宣偉 (SHW) 2009 Q2 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of the second quarter 2009 financial results and expectations for the third quarter and full year. With us on today's call are Chris Connor, Chairman and CEO; Sean Hennessy, senior Vice President of Finance and CFO. We also have John Ault, Vice President Corporate Controller; and Bob Wells, Senior Vice President and Corporate Communications.

This conference call is being webcast simultaneously in listen-only mode by Vcall via the Internet at www.sherwin.com. An archive replay of this webcast will be available at www.sherwin.com beginning approximately two hours after this conference call concludes and will be available until Monday, August 10th, 2009 at 5:00 pm EST. This conference call will include certain forward-looking statements as defined under US Federal Securities laws with respect to sales earnings and other matters. Any forward-looking statements 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 statements whether as a result of new information, future events, or otherwise. A full declaration regarding forward-looking statements is provided in the Company's earnings release transmitted earlier this morning. After the review of second quarter results, we will open the session to questions.

I will now turn the call over to Bob Wells.

Thanks, Jackie. In order to allow more time for questions, we've provided balance sheet items and other selected information on our website at www.sherwin.com under Investor Relations, second quarter press release.

Summarizing overall company performance for second quarter 2009 versus second quarter 2008, consolidated net sales decreased $281.7 million or 12.6 % to $1.95 billion, due primarily to weak paint sales volume by all divisions and unfavorable currency translation rates. Unfavorable currency translation reduced consolidated net sales 2.2% in the quarter, and acquisitions completed since June 30, 2008 increased net sales in the quarter by less than 1%. Consolidated gross profit dollars decreased $77.6 million for the quarter to $895.3 million. Gross margin increased to 46.0% of sales from 43.6% in the second quarter last year. Selling, general, and administrative expenses decreased $24 million in the quarter to $653 million, but increased as a percent of sales to 33.5% from 30.4% last year. Interest expense, net of interest and investment income, decreased $7.6 million compared to second quarter last year. Consolidated profits before taxes in the quarter decreased $24 million or 9.4% compared to second quarter 2008 to $232.1 million. Our tax rate in the second quarter was 31.9% compared to 33% in the second quarter of 2008. For the full year 2009, we expect our effective tax rate will be slightly lower than last year's rate of 33.3%.

Consolidated net income decreased by $13.7 million to to $158 million from $171.7 million in the second quarter of 2008. Net income as a percent of sales was 8.1%, up from 7.7% in the second quarter last year. Diluted net income per common share for the quarter decreased $0.10 or 6.9% to $1.35 per share. Looking at our results by operating segment, sales for our Paint Stores Group in the second quarter 2009 decreased 13.7% to $1.17 billion. Comparable store sales, or sales by stores open more than 12 calendar months, declined 13.5%. The decrease in Paint Stores Group sales was the result of weak demand for architectural and industrial paint and non-paint items across most end-user segments. Regionally in the second quarter of 2009 our Southwest division led the sales performance, followed by Eastern division, Midwestern division, and Southeastern division. Sales in all four divisions declined in the quarter, compared to second quarter 2008.

Segment profit for the group decreased $17 million or 8.1% to $193.5 million in the second quarter 2009 due primarily to lower volume sales that were partially offset by higher year-over-year selling prices, reduced SG&A expenses, and a second quarter 2008 impairment charge totaling $20.4 million. Segment margins increased to 16.5% in the quarter from 15.5% in the second quarter last year. Paint Stores Group opened six new stores and closed five stores in the second quarter. In the consumer group for the second quarter 2009, sales decreased 4 .5% to $366.5 million due primarily to lower volume sales to most of the groups' retail customers. Segment profit for the consumer group increased $7.3 million or 12.3% in the quarter to $66.1 million. Segment profit as a percent of external sales increased to 18% in the quarter from 15.3% in the same period last year, due primarily to favorable sales mix, reduced operating costs from facility consolidation, lower freight and other distribution costs, and a second quarter 2008 impairment charge of $2.7 million.

Turning now to our Global Finishes Group for the second quarter 2009, sales in US dollars decreased $79.2 million or 16.2% to $409.7 million due primarily to lower paint sales volume and unfavorable currency translation rates that were partially offset by acquisitions and higher selling prices. Sales in local currencies decreased 7.7% in the quarter, and acquisitions added to the groups' net sales by 1.6%. Segment profit for the Global Finishes Group in US dollars was $31.2 million in the second quarter of 2009 compared to $48 million for the same period last year. The decrease in segment profit was due primarily to lower sales, poor fixed cost absorption related to lower manufacturing volumes, and unfavorable currency translation rates. Segment profit as a percent of net external sales was 7.6% in the second quarter of 2009 compared to 9.8 % for the second quarter last year. Global Finishes Group opened one new branch and closed nine in the second quarter. All facility closures were in North America.

I'd now like to comment briefly on some of our balance sheet items. Our total debt on June 30, 2009 was $800.7 million, including short-term borrowings of $499.2 billion -- million, I'm sorry. Total debt on June 30th, 2008 was $1.24 billion. Our cash balance at the end of the quarter was $49.3 million. Total borrowings to capitalization were 31.6% at the end of the quarter versus 42.7% at the end of second quarter 2008. Long term debt to capitalization was 14.8% at the end of second quarter this year compared to 15.5% last year. In the second quarter 2009 the Company purchased 500,000 shares of its common stock in the open market, bringing our total year-to-date purchases to 1 million shares. At June 30th, 2009 the Company had remaining authorization to purchase 18.75 million shares. In second quarter 2009, we spent $18.5 million on capital expenditures, depreciation expense was $37.3 million, and amortization expense was $6 million. For the full year '09, we anticipate capital expenditures for the year will be approximately $80 million to $90 million, depreciation will be about $145 million to $150 million and amortization will be about $24 million.

I'll conclude this review with a brief update on the status of our lead pigment litigation. In Wisconsin, the plaintiffs in the Thomas case have appealed the 2007 jury verdict. Briefing has been completed, and we are awaiting for a hearing date, although the case has been staid indefinitely due to the bankruptcy filing of co-defendant Millennium Holding. Another individual plaintiff case in Wisconsin, the [Goidoi] case, was heard on plaintiff's appeal by the Wisconsin Supreme Court on the sole question of whether white lead carbonate pigment is defectively designed because it contains lead. On Tuesday, July 14th, 2009 an unanimous Supreme Court rejected the plaintiff's claim. The court held that the complaint failed to state a claim for defective design because lead pigments necessarily contain lead. The case will now be remanded back to the trial court where it will proceed on the defendant's alleged failure to adequately warn of the dangers of white lead carbonate pigment.

In California, the state Supreme Court will decide whether it is permissible for cities and counties to retain contingent fee counsel to aid them in their suit against the former manufacturers of lead pigment. Briefing is completed, oral arguments should not take place until at least third quarter of this year with a decision most likely coming in early 2010. And finally in Mississippi, the Gaines case, a single plaintiff lawsuit, was tried to a jury in Jefferson county beginning on June 16th, 2009. On June 25th, the jury returned a verdict in favor of the plaintiff, awarding $7 million in damages. The Company is in the process of filing post-trial motions seeking a judgment in its favor, or failing that, a new trial. If the trial judge denies both motions, the Company will appeal to the Mississippi Supreme Court as we believe a number of significant errors were committed during the trial. This process will likely take 15-24 months. Two other suits brought by minors are pending in Mississippi, although neither is in Jefferson county, which is notorious for large plaintiffs' verdicts.

That concludes my review of results for second quarter 2009, so I'll turn the call over to Chris Connor who will make some general comments and highlight our expectations for the remainder of the year. Chris?

Thanks, Bob. Good morning everyone, and thanks for joining us today. Our second quarter results were largely in line with our expectations. However, they were below last year's performance and, as such, we were disappointed. It's always difficult to find much satisfaction in declining numbers, regardless of the economic environment. We are obviously not immune to the effects of this global recession, but we are pleased with the progress we're making in many important areas of our business in this environment. These improvements will provide significant earnings leverage when volumes begin to stabilize.

For example, in our Paint Stores Group, we continue to strengthen our control distribution platform by opening new stores, and consolidating redundant store locations. Our paint store count in the US and Canada now stands at 3,340 locations, compared to 3,302 one year ago. We expect our Paint Stores Group will open approximately 40 to 50 new store locations during 2009. And slow the rate of redundant store consolidation to finish the year with about 25 additional stores in operations over our current store count today. We continue to see growing strength and positive mix change towards our premium product lines, and we're confident that we continue to register market share gains in many of our important professional painter market segments. Our Consumer Group continues the important work of right-sizing our asset base in line with the contracting market volumes, and we've closed 14 facilities in the past six quarters. We believe we're in good position with these changes to capitalize on the eventual uptick in gallon demand. Additionally, we've been pleased with sales efforts, positive mix shift, and shelf expansion from this group with a number of our key retailing partners. And finally, our Global Finishes Group continue to expand into new markets, bringing groups' total branch count to 533 locations at the end of last quarter.

Our ongoing efforts to manage our fixed asset base in line with declining sales volume, increase our productivity, and protect the price increases we implemented during 2008, will help to move our consolidated gross margin back to our more normalized levels as the year progresses. SG&A expense decreased $24 million in the second quarter compared to second quarter of 2008. A particularly noteworthy achievement considering we supported three new acquisitions, covered incremental store closing costs, and added 40 net new stores since the second quarter of last year. Our progress in gross margin improvement and in reducing SG&A expense, interest expense, and our effective tax rate, resulted in a 40 basis point improvement in second quarter net income as a percent of sales. Our working capital ratio also improved to 13% of sales at June 30th from 14.1% at the end of the first half of last year. Through a combination of responsible production plan that held inventories in line with sales volume, and prudent management of receivables and payables, we reduced our working capital funding requirements by $57.3 million in the first half of 2009 compared to the same period of 2008.

Net operating cash in the first six months increased by $3.6 million to $266.4 million. Reduction in working capital requirements more than offset the $54 million decline in first half earnings. Free cash flow, operating cash minus CapEx and dividends, increased $33.6 million as we appropriately pared back our CapEx in the first half of this year. In the 12 month period from July 1st, 2008 through June 30th of 2009, we've generated $880 million in net operating cash. We've invested $68 million to complete three acquisitions, $87 million in capital additions and improvements, we reduced our total debt by $431 million and purchased $105 million in treasury stocks as well as paying $165 million in cash dividends.

We believe the significant challenges that we face in the first half of 2009 will certainly continue into the second half. Based on industry estimates for full-year 2009, the past three years have erased a decade of volume growth in the US architectural market. Although we do not believe industry volumes are sustainable at this low level over the long term, any significant impetus for recovery has not yet materialized, and we believe that the recovery itself will be slow once it begins. Our outlook for the third quarter 2009 is for consolidated net sales to be down in the range of 10% to 13% compared to last year's third quarter. With sales at this level, we expect diluted net income per common share to be in the range of $1.15 to $1.45 per share compared to $1.52 per share for the third quarter of last year. For the full-year 2009 we have again revised our sales expectations and now believe net sales will decline in the range of 11% to 12.5% compared to full-year 2008. With annual sales at that level we are updating and narrowing our diluted net income per common share expectations to be in the range of $3.30 to $3.80 per share compared to $4.00 per share last year.

Finally ,last week our Board of Directors declared a regular quarterly dividend of $0.355 per share up from $0.35 last year, keeping us on track to achieve our 31st consecutive year of increased dividends. Again, I would like to thank you for joining us this morning, and now we would be happy to take your questions.

Thank you. We will now be conducting a question-and-answer session. (Operator instructions). Thank you. Our first question is coming from Saul Ludwig of KeyBanc.

Good morning, everybody.

Good morning, Saul.

This question is related to the consumer division and your facilities, a couple of parts. How much did you incur in expenses related to or closing facilities in the quarter, and I assume they would be included in the consumer group. And then excluding whatever that number is, were your fixed costs in the consumer group down, and if so by how much?

Saul, it is $6 million in the six months, $2.8 million in the three months, and I don't think we've ever divulged what our conversion costs are.

Were they lower?

Yes. I don't think we're ready to start giving that kind of metric out.

Okay. And then a question on the administration line, Sean, your interest costs was down sharply. I guess I was a little surprised at your administrative number wasn't off more sharply than it was. I wonder if you could provide a little color on that administrative number and what we might expect as we look out for the balance of year.

Yes. When you sit there and take a look at the six months, Saul, we're about $17 million, $17.5 million lower of that interest expense is $13 million and the -- just the admin spending and reductions that we've taken here are almost $9 million. So when you take a look at what it has actually cost us is really the first six months of environmental and the timing of environmental, we think on the full year environmental will be fine, but just in that first quarter and the second quarter our environmental expenses were a little higher than what we expected and that is what dampened that difference between the first and second quarter. Going out, we think we're still going to control SG&A expenses. I think that our interest expense is -- we think we're in pretty good shape. The interest rates that we're paying for short-term right now are around 60 to 65 basis points, so when you take a look at where we are right now with interest, we think we're going to have a nice year for interest savings.

So the administrative numbers should continue to trend lower?

Yes.

Thank you very much.

Thanks, Saul.

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

Good morning, guys, it is actually Mark stepping in for Eric.

Hi, Mark.

First on the gross margin line, you talked about normalization in the second half. Any sense for if it can stay around the 46% that you posted this quarter, and how should we think about gross margin going forward and into 2010.

Yes. I think what Chris has said we've done a lot of work over the last couple of years just to recover our gross margin and when you take a look at the first six months it is 45%. If you look at the last 4 to 5 years, if you look at where our gross margin was at the end of the second quarter, it has been within one or two tenths of that at the year end for the full year, because a lot of the pricing activities have already occurred and a lot of the activities as far as when you take a look at the production of paint and so forth. I don't -- when you take a look at the full year, I'll just say I think in the full year when you compare it to that 45%, I would expect that our gross margin would be in that 45% to 45.5% range for the full year.

Okay. And secondly on the SG&A, less progress this quarter versus the first quarter. Should we assume that SG&A can run down 5% in the second half similar to what you saw ex items in the first quarter.

I think when you take a look at it, we don't give out every line of the P&L here, but when you look at it what we've said is we've done a lot of actions throughout 2008, and as we continue to anniversary those, you will see a lower and lower reduction in the SG&A. In the first quarter we were down 43. Second quarter we were down 24. So I would tell you we're just going to continue to annualize that. I don't know how to answer the 5 % number. But -- because we've got a forecast of our SG&A and I do not want to give that number out. But I would tell you that I think as we anniversary more you're going to see that reduce.

And then quickly on the comp within the quarter, breakout roughly of price and volume relative to what that number looked like in the first quarter?

First quarter to second quarter I would tell you that it was fairly -- relatively stable. I would tell you that you are going to -- our gallonage was down in the high teens, just like it was in the first quarter. And our comp store was different by 0.4, 13.5 versus 13.1, and so price mix really didn't change between the first quarter and second quarter.

Thanks, guys.

Thanks, Mark.

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

Good morning, guys.

Good morning, John.

I would have expected the consumer group sales group to be up modestly, given PPG reported up DIY sales last week. Is there a share, market share shift issue here, I know it is not just you and them, there are a lot of players here, but can you make explain why your consumer segment underperformed on sales relative to the DIY sales reported last week by PPG?

Can't comment specifically on PPG's customer mix. I think when we looked at the architectural data from the federal government output, that our DIY sales for the Consumer Group were somewhat in line there. Beyond that, John, I don't have much to comment on it.

Okay. Do you think -- there's a substantial different mix of retailers I guess and regions in the business, that that would account possibly for it.

Well, I've -- we've commented about the customer mix, PPG's DIY base is predominantly with one of the major big box retailers, as those retailing partners tend to align with manufacturers. We've been a strong partner with Wal-Mart, which has been doing well in this segment. Not quite sure how their order pattern versus sales out the door went through that quarter. But as we commented in the call, we think that our consumer group is actually doing fine.

Okay. Thank you.

Thanks, John.

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

Good morning,everyone.

Good morning, Chuck.

First thing I want to get back to is the environmental expense. Sean, it was up year to date quite a bit for the first half. Are you suggesting that we are seeing the bulk of the dollars already expensed for 2009?

I'm not sure how you would interpret bulk, but I would say that our expenses in the first half of the year, we think it is higher than it will be in the second half of year.

All right, got you. That is helpful.

Just because of the timing on a couple projects.

All right. Would you care to put a full number or a forecast annual number for that line?

No, no.

Have to ask, Sean.

No problem.

When we're looking at the consumer group and you mentioned some positive impacts on the mix, can you talk about that in some detail, which products are helping you out there?

Yes. We've been seeing some nice work on our branded programs through a number of retailing partners. I think as we shared with you on previous calls, Dutch Boy had a major launch of a [Refresh] product line this year that has been doing well. Some of our other programs, Minwax, Thompson branded items, for example, Krylon, all continuing it do well in this environment.

Okay. What about raw material costs? Any out -- any reason to comment on those right now? How do you guys feel about that?

As you know, chuck, there's been some volatility in the second quarter in the energy markets, and there are a component of the raw material basket that's sensitive to that, particularly in the area of solvents, monimers, latex, plastic pails, and we've seen actually a bit of upward pressure on some of those materials in the second quarter, just from the move upwards in crude oil from its low. A lot of the non-petroleum-based materials have remained pretty stable in the past few quarters, but in some cases we're seeing some upward pressure on these too. We came over a camel's hump in the middle of 2008, and we're comparing against that hump now, so year-over-year they look somewhat favorable, but in absolute sense there's upward pressure.

Okay. Turning to an ugly subject, the lead pigment litigation, in the Wisconsin win where you had the unanimous decision in the Wisconsin Supreme Court, they bring up this -- which seems to me to be a new concept, that the product was not defectively designed just because it contained the toxic chemical. What kind of import does that have going forward to these cases against Sherwin and your co-defendants?

Chuck, in these cases we've always argued successfully that lead pigment, when intact on the wall doesn't pose a hazard to children, and the courts and in fact the scientific community has agreed. And we believe that the effort by the plaintiffs to have lead pigment declared a defective product was an attempt to circumvent that argument, that intact lead paint well maintained is not a hazard. So today that argument remains intact.

And this ruling, the way that the court ruled affirms that argument?

Correct.

Thank you.

Thanks, chuck.

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

Hi, good morning.

Hi, Jeff.

A few short questions. Can you talk about your sequential pricing? Was it flat or up or down versus the first quarter from the Company as a whole?

Yes. I think what we said just earlier on question is that it's basically flat from the first quarter.

Basically flat. And are your average prices up more than 5% year-over-year in the second quarter, which I guess would be about consistent with the first quarter?

Yes. In fact what we've said is comp stores were down $13.5 million and when you take a look at the volume it's up -- down high single -- or teens so that puts you in that same ballpark.

And are your raw material spreads narrowing or widening out right now?

Spreads versus what, Jeff?

In other words, your raw materials versus your paint prices as we go into the third quarter, that is, is that margin contracting or widening out? Because there's some -- you've got some price pressure but you also have some benefits from, I guess, lags in benefits that come to you.

I think we're staying flat with that, just as Sean commented, that our pricing is remaining flat. There's not a lot of movement in that area.

Lastly, should there be any business that's weaker in the third quarter than there is in the -- than you faced in the second quarter, or should your businesses have a little bit of a positive trajectory or a neutral trajectory?

When we look underneath the different segments a little more carefully, there will be pieces of the stores business for example, that we're concerned about, commercial construction, estimates are quite negative for the third and fourth quarter, and so there's a segment of painting contractors that focus on that and there will be a little bit of a head wind there as well. First half housing numbers were out through June, off 44% in square footage put in place, which is a little stronger than we anticipated. So as those projects would have come to fruition and painters would have been on them, there will be a little bit of a headwind there as well too. So I think the guidance we've given today which is to indicate that our second half sales will continue to be a soft point to the fact that there's a number of these contract areas particularly that are going to struggle.

Okay. Thank you very much.

Thanks, Jeff.

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

Good morning. Thanks for taking my questions.

Good morning, Amy.

My first question is on your pricing strategy on your investor day you mentioned now you adopted a little bit more flexible pricing strategy for your DIY customers. Essentially I think that you are saying that the margin-neutral strategy of bringing down the list prices and at the same time reduce discount levels. I'm wondering how that strategy has played out? That strategy helped you guys to get a little bit more volumes or, just any positive impact and -- quarter to date? Have you guys already seen from that strategy?

Yes. That pricing change, Amy, was effective July 8th so we're really in our infancy, and just to clarify for all of our listeners as a reminder, 85% of the volume that goes through our stores aimed at our official contractors had no impact or changes in our pricing strategy. The remainder of 15% through our DIY, we've left our high end, higher premium quality product lines unchanged, we've simply introduced a lower, in the $20 range, entry level price point product and widened the gaps a little bit in the low to the midpoint of the price point. Those are just going into effect right now and we'll be able to comment on that after the third quarter.

Thank you, very helpful. My second question is regarding your full-year self guidance now expecting overall total sales is down 11% to 12.5% and if I look at the first six months yourself down almost 13% so given that the easy comp from last year on your fourth quarter to this year sales number I'm just a little bit surprised why your guidance could not be a little bit more optimistic with the guidance suggesting further deterioration yourself numbers in third quarter?

Yes. I think we're commenting based on the environment that we're seeing in the domestic US market for professional painting contractors, which is our largest segment. We've commented a little bit about two of those segments commercial and new residential construction which continue to look like they're going to struggle. I think as we said on the call ,there really is no impetus that we're seeing right now for this rebound and while, some pundits have talked about a second half, we think it is more likely to be out into 2010 at this point in time. And so our guidance is giving you the best look that we have right now, what we're likely to see on the top line.

Thank you so much.

Thanks, Amy.

Thank you. Our next question is coming from Dmitry Silversteyn of Longbow Research.

Good morning. I just want to clarify a couple of questions and maybe ask them a little bit differently from the questions that were asked before. First of all in terms of your revenue seasonality in the third quarter, last couple of years we've seen third quarter revenues being stronger than the second quarter, is that what we should expect this year as well? I'm talking about seasonal third versus second.

Yes, the sequential year-over-year or month over month as we've gone through this year have been very much consistent with past practices and we would expect that to be the case again this year. There is no change in that, Dmitry.

Okay. So we're still looking for modest sequential growth in third quarter revenues?

Yes.

Okay. Now you talked about pricing obviously being flat sequentially, but year-over-year did I hear Jeff's comment correctly that it was up about 5%?

That's correct.

Yes.

Okay.

Used the 5% and we said that's not materially off. We didn't use the 5% but, yes, we --

But it is somewhere in the low single digits, let's say.

Right.

Okay, very good. Just wanted to confirm that. Secondly, another follow-up on Jeff's question, when you talk about raw materials with all of the moving parts that you have sequentially, obviously there's seasonal bounceback off the February/March lows, but on a year-over-year basis, if you look at your basket of raw materials, was it lower costs and therefore a benefit to you and if you care to quantify what that benefit is? And as you look at the trajectory of raw material price increases last year, assuming normal seasonality this year, do you expect that positive delta to actually help you more in the second half of the year?

Well, the first half of the question, Dmitry, there was a modest year-over-year benefit in raw materials in the second quarter. Going forward it's hard to say given the volatility in the energy markets and the -- that pressure that we're seeing now, whether that benefit is likely to continue, to increase to decrease.

Okay. But -- okay, all right. So I'm just looking at a very sharp increase in the slope of raw materials in 2008 and what looks like a more benign slope to the extent that you can extrapolate it.

I think that's a fair assessment, Dmitry.

Okay, so these things should get more positive for you in the second half of year.

Possibly correct, given the volatility does not go crazy on us, that is possible.

Got you. Final question, on that restructuring benefits, you talked about the consolidation of assets and some distribution costs being taken out, freight being lower. Can you quantify and maybe not in absolute dollars but at least where you are in a percentage terms in completing your restructuring program, how much more is left to do in 2009 and if you care to comment on the benefit that you saw in the quarter from these restructuring programs.

Yes. I'll comment briefly where I think we are in the process and then I'll let Sean give you a sense of whether we're feeling any of that benefit yet, or what part of that we'd be willing to share with you. This has been an aggressive approach to get these facilities done. I would also comment that the store closings have also been part of that as well, as a quick reminder, Dmitry, we closed 79 locations last year. We're probably going to be in the 30, plus or minus a few, store locations this year. And so by simple math we're about half of what we did a year ago. And my guess is that as we head into 2010 there may be half again as much as we did this year in stores. So we're nearing the end of the need to really get this redundant store closing in place pretty much on the backs of all the acquisitions we made throughout the last the last six, seven years. That feels like it is in pretty good shape. The assets in terms of production capabilities also are in pretty good shape as well for us. So I would say that most of that heavy lifting is behind us as we go forward.

Yes. And I would tell you that we still -- I don't have -- I would have to work up a percentage or even to give you some type of a range, but I would tell you that we do -- we will start -- we will continue to feel more benefit from that, Dmitry. I don't have a percentage for you.

Okay. And then just maybe -- this will help me out a little bit, if you can look at the year-over-year margins that you were able to deliver in the businesses, particularly the consumer group where you had margins up, and the store group where margins were down because of significant negative volumes, but it looks like it -- apples to apples costs were taken out of that business, how much of that was related to restructuring and how much of that was related to raw material?

Yes. And that goes back to when Saul asked that question, I dent think we're prepared to give that metric.

All right, fair enough. Thank you.

Thanks, Dmitry.

Thank you. Our next question is coming from Gregory Melich of Morgan Stanley.

Hi, how are you doing?

Hi, Greg.

Two questions, one on volume and then a follow-up on another one. If you look at your change and your implied back half assumption, it looks like it is around 400 or 500 basis points from where we were before. And it sounds like from an earlier question, the bulk of that is in the how the swing in commercial is coming through, and then a little bit different on the residential. Is that a fair assessment that I'm making?

Yes.

Is industrial running better than you thought or in line?

No. We're seeing the same softness there as well. If you think about the CapEx spending that is being curtailed by most corporations, it would have impacted maintenance projects, this is a time frequently when plants would shut down for summer maintenance, we're not seeing those kinds of work. Some of stimulus money that should be flowing in is also taking longer to reach, quote, shovel-ready projects, that is being deterred a little bit as well. So there's definitely softness in the protective and marine segment of our revenue side as well.

So if we were to look at the second quarter, and that volume was still running down high teens, incrementally versus the first quarter or just -- was residential down high single digit and the commercial was down 30%, 40%? Is that -- am I thinking the right way?

Greg, sequentially, obviously first quarter is a small quarter. If you are looking year-over-year residential was down. And we look at it in square footage. You are talking about the markets?

Yes.

Yes. In square footage, residential was down in the mid-40s and commercial was down in the range of 50, and that is the square footage put in place.

For new construction?

For new construction.

For repair/remodel?

That's a little harder to get at. I mean commercial -- commercial repair is down, the property maintenance, mainly because a large component of that is apartments and apartment occupancy rates are down, and so commercial repaint has been very weak and, as Chris mentioned, not a lot of CapEx spending or maintenance spending on existing buildings. In residential, probably the segment of the market that has held up the best is the DIY portion of the residential re-paint market.

Okay. And then just to confirm, is it fair to assume that in the third quarter you are running within the sales range that you gave out?

Yes. So far. That's our guidance for the third quarter.

Okay, great. Thanks.

Thanks, Greg.

Thank you. Your next question is coming from Pj Juvekar of Citi.

Yes, hi, good morning.

Morning, PJ

I want to go back to consumer group or DIY channels, can you talk a little bit about prices versus volume, and my specific question is that -- is there discounting going on in hard goods like brushes and rollers to move paint volumes in the DIY channel that's impacting you negatively?

I don't think there's been a lot of change in year-over-year discounting through our retailing partners, certainly through our own stores as well. This is the time of year where discounts for paint and associated products, including brushes and roller, which you mentioned, would be going on. We're not seeing them any more aggressive or specific than they might have been in the past. And I don't think as a result then that we're being negatively impacted by that one way or the other.

Okay. And then secondly on the industrial paint demand you talked about architectural, you talked about commercial. Can you give us a little bit of a feel for where you are in the industrial cycle and related to the other cycles, does it bottom out typically six, 12 months later?

Yes, maybe, Bob, you can comment on just some of the industry data that we're seeing on projects in this industrial sector.

Yes, PJ, are you talking specifically -- industrial obviously, is a broad category, are you talking specifically about protective and marine, or --

I'm talking about general industrial. If you have some profitable stores that sell industrial paint.

Primarily our stores group is protective and marine. There are a couple of issues that are -- a couple of areas where we're seeing significant drag on protective and marine. The protective coating side, structural steel that goes into new commercial construction, is off easily to the extent that commercial construction in general is, so that market is down 50%, which means that structural steel coatings are down easily by half. The non-building construction is down. That's a category that we normally see plus or minus low single digits at worst, is off in the double-digit range, in the mid-teens year-to-date. So that would be construction like bridges, wastewater treatment plants, things like that, so a lot of infrastructure is not coming out of the ground because it is driven by growth in residential and non-residential building construction. Does that get to your question?

No. Yes, it does. And one quick question for Sean. Sean, I know that you have a financing book with contractors. Can you just make a comment on what trends have you seen there, and any bad loan losses, et cetera.

Yes. I --

Thank you.

Yes. I would tell you that in the fourth quarter, if you remember our bad debt expense started to move up. I would say when you take a look at it, our DSO looks pretty well. Our past due looks good, but our bad debt expense is higher this year, and just to let you know that we were running for years in those $20 million to $25 million. We're now running at about a $36 million in the first -- for the year, so we're up about $9 million in the first half of the year.

Thank you. That's helpful.

Thanks, P.J.

Thank you. Our next question is coming from Sergey Vasnetsov of Barclays Capital.

Good morning.

Good morning, Sergey.

A couple of questions more towards 2010 rather than this year. You particularly had dividend payout of 30% of previous year EPS and EPS on your dividends have been growing. What's your early thoughts on keeping that number or keeping that range for 2010?

Well, I think, Sergey, this year our payout is, you know, crept up more into the 35%, 36% of previous years' EPS and that's been part of previous years in this 31-year cycle as well, too. Obviously this is a board of directors' decision. The management recommends to them. I think you should take great comfort in the fact that after 31 years of consecutive dividends, we place a high importance on continuing to pay dividends and continue that trend. We've also commented on this call and others that the Company's cash performance continues to be strong, even in this difficult economic environment. So there's nothing that you should read into any of our comments that would indicate that we won't do anything but to continue that policy.

Continue to increase dividends or continue to increase the range.

Increasing dividends.

Got it, okay. And speaking of cash, I agree entirely with your points about very strong pre-cash generation even in the worst conditions. What are your thoughts on share buybacks, again maybe not immediately for the third quarter but for next year?

Yes. I think what we've commented is we continue to buy stock opportunistically. When you take a look at what our dent is right now, what we've consistently said is we do not believe that our shareholders are not paying us to manage cash. I can see that debt coming in slightly below and we'll use that cash to increase shareholder value, which means I'm sure that we'll continue to buy the stock opportunistically.

Okay. And lastly just to touch on tax rates. What are your expectations for the rest of this year and last year?

Yes, last year we finished the year at 33.3%. And I would tell you that we still think that for the full year we'll be down slightly. We're actually down for the first six months 31.9% versus 32.4% last year. But we still think that for the full year we'll be slightly below 33% and looking at 2010 is -- really -- we haven't really taken a look at that, but long term we think that if you look at the last four, five years our stock -- our tax rate has been in that low 30s and we can still see it in that range.

Okay. Thank you very much.

Thanks, Sergey.

Thank you. Our next question is coming from [Dennis McGill] from Zelman & Associates.

Good morning.

Good morning.

I just had a big picture question for you Chris, on your comment earlier you said that obviously you have not seen signs that a recovery is imminent but you did say that you expect the recovery, when it does come, that it will be slow. Realizing it is difficult to peg the bottom, is there any reason why you couldn't see a stronger recovery given the fact that you've said the last three years have wiped out a decade of volume growth, so is there any reason why you think that the recovery will be more muted than maybe we've seen in the past.

I think it is just in our nature to be a little conservative on this guidance, Dennis. As economies and some of the leading indicators start to talk about more positive performance, we've even seen some of those recently where we've been a couple of sustained months of better results. Don't forget that painters are usually the last guys in to these projects to finish them off, and so I think that kind of mutes the bounceback that, while some sectors might start to come back a little bit quicker than painters will. I think that is all that you should read into that comment.

And fair to say that the biggest headwind over the next two, two-and-a-half years is the projects built out on the non-res side that you talked about.

I think that is fair.

Okay. And then just a couple quick ones for Sean, can you talk about the capacity or short term split between the commercial paper and the revolver?

When you take a look at our debt at the end of the second quarter I would tell you that we were actually in the commercial paper -- majority of our debt was in the commercial paper.

That's the end of the quarter number?

Yes.

Okay. Can you give any specifics on the outstandings?

Outstanding, our total debt was $800 million, long term was $300 million, and our short term was was $464 million and I would tell you that the majority of that was commercial paper.

Okay. And then on the corporate line or the administrative line, if we look at that excluding the environmental and the interest, the number that we should be thinking about in the back half of the year should be similar to the front half? Is that kind of how you guided it earlier?

Yes. That's -- we don't really give guidance by the segments and so forth, but I would say that the run rate of our administration costs and so forth probably -- should run around the same kind of run rate that we've had the first half of the year. Which was down compared to last year.

Right. Okay. All right. Thanks again, guys.

Thank you, Dennis.

Thank you. Our next question is coming from Jay McCanless of FTN Equity.

Good morning, everyone.

Good morning, Jay.

Question about the paint stores first, with the changes you've made to bring more DIY folks in, can you give us any sense of what DIY transactions did on a sequential basis and maybe year-over-year in the second quarter?

Yes. I think to be careful here about all of the changes we're making to bring more DIY in. This is a business that has historically generated about 15% of its revenue from our DIY customer base. We've had a long-standing marketing effort towards DIY and continue to do so. The mix is not changing dramatically. I think sequentially to your point, when we've looked at our DIY performance, Bob made the comment that that's been one of the better performing or least retreating areas of the architectural paint market, and we're seeing that with our stores as well. We're seeing some nice weekends on the DIY business and performance is a little better than the groups' numbers overall, so we don't think this is something that moves the needle dramatically for the Company, but it is an important business and we're continuing to pay attention to it.

Should we expect a pickup or an increase potentially in SG&A in the back half of the year as you all roll out some promotions related to these different offerings that you are doing for DIY at the paint stores?

No, you shouldn't, Jay. Our SG&A expenses will continue to track in the general direction they've been in the first half. Again, I think we commented earlier this the call that the rat kind of professional activities we're doing are very consistent with what we've done in past years, and there's no significant uptick in those planned for this year.

Okay. And then one another question, I believe you said that the Southwest stores were, I guess, less negative than everyone else on a year-over-year basis. Does that have anything to do with the foreclosure turnover we're seeing in that area, or could you give some other commentary behind it?

We've commented in the past, Jay, that most of the -- or I think a significant portion of these foreclosure sales are that the purchaser are investors who are sitting on the properties, trying to turn them out into the rental market and making minimal investment in them, and to the extent that they are replacing floor coverings, doing a little painting, a little electric or plumbing maintenance, we think that probably the big box stores are the primary beneficiary of that business. Once those homes are put out for sale again, when the market turns and those homes go back on the market to be flipped for a profit, that is when we think more investment will probably go into them, and that is it when we'll see the benefit. It is likely that our southwestern division outperformed just because there are some stronger markets down there, the Texas markets have held up well.

Okay. Great. Thanks, guys.

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

Good morning.

Good morning, Steve.

The only thing that hasn't really been talked about is the international side, and I wondered if you could comment on the performance of some of your selected international markets.

I'd be happy to do that, Steve. As you know, primarily Latin America is where the Company's nondomestic revenues are generated, and this year we're facing currency headwinds, I think about half of the revenue decline in the quarter was attributable to currency. That leaves us with still significant single digit decline in those businesses, and not unlike the United States we're seeing softness in a number of those different segments down there. Starting with Brazil, which is a -- the majority of our Latin American business goes through that largest country down there, and it's a country that's been slowing down there rapid growth. We've seen, as Bob mentioned in some of the earlier questions, a whole gambit of issues, whether it is our industrial coatings, to our protective and marine down there, some architectural businesses, pretty much across the board. We sell through our own stores, as you know, as well as independent dealers and some of the region's home center chains and pretty consistent performance across all of them in the negative. Again, don't see a lot of impetus for change in the near term down there. The Company continues to do the same kinds of things we do domestically to pull on levers to try to gain share, get costs out and increase cash performance and all of those things are happening.

Any other markets to comment on?

No. We have a slight presence in Asia Pacific through our Global Group. Most of our business over there is industrial OEM coatings. Our market share is in deminimus mostly in that part of the world, I know that is soft for others, but we're just basically getting started. We've opened architectural paint stores, as we've commented in past calls, in India, those are continuing to generate nice sales gains month over month but, again, such a small part of the business, not really enough to move the needle.

Thank you.

Thank you, Steve.

Our next question is coming from Saul Ludwig of KeyBanc.

I just have one follow-up. Earlier you commented that you -- as is normal, your third quarter revenues are somewhat higher than your second quarter. And that is even with the outlook for commercial construction and new housing that you alluded to. When you think about other variances as we go from the second quarter to the third quarter we should have less FX expense, we're not going to have the planned closing costs, Sean talked about lower interest expense and much lower environmental costs. All of those would seem to imply that with higher revenues and lower of these special expenses, if you will, that your earnings should be higher in your third quarter than in your second quarter. What is it that could come about that could cause you to be in the 115 to 135, which would be lower than your second quarter, in the third quarter? What are the other variables that maybe we're not thinking about, if we're going to get higher revenues and lower other expenses?

Well, Saul, when you take a look at it the question was do you think that your sales is a seasonality changing? I think if you look at our sales forecasts, when you take a look at the ranges, the low end of the range actually is below the second quarter. You can do the math and see that. So, we do -- when you take a look at it, there's -- the sales -- the seasonality has not changed. You sit there and we probably should have answered that question because it has moved the lower end of range up in our sales forecasts so, we still see uncertainty in the sales, we still have different things we're working on in the margins, and so to go down there in the SG&A, to go down -- I would have to answer that question -- I don't know how to answer that question without getting very detailed of what our forecasts are on every single line.

But the thrust of my logic isn't out in left field?

No, it's not in left field. And it's -- I can see what you're talking about. But when you sit there and take a look at it --

We must be missing something big because we're talking about a lot of items here, no planned closing costs, no lower environmental, lower interest costs.

Well, first of all we have planned closing costs that will definitely go into the third quarter, the 14 facilities that we've talked about in in the last six quarters that have been either shut down or announced to close are still going forward. So we'll have some of that yet to do. We have some store closing costs to get through in the third quarter as well, Saul.

Okay. That's additional clarification, thank you. And then finally, usually you generate $300 million, $400 million of cash in the back end of the year. Would you expect that to be any different this year, Sean?

Yes. I think we -- probably when you take a look at it from last year to this year, you're taking a look at -- we really did a nice job of the working capital. We're probably not going to have the same type of positive working capital, and so it will be muted compared to last year, and it is going to be very good cash flow for the next six months.

Great. Thank you very much, guys.

Okay, thanks, Saul.

Thank you. Our next question is coming from Don Carson of UBS.

Yes, thank you. Two questions, just a clarification on raw materials. Bob, you talked about how they are going up and certainly the comps get tougher in Q4 if you look at benchmark pricing for acrylic and things like that.

Yes.

What kind of a lag is there before you would see that flow-through? Does that hit you in the fourth quarter? Is there a lag into the fourth quarter? Just wondering when the -- first significant year-over-year increase might come about when I look at these comparisons?

My understanding, Don, is that it depends on the commodity. I mean, the solvents send to move pretty much in lockstep with movement in the crude market, in polypropylene and ethylene and the resins tend to lag. And plastic packaging tends to move a little quicker. But also depends on market dynamics.

Looking at the specific question on acrylics where we've seen propylene move out because of tight supplies, which -- and your acrylic suppliers raised pricing and just wondering when you are going it see that, because getting into the fourth quarter the year-ago comparison gets pretty difficult.

Right. You know, it depends. Typically -- historically, pricing in the acrylics have lagged and every -- but we're in uncharted territory.

Okay. And finally question, Chris, you mentioned how we've wiped out ten years of growth in the paint market, I remember years ago before the new housing boom people used to talk about the coating season in Northeast and Midwest, it was extremely wet this year, did that cost you much in the way of volume and if so is that kind of deferred into the second half or is it gone?

Yes. We rarely, Don, get weather reports on here, but I think you are accurate, it has been a little bit of a wetter, colder period throughout much of the northern markets, and that's had some impact on the early exterior house painting season, whether that gets deferred to the second half and get caught up on that, time will tell. There's certainly enough painters available to do these homes, and so if people are inclined to got it done, they will be able to find a painter.

No discernible impact on volumes --

We'll see what happens in the third quarter but I don't expect it to be a big mover for us.

Okay, thank you.

Thanks,.

Thanks, Don.

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

Thank you. Just a few quick follow-up questions, and the first of the questions on the consumer segment, I'm just wondering have you guys already seen -- the home centers, with the DIY channels home centers taking share from mass merchants and also hardware stores because I remember PPG last week they commented that home centers, actually volumes growth is pretty meaningful for the quarter. I'm just wondering. Your consumer business is a little bit weaker than expected. Actually weak than expected for the quarter. Is that because market share shifted to the home centers from the mass merchants.

In the past, Amy, when we look at the DIY share for those channels and the last time that we had a look at it was at the end of the 2008, and the home centers did continue to, A, be the dominant share of that market and, B, had improved slightly, maybe one or two basis points in that period. So I think there is some movement to them for sure.

Even within the DIY channel.

Yes.

Okay. And my second question for the paint stores, if we think about year-over-year trends in the third quarter, would you say that the comp, I mean, because second quarter your same store sales are down 13.7% and adding to the third quarter of this year would you say that the year-over-year trend just stabilized at that level, or maybe there's just some modest improvement, or there's some further erosion? How do we think about the trend?

I think the guidance that we gave for third quarter would indicate that we're looking at a pretty flat performance second quarter to third quarter.

Thank you.

Thanks, Amy.

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

Sean, as you are looking at the credit markets right now, how do you feel about stock buyback in the second half of the year?

I think that it's pretty good. I think that our liquidity sources have been in a good situation and our credit facility have less -- we're getting close to having less than 12 months. We are in the short term there. I think you'll see us do a multi-year there, and once we do we'll feel pretty good about buying stock backs. All right. Thanks a lot.

Thanks, Chuck.

Thank you. There are no further questions and I would like to hand the floor back over to management for any further comments.

Well, thanks again for joining us this morning. As usual we'll be available over the course of the day to answer any follow-up questions we didn't get to on the call. We appreciate your participation on the call this morning. And as always, we appreciate your interest in Sherwin-Williams.

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