宣偉 (SHW) 2004 Q1 法說會逐字稿

Good morning and welcome to the Sherwin-Williams Company's first quarter of 2004 earnings result conference call. Today's call is being recorded. At this time for opening remarks, I would like to turn the call over to Conway Ivy, Senior Vice President, Corporate Planning and Development. After his remarks Chris Connor, Chairman and Chief Executive Officer; Sean Hennessy, Chief Financial Officer; John Ault, Vice President, Corporate Controller; and Bob Wells, Vice President, Corporate Planning and Communications will be available for questions. Please go ahead, sir.

Yes. Good morning everyone, and thank you for joining us today for our review of our first quarter 2004 results and our expectations for the remainder of the year. 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 Web cast will be available approximately two hours after this conference call concludes. It can be accessed at www.sherwin.com and will be available until Monday, May 10, 2004 at 5 PM Eastern Time. Before proceeding, I would like to remind you that during this conference call, we will make certain forward-looking statements as defined under the US Federal Securities laws, with respect to sales, earnings and other matters. These forward-looking statements are based upon management's current expectations, estimates, assumptions and beliefs concerning future events and conditions. Listeners are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements are necessarily subject to risk, uncertainty and other factors, many of which are outside of the control of the company and these factors could cause actual results to differ materially from such statements and from the company's historical results and experience. A discussion of these risks, uncertainties and factors are described from time to time in the company's reports filed with the Securities and Exchange Commission. 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. After the review of our results, we will open this session to questions.

Summarizing our company's overall performance for the first quarter of 2004 versus first quarter 2003, net sales increased $171.1m or 14.9% to reach a level of $1.320b. During the quarter, we saw continuing strength in our domestic architectural paint sales and improving market conditions and sales momentum in the industrial maintenance, OEM product finishes and automotive finishes market. Gross margin for the quarter declined to 43.3% of sales from 43.7% in the first quarter 2003. This reduction in gross margin was due primarily to the accrued expenses associated with the closing of a factory and a warehouse and a shift in sales mix. SG&A spending for the quarter also declined as a percent of sales to 36.7% from 38.4% last year. This was largely a result of the strong sales growth while maintaining control over expenses. In dollars, SG&A was $484.5m in the first quarter 2004 versus $440.4m in the first quarter 2003, which reflects an increase of $44.1m. Net income for the quarter increased $20.7m or 67.1% to $51.5m from $30.8m in the first quarter of 2003. The combination of strong sales growth and tight expense control accounted for most of this increase. Diluted net income per common share for the quarter was $0.35 per share compared to $0.21 per share in 2003, which is a 66.7% increase. Now I'd like to briefly review our performance by segment.

Sales in our paint stores segment increased 12.2% to $803.7m from $716.3m in first quarter 2003. Architectural paint sales remained strong throughout the quarter, and sales of industrial maintenance products and OEM product finish has improved as economic conditions continue to strengthen. Regionally, our Southeastern division led the sales performance followed by Eastern division, Southwestern division, and our Midwestern division. Comparable store sales or sales by stores open for more than 12 months increased an 11% over the first quarter last year. Paint stores segment operating profit increased $22.6m or 75.4% to $52.5m. Operating margin improved to 6.5% from 4.2% in the first quarter of 2003. For the first quarter of this year, we opened five new stores, closed one store in Mexico and transferred one store to the automotive segment. Paint stores ended the quarter with 2,691 stores in operation in the US, Canada, Virgin Islands, Puerto Rico, and Mexico.

Turning now to consumer segment for the first quarter 2004, external net sales increased 19.2% to $317.2m from $266.2m in the first quarter of 2003. This sales improvement was driven by a number of successful new products introduced during last year. Sales to new customers and acquisitions. You might recall that sales in the first quarter last year were negatively impacted by a variety of factors, primarily related to slow economic growth and unusually harsh weather. Operating profits for the segment increased $10.1m or 25.9% to $49.2m. Strong sales growth and favorable manufacturing absorption related to higher production volume more than offset increases in raw material pricing to yield an operating margin for the segment of 15.5% compared to 14.7% in the first quarter last year. First quarter net sales in the automotive finishes segment increased 13.1% to $120.3m compared to $106.4m in the first quarter of 2003. Net sales for the segment increased 3% for the quarter from the impact of favorable affects of currency exchange rate relative to last year. The remaining 10.1% sales improvement was due primarily to strengthen the poor domestic collision business and improve domestic OEM sales.

First quarter operating profit through the segment improved $1.9m or 18.7% to $12m, a four tenths of 1% improvement in operating margin. Operating profit for the up automotive finishes segment was positively impacted by higher sales volume and the related manufacturing absorption and tight expense control. Turning now to our international clothing segment results for first quarter 2004 versus first quarter 2003, sales increased $18.6m or 32.1% to $76.4m and this compares to $57.8m in the first quarter of 2003. A strong increase in net sales for the segment of 11.1% for the quarter driven primarily by improving economic conditions in South America and the volume growth in the United Kingdom was further enhanced by 21% impact of a favorable currency exchange rates. The segment realized an operating profit for the first quarter of $4.7m compared to an operating loss of $259,000 a year ago. This improvement in operating profit was a result of strong sales growth, tight expense control and operational efficiencies related to manufacturing volume. Favorable currency rate fluctuations had a positive effect on gross margins as a result of our purchasing many required raw materials on the US dollar denominated basis. I would now like to comment briefly on our balance sheet items. You will find more balance sheet information on our website under sherwin.com investor relation's press releases. Working capital defined as the net of our accounts receivable plus inventory less payables, was 12.8% of sales compared to 13.2% of sales last year. Receivable days were flat and inventory days decreased by six days. We had no short-term borrowings at the end of the first quarter. This resulted in our total debt level on March 31, being $105.7m below that of the first quarter of 2003. Total borrowings to capitalization were 26.1% at the end of the quarter versus 32.6% at the end of the first quarter 2003. Barring any major acquisition we expect our total debt to capitalization to be approximately 24% at the end of 2004. During the first quarter of 2004, the company purchased $1,850,000 shares of its common stock in the open market. We intend to purchase shares of the company's stock for treasuring in the open market from time-to-time. At March 31 2004 we had a remaining authorization to purchase $15,173,000 shares. In the first quarter 2004 in terms of other items we spent $25.8m on capital expenditures, depreciation expense was $25.3m, and amortization expense was $3.2m. For the full-year 2004 we expect capital expenditures will be approximately $130m. The predominant share of these capital expenditures will continue to go towards expanding our stores network, plant productivity improvement, and maintenance and distribution infrastructure. Depreciation for the year will be about $108m versus $104.8m in 2003. Amortization for the year will be $12.4m versus $11.8m in 2003.

Now I would like to give you a brief update on the status of our lead litigation. In the first quarter of 2004 the trial court in Rhode Island denied the request of the state, to permit the public nuisance issue to be tried before the judge instead of a jury. In addition the state dismissed the tort claims. This left the court with public nuisance, restitution and indemnity, and consumer protection claims pending. After discussion with the parties the court took the public nuisance jury trial schedule for April 2004 off the trial calendar, and set an alternative trial date of April 2005, for a jury trail on the remaining claims. Discovery is now in progress regarding the nature of the issues and the scope of that trial. All cases in Mississippi are in various stages of discovery and motion practice. As a result of these events and the trial dockets in the jurisdictions involved, no trials are now scheduled for 2004.

A personal injury case in Milwaukee was dismissed in 2003, and the plaintiff's have appealed the dismissal. Only the New York City, St. Louis and Rhode Island government cases are pending and they are in discovery. The case is brought by the cities by of Milwaukee and Chicago and the County of Santa Clara in California and the consolidated cases in New Jersey are all on appeal after dismissals by the respective trial courts on motions filed by the defendant's. As a reminder, to date we've had less than 111 litigation cases filed since 1987, excluding the most recent cases over 85% of them dismissed. None of that have been settled, only one, that's Rhode Island, has ever come to trial. This completes my review of our results for the first quarter of 2004. Now, I would like to turn this session over to Chris Connor who will make some general comments and highlight our expectations for the second quarter and full-year, we'll then open the call to questions. Chris?

Thanks Conway and good morning everybody. Thanks for joining us. Conway walked you through the numbers for the quarter, and I don't think they require much commentary, so I'll be brief. I would like to begin by acknowledging the hard work and dedication of the entire Sherwin-Williams team. Given a difficult market conditions we've faced over the past three years, it is gratifying to report double-digit sales growth across all four segments of the company, and further more our ability to convert a 14.5% or 14.9% consolidated sales increase into a 67% increase in net income. This is strongest evidence to date of the success of our operational excellence program, and helping us to drive productivity through this organization, and drive cost out. While we are pleased with the results over the first three months, we also recognized that the comparisons from first quarter of 2003 were not difficult. Last year at this time, you'll recall that we were coming up a quarter plagued by a sluggish economy, the war in Iraq, unusually harsh winter weather across most of the United States, a soft industrial coatings market. slow retail traffic, and a significant number of store closures by a major account. As a result, revenues for the quarter declined from 2002 as earnings were off. In retrospect, we are very encouraged by the robust business activity, we've seen so far this year, and I'm pleased to report that our strong first quarter sales momentum has continued into the second quarter.

But the comparisons are going to get a lot more difficult from here on in. In the first half of '03, our revenues grew by just seven tenths of 1%, sales growth in the second half accelerated to 7.3%, with 11.1% gain in the fourth quarter. Clearly, the second half comparisons will be more challenging. We also see some potential speed bumps ahead, but fully expect to manage through them. Last week, Federal Reserve Chairman, Greenspan left little doubt that an interest rate hike is on the horizon. We view that pending rate increase as a manageable risk, with 70% of our sales coming through controlled distribution, we had a flexibility to shift our sales and marketing focus, the segments that are showing stronger growth. As a reminder, we believe that 80% to 85% of the architectural coatings market volume is used in repainting and maintenance, and thus would be minimally impacted by a decline in new construction activity. Never the less, the affected rising rates could slow the recent strong growth in the overall market.

Another potential speed bump we see is demanding pressure on raw material cost. Crude oil from the week it is just under $37 a barrel and natural gas continues to trade in the range of mid$5 to mid$6 per million BCU. This higher energy cost have driven up the cost of some basic raw material such as polyethylene, used to manufacture plastic pales, monomers used to manufacture latex binders in various province. Strong buying in the codings market results will spike demand for TI02 and supplier to take an advantage by raising prices. In the first quarter, Industry TI02 pricing rose by as much as $0.06 per pound, an additional increase of $0.05 per pound has been announced to the general market place for the second quarter of 2004. In the year end 2003 conference call, we anticipated that the coding industry will experience an annualized year-over-year raw material price increase of 3% to 5% this year. Today we believe that 4% to 6% is a more likely range for 2004. We are not certainly immune to the impact that higher energy cost in growing global demand have on the pricing of many of these commodities. In this environment, margin expansion will be challenging but to the development and implementation of lower cost product technology, our persistent drive to improve the productivity of our operations and our ability to implement selective price increases. We are confident that we will achieve our sales and earnings plan for the year. Which brings me to our outlook for second quarter in full year 2004. We expect second quarter sales growth in the high single digits over second quarter 2003. With sales at this level, we expect diluted net income per common share to be in a range of $0.80 to $0.86 per share compared to $0.75 per share for the second quarter year. Our original guidance for the full year of 2004 was for sales growth in the mid single digit over last year and diluted net income per share in the range of $2.45 to $2.55 per share. We now expect sales to increase in the mid to high single digits over 2003 based on this revised sales range, we have raised our expectations for diluted net income per common share for the year to a range of $2.54 to $2.62 per share compared to $2.26 per share last year. Again, I would like to thank all of you for joining us this morning and now, we would be happy to take your questions.

Thank you. The question and the answer session will be conducted electronically and if would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one to ask a question, we will pause for just a moment. We will take a question from John Robert.

Good morning. Can you hear me?

Yes John.

Do you still expect four or more stores to open this year and if so, will it be over 10 stores in this upcoming quarter?

Yes. The guidance we have given. John, for the year is that we expect to be at 60 stores.

Okay.

And given the soft first quarter opening as Conway mentioned, five stores. Yes, we will be over 10 for the second quarter.

Well, going with 60. Will you be able to 20, you got almost 20 of .

Yes. I think, just working at how the River state deals are going to lay in for the deals we have done and probably we won't be 20 in the second quarter but we will be accelerating as the year progresses.

Okay and that's all organic or our acquisitions in vision is part of the 60.

That's all organic.

Right. Thank you.

And we will take our next question from Eric Bosshard.

Good morning.

Eric, Good morning Eric.

On the revenue lines in terms of increasing the revenue outlook now versus what you had said previously, can you just talk perhaps business-by-business or what you considered in raising that guidance. What you're seeing in terms of improvement there?

Sure Eric. I'd be happy to do that. I think when we look at segments for the quarter, we believe that the stores group will be up in the mid-to-high single digits. We think consumer will stay on track in the mid-to-high single digits as well. We continue to expect our international business to be up double-digits and automotive strengthening we expect that to be up mid-to-high single digits as well. So, for the quarter it looks pretty strong for us as we gave comments here at the second half gets a little tougher and so just some of those segment numbers is dropped down one notch as we go forward.

Within the segments are there are trends you've seen if it's on the consumer it it's DIY, I mean are the different programs are different end markets that are driving improvement better than you expected? And where you've particularly seen strength?

Well, clearly most of these segments were better than expected given the guidance they gave for the quarter and the Regisatls came in and as we commented it's really been across all four segments really strong double-digit performance so, you can't - most cylinder sitting together right now.

Great. Thank you.

Thank you.

And as a reminder if you would like to ask a question please do so by pressing star one as this time. We'll take our next question from William Tellers.

Hello, everybody.

Hi, Bill. How are you?

I am good, how are you? Looking at the change in the tax rate from fiscal '03 to fiscal '04. Is the rate in the quarter is that a good run rate for the year?

Yes, if you really take a look at the run rates, now it is good for this year but I would believe that the tax rate is good for 2005.

Okay. And then there is the big change looking at the segments, in operating profit, in the administrative segment, I was wondering if you can give a little detail on that.

We were showing roughly about a $9m increase in admin expense that really resulted from an increase in compensation and service cost relative to our significant sales growth, you know, relative to the quarter last year, and the balance was due to incremental spending in software development, maintenance and general IT expenditures.

Okay, and one last thing. In the net other expense that also was an uplift from last year to this year. Is there -- Can you give little of pick up on that please?

Sure. Most of the $4m change resulted from a swing in foreign currency related gains and losses. Losses, it went from a $2 .5m loss in 2003 to a $460,000 gain in '04. The balance was due to a slight increase in other income and a slight reduction in other expenses.

Okay. Great, thank you very much.

Thank you.

We will take our next question from Ivy Zelman.

Good morning gentlemen, actually it's Tom Segaum on behalf of Ivy.

Hi, good morning.

I just really have one thing I'd like to touch on being on the gross margins and the cost versus price aspect. Realizing in this quarter, I think may be you weren't able to raise prices this fast, but just trying to get a handle on for the year where you see the price versus cost asset on the margin side?

Well, I think as we've comment on the cost side, we think the industry will be in that 4% to 6% range on raw material because raw material cost. We have always worked to offset that by two ways, one increasing selling prices selectively and those activity are ongoing in our company and have been since beginning of the year. And secondly through productivity enhancements and our own ability to litigate those cost increases by operating it more efficiently. I think the guidance that we've given for the year is that we'd expect to manage through and keep our margins fairly consistent with last year based on those two practices.

Okay. And in this particular quarter where you just not able to keep up with the rapid movement in the raw material cost.

I've think in the first quarter; we were successful into many selective price increases primarily offset manufacturing cost by that. But, when you take a look at the gross margin, we also accrued for closing of a factory, which was our factory in Chicago and a warehouse, which was operated by our segment. If you take those two things out, it was really a 10% decline and if you really take a look at that it's really a mix change. Our gross margin on an apples-to-apples basis was fine.

Okay, so you staying off 20 basis points.

You are right.

Great. That's very helpful. Thank you guys.

And as a remainder, if you would like to ask a question. Please press star one at this time. We will take our next question from Barbara Allen.

Thanks. And as usual another excellent job, and thank you for the detailed release and explanation. On the mix change in the gross margin, could you elaborate on that a little bit, I would have expected more movement up the price point?

Well, actually when you take a look at return on acquisitions, acquired dispersions as and when you a take a look at the sales increase in the consumer group. When you take a look at the mix change towards aggregate dispersion. Aggregate dispersion had a lower gross margin than the core business. And I think because of that and also some significant sales volumes to some of your major customers in the last retail channel that affected gross margins and that you know the lower SG&A nature, some of these businesses resulted in a neutral or past deeper impact on operating margins.

Okay, and I apologize for not being able to attend your presentation in New York. Could you review for me what you are seeing terms of the competition, any change is out there in your paint stores environment.

Barbara, I think the battles continue. We were blessed with great competition, and think this strong quarter probably has been felt by some of our competitors as well, but, you know, I would say there are no significant changes in terms of the competitive structure there in the industry.

No one has decided to ramp up their expansion of paint stores or anything like that, or nothing.

Nothing beyond the normal course of business for each of these competitors.

Okay, thanks very much.

Thank you Barbara.

And as a reminder, if you would like to ask a question, please press star one at this time. And there appears to be no further questions at this time, I'll turn the conference back over to you for additional or closing remarks.

Thank you all for joining us today, and as you know Bob Wells and I will be available for questions concerning this release for the rest of the day. And obviously on a ongoing basis, should you all have any additional questions, we'll be happy to respond to you, and so, thanks very much for joining us.

And that does conclude today's conference. You may now disconnect.