宣偉 (SHW) 2005 Q3 法說會逐字稿

Good morning, and welcome to the Sherwin-Williams Company's third quarter 2005 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, President, and Chief Executive Officer, Sean Hennessy, Chief Financial Officer, John Ault, Vice President and Corporate Controller and Bob Wells, Vice President of Corporate Communications and Public Affairs will be available for questions. Please go ahead sir.

Yes. Thank you. Good morning everyone. Thank you for joining us today for our review of the third quarter 2005 results and our expectations for the fourth quarter and full year. This conference call is being Web cast simultaneously on the Company's Web site, www.sherwin.com, and on V-Call's Investor Calendar, www.investorcalendar.com. An archived replay of this Web cast will be available approximately two hours after this call concludes. The archived replay will be available until Thursday, November 3, 2005 at 5:00 p.m.

Before proceeding, I would like to remind you that during this conference call we will make certain forward-looking statements as defined under the U.S. Federal Securities laws with respect to sales, earnings, and other matters. Any forward-looking statements speak only as of the date on which such statement is 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. A full declaration regarding forward-looking statements is provided in our earnings release transmitted earlier this morning.

After the review of our third quarter results, we will open this session to questions. In order to allow more time for questions, we have provided balance sheet items and other statistical data on our Web site at sherwin.com. To access this information, click on Press Room and then choose Corporate Press releases in the Corporate Information box and click on the reference to the October 25 press release.

I will now summarize overall company performance for the third quarter of 2005 - excuse me - versus third quarter 2004. Net sales increased 17.9% to $2 billion This was primarily due to strong comp store sales in our paint store segment, acquisitions in our paint stores and consumer segments, and improvements in our automotive and international segments. Acquisitions including Duron and Paint Sundry brands both completed on September 1, 2004 added 102.1 million or 6.1% to net sales in the third quarter of 2005.

The remaining core growth reflects continued strength in architectural paint sales to contractors, improving sales in market conditions and industrial maintenance and product finishes market and improving international sales in automotive finishes and international coating segment. Consolidated gross profit increased $96.2 million for the quarter relative to 839.7 million. Gross margin decreased 42.5% of sales from 44.3% for the third quarter last year. This was due primarily to an increase in the cost of certain raw materials.

Third quarter selling general and administrative expenses as a percent to sales decreased from 31.4% in the quarter -- in the third quarter of 2004 to 30.5% this year. This was due to the improvement in sales and tight expense control. Interest expense for the quarter increased by 1.9 million to $12.1 million compared to third quarter 2004 as a result of borrowings primarily to fund acquisitions.

Other expense net increased by 4.4 million over the third quarter of 2004. This increase reflects the loss taken on foreign investment. Net income increased by 18.7 million or 14.1% to 151.6 million from 132.9 million in the third quarter of 2004. The increase was due to sales improvement and a reduced tax rate, which was partially offset by increases in raw material cost.

Acquisitions accounted for 5.8 million of the increased in net income. Diluted net income per common share for the quarter increased 16.3% to $1.07 per share compared to $0.92 in the third quarter of 2004.

I will now review our performance for segment for the third quarter of 2005 versus third quarter 2004. Sales for our paint store segment in the third quarter of 2005 increased 22.2% to $1.4 billion. The acquisition of Duron increased sales for the segment 6.6% in the third quarter. Comparable store sales, and that's sales by stores open more than 12 calendar months, grew 14% in the third quarter.

Sales growth for our stores was driven primarily by gains in architectural paint sales to contractors and do-it-yourself customers and to stronger industrial maintenance and product finishes sales compared to third quarter last year.

Regionally, in the third quarter, our Southeastern division led the sales performance, followed by Southwestern division, Midwestern division, and Eastern division. There was a negligible effect from Hurricane Katrina and Hurricane Rita (audio skip) on sales by our Southeastern and southwestern division.

Operating profit for the segment increased 9.8% to 185.1 million in the third quarter. This increase was the result of higher sales volume and SG&A expense control. Increased raw material costs were only partially offset by higher selling prices. Paint stores ended the quarter with 3,040 stores in operation in the U.S., Canada, and Mexico, Puerto Rico, and the Virgin islands.

In the consumer segment for the third quarter, sales increased 4.5% to $361.2 million. Acquisitions completed since the beginning of the third quarter 2004 increased net sales by 8% for the segment during the quarter. Incremental sales from new product introductions and higher selling prices were more than offset by the elimination of a paint program with a customer, continued sluggish retail sales and inventory adjustments at some of the segment's larger retail accounts.

Operating profit for the consumer segment decreased 2.6% in the quarter to 53 million from 54.3 million last year. This reduction in operating profit was due primarily to increasing raw material costs that were only partially offset by selling price increases, tight expense control and operating profit from acquisitions. They were (audio skip) the offset was also helped by favorable manufacturing absorption primarily related to paint store segment volume increases.

Turning now to our automotive finishes segment in the third quarter. Sales in U.S. dollars increased 11.3% to $145.5 million. This sales improvement resulted primarily from increased paint sales, selling price increases and favorable (audio skip) currency exchange rates, which added 3.8% to sales. Operating profit for this segment during the third quarter (audio skip) declined 5.2 million to 9.6 million in the third quarter.

The segment's operating profit was negatively impacted by a loss in the quarter resulting from the disposition of its majority interest in a joint venture in (audio skip). This disposition resulted from diverging strategic visions for the business by the two owners and the realization that continuing the joint venture would add significant risk to the venture without a commensurate return for Sherwin-Williams shareholders.

Effective expense control and higher sales volume during the quarter partially offset significant increases in raw material costs. Currency exchange fluctuations had no significant impact on the segment's operating profits.

For our international coating segment in the third quarter, net sales in U.S. dollars grew by 25.9% to $101.5 million. Sales in local currencies grew by 9.9% in the quarter, and this was due primarily to higher sales volume and price increases in South America. Operating profit for the quarter in US dollars increased 88.5% to 8.4 million from 4.5 million in the third quarter of 2004. This improvement was driven by sales increases in local currencies, favorable currency exchange rates and volume-related operating efficiencies, all of which was partially offset by significant year-over-year raw material cost increases.

I would now like to briefly comment on our balance sheet items. Our working capital ratio, defined as accounts receivable plus inventories less payables to sales, came in at 15.1% versus 14.7% for the third quarter 2004. This ratio is based on 12-month sales and average working capital. Despite the year-to-date increase in working capital, we anticipate finishing the year below the 13.8% level reported at year-end 2004.

Our total debt on September 30, 2005, was $780.4 million, including short-term borrowings of $282.6 million. Total borrowings to capitalization were 30.8% at the end of the quarter versus 35.8% at the end of the third quarter 2004. Long-term debt to capitalization was 22.1% at the end of the third quarter this year compared to 24.5% on September 30, 2004. We expect our total debt to capitalization to be in the mid 20% range at the end of 2005.

In the third quarter, the company purchased approximately 2.3 million shares of its common stock in the open market, bringing the total share repurchases for the year to approximately 6 million shares.

On October 21, the board of directors authorized the company to purchase 20 million shares of its common stock for treasury and rescinded the previous remaining authorization. We expect to continue from time to time our opportunistic purchases of company stock for treasury since we continue to believe our stock is a good value.

In the third quarter of 2005, we spent $33.5 million on capital expenditures, (audio skip) depreciation expense was 30.6 million and amortization expense was 5.3 million. For the full year of 2005, capital expenditures will be approximately 150 million. The predominant share of the increase in capital expenditures will be used to expand our manufacturing capacity, including the construction of a new emulsion plant in the western United States and to complete the rollout of an automated color matching matching equipment in our stores. Also included in this number will be additional point of sale devices and investments in other systems. Depreciation for the full year will be about 120 million versus 109 million in 2004. Amortization will be 23 million versus 16.6 million in 2004.

I would now like to give you a brief update on the status of our lead litigation. The retrial of the state of Rhode Island's public nuisance case against former lead pigment manufacturers. Jury selection is in process and opening arguments are scheduled for Monday, October 31. As a reminder, this trial will cover all issues and damages in the case, including whether lead paint on walls constitutes a public nuisance and if so whether each defendant contributed to this nuisance, whether the state incurred damages, and whether the lead paint should be abated and also whether punitive damages should be assessed. The verdict in the case requires a unanimous decision by a six-member jury.

In the New Jersey case, the appellate court ruled that the plaintiff cities could proceed in their public nuisance claims against former lead pigment manufacturers. The defendants have asked the state Supreme Court to review the appellate court ruling. However, this review is not automatic.

In Wisconsin, a ruling by the state Supreme Court on the applicability of risk contribution theory of liability has sent a personal injury case back to the lower court for trial. The Supreme Court declined to rule on any of the constitutional issues as to due process at this time, reserving these issues for future review should the defendants raise them again. Also in Wisconsin, an appellate court sent a public nuisance case back to the lower court for trial. We do not know the timing of either of these proceedings in Wisconsin.

As we've mentioned in the past (audio skip) the case in California that was dismissed by the trial court is under appeal to the higher state court.

In St. Louis, a motion to dismiss the city's public nuisance case is currently before the trial court. It is possible that decisions on the dismissals of these cases could be rendered before the end of this year.

As a reminder, to date we've had less than 100 lead litigation cases filed since 1987. Excluding the most recent cases, over 85% have been dismissed, none have ever been settled, and only one, Rhode Island, has ever come to trial. This now completes my review of the results for the third quarter of 2005. Now I'd like to turn this session over to Chris Connor who will make some general comments and highlight our expectations for the fourth quarter and full year. After that, we will then open the call to questions. Chris?

Thanks Conway, and good morning everybody. And thanks to all of you for joining us. We appreciate your interest in our company. I think this morning's call is important for a number of reasons. First and foremost, it's an opportunity for us to demonstrate the resilience of our business through this third quarter, despite one of the most challenging raw material cost environments any of us has ever experienced. Three of our four reportable segments grew their sales at a double-digit pace during the third quarter. Our automotive and international segments each generated the strongest quarterly sales growth so far this year. And our paint store segment turned in yet another double-digit comp store sales increase at 14% for the quarter. This performance was driven by a balance of strong volume growth and higher selling prices.

From July through September we opened 29 net new stores, bringing our total to 57 net new stores for the year. And this rate of store openings keeps us on track to add 80 to 90 net new stores during calendar year 2005.

We believe our strong consolidated top line growth is a reflection of our customers' acceptance of and preference for our highly differentiated programs, our superior customer service, and our unique distribution channel mix. Although we continue to be challenged on the cost side of our business due to the constant and aggressive pricing pressure being applied by many of our raw material suppliers, the customers that we win today through the combination of the factors I just mentioned, will still be receiving the quality products and services we provide long after the cyclical cost pressures have subsided.

Which brings me to the second reason I think this call's important. It's an opportunity for us to provide our perspective on the current raw material cost environment. Our raw material costs continue to be affected by the rising cost of oil, natural gas and global raw material supply and demand. This situation has been severely (ph) aggravated due to the hurricanes that have hit the Gulf Coast. The storms not only damaged much of the oil and natural gas infrastructure but also impacted much of the Gulf Coast's petrochemical industry's manufacturing capacity. As we speak, over 71% of the crude oil (audio skip) natural gas in the Gulf Coast regions remain shut in, which means it's production capacity that currently cannot be utilized. In addition, many of these petrochemical plants in the Gulf Coast area are still shut down, including a major TIO-2 plant in Mississippi.

The loss of this facility, which could be out of commission into the first quarter of 2006, has created a tight supply/demand balance for the (audio skip) market. The (audio skip) pressures in various feed stocks and a broad supply/demand imbalance has caused further pricing pressures in commodities (audio skip) latex polymers, polyethylene for pails, and various solvents. Based upon the recent events in the Gulf Coast and the data we have today, we would anticipate that the paint and coatings industry will continue to experience high raw material costs throughout the fourth quarter of 2005 and into 2006. We do believe that the Gulf Coast oil and natural gas and petrochemical industry will continue to bring shutdown capacity back on stream. And as that capacity returns, product availability will improve and the supply/demand balance should become more favorable.

This should lead to some moderation in pricing from these historically high levels sometime in the mid or latter half of 2006. In response to these intense cost pressures, we have announced yet another round of price increases this fall and are now in the process of implementing these increases across our various business segments.

The third quarter of 2005 will long be remembered for the unprecedented death and destruction wrought by Hurricanes Rita and Katrina. (audio skip) my third important point of this call. Many of you over the past few months during your regular contact with our company have asked about the safety and well being of our employees in the Gulf Coast region. I'm personally grateful for the care and concern you've expressed and am pleased to report that all Sherwin employees are safe and have been accounted for. Needless to say, it will take many years for the affected region to return to normal, and it remains to be seen what normal even means. But we are part of these communities, and we'll be there when they rise again.

Of the literally hundreds of Sherwin-Williams stores and facilities affected by these two storms, today there are only 13 locations that have not yet reopened their doors. I think this is a reflection of the strength and resilience of our people and our organization, some of the intangible factors that are key to our success but difficult to analyze and quantify.

Finally, I think this call is important because it takes place on the eve of the retrial of the state of Rhode Island's public nuisance lawsuit against former lead pigment manufacturers. You will likely hear a great deal about this trial in the coming months, and much of what you will hear will be day-to-day and week-to-week reflecting the natural ebb-and-flow of a legal proceeding of this nature. Verdicts in these cases are rendered after all of the relevant facts and arguments are presented.

We remain confident in our legal position in the case and in the soundness of our arguments. A judgment in this case requires a unanimous verdict by a six-member jury and we firmly believe that our defense will make sense to a jury of reasonable people. Despite the noise that these proceedings are likely to generate, we remain focused on running our business. We've important work to do in the months and years ahead, developing new products, opening new stores, managing our expenses, and implementing the announced price increases.

I will conclude my remarks this morning by providing our outlook for the fourth quarter and full year 2005. We expect net sales in the fourth quarter to increase in the more moderate mid single digit range over last year as we (audio skip) the Duron and Paint Sundry acquisitions. With sales at this level we expect diluted net income per common share to be in the range of $0.41 to $0.49 per share compared to $0.57 per share for the fourth quarter of last year. This unfavorable comparison is due primarily to a lower effective tax rate in the fourth quarter 2004 of 17.8% compared to 34.5% in the fourth quarter of 2005. Even with this, we expect our effective tax rate for the full year 2005 will be below the annual rate for 2004.

On July 21, 2005, we commented that we expect our annual consolidated net sales to be up in the mid to high teens over 2004 and that diluted net income per common share would be in the range of $3.20 to $3.30 per share. We now anticipate that our consolidated net sales will be up in the mid teens over 2004 and with annual sales at that level we expect diluted net income per common share for 2005 to be in the range of $3.15 to $3.23 per share compared to $2.72 per share reported in 2004. At this point, we'd be happy to take your questions.

[Operator instructions]. Our first question is coming from Jeffrey Zekauskas from JP Morgan. Please proceed with your question.

Hi, good morning. What's the after tax effect of the divestments in the auto finishes segment?

After tax was $0.06.

Second question is have there been new suits filed in Wisconsin?

No, not at this point in time.

Last question is, when - I guess when I look over your results, I'm very impressed with how you have been able to maintain very good probability in consumer given that the pricing environment there must be very, very difficult. I wish you would expand on that. And can you also talk about your ability to get price through on a timely basis as your raw material costs rise?

On the first question - you asked about consumer - you're right. On the operating margins -- with the increase in raw materials -- we feel pretty good about the way they've managed the SG&A. They've continued to watch the programs in place. They continue to look at operational excellence. If you looked at the productivity of our plants, they've done a great job. We've actually put one of our major plants on 24/7 because of the volume and so forth. So between the stores' volume and the productivity and the operational excellence that's what's really helped us keep the operating margin in the consumer division.

And your second question -- you asked about the timing, we continue to talk about the prior year price increases that we've been implementing. And we're really - last month - or last quarter we said we were at about 55 to 80% and now we believe we're at 60 to 85%. And as Chris mentioned in his comments, now we're going out in the fourth quarter and we're going to start implementing the next round.

Okay, thank you very much.

Thank you.

Our next question is coming from John Roberts of Buckingham. Please proceed with your question.

Hi, John.

In the paragraph on the paint store segment, at the very end, it talks about Duron's contribution to nine months, but you don't mention Duron when you talk about the quarter. Did Duron contribute to the quarter's earnings as well?

Yes, it did. The acquisitions in the --

Actually when you take a look at it -- we don't usually break out the acquisitions by segment. But in total, acquisitions for the quarter were $0.04.

For the - not in the segment --

Total.

Was that all the Sundry brands did (audio skip) murmur(ph) or the -

Yes they --

Combined. And the -- as we mentioned, the contribution of Duron to the sales in the store segment was 6.6%.

I knew the sales, you didn't give the earnings part.

Right.

Secondly, could you maybe just qualitatively talk about what's going on with the second tier paint producers? I don't want to name names, but I'm thinking of people like California Paints and Dunn-Edwards, N.A. Breuner(ph), Kelly Moore -- all those guys. How are they dealing with the raw material pressures? They obviously, don't have anywhere near your scale.

Okay, John, we wouldn't comment specifically on any one of them other than to say that as industry has taken the caliber of cost increases, and all of us buy pretty much the same raw materials, we have seen pretty much the industry all moving logically towards price increases.

Are you seeing volume shifts? Do you think you're benefiting right now from --

I think we're seeing - it's early for us to tell market share gains - that usually lags -- but -- we think that the double digit comp store sales gains that we've been posting would indicate that we are seeing some volume shift toward Sherwin Williams in this cycle --

But we don't think that that volume shift is occurring because of our pricing policy as we've been very aggressive in that. We think that that's occurring for other products and services that we're offering.

And then, lastly, can you put in perspective how many cases have been returned to the lower courts over the years. You've had a couple happen recently, and I don't know if that's the beginning of a trend or that's just normally happens every so often?

In this whole process, for the last 18 years, when dismissals are made, either the plaintiffs or defendants appealed them -- it is just recently that we had the one in New Jersey and the two in Wisconsin are the only ones that have been returned to the lower courts. In the past, if any had been returned to the lower courts, they would have come to trial. And so as we mentioned, we've only had the one trial in Rhode Island a couple of years ago.

Is this the beginning of a new trend?

I'm not sure we'll call it a trend but this is an event that's happened recently.

Okay. Thank you.

Our next question is coming from Eric Bosshard of Midwest Research. Please proceed with your question.

Hi Eric.

Good morning guys. A couple of questions. First of all, in terms of the prior guidance, had you considered within that guidance the $0.06 impact from getting out of the China auto JV as well as what looks to be a couple of cents of incremental other expense related to, I guess, currency? Was that considered in the prior guidance or was that new expense relative to the prior guidance?

The $0.06 was new. The decision was made during the third quarter and when the guidance had $3.20 to $3.30 at the end of the second quarter. So without it, our guidance would have still been $3.21 to $3.29. But you're right. I mean, that definitely (audio skip) full-year down as well as the third quarter.

In the prior $3.20 to $3.30 that $0.06 had not been considered.

That's correct.

That's correct.

Okay. That helps me understand that issue. My second issue is this. Internal sales growth in the third quarter looks like it was 12 -- roughly 12%. The reported 18 less 6 from the acquisitions, so the reported sales growth looks like it was roughly 12% excluding the acquisitions in this quarter. What I'm trying to figure out is that 12 % -- on that basis that 12% (audio skip) number being mid single digit or I got that say - roughly half that number in the fourth quarter. Can you give us some more color on why you would see such a significant slowing in sales and what you're seeing thus far in the fourth quarter that give you conviction in that level of slow down in sales?

Yes, Eric, to your point it is a slower pace than we have seen. I think as we look at the company's segments, we would expect that our stores segment will continue to be strong double digit. And we think that some of these other segments are seeing some softness out there. And when we roll it all up, it gets us in the mid single digits.

But also in the stores, when you sit there and take a look at their comp stores, we're starting to go up against harder comparisons. And we're just watching that closely.

I guess for -- if you say the stores will grow double digits and the total numbers is going to be mid single- digit, it almost implies that the rest of the business is going to have a contraction in sales in the fourth quarter. Is there a significant degree of conservatism in place here? Or are there things going on within the other businesses that have you confident that you're going to end up with down sales in not only in consumer but perhaps much softer sales in these other businesses?

Maybe Eric to give you a little more color on that, on paint stores we expect the quarter to get to the total company of mid single digits, the paint stores would be up in the low teens. Consumer would be flat to up slightly. International would be up in the high teens. And automotive would be flat to down slightly. So when you look at all of that mix, that's the way we get to the mid single digits. So that would give you a flavor of at least our expectations by segment.

Have you seen anything - I guess I have two more questions - have you seen anything in the fourth quarter in the stores business that - I know if you've been up against tough comparisons here for a while but have you seen a slowing in demand trend there? Or your market progress there?

No. I think Conway's comment and mine as well is that we'll be up in the double digits in that store segment would indicate it's still going strong, Eric.

Okay. And then lastly, in terms of the price and unit contribution last quarter, you were helpful to provide us with insight into tthe component of the comp and the contribution of price and the contribution of units. Could you help us with that again this quarter and perhaps a bit of what that map might look like in the fourth quarter?

When you take a look at the comps (audio skip) approximately 14%, it was right 50/50 between price and volume. When you take a look at the fourth quarter, we basically, right now, in the forecast, have the volume increase a little lower, slightly below what we have in the third quarter actuals. And we have price just a few points (audio skip).

Great. Thank you.

Thank you.

Our next question is coming from Ivy Zelman of Credit Suisse First Boston. Please proceed with your question.

Good morning, everybody, thank you.

Good morning, Ivy.

Let me understand -- back to Eric's question regarding the $0.06. Are you implying that without the $0.06 you wouldn't have been changing the guidance?

We would have been narrowing it down, but it would have been in the same range.

Yes.

And just to understand that, given that you are pretty much chopping your sales guidance down, where are you going to make up for the sales shortfall? Do you expect to see a margin rebound excluding the $0.06?

I think we're just narrowing the sales results down. The company's going to be in the mid teens for the year, which was kind of where we thought we were going to be. So we're fine with that.

Okay. And then just respect to the charge, realizing that you guys -- it's kind of odd that you would already have to exit at a loss - I understand that your partners didn't see it the same way, I guess. But can you understand why you'd have to exit at a loss? And -- clearly it was only, I think, a year ago that it happened. And then I have one follow-up.

It was 18 months, but the question obviously still applies. The respective owners of the business ended up having a different strategic vision for the business. Our Chinese partner really wanted to focus the venture's resources on the vehicle OE business. We wanted to focus our automotive resources in China on growing our presence in the automotive vehicle refinishing business. In addition to that we wanted to utilize our 100% owned Shanghai (audio skip) manufacturing facility to support an expansion of (audio skip) technology that we've developed in the United States and to expand this technology to the Chinese market.

And because of this, if -- we came to the decision that if we continued in this joint venture, we think there would be significant risk added to the joint venture's obtaining a success and we would not get a commensurate return for that additional risk. This was primarily due because of the additional commitment of capital but would have been required to carry out one of the strategic alternatives. And that was generated by the competing strategic needs of the partners. So we made this decision at this time to recognize these difficulties up front. And basically, this allows us to focus our automotive resources to vehicle refinish, Chinese vehicle refinish business, which is rapidly growing for us. We would be able to support this growth with our own employees in a 100% owned manufacturing facility. So that's the reason why we came to the decision.

Okay, then - thank you, Conway. Lastly with respect to the comment you made regarding inventory adjustment at major customers, are you seeing at maybe the mass merchants some consolidation going on as opposed to inventory adjustments? Can you help us understand if it's really just point of sale is not as good or is there other factors?

When you take a look at our point of sales, they're tracking fairly well, and close to what we would have expected. When we're talking about these inventory adjustments, a lot of times a few of our customers had major inventory adjustments during the fourth quarter to bring their inventory down. And basically, they have tried to take their inventory down as far as the inventory weeks on hand in the third quarter versus last year's fourth quarter. And that's really what the timing difference was..

Great. And one other point. I think you mentioned, Sean, you're raising prices again. Can you quantify what you expect to realize?

Sure. When you take a look at it -

She said realize --

Let me tell you what we're going after and then I'll let Sean comment on the realization. I think again as - in response to what we're seeing in the market, the company is appropriately going back out again. These price increases will range in the mid single digits up into the low double digits, and as we commented, they're going on across the segments. We're going out in the fourth quarter, so the expectation of how much of that we'll realize in the fourth quarter is very little of it and way too soon to tell. Most of these are preparing the company for the calendar year 2006.

So back to your -- the way we've tried to quantify this is during the fourth quarter and in total we can get between 40% and 50%, we'd feel pretty good about it. And then in the first quarter and second quarter of next year, we feel that percentage would drive all the way up to 80%.

One quick follow-up on that. Sean thank you. With respect to the margin performance in the paint store segment, would you expect to recover the margin loss? Or should we use the first quarter - I'm sorry, the third quarter margin run rate a good one for going forward?

No. We believe that the -- when you sit there and take a look at the margins for the full year on the stores, our stores margin -- let me just pull that up. When you take a look at the year-to-date (audio skip) stores were flat with 2004. That is because of the raw material costs, the timing of (audio skip) timing of expenses quarter-to-quarter. Advertising expenses, for example, because of the change in the quarter have to stand by themselves. For the full year we expect stores (audio skip) slightly versus last year.

But in terms of '06, do you expect to recover that?

Yes.

Thanks, Sean.

Our next question is coming from Larry Horan of Parker Hunter. Please proceed with your question.

My question has been covered. Thank you.

Hi, Larry.

Hi.

Our next question is coming from Steve O'Neill(ph) of Hilliard-Lyons. Please proceed with your question.

Good morning.

Good morning, Steve.

I think this has been answered in part and I'll go ahead and ask it again. And that's could you elaborate on the soft retail environment you're experiencing in consumer? I mean, you talked about inventory adjustments and loss of customers and mass marketers and that kind of thing. Could you kind of tie it all together (audio skip) picture that's affecting the consumer segment?

Sure, Steve, we'd be happy to. I thin Sean made the comment that when we look at the out-the-door performance of these, sales are in the range of what we have been experiencing historically here. We wouldn't comment on any one particular customer there and the softness in the quarter there really is relative to the inventory adjustment that we're seeing. We think the market's been consistent, as it has been for the consumer DIY segment all year.

Maybe I'm missing something here. Is there some reason the inventories are being lowered more than usual? Or is this something --

I'm not sure they're being lowered more than usual. We're just seeing our customers do appropriate working capital (audio skip) perhaps they move that up into the third quarter versus fourth this year.

All right. Thanks.

Thank you.

Our next question is coming from Armando Lopez of Morgan Stanley. Please proceed with your question.

Thanks. Good morning guys.

Good morning Armando.

Just a -- most of my questions have been answered. Just a quick question. I guess, could you just provide more clarity on what you're seeing on the raw material front now? I think you used to -- or previously were talking about expecting raw material costs up about 15% for the year. Has that changed?

Yes. I think as a result of the recent hurricane activity recently, we're seeing a spike in the range of an additional 3%. So where we had commented for the industry we expected 10 to 15 for the year, we now expect it to be 13% to 18% for the year and really driven by a pretty rough fourth quarter.

Okay great. And then just one other question. On the paint store segment, 14% comps remain really strong. Could you just talk a little bit in terms of - maybe provide a little more color on what you're seeing maybe on the architectural versus like industrial and maintenance? Are you seeing a greater growth on the industrial side? On the architectural slide? Where are you seeing the most growth ?

Yes, Armando, those breakouts inside that stores group have all been strong for us this year, all of them contributing to the double-digit growth. We wouldn't identify architectural or product finishes segment as being out of step one with the other.

Okay, great. Thanks a lot guys.

Thank you.

Our next question is a follow-up coming from Jeff Zekauskas of JP Morgan. Please proceed with your question.

Just a quick follow-up. In the quarter, was your volume growth (audio skip) acquisitions above 10% or below?

Well, Jeff, we really avoid answering that question because when you start talking about volume in units, because we have some many different types of units, and especially we've - we don't really break out (audio skip) mix. And so when you really take a look at it, we really look at it by segment and we really don't comment by segment.

I think for the company as a whole, it would have to be below the 10%. I mean, if you looked for the quarter, our total sales increased 17.9%, and then we had about 6.1% of that was due to acquisitions. So that would take you to 12. And we've already commented on some of the pricing action that we have. So logically, that would be below 10%.

Right, though I was including the acquisition volume. Maybe another way to ask it is -

With the acquisition in there, perhaps we did get to double digit. But with it out, we would be below.

Right, below. Were your prices on average higher in areas apart from the paint stores or lower?

Higher than a year ago?

In other words, if your paint store prices were up roughly 7.5%, were the other parts of the company up as much, or more, or were they lower?

I don't think we'd comment on segment pricing other than to say that prices are up year-over-year in every segment. And then we would comment in the range that we've raised for the company in that mid single digits to low double digits.

Okay. Thank you very much.

I think we've also said that pricing in the consumer segment has been tougher than the other segments of the company.

What about auto finishes?

We've gone up. Our price increases in our auto finishes are consistent with other segments of the company.

Okay. Thank you.

Our next question is coming from Margaret Whelan of UBS. Please proceed with your question.

Good morning guys.

Good morning.

Could you give us a sense of the trends in the quarter and into October in your consumer business?

I'm sorry, Margaret. We didn't hear your question.

Could you be able to give a sense of the trends in the quarter and into October on the consumer side of the business, in terms of which months were stronger or weaker?

If you take a look at it our, we - it's hard - we're on a calendar basis. And sometimes people - but our August was the strongest. And that's because we picked up a day. When we look at consumer, because of the ordering patterns, one thing may come into the quarter - in a month just because the order fell on the 30th versus the first. When you take a look at it though - we look at the consumer in total -- the orders did get stronger in August, back down a little bit in September, and October it's proceeding pretty much the same as the third quarter.

So basically flat in October?

Up slightly.

Up slightly. And then are you actually rejecting any sales because of the higher costs or your inability to get raw materials?

No.

Do you foresee that potentially happening later in the year?

No.

Have you been put on an allocation then by any of your suppliers. Do you expect that to happen?

I wouldn't use the word allocation. We've commented that demand is tight and all of our suppliers are working with us appropriately to keep us in the raw materials that we need.

Okay, thanks very much.

Thank you.

Our next question is coming from Norien Garo (ph) of BlackRock Financial. Please proceed with your question.

Hi guys, two quick questions. The first is, you guys have talked in the past about building a relationship with the national home builders. And I was just curious - is there any change kind of coming from them on the demand side of things?

Yes, we have been building our relationships with national home builders. Their forecast for the remainder of the year into the first half of next year remains fairly consistent with the build rate that we've seen. So there has been no spike up or down in that business demand.

Okay. And then, just the second thing. At what point are you guys able to go back into the market with your share repurchase?

Actually two days from now.

Two days from now. Okay, great. Thank you.

Thank you.

Our next question is coming from John Roberts of Buckingham. Please proceed with your question. John? Mr. Roberts, your line is open.

Just a couple of clarifications. Higher October would be seasonably good. Isn't that fair to say? You talked about the month-to-month trends and that October came back and was up a bit.

I think, one is September overall being slower than August, there may have been some impact on weather that would come back in October. And that might be causing part of this shift from the end of September into the early part of October.

And then to the earlier question on the automotive paint prices. I would suspect that's a segment that's relatively easier to get price increases through since auto body shops are doing repair work and then passing it through in insurance claims and so forth?

I don't think we'd say any place is easy, John, in this environment. We have commented about the difficulty in the consumer group. And having said that, we would agree that other segments have a little bit easier run to market.

Okay. It sounds like the objective is to get back your percentage margins. But if you do that on higher prices, obviously, you're ahead of the game. So I just wanted to clarify that he intention is to get ahead of the game on earnings by getting your percentage margins back on higher prices?

We're trying to implement these price increases towards a goal of recovering the costs that we're taking, and if that gets dollars back and/or percentages back, that would be great. We'll see what happens over time.

Okay. And then, lastly, I know you don't like to comment on weather effects on volume during the quarter but, to the extent that there were some in the Gulf Coast area during the quarter -- I mean, you talked about hundreds of stores having at least some effect? Do you get that back in rebuild activity over the next 12 months?

We have commented that there were weather impact to those stores but it was negligible given the size of the company, so we don't hold that up as an issue. And the recovery of that depends on the rebuild. We can comment, for example, that on the heels of the four hurricanes that hit the state of Florida last year, our market has been doing well for us this year. It remains to be seen how quickly the Gulf region will be able to rebuild. We would not give any guidance that we would expect to see an increase as early as next year there.

All right Thank you.

Our next question is from William Teller (ph) of Key McDonald. Please proceed with your question.

Hello?

Hi Bill.

Hi. Thank you. Going back to the raw materials just quickly. For the fourth quarter, do you see it being at the high-end of that 13% range or above it?

We would see it in the range, Bill, that's why we have moved it to that. And again, since that's an industry average, people will be in all places throughout that range.

Okay. Sequentially, then from fourth quarter to third quarter, can you let us know what you think raw material costs are doing?

From third quarter to fourth quarter?

From fourth quarter to third quarter.

I think the basic thing which we're indicating because of the impact of the hurricanes, we can see the ratcheting up of costs of 3% to 4%. I don't have the actual measure before me in terms of sequentially.

Okay. Do you think, I guess, ballpark, the fourth quarter maybe be the peak that raw material prices are going to start to recover or come down in fiscal '06?

I think we would start to see it -- barring any further changes - we would see it start to stabilize towards the end of the second quarter. As some of the capacity would come back onstream on that timeline - that's where we should see a little more supply, and that would bring better balance. But that impact would probably be toward the last half of next year.

Okay. One other thing. Can you comment briefly on the ready to roll product? How it's rolling out?

Ready to roll continues to do well. We have it in a more limited distribution than perhaps our initial packaging innovations. We're pleased with its results. Performance is doing well. Of note - well, I think I'll just leave it at that - I don't think I'll comment on any individual customer.

Okay. Thank you very much.

Thank you.

Our next question is coming from Barbara Allen of Avondale Partners. Please proceed with your question.

Thanks. Another good job in a difficult environment, guys.

Thank you Barbara.

I was wondering the emulsion - is that what it's called? Is it the emulsion plant or the emusion plant? I'm getting confused --

Emulsion.

Okay. Is that in Fernway (ph) Nevada? And how is it coming along? And should we be expecting any type of temporary costs - startup costs when it's up and running?

The project is coming along fine. As we've indicated, our CapEx this year will be up a little bit higher than our typical run rate as we build that plant out. We expect it to be on some time in the second or third quarter of next year. What little marginal startup costs we would have would just be part of our ongoing operations.

Okay. So nothing that will be noticeable really.

No, nothing noticeable but (audio skip) first two quarters, we run that plant because of the volume that we're putting through that valley (ph) versus fully staffed plant. Our costs will be a little higher at that plant.

Right. Okay, thanks very much.

Thank you.

Our next question is coming from Larry Horan of Parker Hunter. Please proceed with your question.

Yes. I'm going ask for a more colorful explanation in terms of pricing and cost and how often you can increase your prices as you realize that your raw material costs are going up? Obviously, in three out of your four segments, since you don't do retail, it's the retailer's resistance to price increases that may cause a lag between raw material prices and final prices.

In paint stores, you are the distributor. And I'm wondering, in terms of timing, how often during a year would you consider changing prices because of raw material cost increases that were greater than you had anticipated?

Larry, I'd be happy to comment on historically how we've handled that, and that would be an indication for you of how we would do it going forward. If you look at the last two years, unfortunately we've had to go out with two price increases both in the spring and fall of each of those years, this being the fall of the second year. Traditionally, we try to steer clear of the second and third quarters, which is the height of the paint season and the activities tend to take place more around the time periods that were going up.

Okay. Thank you very much.

Thank you.

Our next question is coming from Nigel Coe of (audio skip). Please proceed with your question.

Good morning. Just another question on the price increases. You mentioned 5-10% as the range. That's pretty aggressive. Assuming that the raw materials do stabilize in the second half of the year, maybe come down to more normal levels, do those price increases stick, or would you be under pressure to come down in price?

I think in terms of what we're indicating, the raw material cost would stabilize, and if oil prices, natural gas prices come down, there would be -- some of those raw materials would move with the market. However, others are more influenced by capacity constraints in the market as we're seeing now. And so if the demand factors are strong in the market at that time, than we wouldn't expect a lot of decrease in raw material costs. If the demand factors are weak and there's excess capacity on the part of raw materials suppliers, that's where we would anticipate some discounting. So we -- I think it would really depend on those factors.

Okay. And on the Chinese JV, did you consolidate sales there? And therefore, does the growth that you forecast - you reported in that segment. Does that reflect the termination of sales in China?

Yes. For the fourth quarter, yes.

Okay. So third quarter they're in there but fourth quarter they won't be?

Yes.

Okay, thanks.

Mr. Coe, has your question been answered?

Yes, thank you.

I show no further questions in the queue at this time. I'd like to turn the floor back over to our speakers for any further comments.

Okay. As you all know, if you all have any individual follow-up questions, Bob Wells and I will be available for the rest of the day and tomorrow, as we always are. Should any of you all have any additional questions, we'd be very pleased to speak with you. And we thank you all very much for your interest.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.