宣偉 (SHW) 2010 Q2 法說會逐字稿

Good morning. Thank you for joining the Sherwin William Company's review of the second quarter 2010 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, Allen Mistysyn, Vice President, Corporate Controller and Bob Wells, Senior Vice President Corporate Communications and Public Affairs. This conference call is being web cast on simultaneously in listen only mode by Vcall via the Internet at www.Sherwin.com. An archived replay will be available at www.Sherwin.com beginning approximately two hours after this conference call concludes and will be available until Wednesday August 11, 2010, at 5:00 p.m. Eastern Standard time. This call will include certain forward-looking statements as defined under US federal securities law 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 statement whether as a result of new information, future events and 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 Sherwin.com under investors relations second quarter press release. Summarizing overall Company performance for the second quarter 2010 versus second quarter 2009 consolidated net sales increased $195.2 million or 10% to $2.14 billion due primarily to improved architectural sales, acquisitions, and favorable foreign currency translation rate changes. Acquisitions increased net sales by 1.9% in the quarter and favorable currency translation rates increased consolidated net sales 1.3%. Consolidated gross profit dollars increased $76.5 million for the quarter to $971.9 million. Gross margin decreased 60 basis points to 45.4% of sales from 46% in the second quarter last year.

Selling, general and administrative expenses to the quarter increased 5.9% to $691.2 million as a percent of sales SG&A decreased to 32.3% in the second quarter this year from 33.5% last year. Interest expense increased $16 million compared to the second quarter last year. Consolidated profit before taxes in the quarter increased $27.1 million or 11.7% to $259.2 million. Our effective tax rate in the second quarter this year was 29.9% compared to 31.9% in the second quarter of 2009. For the full year 2010 we expect our effective tax rate to be approximately 33%. Consolidated net income increased $23.7 million to $181.7 million from $158 million in the second quarter of 2009. Net income as a percent of sales was 8.5% compared to 8.1% in the second quarter last year. Diluted net income per common share for the quarter increased 21.5% to $1.64 per share from $1.35 per share in 2009.

Looking at our results by operating segment sales for our paint stores group in the second quarter 2010 increased 6.4% to $1.24 billion. Comparable store sales, sales by stores open more than 12 calendar months increased 5.9%. The increase in sales for the segment was due to improved domestic architectural paint sales primarily to residential repaint contractors and improving protective and marine product sales. Regionally in the second quarter, our Eastern division led all divisions followed by Southeastern division, Midwestern division and Southwestern division. Sales by all four paint stores divisions increased from the second quarter compared to last year. Segment profit for the group increased 9.5% to $212 million in the second quarter 2010. Segment margin increased to 17% from 16.5% due primarily to higher sales volume and effective SG&A control. During the second quarter paint stores group opened seven new stores and closed four redundant store locations.

Turning it to consumer group, sales in the second quarter increased 11.9% to $410.2 million. The increase was due primarily to improving demand at some of the segments retail, industrial and institutional customers. Segment profit for the consumer group increased 22.1% in the quarter to $80.7 million. Segment profit as a percent of external sales increased to 19.7% from 18% in the same period last year due primarily to effective cost control and cost savings realized from previous years site rationalizations that were partially offset by raw material cost increases. For our global finishes group sales in US dollars increased 18.8% to $486.5 million in the quarter, due primarily to acquisitions, favorable currency translation rate changes and higher paint sales volume.

For the quarter acquisitions increased global finishes group net sales by 9.2% and favorable currency translation rate changes added 5% to net sales in US dollars. Second quarter segment profit increased 28.2% to $40 million due to higher sales volume, good expense control and currency translation. The combined effect of positive foreign currency rate changes and the negative impact of acquisitions including all transaction costs slightly reduced global finishes group segment profit in the quarter.

Turning to the balance sheet, our total debt on June 30, 2010, was $908.6 million including total short term borrowings of $199.5 million. Total debt on June 30, 2009, was $800.7 million. Our cash balance at the end of the quarter was $48.4 million compared to $49.3 million at the end of the second quarter 2009. Total borrowings to capitalization where are 37.2% at the end of the quarter versus 31.6% at the end of the second quarter last year. Long-term debt to capitalization was 29.1% at the end of the second quarter this year compared to 11.9% last year.

In the second quarter 2010 we spent $22 million on capital expenditures, depreciation expense was $33.1 million and amortization expense was $6.5 million. For the full year 2010 we anticipate capital expenditures for the year will be approximately $100 million to $115 million, depreciation will be about $147 million and amortization will be about $26 million.

I'll conclude my remarks on the quarter with a brief update on the status of our lead pigment litigation. In California State Supreme Court will decide whether it is permissible for cities and counties to retain contingency counsel to aid them in their suit against former manufacturers of lead pigment. Briefing is completed, oral argument was held on May 5, 2010, and we expect a decision some time this summer. The Gains case, a single plaintiff personal injury suit was tried to a jury in Jefferson County, Mississippi beginning in June of 2009. The jury returned a verdict in favor of the plaintiff. The Company has filed a notice of appeal with the Mississippi Supreme Court and briefing has now begun. We recently filed our opening brief. We expect plaintiff to file their brief within the next 60 days at which time we will have an opportunity to file a reply brief. No hearing date has been set yet and a decision is not expected until at least late 2010 or early 2011. That concludes a review of results for the second quarter 2010, so I'll turn the call over to Chris Connor who will make some general comments and highlight our expectations for third quarter and full year. Chris.

Thanks, Bob. Good morning, everybody. Thanks for joining us today. Second quarter of 2010 was a solid quarter for Sherwin Williams in many respects. It was our strongest quarter in terms of sales growth in the last four years dating back to the first quarter of 2006. After backing out acquisitions and positive currency translation revenues increased nearly 7% versus the second quarter of last year. Our domestic architectural paint business improved across all end user segments led by particularly strong volume gains in the residential repaint market. Domestic and international sales of automotive finishes, OEM product finishes and protective and marine coatings also rebounded nicely in the quarter compared to the second quarter of last year.

It was a solid quarter in terms of earnings improvement as well. Although we did experience some year over year gross margin compression resulting from a rapid increase in raw material cost primarily acrylic latex and titanium dioxide and higher operating cost we incurred to compensate for the poor service performance of a major raw materials supplier, these included the cost of transferring raw materials between manufacturing plants, moving finished goods between distribution centers and between stores, lower plant productivity due to raw material outages and higher cost spot buys to compensate for poor service levels. Although these raw material supply problems are being resolved as we speak, many of these higher costs will continue to pressure our margins in the near term. We have been responding to the mounting raw material cost pressures by appropriately tightening SG&A expense control and raising prices where necessary. SG&A as a percent of sales for the quarter decreased 120 bases points compared to last year, which is noteworthy considering the incremental service expense required to support double digit sales growth.

All three of our reportable segments posted strong operating margin increases in the quarter combined profit for the three segments increased by $42 million more than 14% and combined segment profit margin increased 60 basis points to 15.5%. Our interest expense for the quarter increased by $16 million over last year as we took advantage of an opportunity to repurchase $85 million in long-term debt. In this particular case, long term, means bonds maturing in 2097, the financial matrix were favorable and this repurchase allows for greater flexibility for our balance sheet going forward. The decision to take advantage of this opportunity impacted our earnings performance for the quarter by $0.08, and it will be reflected in our guidance estimate for total year earnings as well.

Despite the gross margin pressure I mentioned earlier and the higher interest expense our consolidated net income for the quarter rose 15% and diluted earnings per common share decreased 21.5%. In the first six months of 2010 we generated $211 million in net operating cash, this was down slightly from the $260 million range in the first half of last year due primarily to a $78 million increase in accounts receivable as result of higher sales. We've continued to invest this Company's cash to expand our control distribution platform, complete suitable acquisitions as well as purchase shares of our stock for treasury. During the first six months of the year our paint source group opened 13 new store locations and consolidated 7 redundant stores. We finished the quarter with 3,360 stores in operation compared to 3,340 this time last year. Once again, for the full year we expect to open between 40 and 50 new years and slow the place of redundant store closings.

Over the past two-and-a-half years our net store count has increased by 35 stores but it was 35 the hard way. During this time we've opened 166 store locations in new markets and closed 131 redundant locations primarily stores that we acquired over the past six years that were located in close proximity to existing Sherwin Williams stores. The exposure to new markets we achieved with these 166 new openings has given us a significant advantage in reaching new customers as well as servicing existing ones. On April 1, we completed the acquisition of Arch Chemicals industrial wood coatings business which trades under the Sayerlack brand name. In late May we announced a definitive agreement to acquire Becker Acroma, one of the largest global manufacturers of industrial wood coatings. These two European-based companies with combined annual sales of approximately $450 million serve the joinery, kitchen cabin, furniture and wood flooring industries worldwide. They represent another important step in our efforts to strengthen our growing global industrial coatings platform, to better serve our customers around the world with outstanding assets, technology and people.

During the quarter we used the Company's cash to buy back 1.95 million shares of our common stock on the open market bringing our year to date total to 2.35 million shares on June 30, we had remaining Board authorization to purchase 8.4 million shares of stock. We remain cautiously optimistic about the resilience of the architectural repaint markets in the Americas and global demand for most indust air coatings. Our outlook for the third quarter for 2010 is for consolidated net sales to increase in the mid to high single digit percentage 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 $1.55 to $1.70 per share compared to to $1.51 per share in 2009. For the full year of 2010 we expect consolidated net sales to increase in the mid to high single digit percentage range compared to last year. With annual sales at that level, we're updating our diluted net income per common share expectation to be in the range of $4.12 to $4.52 per share compared to $3.78 per share last year. As a reminder our full year guidance includes the $0.08 per share charge for the higher interest expense in the second quarter as well as the $0.10 per share charge taken in the first quarter related to the health care legislation.

Finally, earlier this week our Board of Directors declared a regular quarterly dividend of $0.36 per share up from $0.355 per share last year keeping us on track to achieve our 32nd consecutive year of increased dividends. Again, thanks for joining us this morning and we'd be happy to take your questions.

Thank you, ladies and gentlemen at this time we will be conducting a question and answer session. (Operator Instructions) One moment please while we poll for questions. Thank you our first question is coming from Kevin McCarthy from Bank of America.

Good morning. How are you.

Good morning, Kevin.

Chris, you mentioned you had to take a number of special actions given poor service levels from some vendors, what was the aggregate cost to Sherwin from those special actions and perhaps you could comment more broadly on your raw material cost inflation expectations for 2010 versus' 09 given the TI02 in acrylic pressure that you referenced.

Be happy to do that, Kevin. First of all regarding the cost, we haven't disclosed that. We indicated that our margins were backwards about 60 basis points, most of that was relative to the cost associated with these actions. In terms of our outlook for the year, Bob, may you want to comment on what we're guiding at this point.

Yes, Kevin, we think that the for the industry there were whole raw materials for basket for paint and coating is probably up mid single digits by year end we expect that to push maybe a little higher to the mid to high single digit range for full year.

And did the constraints restrain your sales volumes across any product lines through the Company.

I think there's been some indication regarding some shortages in particular product and I think there's been some comments regarding the traffic market paint industry as one case in point where there's been some shortages. For the most part our higher demand architectural paint products have remained in stock through the actions that we've talked about we've been able to keep our customers in business. So very little constraint at that end of the scale.

Final question, if I may, what is your outlook for pricing in Company stores for the back half of the year, please.

And here, again, Kevin, we've been very consistent about our pricing philosophy here at the Company when facing raw materials pressure, this is reminder for the entire audience we first push back against the supplier, secondarily look internally to see what efficiencies we can gain and then finally take pricing to the market as a last resort. We've been very open with the investment community regarding those pricing actions after we've announced them to our customers in terms of timing and percentage. At this point in time we're not commenting on any pricing activities planned in any of our segments for the second half.

Thank you very much.

Thanks, Kevin.

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

Hi, good morning.

Good morning, Jeff.

In the quarter, were your average prices -- did they increase above 2% or below?

Above, but not much over 2%.

You're estimating $173 million in D&A for the year, but the first two quarters are about $80 million so that's $93 million in the second half or $46.5 million per quarter. Why so high; is that correct?

Yes, I think that -- when you look at that forecast we're looking at different things with our fixed assets and what we think is happening with amortization. You're right. That's probably at the high end of be it will be.

What was the tax rate on the debt charge?

37%.

Lastly if you compare your over year volumes in April, May, and June versus the previous year, what was the variance. I mean, my general impression for coatings, is that April was tremendously strong and sort of was a little bit weaker in May and a little bit weaker in June; is that correct? And what's your impression of the reason for the change?

I think that would be fairly accurate to what we're seeing in the industry Jeff, as all of us are aware the first time home buyer tax credit expired in April. I think that drove a lot of energy in our particular segment and as that passed through, we saw lower housing numbers come out as an example and other retailers commenting about it slowing in the quarter from the beginning to the end. I think that was clear with our numbers as well.

Okay, thanks very much.

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

Good morning, everyone.

Good morning, Chuck.

Sean, are you done repurchasing debt, is there more to go under this strategy?

No, I think for the remainder of the year that, when we look at our hundred year notes there's an opportunity to bring some of that in at pretty favorable rates. But for the current year I don't think you're going to see us do that, bring any more in.

Okay. Did you say how much you actually bought back of that?

$84.9 million is the exact number. We said approximately $85 million earlier today.

I think $85 million will work. I missed the CapEx number you gave in the guidance for the year.

$100 million to $110 million -- $115 million, I'm sorry.

And then when we look at the interplay between volume growth in the quarter, the gross margin decline and the SG&A ratio decline, could you talk about what was going on there including benefits of operating leverage and some of the cost reductions you've taken over the past 18 to 24 months?

I think the gross margin as you indicated when we take a look at the kind of benefits we've had from taking the -- right sizing our footprint, I think that we're down six-tenths in our gross margin. But raws, when you take a look at the raw selling price and home mixture, we feel pretty good about how our conversion cost came in. And the SG&A -- our SG&A was in the second quarter was up right around $38 million, but we did have the acquisition in there and without the acquisition we feel pretty good because our SG&A grew -- less than half of what our sales rate did. So when you take a look at it, our SG&A was down 1.2% and I think that's really what the strength -- shows the strength of the leverage when we get a 10% sales gain that we can drive that PBT up 21%.

Sean, how does the volume growth of the cost of goods line? Obviously you have the cost pressure, but can you get into a little bit what the volume--?

We've always said that the incremental volume really helps consumer and when you look at the consumer group operating margin which were up fairly strong in the second quarter and year to date, with the plants running at full capacity that helps us. We've never gotten into the metric of what our conversion cost is on an incremental gallon. If you can think about that incremental gallon, the gross profit over 40% and when you take a look at it, the incremental cost in SG&A and admin, especially in admin is basically zero, those incidental gallons really flow down to the bottom line.

All right. Thank you.

Thanks, Chuck.

Thank you and our next question is coming from Robert Koort of Goldman Sachs. Mr. Koort, you may ask your question. If you're on a speakerphone we're unable to hear you.

Sorry about that. Chris, I think last quarter you talked about maybe the clouds are starting to lift a little bit and now you talked about a little deceleration here in May and June, do you think that's directly attributable to the tax issues or something broader that might extend this bit of malaise here or lull if you will into the second half.

Obviously while that was a piece of it, I don't think that explains the entire slowing and we've commented about the skittish consumer in this economy that any little bit of bad news tends to see a bit of a pull back in some of this discretionary spending. We have commented earlier at the beginning of the year about the increasing head wind that we're going to face on the new construction and nonresidential businesses and those are continuing, I think the new housing numbers came out and they've been adjusted down a little bit as well, too. There's a broader base slowing we see to the demand for end products here in the United States across a lot of segments.

And how would -- how will you adjust, if at all, your plans for store count next year as these trends play out?

We've always taken a long term view of that, Bob. We've talked repeatedly to the investment community about our next short term horizon goal which is to get 4,000 paint stores in, North America, we're on a continuous path to do that. The 40 to 50 gross new stores we're planning for this year has been the low end of our range. I don't see us dropping below the low end of that for next year. As the economies improve we'll probably ramp it back up to our more normalized run rate of about 100 new stores per year.

One last one, I appreciate your time. Was there a difference in the typical approach to pricing, timing of price increases this year or was 2010 a normal sequence in terms of when you institute those pricing?

Absolutely normal in terms of the sequence of the process that we go through. The only abnormal part of that was that we raised them April 1, for our architectural businesses as opposed to the beginning of the year, the reason was is because we're following the very disciplined approach we take here which is to make sure that we have clear visibility of the cost that we've done everything we can to mitigate it. We didn't see that late in the fourth quarter of last year which took a pass on the first quarter pricing by the time the first quarter stiffened we realized we needed to go out, so that was very much the process that we went through to get this earlier price increased announced and all future price increases will follow the same mindset.

Got it. Thank you very much.

Thanks, Bob.

Thank you. Our next question is coming from of Saul Ludwig of Northcoast Research.

Thank you. Good morning, guys.

Good morning, Saul.

If we just look at raw material cost sequentially, to what degree do you think they were up in the second quarter versus the first quarter?

I think what we've said is the second quarter is -- was going to be the hardest quarter so I think it does tell you raws were up in the second quarter. We sort of put that in our guidance, but -- for the exact number I'd have to figure that out and get back to you, Saul.

Thank you. Next question, was there any LIFO affect in your results in this quarter, Sean.

No, not really. If you remember last year in the third quarter is when we had to take some more LIFO hits, I would say this is a normal LIFO year over year in this quarter.

In the intersegment transfers for the consumer group, these are products that they sell to the stores, right?

Yes.

They were up, I guess, as 19% year over year, so that means if the stores bought 19% more paint than they did a year ago they only sold 6% more paint, did the store inventory get bloated.

I think you've got that in front of you, the consumer group for the three months up 423 from 356. Global finishes were down 48 versus 30. You have to put those two numbers together. There were some products that the global finishes group used to make and transfer to stores that the consumer group is now making, so if you put those two together you have the 404 versus 453 so that takes your percentage down to about 10% and so we had some -- so consumer group also made some product for the global group.

So there--?

That's not just 100% to the stores group any more.

So there's no build up in inventory--?

No.

At stores or the global group as a result of that?

No. In fact if you look at our total inventory 793 versus 769 almost 100% of that is related to the acquisition that we booked this quarter.

These earnings also included, I guess, some loss on sale of assets that was a few million dollars.

Yes, we sold the 2 -- just over $2 million loss on a plant that we sold.

Okay. And then the other thing that was noteworthy was dividend income in royalty income had a big spike up sort of unusual versus historical patterns.

Yes, when you take a look at that royalty income, I think when we have -- we have a couple licensees and we just had some payments that came in this quarter.

Okay. Very good. Thank you very much.

Thanks, Saul.

Thank you, our next question is coming from John Roberts of Buckingham Research.

Looked like you had a few to several cents of dilution in the quarter from recent acquisitions. How does that change over the rest of the year?

I think when we take a look at it is for the full year we said that it would be slightly dilutive. I think you can see the dilution in the second quarter. I would say that we're going to be relatively flat for the acquisitions in the third and fourth quarter.

So the third and fourth quarter will have minimal or no dilution from those two?

True.

And then you'll have the positive swing next year versus this year in those businesses I guess, 2011 versus 2010?

That's the idea, John.

Okay. Thanks.

Thank you. Our next question is coming from Eugene Fedotoff of Longbow Research.

Good morning. Today's raw materials shortages that you experienced in the quarter, you're getting better or worse in the third quarter can you provide a little bit more color on the acrylic acid in--?

I think we made the comment that these issues are getting resolved, the raw material chain of monymers has strengthened during the quarter. Our suppliers are catching up. We're seeing improvement although catching up in the middle of the paint season is a difficult thing to accomplish, so we think we're going to feel this tightness for the remainder of the year probably catching up significantly back to normal run rates in the fourth quarter, early first quarter of next year. So the point that there will still be some tightness in the third quarter, the Company will continue to take the remedial actions that we've been taking to maintain service to our customers and we'll just hope to see that improve as time goes on.

Just following on Saul's question. Inventories in the sales channel how would you describe the levels that you see right now?

In terms of through our own stores, Eugene, or through our customers?

Through your customers.

I think they're in appropriate shape, these are excellent business people who have sophisticated programs and systems in place to keep inventory at the appropriate level. I don't think there's any over stocking or destocking that's been occurring. I'd say it's pretty much as it should be at this point this time.

Okay, can you update on us M&A program and focus of M&A activity?

Obviously with the announcement of these two industrial wood coatings activities in Europe a little stronger year for the Company than the past couple of years. We have indicated that we continue to have an interest in using cash for appropriate acquisitions where we strengthen our control distribution and architectural store model both domestically and around the world as well as building out our industrial coatings service capabilities. There are a number of those opportunities that we're looking at as we speak and it would be inappropriate to comment on them at this point in time.

Thank you very much.

Thanks, Gene.

Thank you. Our next question is coming from PJ Juvekar of Citigroup.

Yes, hi, good morning.

Good morning, PJ.

Chuck, are you able to gain share in the store business, is that what's driving your growth here because some of your competitors, smaller competitors seem to be less focused on their store business.

As you know, we've talked a great deal about the importance of that distribution platform for our story, PJ. And as you also know our focus -- primary customer segment is through the professional painting contractor. I think the improving trends that we're seeing are the result of the contractor coming back a little bit this year. We see them hiring painters and lining up more work, their schedules are more robust than they have been. The residential repaint market as we indicated at the beginning of the year would be the driver for this group this year and that's proving to be the case as the year is unfolding, so to the extent that we remain focused on the contractor, we're enjoying a little bit of bounce back in that business this year.

And can you split your business in terms of volumes the new segments and how does it bring down these days between new construction, repaint and maybe commercial activity.

I can do that for the industry, PJ. We're not too far off industry numbers. We think that new construction in total in the US in terms of architectural volume is down probably in the low teens now, so it's 12%, 13% of total gallon volume goes to new construction and that's roughly half and half nonresidential and residential. Residential may be a little bit higher than nonresidential. In the repaint market, the other 87%, 88% residential is probably 70% of that, nonresidential 30%. Relative to the market, we'd probably skew a little heavier toward new construction and a little heavier toward nonresidential.

Thank you. That's help. Secondly, you talked about price growth of average about 2%. Is it fair to say that maybe consumer channel is kind of flat, maybe stores group is about 5% and it averages out to about 2%, would that be in the ballpark?

That's why a lot of times we never have tried to give you a total because when consumer they have aerosol cans, they have -- aerosol cans, brushes, rollers and so forth, so that's a tough one to give to you that's why we've never gone to the full -- but I -- but in general I would say when you -- that the price increases that stores group typically go in faster and are more effective earlier than we realize them in the consumer group and since we went out April 1, that's probably still true to this day also.

And just lastly, Chuck, you talked about second quarter being hit hard by raw materials. Can you just give us some idea about what kind of raw materials you get as to all this acrylic shortages and all of that balance out?

I think the, the comment was that we had been working hard to mitigate some tightness in the supply chain in getting through that. We are looking for the relief to come primarily in the latexes, that's been where a lot of the tightness has been and some of the additives that come off of that chemical chain. I think that was pretty broadly discussed in the industry in the second quarter and as those raw materials that supply those industries have caught up, we're seeing some catch up as well. In terms of the other core raw materials, packaging other types of solvents, et cetera, we're in fine shape there.

Thank you thank you our next question is coming Amy Zhang of Goldman Sachs. Ms. Zhang, you may go ahead and ask your question. If you're on a speakerphone please pick up your handset. Thank you. We'll go to the next question coming from Douglas Chudy of KeyBanc.

Hi, good morning.

Good morning, Doug.

First off, the new construction data has remained pretty weak here. Roughly speaking what level of new home starts is currently assumed in your full year guidance?

Doug, we started the year thinking that if the industry in terms of start if we saw more than 600,000 starts that it would be a pretty strong year. We're still assuming right in that range maybe high 5s to low 6s.

Okay, thanks, that's helpful. Secondly here if raw material cost stay constant do you have enough in the way of price increases already out there on a go forward basis to offset that or would you need to implement more? I know the expectations would be raw materials moderate, but if they don't, is there enough price increases in there now to fully offset that?

I think answering that question gets too close to disclosing what pricing activities we may or may not take in the second half. Doug, I'm just going to respectfully decline to answer that and once again if and when we take pricing to the field we'll be happy to keep the Street updated.

Fair enough, and then just finally here, can you talk about have you been doing in addition in terms of store lease negotiations the market traditions here are pretty quick. Have there been opportunities to renew at favorable rates or get any sort of concessions.

Yes, I think we've been doing that over the last really, over two years now. And we've had different things and, instead of just I would call it a standard lease, I think we've looked for different aspects of a contract and lease language that we can get -- that can help us for the long term. Sometimes that's longer -- that's more options. Sometimes that's options at a lower price we're renewing an option at lower price than what was in the lease and then also looking for terms, favorable terms such whether it's common area maintenance or other type of aspects that we can get. So it's been -- we've done fairly well over the last two years.

Okay. Thanks, guys.

Thanks, Doug.

Thank you. Our next question coming from [Gregory Miledge] of ISI Group.

Thanks, guys, can you hear.

Yes, Greg.

Two questions, and I don't want to know anything about any future price increases but just to fully understand you did April 1, was a price increase. You saw just over 2% in this quarter. Is it fair to say with the normal lag that we should expect to see something more than that into the third and fourth quarters if everything else is constant?

Yes, I think as each quarter goes by we'll get a higher and higher percentage of what we (inaudible).

How much have you gotten it so far?

Well, we went out with 3% to 5%. If we sit there and take a look at 2%, over 2% you're talking the midpoint being 4%, we're over 50%.

Great. And then second we've seen DIY take a bigger shift of the market the last couple of years and you guys that obviously isn't a great trade, do you see any trends there at this time you start to pick up your DIY business or is that still underperforming the real trend that's on your paint source group?

Are you asking, Greg, about the shift between DIY and the pro or DIY performance inside.

Actually both. The market shift between DIY and Pro and then within your own business how you think you're doing in DIY?

I think the market shift as we indicated would start to come back towards the pro as markets improve certainly as new construction would come back a little bit and we do expect as Bob just answer and I earlier comment that when the year is said and done the new residential construction market will be slightly positive for the year. We're going to start to see a little rebound in those areas and as we've also commented in those discussions that the anecdotal evidence of contractors in our stores with more work buying equipment, hiring folks et cetera would indicate that that's starting to come back a little bit. We remain bullish on this contractor segment, we think the 60%-40% range that it's been bouncing around in the last couple of years is probably a pretty reliable number to count on going forward and it should strengthen as new construction comes back certainly in the coming years on the commercial side as well. Regarding our own DIY performance, I think we've been pleased. You see the numbers in our consumer segment this quarter which have a lot of DIY presence there so that's been strong for them. As well as DIY performance in own stores so we get our comp stores running at a 5% plus performance all customer segments are moving in the right direction. We're getting some lift from DIY as well.

Thanks.

Thanks, Greg.

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

Good morning, my questions have been answered. Thank you.

Thanks, Steve.

Thank you our next question is coming from Ivy Zelman and Zelman and Associates.

Hi, guys this is [Scott Ridner] on for Ivy. I just have a quick question, last quarter you guys spoke about a benefit from targeting contractors going after foreclosed homes. I was wondering if you can give an update on the incremental trends you saw this quarter?

Scott, I think our comments in the past has been that the nature of the Pro doing the work on foreclosed homes -- I think the foreclosed homes that are being purchased by investors probably benefit the multi line warehouse home center more than the specialty paint store because there needs for materials are much broader than those offered -- than the assortment offered by a specialty paint store. That doesn't mean that there's no professional painting contractors working on those properties it's just generally the contractor working on those properties also does some floor covering, some electrical, some plumbing, et cetera. We think that that channel has probably seen the benefit disproportionate to the paint store channel.

Thank you very much.

Sure.

Thank you, our next question is coming from Eric Bosshard of Cleveland Research.

Good morning.

Good morning, Eric.

A couple of questions, first of all, Bob, I think you commented that the input cost insulation for the industry, I thought you said was mid single digit in the second quarter and it would be higher by the end of the year, can you just explain what the input cost year over year was for the industry in the second quarter and what the expectation is that that would look like in the second half if you could do it that way?

Well, it's a timing issue, Eric. The input cost rose through the second quarter. So on average to start out in -- at the beginning of the second quarter they were -- most of these raw material categories were lower than they were by the end of the second quarter. So we're -- we saw them rise through the second quarter and, where they plateau is hard to predict but even if they stayed at the level they are now you'd be in the mid to upper single digit range. Does that make sense?

Yes, I guess, more directly, the input cost inflation will be greater in the second half than it was in the second quarter; is that right?

The answer to that is, yes, and when you sit there and take a look at year over year, though, because the raws were at the low point in the second quarter of 2009 it probably on the year over year basis the second quarter would have been harder.

Okay. That's helpful. Secondly, in terms of the momentum of sales, if you can just talk about the currency excluding acquisitions, what that number was, again, for the second quarter and what the expectation is that that number will look like in the second half so we can just see the underlying business excluding these other things?

I think when you take a look at it, what we've said in our guidance last quarter was that the acquisition would be about in the second and third and fourth quarter but only 1.5% for the full year because we had only three months against -- three quarters against four quarters. So acquisition came in at 1.9% of our increase and so we still think in the guidance we have around 2% for the acquisition. We have not put the next acquisition into the guidance yet. We're waiting to see -- it's hard for us to forecast when that will close. When we look at the -- at the currency, we have very little currency in the second half of the year when you take a look the Brazilian real or the Mexican peso or really the currency that drives us, when you start looking at that third quarter to third quarter and fourth quarter to fourth quarter we think the currency is going to be relatively flat, so when we give our guidance, I would say less than two-tenths of a percent will be currency and 2% each quarter but 1.5% for the full year will be for acquisition.

Great. And then lastly from a tax rate I think you had talked about mid 30s coming out of the last quarter this tax credit was a little bit lower apparently some of that may have been influenced by the charge or not. Can you update us on what the tax rate assumption would be?

When you take a look at it we had some discrete items that hit us in the second quarter. It's hard for us to really predict when discrete items will hit. When we take a look at our full year forecast we think last quarter -- we think -- we were talking about the low to mid 30%'s for that tax rate. We think probably for the full year the tax rate will be back in that 33% range.

And then lastly within the slightly softer second half growth versus the second quarter, can you just specifically talk about where you're seeing or expecting that difference to be, is it just new residential due to the expiration of the tax credit, or can you talk about where else you're seeing that or you expect it?

I don't know that we have any specific in market segment, Eric, that's more prominent than others obviously the commercial markets as we've talked about are still lagging and facing a lot of head wind and I think there's just been a little bit of a slowdown in some demand in the residential market, so, guidance in the mid to upper single digits range is still robust given the last four year track record we've been in. With less FX in that number Sean just went through while we're seeing a little bit of slow down we're still fairly bullish on this revenue stream.

Great. Thank you very much.

Thanks Eric.

Thanks our next question is coming from Jeff Zekauskas of JPMorgan.

Hi just a few quick follow ups. How much did you spend to repurchase your shares in the quarter?

Let's see, the average price was $76.48 and so $73 year to date and I just had it here because I pulled it up for that. Give me 10 seconds here and I'll find it. Sorry it's taking me so long.

No. It's okay.

I know why. We spent $149.7 million in the second quarter, $76.78, year to date we bought bought $2.35 and that's $74.68.

Did you buy any shares in June?

Yes, we did.

In the consumer business you were up roughly 12% for the quarter versus, up 1% in the first quarter. And I know April volumes were really strong, so I take it that that's an unrepresentative number going forward, so should we expect that to diminish and likewise in stores given that probably there was a real bump up in April, are the gross rates in those two businesses for the next couple of quarters likely to be lower than what they were in the second quarter all things being equal?

I think when you take a look at it when we came out of out guidance for the second quarter we set high-single digits, we didn't give a range and now when you look at the third quarter we're saying mid to high and we still are -- we still have the acquisition in there and for the full year we've stayed the same. So I think that's -- it's pretty easy to assume that the different segments are going to be not as high because of the high single digits versus the mid to high. I think on the consumer specifically, Jeff, you were a real wordsmith you saw in Bob's comments here that we talked about segments retail, industrial and institutional customers. This is a part of the business we don't talk a lot about, but on this segment we have a significant product line of aerosols and coatings that we sell into other types of distribution channels beyond typical retail partners and it was in that space that we saw some really unique and strong performance in the quarter. And I think your comment about it is sustainable, this is probably more of a blip for us and consumer segment will probably come back down in range coming forward.

Was pretty much sequential volume growth than global?

Slightly. But you have to remember Latin America is in there and they're going through winter right now. So they have the opposite -- so when you take a look at the different segments, it was higher but when you look at sequential because of going into winter Latin America group in that global group did not have any.

What was your cash-flow from operations in the quarter?

Cash-flow for operations in the quarter, hang on one second. I'll put that out. Oh, I don't have that.

Okay.

We'll have to get back with you on that, Jeff.

Lastly, does your sales guidance for the year include Becker?

No.

No.

Does not. Okay. Great. Thank you very much.

Thanks, PJ.

Thank you. Our next question is coming from of Saul Ludwig of Northcoast Research.

Couple of quickies. The interest number, how much did that include, I mean that is where you took the hit for the debt repurchase? How much was that?

That was just about $15 million, so.

And so interest expense going forward is going to be $11 million, $11.5 million.

Yes, I would say that you're looking at -- without it will be about flat to where we were this quarter.

And the -- is there any inclusion in your guidance Sean, for asset impairment, goodwill I mean last year in the fourth quarter you had, I think there was a big chunk in stores, there was a big chunk in global group, does your guidance include a recurrence of those either asset impairment, goodwill write off things that are not of operating nature but hit the income statement?

Yes. Not a material number.

But some?

Yes, but I mean slight. There's always some slight number. I mean, with the way we value the goodwill and we have goodwill from many many acquisitions and so forth, but it's going to be de minimus.

And this is a trivial question, but in the first quarter you had 110 million diluted shares in the second quarter you almost had 110 million, but the six month diluted shares was less than either the first quarter or the second quarter.

I'll have to get back with you on that, Saul. I don't have this calculation in here with me.

Okay. Very good. Thank you very much guys.

Thank you, Saul.

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

Thanks, guys can you hear me now.

Yes, hi, Amy.

Two quick follow-up questions the first one is consumer segment obviously you mentioned several times you delivered very strong results in the quarter but one of your major competitors in the retail channel reported the months were less robust in terms of last week, so I'm just wondering what contributed to your volume outperformance relative to competitors in that channel, is that because some market share wins or some mill contract or something like that?

Amy, I think, again, the significant lift in the quarter for our consumer segment was more on the segments industrial and institutional businesses. Our retail traditional business in that segment probably performed close to market, maybe slightly better.

Okay. And then follow-up question in consumer business I know on April 1, you guys roll out price hikes across the paint stores. I'm wondering, did you take any actions on the consumer segment as well by implementing price hikes?

We announce price increase on our architectural businesses across all channels, consumer and storage group so absolutely.

So if your store groups will see salary and benefits around the pricing actions, I guess that's a trend. Is that the same trend for a consumer business as well?

As Sean commented on the earlier portion, our track record here in this price increase has been going on pretty much consistent with past price increases is that it takes a little while for us to get announcements out to negotiate and to start to see the effectiveness and sometime on the consumer segment that lags our stores early start by full implementation typically across all segments we see some were in the 70% to 80% implementation.

My final follow-up question is, the guidance -- just clarification, the guidance you issued in April, that guidance didn't include the about $0.08 the charges relative to the -- related to the debt repurchase, right?

That's absolutely correct, that was an opportunity that presented itself in the quarter that was not in any previous guidance.

So essentially on an apples to apples basis, you actually didn't lower your underlying guidance, you just included that $0.08, that means that $0.08 is a reoccurring item?

That's correct. You've got it correct.

Okay. Thank you so much.

Thanks, Amy.

Thank you, next question is coming of Arun Viswanathan of Susquehanna.

Hey, guys, thanks for taking my question, how are you guys doing?

Doing great, how are you.

Good. Just a couple of questions first off I guess a little bit high level, looks like everyone said you kept the guidance the same but expectations for the top line seem to be moderating both from you guys and the rest of the market and existing was out today and it was slightly worse than expected. What gives you the confidence I guess that you can keep the guidance the same. Is it mainly just the cost side and so on?

Well, just when you -- if you went back to our full-year guidance on sales for the full year three months ago we gave guidance for the year. It was mid to high single digits so we really haven't changed the sales guidance for the year nor the EPS guidance back to Amy's calculation. We still feel our sales are going to come in pretty much where we thought we would be three months ago.

Okay. But why are you confident of that, I guess is my question, given the recent moderation on the market information that we're seeing?

I think the other lovers that are in play here, Arun, are in good shape. We've commented about the SG&A control, the Company, the improved efficiency as a result of the tough things we did a year or so ago to get some of our plants down, the margin performance, while down 60 basis points in this rapid raw material rising environment with more pricing implementation from previously announced pricing to go we're confident that we'll be in that range.

Okay. I guess similarly along those lines you did see the margins expand, as noted in consumer as well as slightly in paint stores just on the segment side. How much further can those go, I guess, from a segment basis?

Yes. I think when you sit there and take a look improving in operating margins, two, three years ago our stores group was over 15.5%.

Right.

Consumer is not as consistent as store but it's been as high as 19 at one time. So, our thoughts are that eventually we're going to get back to those levels and go higher. When you look at the global group, we believe that eventually we'll be at around 80% of where stores can be which would tell you that we think it's going to be in the low double digits, low teens. So when you think about it that's what we're looking for for the segments.

And you can -- you feel like you can do that in this, I guess, kind of moderate sales growth environment even -- or even declining?

Over long term when we look at those type of things we believe that there will be some sales growth, but we still think we can get margin improvement in moderate sales growth.

Right. Okay. Thanks.

Thanks, Arun.

Thank you our last question is coming from [Robert Goch] of [Mack Capital].

Hi, good afternoon. I think you guys said that on the new home sales you're sort of looking at 500,000 to 600,000, could you -- into your guidance, could you comment on growth, what you're thinking about existing size as well as on the nonresi side?

Let me deal with nonresidential first, in nonresidential square footage put in place for June we're down in the mid 20% range. We think that is -- that rate of decline has moderated somewhat from last year. We don't think we're on bottom yet. We think that's probably a good number for the balance of the year as we're going to finish the year down in the 20% plus range. In terms of sales of existing homes, it certainly softened somewhat also after the expiration of the tax credit because that was driving some resales as well. What is important to us, Robert, and looking at those numbers is not just the sheer volume but the quality of the transaction. Foreclosed and distressed properties being acquired out of foreclosure by investors really doesn't drive our end markets as well as existing home sales buy an owner occupant to a newer owner occupant. So to the extent that we can, I mean, if volume is flat from last year and the quality improves because of the decline in foreclosure transactions, that's good for us. We know that there's probably -- that there's certainly more pain to come in the foreclosure market, but it's been fairly orderly and we've seen a steady rise in the quality transactions. So -- a flat number in existing home sales with improving quality would benefit our business.

I got you. Just one follow up on that very point. I mean, with the modifications that have been going on on the mortgage side and I think as mixed results maybe people are thinking a little further out they're just going to fail again, your thoughts on that just with respect to the mix? And my last question pertains to the previous question there, if you mentioned -- your peak margins were in both the consumer group as well as the -- your store group and that was off a, I guess, a very high size and a good quality, I guess on the existing and certainly on the new stuff. And I guess I'm just thinking about this. I guess you're looking more on the cost side both the SG&A initiatives or others to offset what seems to be a lower volume than what took place three, four years ago.

I would say it's cost, but it's also productivity. I think when you think about the stores group, Bob mentioned that we opened over 160 stores in new markets when we take a look at that, we have to close some redundant stores. As we continue to get more penetration in markets. We get more productivity in the markets. So when you take a look at the make up of our stores, organization two, three years from now versus three years ago we'll have higher store count and we'll be more productive and we can probably hit the peak margins at a low -- at weaker sales is what we believe.

We also believe the same thing in consumer group, we think that as we continue to get more productivity, what we've said is that we think we can hit our peak margins without hitting our peak sale. And then you look at the global group, it's the same thing as we continue to get more mass in individual countries we're going to be able to get that margin up.

And on the first part of your question, clearly there is more pain to come in the housing markets and we have not called the bottom of the housing markets. We think that foreclosure activity to come is going to keep pressure on home values and that won't write itself for a while, yet. We should point out, though, that a lot of the vitality we're seeing in the residential repaint markets are not so much driven by the traditional drivers, which are existing home turn over, but they're being driven by pent up demand from postponed maintenance activity by people who are staying in their house. And we think that that's what's driving some of the goodness in the market today.

I got you. Thank you very much for addressing my questions.

Thank you.

Thank you. I'd like to hand the floor back over to management for any closing comments.

Great. We'd like to thank you all once again for joining us this morning. As always, we'll be available over the balance of the day to answer any follow-up questions you have. We appreciate the time you've spent with us this morning and your continued interest in Sherwin Williams.

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