宣偉 (SHW) 2010 Q3 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of the third quarter 2010 financial results and expectations for the 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 webcast simultaneously in listen-only mode by Vcall via the internet at www.sherwin.com. An archived 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, November 15, 2010 at 5:00 PM Eastern time.

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 statement whether as a result of new information, future events or otherwise. A full deceleration regarding forward-looking statements is provided in the Company's earnings release transmitted earlier this morning. After the review of third quarter results, we will open the session to questions.

I will now turn the call over to Bob Wells.

Thank you, Claudia. In order to allow more time for questions, we've provided balance sheet items and other selected information at our website at sherwin.com under investor relations third quarter press release.

Summarizing overall Company performance for the third quarter 2010 versus third quarter 2009, consolidated net sales increased $175.4 million, or 8.8%, to $2.172 billion due primarily to acquisitions, selling price increases, higher sales volume and favorable foreign currency translation rate changes. Favorable currency translation increased consolidated net sales 0.6% in the quarter and acquisitions increased net sales by 3.4%. Consolidated gross profit dollars increased $42.6 million to $971.6 million. Gross margin decreased 180 basis points to 44.7% of sales from 46.5% in the third quarter last year. The decrease in gross margin was primarily due to higher year-over-year raw material prices which included certain spot market material purchases tied to supplier planned shutdowns.

Selling, general and administrative expenses for the quarter increased 7.6% to $703.7 million due primarily to incremental SG&A from acquisitions, currency translation rate changes, higher service costs resulting from increased sales, and higher freight and distribution costs to maintain customer service levels. As a percent of sales, SG&A decreased to 32.4% in the third quarter this year from 32.8% last year. Net interest expense increased $2.8 million compared to the third quarter last year. Consolidated profit before taxes in the quarter decreased $3.3 million, or 1.3%, to $255.4 million. Profit before tax decreased as a percent of sales to 11.8% from 13% last year. Our effective tax rate in the third quarter this year was 31.4% compared to 32.3% in the third quarter of 2009. For the full year, 2010, we expect our effective tax rate to increase slightly to 32% compared to last year's rate of approximately 30%.

Consolidated net income was essentially flat at $175.3 million compared to $175.2 million in the third quarter of 2009. Net income as a percent of sales declined to 8.1% from 8.8% in the third quarter last year. Diluted net income per common share for the quarter increased $0.09, or 6%, to $1.60 per share from $1.51 per share in 2009. Acquisitions reduced diluted net income per common share by $0.02 per share in the quarter, which was partially offset by favorable currency fluctuation rate changes which increased diluted net income per common share by $0.01 per share.

Looking at our results by operating segment. Sales for our Paint Stores Group in the third quarter increased 5.4% to $1.286 billion. Improving architectural paint sales to residential repaint contractors and DIY customers and selling price increases more than offset continued weakness in new residential and commercial markets. Comparable store sales, that is sales by stores open more than 12 calendar months, increased 5.1% in the quarter compared to the third quarter last year. Regionally in the third quarter 2010, our Southeastern division led the sales performance followed by Midwest division, Southwest division and Eastern division. Sales by all four Paint Store divisions increased in the third quarter compared to last year.

Segment profit for the group decreased $5.1 million, or 2.2%, to $225.1 million in the quarter as higher year-over-year raw material costs and selling, general and administrative expenses more than offset selling price increases. Operating margin decreased to 17.5% from 18.9% in the third quarter last year. During the quarter, Paint Stores Group opened 12 new stores and closed four redundant stores.

Turning to the Consumer Group. Sales in the third quarter increased 3% to $340.4 million, reflecting moderately higher demand at some of the segment's retail, industrial and institutional customers. Segment profit for the Consumer Group increased $3.2 million or 5.7% in the quarter to $59.7 million due primarily to good expense control and savings from manufacturing site rationalization completed the previous year that were partially offset by raw material cost increases. Segment profit as a percent of external sales increased to 17.5% from 17.1% in the same period last year.

For our Global Finishes Group, sales in US dollars increased 22.6% to $544.5 million in the quarter due primarily to acquisitions, higher paint sales volume and favorable currency translation rate changes. In the quarter, acquisitions increased Global Finishes Group net sales in US dollars by 15.1%. And favorable currency translation rate changes increased sales in US dollars by 2.5%.

Third quarter segment profit increased $2.3 million, or 7.6%, to $31.9 million. Higher paint sales volume, favorable currency rate changes and good expense control were mostly offset by higher raw material costs and the negative effect of acquisitions. Currency rate changes increase segment profit by $1.4 million while acquisitions reduced segment profit by $2.8 million. Global Finishes Group opened or acquired 20 new branches and closed two branches in the third quarter.

Turning to our balance sheet. Our total debt on September 30, 2010, was $1.066 billion compared to $711 million in the third quarter 2009. Our cash balance at the end of the quarter was $64.9 million compared to $32.8 million at the end of third quarter last year. Total borrowings to capitalization were 39.4% at the end of the quarter versus 29.5% at the end of the third quarter 2009. Short-term borrowings decreased $57 million to $354.6 million compared to third quarter last year. And long-term debt to capitalization was 26.3% at the end of the third quarter this year compared to 12.4% last year.

In the third quarter this year, we spent $28.7 million on capital expenditures, depreciation expense was $34.5 million and amortization was $8.6 million. For full year 2010, we anticipate capital expenditures for the year will be approximately $100 million to $115 million, depreciation will be about $140 million and amortization will be about $35 million. That concludes my review of our results for third quarter 2010. So I will turn the call over to Chris Connor who will make some general comments and highlight our expectations for the remainder of the year. Chris?

Thank you, Bob, and good morning, everybody. Thanks for joining us today. From a demand perspective, the third quarter actually started to feel a little bit more normal to us. We posted solid revenue and volume growth in the quarter including a 5% comp store sales gain, even though many segments of our end markets continue to struggle. What did not feel normal is the fact that we failed to generate earnings leverage on this revenue growth. Our sales in the third quarter came in about as we had expected. When you back out revenue from the Becker Acroma acquisition, which was completed during the quarter but not included in our guidance, our sales increased 7.3%, which was in the dead center of our range of mid-to-high single-digits. A little more than half of this sales improvement was from increased volume. The balance coming from a combination of price and favorable mix for the Company.

Earnings per share for the quarter, also adjusted for the Becker Acroma acquisition, finished in the middle of our guidance range of $1.55 to $1.70. We knew going into the quarter that earnings improvement would be challenging even with the solid sales increase and we guided accordingly.

Three key factors contributed to our cautious outlook, continued raw material cost pressure, higher SG&A expense and dilution from acquisitions. And let me comment briefly on each of the three issues a little further.

First, the persistently high raw material costs we experienced during the first half did not abate in the third quarter and some commodities such as titanium dioxide are still rising. We are also continuing to experience higher operating cost results from raw material supply shortages. Many of the extraordinary actions we've taken during the year to ensure uninterrupted supply of raw materials to our plants and finished goods to our stores continue to impact our P&L. Despite our efforts to help offset these higher input costs including multiple price increases announced during the year, the normal lag between raw material cost inflation and higher effective pricing has pressured our gross margin in the second and third quarters and most likely will again in the fourth. Implementation of our price increases is progressing as expected, and we remain confident that we will ultimately close the gap on these input costs.

Second, in addition to the impact of lower gross margin in the quarter, operating income was also impacted by higher SG&A expense, and this higher spending level is also likely to continue for the balance of the year. SG&A expense was up almost $50 million in the third quarter after rising just over $42 million in the first half. As a percent of sales, SG&A was down 90 basis points for the first half and down 40 basis points in the third quarter. Slightly less than half of the SG&A increase in the quarter can be attributed to acquisitions and currency exchange. The balance is from higher service costs and incremental freight and handing to ensure product availability and good customer service. All of these factors will continue to weigh on SG&A expense in the fourth quarter.

And finally in the impact of some of these issues, the acquisition of Sayerlack completed on April 1 and Becker Acroma completed September 1, were diluted to earnings in the third quarter and again will be for the balance of the year. Although we knew this when we closed these deals, this solution was not included in our initial earnings guidance provided in January nor was the Becker acquisition included in our first quarter or second quarter updates to guidance given in April and July due to the unknown timing of the closing of these acquisitions.

Moving on to some other areas of focus for the Company. We continue to manage working capital efficiently and generated significant net operating cash in the quarter. In the first nine months of 2010, we generated $478 million in net operating cash. Working capital for the nine months increased $140 million as a result of higher accounts receivable and inventory to support our sales increase. Working capital as a percent of sales increased to 13.4% from 12.5% last year. Acquisitions added 130 basis points to working capital as a percent to sales. Our free cash flow, net operating cash less CapEx and dividends, came in at $284 million. We continue to invest the Company's cash to expand our controlled distribution platform, complete suitable acquisitions and purchase shares of our stock for treasury.

Year-to-date, our Paint Stores Group has opened 25 new store locations and consolidated 11 redundant locations. We finished the quarter with 3,368 stores in operation, compared to 3,344 this time last year. For the full year, we still expect open 40 to 50 stores and slow the pace of store closings.

On October 1, we completed the acquisition of [Entorres Condor], the leading paint and coatings company in Ecuador. The company develops and manufactures products for the architectural, industrial and automotive vehicle refinish markets and sells them through a combination of company-owned paint stores as well as exclusive dealers in more than 1,800 independent dealers in the country. Sales in 2009 were approximately $61 million US.

During the quarter, we also used the Company's cash to buy back 1.13 million shares of our common stock on the open market at an average price of $69.39. This brings our year-to-date total to 3.48 million shares. On September 30, we had remaining Board authorization to purchase 7.3 million shares.

While it appears the architectural repaint markets in the Americas and global demand for most industrial coatings have stabilized or even rebounded somewhat, raw materials remain a challenge for the foreseeable future. Our outlook for the fourth quarter 2010 is for consolidated net sales to increase in the mid-teens percentage compared to last year's fourth quarter due primarily to acquisitions. We expect fourth quarter diluted net income per common share to be in the range of $0.59 to $0.69 per share compared to $0.58 per share in 2009. For the full year 2010, we expect consolidated net sales to increase in the high single-digit percentage range compared to last year.

With annual sales at that level, we are updating our July 22, 2010 full year guidance for diluted net income per common share to be in the range of $4.12 to $4.22 per share compared to $3.78 per share earned in 2009. As a reminder, our full year guidance includes an $0.08 per share charge per higher interest expense in the second quarter, a $0.10 per share charge taken in the first quarter related in the healthcare legislation and $0.07 dilution from two acquisitions completed during the year. Finally, last week our Board of Directors declared a regular quarterly dividend of $0.36 per share, keeping us on track to achieve our 32nd consecutive year of increased dividends. Again, I'd like to thank you for joining us this morning. And now the Management team will be happy to take your questions.

(Operator Instructions) Our first question is coming from the line of Bob Koort with Goldman Sachs. Please state your question.

Hi, this is [Greg McGuire] on for Bob. Just hoping to dig into the raw material cost pressure a little bit more. You mentioned titanium dioxide, I was hoping you could maybe quantify what kind of year-over-year price increases you're seeing? And then maybe you could also talk about what's going on with some of the other raw materials, whether some of the pressure from the first half of the year is abating or if you're seeing continued pressure there? Thank you.

Yes, Greg, for the first half of the year most the inflation we saw in the material basket was acrylic monomers and acrylic latex. And although those-- the supply situation is getting better in the acrylic chain, we're not seeing much relief on the price side yet in acrylics. At the same time, as Chris mentioned, titanium dioxide is starting to heat up, we're seeing pressure on Ti02. The pressure for this year is embedded in our outlook for the full year for the raw material basket to be up in the high single-digits. Year-to-date it's probably mid-to-high with the highest level of inflation being in the fourth quarter.

For next year, we're seeing analyst outlooks that across a pretty broad range with the high probably being in the 40% to 50% inflation range. Most analysts put titanium inflation for 2011 in the range of 20% to 30% and we think that that feels about right based on the tightness in the supply right now.

Thanks, that's helpful. Just one more, if I might. On the cadence of losses from acquisitions, you mentioned there was about $2.8 million in this quarter. I was wondering if you might give some indication of how that will track over the next quarter or two and when you might expect the dilution to end?

Chris mentioned in his comments that for the full year we expected it to be out $0.07. It was $0.02 in the third quarter. That brought us year-to-date up to $0.05. So it's going to be $0.02 in the fourth quarter. We believe that the first quarter will be dilutive. But after that, in the second-- starting in the second quarter, we'll start to see accretion.

Great. And that $2.8 million expense does that include rebranding or conversions of any of the acquired companies or was that strictly just kind of amortization expense and lower margin or profitability for those businesses?

Yes, those are operating hits and costs of acquisitions to get them in there. There won't be significant expense towards rebranding at this point in time.

Okay, thanks again.

Thank you.

Our next question is coming from the line of Kevin McCarthy with Banc of America Merrill Lynch.

Yes, good morning. Just to follow up on raw materials, if I think about the pace of inflation there on a relative basis compared to the selling price increases that you've announced, would 3Q be the quarter of maximum margin compression if we think about the spread there or do you anticipate more severity over the next quarter or two?

I think if you take a look at our quarter last year in the fourth quarter, we were over 37% for the quarter, a stand alone quarter, or I'm sorry, 47%. When we take a look at this year, we think that the degradation from last year as a percent that'll be the greatest difference this year.

Okay. That's helpful. And then to follow up on pricing, what is the outlook in the Consumer segment relative to the increases that you've already announced in Paint Stores?

I think we've been consistent about sharing with the street our pricing activities. We announced that in the middle of the third quarter, specifically in August, that we took pricing to the market in all of our architectural businesses, including the Consumer Group that you're specifically asked about, Kevin. And as we commented, the implementation of these price increases has gone pretty well, pretty in line with our historic performance and trucking along appropriately. When we took that pricing in August, we were able to have very good visibility of the impact that we've been hitting during the first half of the year obviously but also the titanium pressure was starting to build at that period of time. So that was the pricing we took to offset Bob's comments that we're seeing the basket of raws for the industry move up into the mid-to-high single-digits for this year.

And Kevin, I should also mention, we freely give this guidance that we believe that our gross margin for the full year will be slightly below 45%. So when you look at the 44% rate through the first three quarters, we're going to be just-- we're going to be slightly below 45%, so you can see what we think the gross profit's going to come in at in the fourth quarter.

Great. Thank you very much.

Thanks, Kevin.

Our next question is coming from the line of Jeff Zekauskas with JPMorgan.

Hi, good morning.

Good morning, Jeff.

A couple of questions. In Ti02 some-- I guess some competitors or some paint companies can access Ti02 from China where there seems to be a lot of capacity growth whereas everywhere else, there's not much growth. Because you're largely a domestic seller of paints, is that something that you can't really access or can you? How do you see that?

Yes, we absolutely have the ability to access titanium, Jeff, from a variety of different locations around the world. This is a global commodity with operations now in multiple continents and countries around the world where buying titanium from a variety of these different sources, including Chinese suppliers as you mentioned, so not a problem.

So over just say a multi-year period, do you see the supply/demand balance in titanium dioxide loosening up or continuing to stay pretty tight?

Well we're the wrong guys to be asking that question. The titanium producers are the folks that need to answer that for us. We've been fairly consistent in saying that while there certainly is pricing pressure on titanium that is sticking in this market, the availability of titanium is not an issue for the short term or the near-term outlook in terms of downs that we're going to need to manufacture. So we would remind all of the listeners on the call that speaking specifically in the United States and to the equal amount, the globes been through somewhat of a global recession here, we've seen significant fall off in the manufacturing of architectural paint coatings, which is the primary user of these titanium dioxide raw materials, from 800 million some gallons down to the 500 million gallon range. And we just don't think that much capacity came out of the industry. So long-winded answer of saying, that we're comfortable that there's capacity out there. We're not going to have an issue dealing with that side of it, it'll all be in the pricing.

Okay, just a couple of more short things. Normally your inventories sequentially go down in the third quarter, but this time they went up by about $65 million. Why is that?

I think a part of that is really the raw material piece of the inventory, Jeff. You can start to see those, as Bob mentioned, the basket, how large the basket is and then you compare to our growth in inventory is, you can start to see that raw material costs being converted into finished goods.

And then lastly, organically did your gallon, gallonage grow domestically in the quarter or globally in the quarter?

It did, Jeff. It grew low single-digits.

Okay. Good. Thank you very much.

Our next question is coming from P.J. Juvekar with Citi. Please state your question.

Yes, hi good morning.

Good morning, P.J.

The recent slowdown that we're seeing in foreclosure activity that is likely to have some negative impact on existing home sales. So do you think that can be a risk to fourth quarter or early part of 2011 volumes?

We think that the typical drivers of architectural paint demand in the US have been crippled for quite sometime. And certainly in the new construction market, it declined rapidly years ago. REIT sale or turnover has traditionally been a driver of coatings volume, less so in this environment. So as the challenges in the foreclosure market continue to work themselves out, we think that most of the volume demand in the states will be driven by just cycle painting amongst homeowners that are staying in their home.

But earlier in the year, you had mentioned that foreclosure was a growth driver and you had a foreclosure team.

Yes, I think that was a miscommunication, P.J. What we've said is that foreclosure activity really doesn't drive volume in our markets. It-- the banks selling properties to investors is not nearly as good for us as an owner/occupant selling to a new owner/occupant.

Okay and I'll follow up on that later on. And then just another question quickly, there's a lot of excitement about this paintless primer introduced by two of your competitors. And you think that could have some negative impact on your Consumer Group?

No, I don't think so. Quality architectural paints and quite a few products on our line also had this capability to act as a paint and primer in one. If you're going over previously unpainted surfaces, these competitive products articulate that two coats are needed. So I think it's an interesting marketing approach, good quality paints should be able to handle these types of projects in one or two coats and we have a full basket of these products as well on our line.

Thank you.

Thanks, P.J.

Our next question is coming from the line of Dennis McGill with Zelman & Associates.

Good morning, guys and thank you.

Good morning, Dennis.

First just one just to clarify the fourth quarter revenue guidance, Sean how much should we model for the benefit from acquisitions for the quarter?

We think that when you think about the mid-teens, and probably just about a half of that will be for acquisitions.

Okay. So when you think about it from an organic standpoint, you could actually see an acceleration relative to the third quarter even though comps are a little bit more challenging year-over-year?

Yes, if you take a look at the third quarter, our total sales were up 8.8%, net of acquisitions that was 5.4% and yes we can see an acceleration from that 5.4%.

And that's just a function of price and to Chris' comments, a little bit better on the margin?

And improving volume as well, Dennis.

Yes, all those things.

Greet. Second question, I know there's been a lot of comments out there most of which I think are probably inaccurate around what's happened with some of the share loss at Wal-Mart. Can you just clarify what that announcement means for your business and also though the timing of when that'll actually start to flow through on the revenue side?

Yes, the decision that Wal-Mart made was to displace their two branded product offerings, which were our Dutch Boy and another product supplied by Masco with the Glidden brand, and then move some of their volume of their house brand, which is Color Place, to AkzoNobel and away from some of their current suppliers. In total, we have reported that in terms of revenue loss for us on a full year basis, it would be less than $100 million.

And as far as timing on that, are you starting to see that now with the order shipments or is that later?

With our fourth quarter guidance in the mid-teens, and about half of that being organic, if there is an impact in the fourth quarter, it's not significant.

And I think just from what we're operating under, Dennis, is the expectation that the branding part of this business will move first and then as the paint season unfolds next year, you should probably see Wal-Mart's new branding position on shell and the private label work will flow in behind that, that won't be as evident to the marketplace. But all of these things should be well underway by the first quarter of next year.

Okay, very good. And then just one last question, taking the comments you made about the dilution in the Global segment, is it right to assume that the margin's there, but excluding the acquisitions, were up this year 100 basis points year-over-year?

Yes. When you take a look at, without acquisitions in the third quarter, no, actually, I misspoke there, without the acquisitions, they were still-- they were not up that much. But for the full year, they are going to be almost twice of what they were last year.

Preacquisitions? Okay. Thanks a lot, guys.

Thanks, Dennis.

Our next question is coming from John Roberts with Buckingham Research.

Thanks. A couple clarifications, one it sounds like you expect to fully restore margins after raw materials stabilize?

Yes, I think when we take a look at the long term the way we run the Company, we-- when the raws go up, we usually do see some depression in our gross margin and it's happening again. But over a course of time, 12 to 18 months, we eventually come back and recover our gross margin. So last year was the all time peak at 46%, and we're going to be slightly below 45% this year. We think that eventually we're going to be back in that 46% range.

Secondly, could you comment on the commercial repaint market? There's a lot more square footage out there obviously, which you've talked about in the past, because of all of the construction activity over the past several years. It seems like we're having a lag here in getting the repaint activity to pick up in commercial.

Yes, that's accurate, John. Most of the lift that we're seeing this year we've commented has come from the residential repaint market and the commercial repaint market has actually been one of those areas that we're seeing stress in. Two numbers that you can look at to help support that would be the vacancy rate at both retail and office, big users of residential repaint and products and contractors time, and both of these numbers are running at pretty high rates historically. So much like we needed to get this kind of glut of housing through the residential side to start to see some lift there, we need to see occupancy rates for overbuilt retail space rebound as well as in office.

To that end, very little if any new commercial construction activity happening in the United States this year in those spaces. We think this is the first time in about 40 years that there hasn't been a major retail complex under construction somewhere in the United States. So we're going to have to wait a while before that glut goes through. And our guidance for this year was that commercial repaint would be a soft segment for the Company and it certainly has proven to be the case.

Is the industrial and government repaint activity picking up enough to have any effect on the overall?

Yes, absolutely that's certainly better than the commercial repaint and actually quite strong. It was a real help in the quarter. Not only have we seen some of the impact of the stimulus money on infrastructure projects but as typical in a cycle like this, you can only hold off on maintaining these kinds of assets for so long and then you need to get back on them. So our protective and marine coatings business both domestically as well as around the world is actually performing quite nicely right now.

Great, thank you.

Thanks, John.

Our next question is coming from Douglas Chudy with KeyBanc Capital.

Good morning.

Good morning, Doug.

You notice some temporary elevation in SG&A, but taking a longer term view, do you sense that as your volumes improve, you can ratchet that SG&A as a percentage of sales back down to say the 32%, 33% level you saw on 2006, 2007?

Yes, I think as a percent of sales for sure that over the course of time you're going to see us ratchet that SG&A down as a percent of sales. I think that, though, when you saw the SG&A improvement in the first six months of the year versus the last six months of the year, I think you're going to-- you're starting to see that our SG&A from the closed doors and all of the activities we've done, we've now-- really getting close to a more normalized rate. As we get more volume, than I think you're going to start seeing that SG&A as percent of sales continue to go down.

Okay, that's helpful. And then secondly, just to follow up on the Wal-Mart business. Do you have any concerns that some of your other Wal-Mart business could be at risk here?

Business is always at risk at all of these third party retailers that we do business with. Having said that, the programs are performing well, these are strong brands that are at Wal-Mart, Minwax, Thompson's, Krylon and our expectations are going forward that that won't be an issue for us but we'll have to-- time will tell.

Okay, and then just finally, can you comment on the sequential demand trends? I mean it sounded that you were being-- you were a little bit more optimistic, I mean have you seen any sort of a pickup here in the early parts of the fourth quarter versus what you were seeing during the third quarter?

No, again I think the residential repaint components of the business continue to show some strength. As Sean clarified that the kind of fourth quarter sales guidance with acquisitions out we're looking into kind of that mid-to-upper single-digit range here. So all that's an indication that we're seeing a little better performance for the Company. I think that clearly there's market share gains being generated here, but also we're seeing a little better health in our end markets.

All right, thank you.

Thanks, Doug.

Our next question is coming from Dmitry Silversteyn with Longbow Research.

Good morning, gentlemen.

Good morning, Dmitry.

A couple of questions and most of them have been answered. But you had a pretty decent volume growth in the Global market, was-- I mean it's Global and industrial, so was the growth more on the architectural side in Latin America or was the growth more on the aftermarket automotive and maintenance in marine in global coatings?

Actually, the architectural volume for the quarter was a little bit higher than the automotive or the industrial. But the automotive industrial were fairly strong for us.

Okay, so you actually did have mid-to-high single-digit growth it sounds like in architectural paint--?

Yes.

Latin America. And did that come largely as a function of adding new stores or did you also disclose same-store sales for the Global business like you do for domestic?

No, we don't do comp store sales for our Global business, probably something we should think about doing going forward, Dmitry, fair question. I would just say there's just a better architectural health, and the key architectural segments, Brazil, Mexico, Argentina, Chile really drive Latin America for us. So through our stores, our dealer network, our home centers, all doing nicely right now.

Okay. Okay. That's helpful. And then not to so much concentrate on the loss of the business at Wal-Mart but kind of what that loss represents beyond the P&L impact and how do you view your brands outside of Sherwin-Williams? Obviously you have a very good and very strong brands in Minwax and Thompson sealants in just about every distribution channel you can think of. Krylon is a good brand. But is there much behind that or were you going to have to address at some point your stable of brands and see how viable some of these are longer term, particularly Dutch Boy but also beyond Dutch Boy?

Well we should be thinking about that all the time, Dmitry, and working to strengthen the brands that we have in the Company. We would point out that the third largest home center chain in United States, Menards, is a terrific partner for our Dutch Boy brand.

Right.

And there are dozens of other regional home center, discounts, hardware chains across the United States that are enjoying and helping us market that brand. So we're committed to the [stable] of brands we have, there's no movement afoot because of this one decision by Wal-Mart to change any kind of a channel strategy or support for the brands we have inside the Company.

Okay, that's helpful. Thank you very much.

Thanks, Dmitry.

Our next question is coming from the line of Trey Grooms with Stephens.

Good morning, guys.

Good morning, Trey.

Couple of questions back on the-- just on the raw materials just briefly. How much-- can you remind us how much of your paint costs are associated with Ti02?

Yes, it's in the low 20%. It's-- Ti02 represents the 21%, 22% of the cost of our total raw material basket.

Okay. So if I understood right, you're kind of thinking or at least you think it's the most realistic expectation is that those costs might be up 20% to 30% next year?

That's what it looks like now.

Yes, okay. And so that would imply I think like 4% to 6% price increase needed to help offset that particular increase in raw?

Well that would be the math to get to the raw material cost input. But the pricing that we would need would be about half of that as raws-- as the basket of goods account for about half of the average selling price of a gallon of architectural paint.

Right, okay. That's real helpful, thank you. And then also your thoughts kind of on acrylic prices, and you said that supply looks like it's getting better, but the prices continue to be high. Do you think that that's going to kind of continue or do you think at some point we'll start to see those move down again?

Yes, I think that that's obviously a good question and one that we're all paying attention to. Our practice, Trey, has been at that first quarter call to give you guidance on what we're seeing for the industry for the year. It's just a little early for to us start going down the whole basket of raw materials here. There's so much noise around titanium and there's a lot of press on that now is why Bob wanted to comment on that, the kind of ranges that we're seeing out there. It's just too early to make this call and the others. Supply is easing, as Bob mentioned, and we're off with the force majeure and some of the struggles we had earlier in the year. We need to let that settle in a little bit, get through our year end negotiations with these folks. And we'll give you as much visibility and guidance as we possibly can in the first quarter.

Okay, guys. Thanks for the color, appreciate it.

Thank you, Trey.

The next question is coming from Eric Bosshard with Cleveland Research.

Good morning.

Good morning, Eric.

A couple things. First of all the titanium dioxide, the 20% to 30%, and maybe I'm missing something, but that seems to be a tremendous amount of inflation in a very important raw material. And I guess my question is, is that actually where you think it ends up in 2011? And secondly, when you put through your August price increase, you had commented that that reflected what you'd seen in inputs. I'm assuming that titanium dioxide has risen materially since that pricing decision was made. Can you just give a little bit of color on those two items?

Yes, where Bob's comments were relative to some of the chemical analyst reports that we're reading, Eric. Not so much hard negotiation at the table on what the stuff's going to cost the industry for calendar year 2011. So that's just an early look at kind of the pressure. You're correct in your assessment, this is remarkable inflation in price for a product line that has typically gone through its ups and downs. We're just going to have to let time go by here until that kind of settles in and we see what the number comes in at. We're not giving guidance on this call for 2011 cost increase for the industry. And we absolutely will hold true in our commitment to give that to you in the first quarter.

In terms of the second half of my question that was the pricing in August. I don't know if you can give any color that the-- if the input cost environment has changed since that pricing decision was made?

Yes. I would say that what you categorized earlier about the Ti02 situation and worsening than before we went out with that price increase and determine the percentage we needed. I would say that the Ti02 pricing has become more dire than what we had there at that time.

And then secondly on the progress with that August increase, Chris, you said that it's kind of gone through on a normal basis of-- or similar to what's happened historically. Can you give any further color about the markets (inaudible) to price increases?

Yes, I think that when you take a look at it it's always difficult. Sometimes we-- but if you take a look at it on the Store side and the Consumer side it's just as difficult as always. But I would tell you when we look at the effect of this, of that August 16, plus having just a little bit of mix, again, positive mix that we've had in the past. Now it's only been six weeks, Eric, but when we take a look at it, we think it's-- that price increase probably has gone in just as well as any that we've put in to the last ten years.

Great, thanks for that, Sean. And then lastly on the acquisition solution and the transition to accretion, which sounds like begins in 2Q of next year, can you give us any sense of what the magnitude of that swing is? And then also explain what happens within the business to make it go from diluted earnings to accretive?

Yes, I'd probably-- if I could just refer you later this week, we're going to be putting out our Q and our financials and our footnote. And if you look at footnote 14, which basically does a pro forma, and what it shows and I'll clearly share with you, 2009, if we would have owned Becker as well as Sayerlack from the beginning of 2009, our pro forma third quarter would have been at $1.52. And for the first nine months would have been $3.19. And as you know last year we owned $1.51, so they would have been accretive by $0.01 and $0.02 for the first nine months. And I think we've talked about that it was lower than $1 for $1 for sales for that reason.

But when we think about next year, number one, does the first thing that's going to cost accretion is not going against the closing costs. And number two, we think that some of the steps that we're going to take when managing these businesses will be higher than what they were earning in prior years. So I think you can see they earned $0.01 in the third quarter and $0.02 for the first nine months. We expect to have more than that and a run rate, maybe not because of just the beginning of the changes we're making, but by 2012, we'll start to see more. But I think we'll have more than what they've earned in 2009.

Okay. That's great, thank you.

Thanks, Eric.

Our next question is coming from Matt McGinley with ISI Group.

Good morning.

Good morning, Matt.

Quick question on that-- or follow-up question on the inventory question that was answered, or asked earlier. On the increase in inventory that you had, on the raw materials versus the acquisitions, can you give me the rough split between what those two in the quarter? And then from the acquisition side of that, as you fully integrate these acquisitions out come the 2011, how will that number change? Do you think that you can get that number to go down as you become in (inaudible) the Sherwin-Williams fold?

Yes. I think when you take a look at the working capital as a percent of sales of these two acquisitions if you combine them, they're going to be around 30% of sales. And I think, which is almost three times as high as we run the Company, but when we look -- when we segregate our Company, we're a little higher outside of the United States because of scale and so forth. But when we look at this, we expect over the next few years, we're going to be able to make dramatic improvements in there. The inventory of $859 million, the inventory was $74 million from acquisitions. So when you take a look at that, the remainder was up about 7.2%, 8%. So when you take a look at it. And again, that's again in the high end of the range that Bob talked about with the raw materials.

Got it. Okay.

But you make a great point that 30% working capital as a percent of sales, we're going to begin working on that next year.

Got it. Okay, that's helpful. Thanks. And a second question is this is the first time in I think a couple years we saw Paint Stores top line growth that was better than the Consumer Group. Do you think you're starting to see a shift, channel shift back to the (inaudible) in DIY or is this just the (inaudible) second bouncing off the bottom?

Don't forget that in that Paint Store's Group number there's also DIY business as well and we've had a good DIY quarter there. But the strength primarily coming from that residential repaint category and certainly the painting contractors playing a real role there.

Okay. Thank you.

Our next question is coming from Chuck Cerankosky with Northcoast Research.

Good morning, everyone.

Good morning, Chuck.

Chris, when you're looking at the volume strength the weaknesses came from, you touched on a number of markets, are there any others you'd like to call out or point to?

We've talked about the residential repaint both the professional DIY through our stores. I think one of the earlier callers also got us talking a little about the protective and marine segments both domestically and globally. Those have certainly been highlights in the quarter, Chuck.

All right. As you're looking out to next year with the prospect of some higher raws behind you, what do you think the contractor market's going to be like regarding it's receptivity for future price increases, there's been a lot of them in the last couple three years?

Yes, we're blessed with the customer base with the professional that has the ability to pass pricing onto their customers. As we have commented frequently on this call, the cost of materials anywhere between 10% to 20% of the costs of the paint job, so they're able to mitigate it. The likelihood, if some of the chemical analysts are correct, that titanium's up in the 20% to 30% range, we would expect to see the industry go through another round of pricing in calendar 2011 and we'll just have to be prepared to respond to that.

All right. Thank you.

Thanks, Chuck.

Our next question is coming from Carly Mattson with Goldman Sachs.

Hi, good morning. I was wondering could you like give us an update on lead paint litigation including anything that's happening in California?

Yes, there are actually-- there's a handful of cities and counties that brought suit in California and recently the State Supreme Court ruled on one of our motions and determined that it is permissible for these cities and counties to retain contingency fee council to aid in these suits, but that the governmental agencies must retain control over the suit. So that is essentially now sending the matter back to the trial court for further proceedings. We anticipate that we still need to complete discovery in those suits and there's other motion practice issues to resolve there.

And then in addition to that, there are a couple personal injury suits that we face in Mississippi. One being a single point of suit which was tried to a jury last year and it returned a verdict -- the jury returned a verdict for the Plaintiff. The Company has filed a notice of appeal with the Mississippi Supreme Court and we've now begun briefing. We filed our opening brief this summer-- this past summer and the Plaintiff filed their brief shortly after that. No hearing date's been set yet, and a decision's not expected until at least mid-2011 on the outcome of that appeal.

Okay, great. Thank you.

Thank you.

Our next question is coming from James Finnerty with Citigroup.

Hi, good afternoon, well almost.

Close enough.

Exactly. Just had a question on the proposed lease accounting changes and what impact that would have on Sherwin-Williams? I know we don't really deal with that much in the chemical sector but (inaudible).

Yes, two-- a couple things. We-- of our 3350 approximately stores, we own right around 260 of them. And so that means that we have many leases. And we try to get a five-year term and four or five year options with defined bumps. What's going to happen and a lot of times people will ask us about our leverage, we always talk about our debt to EBITDA being right around one but really 1.7 if you think about the net present value of those leases. So we've always continued to freely point that out.

What you're going to see is our leverage is going to go to about 1.7 because what we're going to have to do is put that asset on our books and we're going to have to put the debt on the books. We don't-- we're not going to have any problems with our covenants, we looked at our covenants. And I know other companies are taking a look at this and saying does this trigger a covenant issue for them with the banks, we don't have that.

The real question will be how much we're going to have on an ongoing basis change the fair market value of those leases. And that'll be pretty interesting because we've got like 20 years control with the change of interest rate, we might have that going in and out. And unfortunately, I think it really doesn't change the aspect of our Company or the-- or so forth. We're going to see more volatility on our balance sheet because of this size asset being changing on an ongoing basis for fair market value. But what we're going to try to do is keep this out of our operating division so that there's still (inaudible) selling paint which is how we really make paint money.

Right. So-- it's just a bit more transparent in terms of the leases being on the balance sheet, but once they're there assuming that this goes forward then there may be some noise, but it's just more about accounting?

Yes.

Different noise rather than actual results being impacted?

Yes, you probably remember about six, seven years ago with the lease changes there was many people and you had to come up with a change and we put something on our balance sheet but it was less than $10 million. But this one's going to be tremendously larger, it'll be in the neighborhood of $700 million.

Okay, thank you very much.

Thanks, James.

Appreciate it.

(Operator Instructions) Our next question is coming from Paul Mann with Morgan Stanley.

Thanks. Yes, [yield] analysts are expecting sort of 20% to 30% inflation in Ti02 in 2011. I'm assuming that's year-over-year inflation, what sort of inflation you expect from the current level of Ti02? And also what are you expecting for the rest of the material basket, I guess the rest of the baskets are going to ease a little during 2011.

Paul, we really aren't prepared for a full raw material outlook for 2011 on this case. We-- the comment about the 20% to 30% inflation is simply picking up kind of the consensus view of the analysts that we read and we have not done the analysis of current levels versus a 20% to 30% inflation rate year-over-year. So I'm not-- I don't think we're prepared to answer that question.

Okay. And then my second question's just how would you feel about your earned inventory of raw materials particularly acrylics during Q4, during kind of the seasonal downturn, is it like you can sort of (inaudible) to restocking in the acrylic inventory?

I think the acrylic inventory position in the industry is phenomenally better today than it was two or three quarters ago. Most of the operating issues from our suppliers have been resolved, they're back up running at full capacity. The seasonal slack in demand has helped that process and at this point in time, there are no issues there at all to deal with.

Okay, thank you.

Thanks, Paul.

There are no further questions at this time. I will now turn the floor back over to Management for any closing remarks.

Thanks again, Claudia. We'd like to thank you all for your participation on the call this morning. As always, I'll be available over the balance of the day and this week to take any follow-up questions you might have. We appreciate you joining us this morning and thanks as always for your continued interest in Sherwin-Williams.

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