the Becker Acroma acquisition which was completed during the quarter, but not included in our guidance. Our sales increased 7.3%, which was in the debt center of our range of mid to high single digits. A little more than half of this sales improvement was from increased volume, the balance coming from a combination of price in favorable mix for the company.

Earnings per share for the quarter also adjusted for the Becker Acroma acquisition finished in the middle of our guidance range of a $1.55 to $1.70. When you are going into the quarter the earnings improvement would be challenging even with the solid sales increase and we guided accordingly. Three key factors contributed to our cautious outlook, continued raw material cost pressure, higher SG&A expense and dilution from acquisitions. So let me kind of brief on each of these three issues a little further. First, the persistently higher raw material cost we experienced during the first-half, did not update in the third quarter and some commodities such as titanium back side are still rising.

We are also continuing to experience higher operating cost results from raw material supply shortages. Many of the extraordinary actions we’ve taken during the year to ensure uninterrupted supply of raw materials to our plans and finished goods to our stores continue to impact our P&L. Despite our efforts to help offset these higher input costs including multiple price increases announced during the year. The normal lag between raw material cost inflation and higher effective pricing has pressured our gross margin in the second and third quarters and most likely will again in the fourth.

Implementation of our price increases is progressing as expected, and we remain confident that we will ultimately close the gap on these input costs. Second, in addition to the impact of lower gross margin in the quarter, operating income was also impacted by higher SG&A expense, and this higher spending level is also likely to continue for the balance of the year.

SG&A expense was up almost $50 million in the third quarter after rising just over $42 million in the first-half. As a percent of sales SG&A was down 90 basis points for the first-half and down 40 basis points in the third quarter, slightly less than half of the SG&A increase in the quarter can be attributed to acquisitions and currency exchange. The balance is from higher service cost and incremental freight and handling to ensure product availability and good customer service. All of these factors will continue to weigh on SG&A expense in the fourth quarter.

And finally in the impact of some of these issues the acquisition of Sayerlack completed on April 1st and Becker Acroma completed September 1st, were diluted to the earnings in the third quarter and again will be for the balance of the year.

Although we knew this when we closed these deal this delusion was not included in our initial earnings guidance provided in January nor with the Becker acquisition included in our first quarter or second quarter updates to guidance given in April and July due to the unknown timing of the closing of these acquisitions. Moving on to some other areas of focus for the company, we continue to manage working capital officially and generated significant net operating cash in the quarter.

In the first nine months of 2010, we generated $478 million in net operating cash. Working capital for the nine months increased $149 as a result of higher accounts receivable and inventory to support our sales increase. Working capital as a percent of sales increase to 13.4% from 12.5% last year. Acquisitions added a 130 basis points for working capital as a percent of sales.

Our free cash flow net operating cash less CapEx and dividend came in at 284 million. We continue to invest the company’s cash to expand our control distribution platform, complete suitable acquisitions and purchase shares of our stock for treasury. Year-to-date our paid service group has opened 25 new store locations and consolidated 11 re-done in locations. We finished the quarter with 3368 stores in operation compared to 3344 this time last year.

For the full year, we still expect to open 40 to 50 stores and slow the pace or start closing.

On October 1, we completed the acquisition of Pinturas Condor, the leading paint and coatings company in Ecuador. The company develops and manufactures products to the architectural, industrial and automotive vehicle refinish markets and sell them to a combination of company owned paint stores as well as exclusive dealers in more than 1800 independent dealers in the country.

Sales in 2009 were approximately $61 million US. During the quarter, we also used the company’s cash to buy back 1.13 million shares of our common stock in the open market at an average price of $69.39. This brings our year-to-date total of 3.48 million shares. On September 30, we had remaining board authorization to purchase 7.3 million shares.

While it appears the architectural repaint market in the Americas and global demand for most investor coatings have stabilized or even rebounded somewhat. Raw materials remain a challenge for the foreseeable future. Our outlook for the fourth quarter in 2010 is for consolidated net sales to increase in the mid-teens percentages, compared to the last year’s fourth quarter due primarily to acquisitions. We expect fourth quarter diluted net income per common share to be in the range of $0.59 to $0.69 per share, compared to $0.58 per share in 2009.

For the full year 2010, we expect consolidated net sales to increase in the high single digit percentage range, compared to last year. For the annual sales at that level, we are updating our July 22, 2010 full year guidance for diluted net income per common share to be in the range of $4.12 to $4.22 per share, compared to $3.78 per share earned in 2009. As a reminder our full year guidance includes an $0.08 per share charge for higher interest expense in the second quarter, a $0.10 per share charge taken in the first quarter related to the healthcare legislation and $0.07 dilution from two acquisitions completed during the year.

Finally, last week our board of directors declared a regular quarterly dividend of $0.36 per share keeping us on track to achieve a 32 consecutive year of increase dividends.

Again I’d like to thank you for joining us this morning and now the management team will be happy to take your questions.

Question-And-Answer Session

Operator

(Operator Instructions). Our first question is coming from the line of Bob Court with Goldman Sachs. Please state your question.

Unidentified Analyst

Hi, this is (inaudible) on for Bob. Just help me to dig into the raw material cost pressure a little bit more, you mentioned titanium back side, I was hoping you could maybe quantify what kind of year-over-year price increases you are seeing and then maybe you could also talk about what's going on with some of the other raw materials or there is some of the pressure from the first half of the year, is it [baiting] or if you are seeing continued pressure there? Thank you.

Bob Wells

For the first half of the year most of the inflation we saw on the material basket was acrylic (inaudible) and acrylic latex. And although those the supply situation is getting better in the acrylic chain, we're not seeing much relief on the price side yet in acrylics. At the same time as Chris mentioned, titanium dioxide is to heat up. We're seeing pressure on TiO2. The pressure for this year is embedded in our outlook for the full year for the raw material basket to be up in the high single digit. Year-to-date its probably mid-to-high with the highest level of inflation being in the fourth quarter. For next year we're seeing analyst outlooks that across the pretty broad range with the high probably being in the 40 to 50% inflation range, most analysts put titanium inflation for 2011 in the range of 20 to 30% and we think that feels about right based on the tightness in the supply right now

Unidentified Analyst

Thanks that’s helpful. Just one more if I might. On the cadence of losses from acquisitions you mentioned there is about 2.8 million this quarter. I was wondering if you might give some indication of how that will track over the next quarter or two and when you might expect the dilution to end?

Bob Wells

Chris mentioned in his comments that for the full year we expected to be out $0.07, it was $0.02 in the third quarter. That brought us year-to-date up to $0.05, so its going to be 0.02 in the fourth quarter. We believe that the first quarter will be dilutive, but after that and starting in the second quarter we'll start to see accretion.

Unidentified Analyst

Great and that 2.8 million expense, is that include re-branding or conversions of any of the acquired companies or is that strictly just kind of amortization expense and lower margin or profitability for those businesses?

Chris Connor

Yes those are operating hits and cost of acquisitions to get them in there. There won’t be significant expense towards re-branding at this point in time.

Operator

Our next question is coming from the line of Kevin McCarthy with Bank of America Merrill Lynch.

Kevin McCarthy - Bank of America Merrill Lynch

Just a follow-up on raw materials, if I think about the pace of inflation here on a relative basis compared to the selling price increases that you've announced. Would 3Q be the quarter of maximum margin compression if we think about the spread there or do you anticipate more severity over the next quarter or two?

Chris Connor

I think if you take a look at our quarter, last year in the fourth quarter we were over 47%. When we take a look at this year, we think that the degradation from last year as a percent, that will be the greatest difference in this year.

Kevin McCarthy - Bank of America Merrill Lynch

Okay, that’s helpful and then to follow-up on pricing, what is the outlook in the consumer segment relative to the increases that you've already announced in paint stores?

Chris Connor

Yes, I think we have been pretty consistent about sharing what the straight our pricing activities, we announced that in the middle of the third quarter specifically in August that we took pricing to the market in all of our architectural businesses including consumer group you're specifically asking about Kevin. And as we commented, the implementation on these price increases has gone pretty well, pretty inline with our historic performance and trucking along appropriately. When we took that pricing in August we were able to have very good visibility of the impact that we've been hitting during the first half of the year obviously but also the titanium pressures was starting to build at that point in time, so that was the pricing we took to offset Bob's comments that we're seeing the basket of [rods] for the industry move up into the mid to high single digits for this year.

Bob Wells

And Kevin I should also mentioned we could fairly give this guidance that we believe that our gross margin for the full year will be slightly below 45%. So when you look at the 44 right through the first three quarters, we're going to be slightly below 45, so you can see what we think the gross profit's going to come in at in the fourth quarter.

Operator

Our next question is coming from the line of Jeff Zekauskas with JPMorgan.

Jeff Zekauskas - JPMorgan

Couple of questions, in TiO2 some, I guess, some competitors or some paint companies can access Ti02 from China where there seems to be a lot of capacity growth or as everywhere else there is not much growth, because you're largely domestic seller of paints, is that something that you can't really access or can you? How you see that?

Chris Connor

We absolutely have the ability to access titanium, Jeff from a variety of different more locations around the world. This is a global commodity with operations now in multiple continents and countries around the world, we're buying titanium from a variety of these different sources including Chinese suppliers as you mentioned, so not a problem.

Jeff Zekauskas - JPMorgan

And so you say a multi-year period, do you see the supply demand balance in titanium dioxide loosing up or continuing to stay pretty tight?

Chris Connor

Well, we're the wrong guy to be asking that question. The titanium producers of the folks that need to answer that for us. We've been fairly consistent in saying that while there certainly is pricing pressure on titanium that is sticking in this market, the availability of titanium is not an issue for the short-term or the near-term outlook in terms of gallons that we're going to need to manufacture.

Now we would remind all of the listeners on the call that speaking specifically in United States and to equal amount that the growth has been through some what of a global recession here we’ve seen significant fall off in the manufacturing of architectural paint coatings which is a primary user of these titanium backside raw materials from 800 million ton gallons under the 500 million gallon range and we're just hoping that much capacity came out of the industry. So long one did answer saying that we're comfortable that there is capacity out there. We're not going to have an issue dealing with that side of it. It will be all in the pricing.

Jeff Zekauskas - JPMorgan

And just a couple more short thing. Normally your inventories sequentially go down in the third quarter, but this time they went up by about $65 million, why is that?

Chris Connor

I think part of that is really the raw material piece of the inventory Jeff. You can start to see those. As Bob mentioned, the basket, how large a basket is when you compare to what our growth in the inventory is. You can start to see that raw material cost being converted into finished goods.

Jeff Zekauskas - JPMorgan

And then lastly, organically did your gallonage grow domestically in the quarter or globally in the quarter?

Bob Wells

It did Jeff; it grew low single-digits.

Operator

Our next question is coming from PJ Juvekar with Citi. Please state your question.

PJ Juvekar - Citi

The recent slowdown that we're seeing in foreclosure activity, that is likely to have some negative impact on existing home sales. So do you think that can be a risk to fourth quarter or early part of 2011 volumes?

Bob Wells

We think that the typical drivers of our architectural paint demand in the US have been crippled for quite some time and certainly new construction market declines rapidly years ago. Re-sale or turn over has traditionally been a driver of coatings volume, less so in this environment. So as the challenges in the foreclosure market continue to work themselves out, we think that most of the volume demand in the states will be driven by just cycle painting amongst home owners that are staying in their home.

PJ Juvekar - Citi

But earlier in the year you had mentioned that foreclosure was a growth driver and you had a foreclosure team.

Bob Wells

Yes, I think that was a miscommunication PJ. What we’ve said is that foreclosure activity really doesn’t drive volume in our markets. The banks selling properties to investors is not nearly as good for us as an owner occupant selling to a new owner occupant.

PJ Juvekar - Citi

Okay now I will follow up on that later on. And just another question quickly I know there is a lot of excitement about this paintless primer introduced by two of your competitors and you think that could have some negative impact on your consumer group.

Bob Wells

No I don’t think so. Probably architectural paints and quite a few products in our line also have this capability to act as a paint and primer in one. If you're going over previously un-painted services, these competitive products articulate that two coats are needed. So I think it's an interesting market approach. Good quality of paints should be able to handle these types of projects in one or two coats and we have full basket of these products as well in our line.

Operator

Our next question is coming from the line of Dennis McGill with Zelman & Associates.

Dennis McGill - Zelman & Associates

Just first one, just to clarify the fourth quarter revenue guidance. Sean how much should we model for the benefit from acquisitions for the quarter?

Sean Hennessy

We think that when you think about the mid-teens and probably just about half of that will be for acquisitions

Dennis McGill - Zelman & Associates

Okay, so when you think about it from an organic standpoint, you could actually see an acceleration relative to the third quarter even though comps are a little bit more challenging year-over-year?

Sean Hennessy

Yes, so if you take a look at the third quarter, our total sales rough 88. Net of acquisition there was 5-4. Yeah we can see an acceleration from that 5-4.

Dennis McGill - Zelman & Associates

And that's just a function of price and to Chris' comments, a little bit better on the margin?

Chris Connor

And improving volume as well.

Sean Hennessy

Yes, all those things.

Dennis McGill - Zelman & Associates

Great, second question, I know there's been a lot of comments out there most of which I think are probably inaccurate around what's happened with some of the share loss at Wal-Mart. Can you just clarify what that announcement means for your business and also throw the timing of when that will actually start to flow through on the revenue side?

Bob Wells

Yes, the decision that Wal-Mart need was to displace their two branded product offerings which were our Dutch Boy and another product supplied by Masco with the Glidden brand and then move some of their volume of there house brand which is colored place to AkzoNobel and a way from of their current suppliers. In total, we have reported that in terms of revenue loss for us on a full year basis, it will be less than $100 million.

Dennis McGill - Zelman & Associates

And as far as timing on that, are you starting to see that now with the order shipments or is that later?

Bob Wells

With our fourth quarter guidance that has been (inaudible) 17th 0:10 and about half of that being organic if there isn't impact in the fourth quarter it's not significant. I this from what we're operating under Dennis, is the expectation that the branding part of this business will move first and that as the paint season unfolds next year you should probably see Wal-Mart's new branding position on shelf and the private label work will flowing behind that, that won't be as evident to the marketplace but all these things should be well underway by the first quarter of next year.

Dennis McGill - Zelman & Associates

Okay, very good and then just one last question. Taken the comments you made about the dilution of global segment. Is it right to assume that the margins there excluding acquisitions were up 50 or 100 basis points year-over-year?

Chris Connor

Yes, when you take a look at without acquisitions in the third quarter. No, actually misspoke there, without the actuations they were still, they were not up that much but for the full year they are going to be almost twice of what they were last year.

Operator

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

John Roberts - Buckingham Research

Couple of clarifications, when it sounds like you expect to fully restored margins after freight raw material stabilize?

Chris Connor

Yes, I think when we take a look at the long-term, the way we run the company, when the runs go up, we usually see some depression in our gross margin and it's happening again. But over a course of time, 12 to 18 months we eventually come back and recover our gross margin. So, last year was their all-time peak at 46%. Now we're going to be slightly below 45 this year. We think that eventually we're going to be backing that 46 range.

John Roberts - Buckingham Research

Secondly could you comment on the commercial re-paint market? There's a lot more square footage out there obviously which you've talked about in the past because of all the construction activity over the past several years. It seems like we're having a lag here in getting the re-paint activity to pick up in commercial.

Bob Wells

Yes that’s accurate John, most of the lift that we're seeing this year, we commented comes from the residential re-paint market and the commercial re-paint market has actually been one of those areas that we're seeing stress in. Two numbers that you can look at to help support that would be the vacancy rate at both retail and office. Big users of residential re-paint products and contractors time and both of these numbers are running at pretty high rates historically.

So much like we needed is get to those kind of glut of housing through the residential side has start to see some lift there. We need to see occupancy rates for over build retail space rebound as well as in office. To that end, very little if any new commercial construction activity happening in United States this year and those spaces we think this is our first time in about four years that there hasn’t been a major retail complex under construction somewhere in the United States so we're going to have to wait for a while before our backlog goes through and our guidance for this year with the commercial re-paint would be a soft segment for the company and it's certainly proven to be the case.

John Roberts - Buckingham Research

Is the industrial and government re-paint activity picking up but not have any effect here on the overall?

Bob Wells

Yes, absolutely that’s certainly better than the commercial re-paint and actually quite strong, it was a real help in the quarter. Not only are we seeing some of the impact at the stimulus money and infrastructure projects but as typical in a cycle like this, you can only hold off on maintaining these kinds of assets for so long and then you need to get back on them. So our protective and re-encodings business both domestically as well as under role is actually performing quite nicely right now.

Operator

Our next question is coming from Douglas Chudy with Keybanc Capital

Douglas Chudy - Keybanc Capital

Good morning. You know there is some temporary elevation in SG&A, but taking a longer term view, do you sense that is your volumes improved, you can ratchet that SG&A as a percentage of sales back down to say 32, 33% level on 2006, 2007.

Chris Connor

Yes, I think that as a percent of sales for sure that over the course of time you're going to see us ratchet that SG&A down as a percent of sales. I think though that when you saw the SG&A improvement in the first six months of the year versus the last six months of the year. I think you are going to starting to see that our SG&A from the closed stores and all the activities we have done, we've now really getting close to a more normalized rate as we get more volume then I think you are going to start seeing that SG&A as a percent sales continue to go down.

Douglas Chudy - Keybanc Capital

Okay, that’s helpful and then secondly just a follow-up on the Wal-Mart business. Do you have any concerns that some of your other Wal-Mart business could be at risk here?

Bob Wells

Business is always at risks, at all these third party retailers that we do business with. Having said that, the programs are performing well. These are strong brands that are at Wal-Mart, Minwax, Thompson's, Krylon and our expectations are going forward that that won't be an issue for us but time will tell.

Douglas Chudy - Keybanc Capital

Okay, and then just finally, can you comment on the sequential demand trends? I mean it sounded that you are a little bit more optimistic. I mean have you seen any sort of a pick up here in the early parts of the fourth quarter versus what you were seeing during the third quarter?

Bob Wells

No again I think the residential re-paint components of the business continued to show some strength. As Sean clarified the kind of fourth quarter sales guidance with acquisitions out we're looking in kind of that mid to upper single digit range here. So all that's an indication that we're seeing a little better. Performance for the company, I think that clearly there is market share gains being generated here, but also we're seeing a little better health in the [iron] markets.

Operator

Our next question is coming from Dmitry Silversteyn with Longbow Research.

Dmitry Silversteyn - Longbow Research

Couple of questions, but most have been answered, but you've had a pretty decent volume growth in the global market. I mean, it's global and industrial. So was the growth more on the architectural side in Latin America or was the growth more on the aftermarket, the automotive and maintenance and marine and global colorings?

Bob Wells

Actually the architectural volume for the quarter was a little bit higher than the automotive or the industrial, but the automotive, industrial were fairly strong for us.

Dmitry Silversteyn - Longbow Research

Okay. So you actually did have mid to high single digit growth, it sounds like an architectural paint.

Bob Wells

Yes.

Dmitry Silversteyn - Longbow Research

Latin America, and did that come largely as a function of heading new stores or did you also disclose same store sales for the global business like you do for domestic?

Bob Wells

No.

Chris Connor

We don't do comp store sales for our global business probably something we should think about doing going forward, Dmitry fair question. I would just say that just a better architectural health and the key architectural segments, Brazil, Mexico, Argentina, Chile really drive Latin America for us. So to our stores, our dealer network, our home centers all doing nicely right now.

Dmitry Silversteyn - Longbow Research

Okay. Okay. That's helpful. And then I'll not do so much concentrate on the loss of the business of Wal-Mart, but kind of what that loss represents beyond the P&L impact and then how do you view your brands outside of Shawn-Williams, obviously you have a very good and very strong brands in Minwax and Thompson Seal that’s just about every distribution channel you can think of. Krylon is a good brand, but is there much behind that or will you going to have to address at some point your stable of brands and see how viable some of these are longer term particularly Dutch Boy but also beyond Dutch Boy?

Chris Connor

Well we should be thinking about that all the time Dmitry and working to strengthen the brands. So we are having that in the company. We would point out that the third largest home center chain in United States Menorah is a terrific partner for our Dutch Boy brand and there are dozens of other regional home center discount hardware chains across United States that are enjoying and helping us market that brand.

So, we are committed to the staple of brands we have. There is no movement of foot because of its one decision by Wal-Mart to change any kind of channel strategy or support for the brands we have inside the company.

Operator

Our next question is coming from the line of (inaudible) with Stevens.

Unidentified Analyst

Couple of questions back just on the raw materials just briefly. Can you remind us how much that you are paying costs are associated with the TiO2?

Bob Wells

Yeah it’s in the low 20%. TiO2 represents the 21%, 22% of the cost of our total raw material baskets.

Unidentified Analyst

Okay. So if I understood right, you are kind of thinking or at least you think it’s a most realistic expectation is that those costs might be up 20% to 30% next year.

Bob Wells

That’s what it looks like now

Unidentified Analyst

Okay and so that would imply I think like 4% to 6% price increase needed to help offset that particular increase.

Chris Connor

But I don’t see the math you get to the raw material cost input, but the pricing that we would need would be about half of that as raws as the path kind of good that counts about half of the average selling price of given of architectural paints.

Unidentified Analyst

Okay that’s really helpful thank you. And then also your talks kind of on accrued prices I know you said that the ply looks like its getting better prices continue to be high do you think that that’s kind of continue or do you think at some point we’ll start to see those move down again?

Chris Connor

I think that’s obviously a good question and one that we are all paying attention to. Our practice trade has been at that first quarter call to give you guidance on what we are seeing for industry for the year. And its just a little early for us to start going down the whole basket of raw materials here.

There is so much noise around Titanium and there is a lot of press on that now that’s why Bob wanted to commented on that kind of ranges that we are seeing out there. Its just too early to make this call and the others supply is easing. And as Bob mentioned we are off for the forced measure and some of struggles we had earlier in the year.

We would like that settle in little bit, get to our year end negotiations with these folks. I won’t give as much visibility and guidance we possibly can in the first quarter.

Operator

Our Next question is coming from Eric Bosshard with Cleveland Research.

Eric Bosshard – Cleveland Research

A couple of things first of all the titanium dioxide the 20% to 30% or maybe I am missing something. But that seems to be a tremendous amount of inflation in a very important raw material and I guess my question is, is that actually where you think it ends up in 2011? And secondly, when you put through your August price increase, you had commented that that reflected what you'd seen inputs. I'm assuming that titanium dioxide has worsened materially since that pricing decision was made. Can you just give a little bit of color on those two items?

Chris Connor

Bob’s comments were relative to some of the chemical analyst reports that we are reading here and that’s so much hard negotiation at the table and what the stuff is going to cause the industry for calendar year 2011. So that’s just an early look at kind of the pressure. You are correct in your assessment, this is remarkable inflation in price for product line that has typically gone through its ups and downs. I am just going to have to wait let a whole time, go by here until that kind of settles in and we see what the number comes in at.

We are not giving guidance on this call for 2011 cost increase for the industry and we absolutely will hold true to our commitment to get that to you in the first quarter.

Eric Bosshard - Cleveland Research Company

In terms of the second half of my question that was about pricing in August. I don't know if you can give any color that if the input cost environment has changed since that pricing decision was made?

Chris Connor

Yes, I would say that what you categorized earlier about the CO2 situation and worsening them before we went out with debt price increase and determine the percentage we needed. I would say that the TiO2 pricing has become more dire than what we had there at that time.

Eric Bosshard - Cleveland Research Company

And then secondly on the progress with that August increase, Chris, you said that it's kind of gone through at a normal basis up or similar to what's happened historically. Can you give any further color about the markets instead for the price increases?

Sean Hennessy

Yeah I think that you know when you take a look at it, it’s always difficult. But if you take a look at on the store side and the consumer side is just as difficult that’s it is always but I would tell you when we look at the effectiveness of that August 16 plus, have it’s a little bit of a mix again positive mix that we have had in the past, now its only been six weeks there but we take a look at it, we think its that price increase probably has gone in just as well and any that we put in, in the last 10 years.

Eric Bosshard - Cleveland Research Company

Great, thanks for that Sean. And then lastly on the acquisition delusion and the transition to accretion which sounds like begins in 2Q of next year, can you give us any sense of what the magnitude of that swing is? And then also explain what happens within the business to make it go from diluted earnings to accreting?

Sean Hennessy

Probably if I could just refer you, later this week we are going to be putting out our queue and our financials, and our footnote and if look at good footnote 14 which basically does a pro forma and what it shows, I freely share with you. 2009 if we would have owned Becker as well as Sayerlack from the beginning of '09 our pro forma third quarter would have been in $1.52 and for the first nine months would have been 3.19 and as you know, last year we earned $1.51, so they would have been accretive by $0.01 and $0.02 for the first nine months. And I think we have talked about that it was lower than dollar-for-dollar for sales for that reason. But when we think about next year number one, the first thing its going to cause accretion is not going to get to closing cost and number two we think that some of the steps that we are going to take are managing this businesses will be higher than what they were earning in prior year. So I think you can see they you are in the depending in the third quarter and $0.02 for the first nine months. We expect to have more than that in a run rate maybe not because of just the beginning of the change that we are making but by 2012 we’ll start to see more, but I think we’ll have more than what they have earned in 2009.

Operator

Our next question is coming from Matt McGinley with ISI Group.

Matt McGinley - ISI Group

On the increase in inventory that you had on the raw materials versus the acquisitions can you give me the rough split between what those (Technical Difficulty) quarter and then on the acquisition side of that as you fully integrate these acquisitions out on the 2011, how will that number change do you think that you can get that number to go down as this become broaden the share (inaudible).

Sean Hennessy

Yeah I think when you take a look at the working capital as a percent of sales of these two acquisitions that we can buy them we are going to be around 30% of sales and I think which is almost three times the time we run the company, but when we segregate our company we are little higher outside of the United States because of scaling so forth, but when we look at this we expect over the next few years we are going to be able to make dramatic improvements in there. The inventory of $859 million of the inventory was $74 million from acquisition so when you take a look at that the reminder was up about 7.2% - 8%, so when you take a look and gain that’s again the high end of the range that Bob talked about with the raw material side. You make a great point that 30% working capital percent of sales we are going to be again working on that next year.

Matt McGinley - ISI Group

Okay. that’s helpful thanks and then second question is, this is the first time, a couple of years we saw paint stores top line growth that was better then the consumer group. Do you think you are starting to see a channel shift back to other (inaudible) DIY or is this just you know the pro segment bouncing off the bottom?

Bob Wells

Don’t forget that in that paint stores group number is also DIY business as well. E have had a good DIY quarter there, but the strength primarily coming from that residential re-paint category and join the painting contract is playing the real role over there.

Operator

Our next question is coming from Chuck Cerankosky with Northcoast Research

Chuck Cerankosky - Northcoast Research

Chris, when you are looking at the volume strengths and weaknesses gained from you touch then a number of markets are there any others as you’d like to call out or point to?

Chris Connor

We’ve talked about the residential repaid both from a professional DIY to our stores, I think one of the earlier callers also got us talking a little bit about the protective in marine segments both domestically and globally. Those have certainly been highlights in the quarters Chuck.

Chuck Cerankosky - Northcoast Research

Alright, as you are looking out to next year with the prospects of some higher [royals] what do you think the contracted markets is going to be like regarding its receptivity for future price increases as there has been a lot of them in the last couple or three years.

Chris Connor

Yeah we are blessed with a customer base with the professional that has the ability to pass pricing on to their customers as we have commented frequently on this call, the cost of material is anywhere between 10% to 20% of the cost of the paint jobs, so they are about able to mitigate it. The likelihood if some of the chemical analysts are correct the titanium is up into 20% or 30% range, we would expect to see the industry go to another round of pricing in calendar 2011 and we'll just have to be prepare to respond to that.

Operator

Our next question is coming from Carly Mattson with Goldman Sachs.

Carly Mattson - Goldman Sachs

I was wondering, give us an update on white paint litigation and putting anything that's happened in California?

Sean Hennessy

Yeah. There are actually handful of season counties that brought simply in California in recently the State Supreme Court ruled on one of our motioned and determined that it is permissible for these season counties to retain contingency be council to aid in these suits, but the governmental agencies must retain control over the suits, so that is essentially now sending the matter back to the trial court for further proceedings. We anticipate that, we still need to complete discovery in those suits and there is other motion track that issues to resolve there. And then in addition to that there are a couple of our personal injury suits that we face in Mississippi one being a single point of suit which was tried to a Jury last year and The Jury returned a verdict for the Plaintiff, the company has filed a Notice Of Appeal with the Mississippi Supreme Court and we've now begun briefing, we filed our opening brief this past summer and the Plaintiff filed their brief shortly after that, no hearing date have been set yet a decision is not expected until at least mid 2011 for any outcome of that appeal.

Operator

Our next question is coming from James Ainley with Citigroup.

James Ainley - Citigroup

Just a question on the proposed lease accounting changes and what impact that would have on Shawn-Williams. We don’t really hear with that much in the chemical sector but you are sort of a hybrid.

Chris Connor

Couple of things. Of our 3350 approximate stores we own right around 260 of them and so that means that we have many leases and we are trying to get a five year term and four or five year options with a fine (inaudible). What’s going to happen, when a lot of times people will ask us about our leverage, we always talk about our debt to EBITDA being right around one but really 1.7 if you think about net present value of those leases.

So, we’ve always continued to freely point that out. What you are going to see is, our leverage is going to grow to about 1.7, because what we have to do is put that asset on our books and we are going to have to put the debt on the books. We are not going to have any pounds with our covenants. We looked on our covenants and I know other companies are taking a look at this and say that this trigger covenant issue form with the banks, we don’t have that.

The real question will be how much we are going to have to on an ongoing basis change the fair market value of those leases and that will be pretty interesting because we got with 20 years control with the change of interest rate, we might have that going in and out and unfortunately I figured really it doesn’t change the aspect of our company or so forth. We got to see more volatility on our balance sheet, because of this sized asset being changing on an ongoing basis for fair amount of value, but what we are again trying to do is to keep this out of our operating division so that they are so focused on selling paint which is how we really make paint money.

James Ainley - Citigroup

So it just a bit more transparent in terms of leases beyond the balance sheet, but once they are there assuming that this goes forward then there maybe some noise, but its just more about accounting. Different noise rather than actual results being impacted.

Chris Connor

You find them about six, seven years ago with the lease changes there was many people and you had a sum up come over the change and we put something on our balance sheet, but it was less than $10 million but this one is going to be tremendously larger. It’ll be in the neighborhood of $700 million.

Operator

(Operator Instructions). Our next question is from Paul Mann with Morgan Stanley.

Paul Mann - Morgan Stanley

You know the analyst is expecting sort of 20% to 30% inflation in TiO2 in 2011. On the similar year-over-year inflation what sort of inflation is better than the current level of TiO2. Also what are you expecting from the rest of the raw material baskets. I guess the rest of baskets is going to ease a little during 2011.

Bob Wells

We really aren’t prepared for a full raw material outlook for 2011 on this case. The comment about the 20% to 30% inflation was simply picking up kind of consensus view of analyst that we read and we have not done the analysis of current levels versus a 20% to 30% inflation rate year-over-year. So, I don’t think we are prepared to answer that question.

Paul Mann - Morgan Stanley

Okay then my second question is just how do you favor by your own inventory of raw materials particular in acrylics during Q4 during kind of the seasonal down turn. Is it like you can sort of re-order to re-stocking in your acrylic inventory.

Chris Connor

I think this acrylic inventory position in the industry is phenomenally better today than it was two or three quarters ago, most of the operating issues from our suppliers have been resolved to back up running and full capacity. The seasonal slack in demand and its helped that process, and at this point in time there are no issues there at all.

Operator

Thank you. There are no further questions at this time. I’ll now turn the floor back over to management for any closing comments.

Bob Wells

Thank you again Claudia. I would like to thank you all for your participation on the call this morning. As always I’ll be available over the balance of the day and this week to take any follow up questions you might have. We appreciate you joining us this morning and thanks as always for your continued interest in Sherwin Williams.

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