宣偉 (SHW) 2004 Q2 法說會逐字稿

Good morning, and welcome to the Sherwin-Williams Company' second quarter 2004 earnings results 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 Communication will be available for questions. Mr. Ivy, please go ahead sir.

Thank you. Good morning everyone. Thank you for joining us today for the review of our second quarter 2004 results and our expectations for the 2004 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 webcast will be available approximately two hours after this conference call concludes. It can be accessed at www.sherwin.com and will be available until Sunday, August 1, 2004 at 5:00 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 Security 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 the control of the Company. And these 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 other factors are described from time to time in the Company's reports filed with the Securities and Exchange Commission. Any forward-looking statements speaks only as of that date on which the statement has been made and the company undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. After the review of our results, we will open the session to questions.

Summarizing the company's overall performance in the second quarter of 2004 versus second quarter of 2003, consolidated net sales increased 9.9% to $1.62b. This result reflects continuing strength in our architectural paint business and improving sales and market conditions in domestic industrial maintenance and product finishes market. Gross margin for the quarter decreased to 44.6% from 45.2% for the same period last year. This decrease resulted primarily from raw material cost increases, most notably TiO2 steel containers, acetones and various solvents. These increases could not be totally offset by improved manufacturing absorption. Raw material cost increases affected all four operating segments. SG&A as a percent to sales decreased to 31.8% from 32.9% in the same period last year. This reflected the combined impact of strong sales growth and tight the expense control.

In dollars SG&A was $514.4m in the second quarter 2004 versus $484.1m in the second quarter of 2003. This was an increase of $30.3m. Interest expense for the quarter was virtually unchanged at $9.4m. Other expense, net increased by $4.5m approximately half of this increase was related to foreign currency losses and the other half due to an increase in environmental provisions. Income before taxes increased $21.7m or 12.5% to $195.2m. Net income increased 14.8% to $126.4m from a $110.1m in the second quarter of 2003. Diluted net income per common share for the quarter was $0.87 per share compared to $0.75 in the same quarter in 2003. In reviewing our performance by segment for the second quarter of 2004 versus second quarter of 2003, I will start with our Paint Store segment. Sales in our Paint Store segment increased 11% to $1.40b. This was due primarily to gains in our architectural paint sales to contractors and do-it-yourself customers and to stronger industrial maintenance and product finishes sales compared to the second quarter last year. Regionally, our Southeastern Division led the sales performance followed by Eastern Division, Midwestern Division and Southwestern division.

Our Chemical Coatings division achieved strong sales growth during the quarter. Comparable store sales increased 9.9% during the second quarter. This figure includes sales of industrial maintenance coatings and OEM product finishers, both of which had favorable comparisons. Operating profit increased 17.3% to $143.8m from a $122.6m in the second quarter 2003. Operating margin for the quarter improved to 13.9% from 13.1% last year. Strong sales volume growth and tight SG&A expense control more than offset a reduction in gross margin cost in part by raising raw material cost. We have continued our new store opening program as planned. For the second quarter of this year, we opened 14 new stores and closed one. Paint stores ended the quarter with 2,704 stores in operation in the US, Canada, and Mexico. Since the first of this year, we have added a net of 16 new stores, none by acquisition. Our goal remains to open more than 60 net new stores during the year. Our store refinish program is also proceeding as planned with a completion of 219 stores during the quarter. This brings our total to 1,652 stores and keeps us on track to complete our 2,200 retail oriented stores by year end.

Turning now to the Consumer segment for the second quarter of 2004 versus 2003, sales increased 7.5% to $371.7m. This sales improvement was driven by a number of successful new products and sales programs introduced during the past year, and also due to sales to new customers and acquisitions. Operating profit for the Consumer segment increased $3.6m to $70m compared to second quarter of 2003. This improvement was the result of higher sales volume and favorable manufacturing absorption related to increased manufacturing volume. This partially offset raw material cost increases. Operating margins for the quarter declined by four-tenths of 1%. Consumer segments SG&A for the quarter declined as a percent of sales versus second quarter 2003 due to tight spending control. Going now to our Automotive Finishes segment, sales for the second quarter of 2004 increased 8.4% to $131.5m from a $121.3m in the second quarter of 2003. This increase was primarily due to the successful new product introductions, improving international sales for the segment, and the acquisition of a majority interest in a Chinese Automotive Coatings Company. The positive effect of favorable currency exchange fluctuations relative to last year had a negative effect on sales for the quarter. Operating profit for the segment improved by $900,000 to $16.3m, a 6% increase over second quarter of 2003. New product introductions, improvement in the segments, international business, and the foreign acquisition more than offset the negative effect of raising raw material cost on the operating profit. Finally, now turning to our International Coating segment, in the second quarter of 2004, this segment posted a 10.6% increase in net sales to $76.1m from $68.8m in the second quarter of 2003. Favorable currency exchange fluctuations accounted for 6.9% of the sales increase in US dollars. Stiff competition in most South American markets continued to constrain sales, while our sales in the UK registered strong gains. Second quarter operating profit for the segment in US dollars increased to $1.3m from $600,000 a year ago. This was primarily due to increased volume and tight expense control. I'd now like to comment briefly on our balance sheet items. As many of you know, you will find more balance sheet information on our Web site under sherwin.com, Investor Relations, Press Releases. Working capital defined as net of our accounts receivable plus inventories less payables was 13.2% of sales compared to 14.6% of sales last year. Receivables were up two days, inventory days decreased by eight days, and payable days increased by two days.

Our total debt level on June 30 of 2004 was $512.5m, a decrease of $5.5m from the end of the second quarter in 2003. Total borrowings to capitalization were 25.4% at the end of the quarter versus 27.5% at the end of the second quarter in 2003. During the second quarter of 2004, the Company purchased $1.5m shares of its common stock in the open market. We intend to continue our repurchase of shares of the company stock in the open market on an opportunistic basis. At June 30, 2004, we had a remaining authorization to purchase 13,673,000 shares. Also during the second quarter of 2004, we spent $27.2m on capital expenditures, our depreciation expense was $25.5m, and amortization expense was $3.3m. For the full-year 2004, capital expenditures will be approximately $110m. This is down from our previous estimate of $130m due to the timing of certain projects. The predominant share of these capital expenditures will continue to go toward expanding our store network, plant productivity improvements, and maintenance and distribution infrastructure. The depreciation for the year will be about a $108m versus a $104.8m in 2003. Amortization for the year will be $12.4m versus an $11.8m in 2003.

Now I'd like to give you a brief update on the status of our Lead litigation. In Rhode Island, there have been essentially no changes. A tentative trial date of April 2005 has been set and discovery is now in process regarding the nature and scope of that trial. Two personal injury cases, one in Wisconsin and one in Maryland were dismissed in 2003 and appealed by the plaintiffs. In the Maryland case, the appeal was denied in part. In Wisconsin the appeal was denied in its entirety. Both plaintiffs have indicated their intention to appeal the cases to the highest courts in their respective states. All cases in Mississippi are in various stages of discovery and motion practice. 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 of New Yorkish, Chicago. Santa Clara, County of Santa Clara, California, and the consolidated cases in New Jersey are on appeal after dismissals by the respective trial courts on motions filed by the defendants.

As a remainder today we've had less than 100 -- litigation cases file since 1987, excluding most recent cases. Over 85% of them dismissed or been settled, and only one the Rhode Island case has ever come to trail. This now completes the review of our results for the second quarter of 2004. Now, I would like to turn this session over to Chris Conner, Who will make some general comments and highlight our expectations for the third quarter and full year. We will then open the call to questions. Chris?

Thanks Conway and good morning everybody. With the first half of 2004 now behind us, we remain confident about our prospectus for the year. Given the tougher comparisons that we knew we had coming up from the later half. We knew that we had to get off to a strong start and we have. And, I just like to take moment to complement and thank the entire Sherwin-William team for their hardworking commitment over the past six months. There was some pretty -- persistent selling effort and disciplined expense control. Each of our core operating segments achieved double digit revenue in profit improvement in the first half. With the positive sales momentum we have established an earnings per share improvement of 16% and 28% respectively for the second quarter and first half. I think we are in position to deliver a pretty good year, but there is still a lot work to be done.

During our first quarter conference call, I commented on two potential speed bumps that would need to manage our rates bring the balance of the year. They are the Federal Reserve Bank interest rate action, and rising raw material cost. The quarter point increase and effect run rates announced on June 30. I think was widely anticipated and further tightening action appears certain. Many the transaction for the sequential decline in June Housing Sargent Permanent applications prompting felt the end of the long homes in home building, while this is in fact the beginning of a sustained slow down or temporary market reaction to the rate increase. We believe that we are well positioned to manage through any potential declines in new home construction, as we have done successfully during the past periods of decline. As a reminder the majority our consumptional coatings, 80% to 85% are used for maintaining and redecorating existing properties. As you are all aware I just commonly commented there is mounting pressure on raw material cost. Higher crude oil and natural gas prices have driven up the cost of some basic raw materials, such as polyethylene used to manufacture plastic pails, monomers used to manufacture latex binders and various solvents.

The strengthening global economy and growing volume in the coating markets has also spiked demand for commodity like and steel cans and Ti02, and suppliers have responded by raising prices. Based on these factors, we anticipate the coatings industry will experience an annualized year-over-year raw material price increase of 4% to 6% in 2004, which reflects a significant double-digit cost increases in selected materials. As a Company, we've been diligent in our efforts to offset any raw material increases through manufacturing efficiencies, higher fixed cost absorption, the implementation of newer low-cost technologies, as well tight expense control. Going forward we must be equally diligent in our effort to implement prices increases are necessary and those efforts are happening as we speak. Most of my remarks this morning had focus of appropriately on sales and income. I like to ramp up by commenting briefly on the project that we continue to make on our balance sheet.

At the end of the June we had more than $213m in cash and equivalents on hand, with no short-term borrowings. And the strongest cash generating months is still to come. Working capital as a percentage of sales continues to shrink, primarily due to significant improvements in the inventory control. And our total debt-to-cap declined to 25.4% from 27.5% one year ago. This strong financial position enables us to continue to repurchase our stock on the open market for retaining the ability to seek viable acquisition opportunity. As, Conway mentioned during the second quarter, we repurchased 1.5m shares for treasury, and as all of you are aware on May 17 of 2004, we announced the -- that we going arrange an agreement to purchase 100% of the Stock of Duron, Inc. The acquisition of Duron is subject of reporting requirements and is currently under review by the Federal Trade Commission. We are fully cooperating with and supporting the Commissions review and we are optimistic that they will close the transaction in the third quarter. Year one results are not included in our guidance for the third quarter or full-year of 2004. Which brings me into that topic of our guidance. We expect third quarter sales growth in the high single-digit over third quarter 2003. With sales at this level, we expect diluted net income for common share to be in the range of $0.88 to $0.93 per share, compared to $0.82 per share for the third quarter of last year. On April 29, we said that we expected sales growth for the full year of 2004 to be in the mid-to-high single-digit range over last year. In diluted net income for common shares in the range of $2.54 to $2.62 per share. We now expect sales to increase in the high single-digit over 2003. And based on this revised sales range, we've raised our expectations for diluted net income for common share for the year to a range of $2.58 to $2.66 per share compared to $2.26 per share last year. Again let me thank all of you for joining us, and now we will be happy to take your questions.

And the question and answer session will be conducted electronically today. If you do have a question, simply press the star key followed by the digit one on your touchtone telephone. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again if you do have a question please press star one on your touchtone telephone now. And we will take our first question from Eric Bosshard, FTN Midwest Research.

Good morning.

Good morning Eric.

Couple of things for you. First of all in terms of sales guidance, you had commented coming out of 1Q that the comparisons in the second half of the year were difficult, and now you are talking about high single-digit increases on top of high single-digit and then some increases from the second half of last year. What's changed in the business, that's given you more confidence about such a higher levels, such a strong level of sales?

I think, unlike the sales in architectural coatings have remained strong and we see an improving situation in the industrial maintenance and chemical coatings sales. Also I think, as you realize the sales in our automotive segments are coming in higher than we anticipated. So I think it's the combination of those factors as we get, obviously we got closer to the last-half, we could see that momentum continuing.

Within the architectural business that's doing better, is this better market demand, do you feel like you are gaining market share, what are the factors that are contributing to that better performance?

We think it's both.

Clearly the market is better this year and from the numbers that we are able to look at here, we think we are up taking the market.

Secondly, in terms of the material and price situation. You had impressive operating margin improvement in the second quarter, less significant of what was accomplished in the first-half, first quarter, and in your sales and earnings head for the second half, seems like you have taken a conservative position on margin. Can you give us any color insight and your thinking on the margin performance in 2Q in the conservative margin guidance in the second half?

You are right Eric. That same quarter we had real nice margin improvements. If you take a look at it by segments for the first half of the year, our consumer is up slightly one- tenth over last year. But it was negative in the second quarter. We believe that for the year, I just give a comment on the year. We believe that in third and fourth quarter for consumer, we will be negative in margin and negative for year. But the other segments, it negative compares lower margins than we had last year, but the other segments the margins will increase for the year.

And then just two last questions in terms of Duron timing of closing the acquisition, what is the if you can give us any color on the potential accretion contribution in 2004?

Eric, the timing of the closing on that will depend on the timing of when the Federal Trade Commission led vendor, their decision. So, we think in terms of the process, it's very likely that would occur some time in the third quarter. I think as we go through the year, that the accretion that would come from the Duron acquisition would diminish and for any reason the acquisition closed at the tail end of the fourth quarter, we would not have any accretion and we that was late enough in the quarter, we not even slight dilution. So really the amount of the accretion will depend on the timing of when the acquisition would close.

And then last question, momentum in the first 22 days of the third quarter relative to the second quarter experienced the momentum of the business getting better, getting worse, staying the same?

I think the fact that we have given guidance for the year for sales in the high-single digits, July is starting off just like that.

Thank you.

Thank you.

And we'll take our next question from Jeffrey Zekauskas, J.P. Morgan.

Hi good morning.

Good morning.

A couple of things, the margins in the stores business improved nicely and the consumer business didn't show the same improvement. Is that a difference in the pricing dynamic in stores versus the pricing dynamic in consumer?

It's slightly that way, but the gross margin in consumer was affected at a greater rate than it was in stores, but you are right.

Okay. Secondly, certainly what I noticed is that some of your corporate costs in the first quarter of the year were way off and then they came down a good deal in the second quarter. Is that -- and at the same time you've also really improved your SG&A ratio. Is there a tie between the corporate costs and the SG&A ratio? And sort of can you explain the volatility in the corporate costs on an sequential basis, and sort of, I guess for the first half?

A big potion of the corporate costs had to do with the employee welfare benefit plans. Many of our compensation plans are related to operations. So, as the operations improve, the accruals for some of those benefit and welfare plans improve. So, I believe, between the first and second quarter, most of those changes had to do with our operations, and the cost of the benefit and welfare plans. I don't think there is a direct relationship to the overall SG&A spending because our corporate or our administrative spending was up in both quarters over last year.

You had a minority interest item in the quarter. What's that?

That reflects -- as we mentioned the Chinese Automotive acquisition, we bought a majority interest in that. And so, that reflects the minority interest in that business.

Lastly, you were kind enough to list all the raw material cost pressures that you were feeling, Tio2, steel, acetone, solvents. Can you kind of rank them in terms of one, two, three, and four in importance to Sherwin-Williams?

Well, no. I won't rank them, but I think part of these costs are being skewed by also a couple of items. We mentioned acetone, which directly impacts our aerosol business. As the cost of acetone has increased 34%, since its low point in the second quarter of 2003, another area of very significant increase is also in the prices of mineral spirits and this directly impacts our woodcare business. And the cost of mineral spirits have increased 45.5%, since the first quarter of 2003. So, these are effecting the waving in our overall raw material costs. I think also as you are aware, there have been several price increases in Tio2, which is an important pigment. The first quarter they announced -- the producers announced a increase of $0.06 a pound and in the second quarter, an additional increase of $0.05 per pound was announced. And they have announced a fourth quarter increase of $0.04 a pound. So, there is a -- sequential increase is there, and we think if coatings sales in the industry remains strong, we would expect that Tio2 producers will be successful in obtaining some or most of these increases. So, those are really the primary elements and then just basically strength in latex polymers and steel prices. But lower rates than that.

And I guess lastly, a question for Chris, Chris talked about having very good spending control, I was just wondering if you could expand on that, that is what kind of spending did you control?

I think, Jeff we look at SG&A expenses across all our divisions, working capital as another form of use of cash these are all things that we keep tight focus on. So whether we are looking at the ratios inside our 2700 stores now in terms of their service expense to sales ratio, controllable expenses, all of those things are showing improvement in an effort we would expect from our management team.

Okay thank you very much.

Thank you.

And we will next hear from Chuck with Key McDonalds.

Good morning everyone.

Good morning Chuck.

Looking again at the consumer segment, did you going cost driven price increases to key business in the quarter or for the remainder of the year, and can you give us an update on retailer acceptance of the ready to roll container?

Chuck we don't want to comment on any specific pricing with -- within -- that segment, so we will just leave it. The ready to roll launch is scheduled to ship by the end of the third quarter.

Can you talk about which customers we be taking that product?

No, it's being offered to customers now, and I think that until it's actually on the shelf, we would not be able to comment where its placement is.

All right thank you.

Thank you Chuck.

And moving on, we will hear from John Rodricks, Buckingham Research.

All right thanks. Can you hear me?

Yes, Hi John.

Is there any way to gage what the impact of weather was in the year-to-year comparison so, a year ago, we had one of the wettest springs on record into the early summer and now you had normal weather. Can you gage whether it was three, four, five percentage points worthy to grow?

Well, maybe where you were was normal weather this year, if you were talking to our stores in Texas, they have pretty much lost the exterior paint season in the month May and June due to really strong rainy seasons down there, so I guess way we look at that John is that you get weather every year, and being a national company you may touch your break in one part of the country and get in the another and another, so we don't think the weather has had much impact at all in this year's performance.

Okay, and then secondly Chris I think in response to what you might do about raw materials in the past you have said a few times that you have the capability if you wanted to back integrate into ingredients, are there any ingredients you might consider doing that given maybe a prolonged period of high raw material cost coming up?

No, that's not where we would look to get relief.

Okay thank you.

Thank you John.

And again if you do have a question please press star one on your touch-tone telephone. Next we will hear from Josh Davel at Texas .

Hi, most of my question are answered and I know you spoke a little bit about the raw material cost, and I don't want to labor the point, but is there any segment in particular you may see easier to get price increases or more difficulty or just kind of maybe you can talk about the effect on the different segments, specifically in -- and where you may have reacted at?

Well, Josh we have always commented that through our own stores with a very broad customer base, it's always painful and difficult to ask for price increases, but that might be a little bit easier than it would be in the consumer segment, and I think the margin expectations that laid out for you for the remainder of the year reflect that.

Okay great thanks.

And gentlemen there are no further questions at this time, I will turn conference back you for any additional or closing remarks.

Okay, thank you all for joining us, and I think if anybody else has any additional questions, Bob Wells and I will be able to take your calls today and afterwards and so we thank you all very much for joining us.

And that does concludes today's conference. Thank you for your participation, have a wonderful day. You may now disconnect.