宣偉 (SHW) 2010 Q4 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of fourth-quarter and full-year 2010 results and expectations for 2011. With us on today's call are Chris Connor, Chairman and CEO; Sean Hennessy, Senior Vice President, Finance and CFO; Al Mistysyn, Vice President, Corporate Controller; and Bob Wells, Senior Vice President, Corporate Communications. 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 Sherwin.com beginning approximately two hours after this conference call ends and will be available until Tuesday, February 15, 2011 at 5 p.m. Eastern time.

This conference call will include certain forward-looking (technical difficulty) statements as defined under US federal securities laws with respect to sales, earnings and other matters. Any forward-looking statements speak only as of the date on which such statement is made and the Company undertakes no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the Company's earnings release transmitted earlier this morning.

After the review of our fourth-quarter and full-year results and 2011 expectations, we will open the session to questions. I will now turn the call over to Bob Wells.

Thanks, Claudia. In order to allow more time for questions, we have provided balance sheet items and other statistical data on our website, Sherwin.com under Investor Relations 2010 Year-End Press Release.

Summarizing overall company (technical difficulty) performance for the fourth quarter and full year 2010, consolidated sales for the fourth quarter increased 18.6% to $1.9 billion due primarily to acquisitions, higher paint sales volume and selling price increases. For the full year, sales increased 9.6% to $7.78 billion. Sales from acquisitions increased consolidated net sales 8.7% in the quarter and 3.4% for the full year.

Currency translation rate changes increased consolidated net sales 4/10 of 1% in the quarter and 1.2% for the year. Consolidated gross margin in the fourth quarter decreased to 44.6% of sales from 47.4% in the fourth quarter of 2009. For the year gross margin decreased to 44.8% of sales from 46% last year. The decrease in gross margin for the quarter and year was primarily due to higher year-over-year raw material costs.

Selling, general and administrative expense in dollars increased $101.7 million in the fourth quarter compared to fourth quarter last year, but decreased as a percent of sales to 38% from 38.7% in the same quarter last year. For the full year 2010, SG&A expense increased $193.3 million, but also decreased as a percent of sales to 35.1% from 35.7% in 2009. Incremental SG&A from acquisitions, higher service costs resulting from increased sales and higher freight and distribution costs accounted for the majority of the SG&A increase in the quarter and year.

A fourth-quarter asset impairment charge of $4.5 million was offset by a reduction in environmental expenses related to the disposition of closed manufacturing sites in the quarter. As a reminder, in the fourth quarter last year, asset impairment charges and a loss on the dissolution of a foreign subsidiary reduced diluted net income per common share for the quarter by approximately $0.13 per share.

Interest expense for the quarter increased $12.4 million to $21.4 million reflecting costs associated with the repurchase of $51.6 million in long-term debt. For the year, interest expense was $70.6 million, an increase of $30.6 million over 2009. The incremental interest expense related to the repurchase of long-term debt reduced diluted net income per common share by approximately $0.04 in the quarter and $0.12 for the full year.

Our effective income tax rate for the fourth quarter 2010 increased to 29.7% from 19.5% in the fourth quarter of 2009. Our fourth-quarter tax rate last year was reduced by the tax effect of the dissolution of a foreign subsidiary. For the year, our effective tax rate was 31.8% in 2010 compared to 30% in 2009.

Consolidated net income for the quarter increased by $7.6 million, or 11.6%, to $72.9 million. For the year, net income increased $26.6 million or 6.1% to $462.5 million. Net income as a percent of sales decreased to 3.8% from 4.1% in the fourth quarter last year. This decrease was due primarily to lower gross margin and the dilutive effect of the acquisition.

For the year, net income as a percent of sales decreased to 5.9% from 6.1% in 2009, largely for the same reasons. Diluted net income per common share for the fourth quarter 2010 increased 15.5% to $0.67 per share from $0.58 per share in the fourth quarter last year. Acquisitions reduced diluted net income per common share in the quarter by $0.05 per share. Currency translation rate changes had no material impact on fourth-quarter diluted net income per common share.

For the year, diluted net income per common share increased 11.4% to $4.21 from $3.78 per share in 2009. Acquisitions reduced full-year diluted net income per common share by $0.10 per share and favorable currency translation rate changes increased full-year diluted net income per share by $0.05 per share.

Now I would like to review our performance by segment. Sales for our Paint Stores Group in the fourth quarter 2010 increased 8.6% to $999.3 million. For the year, net sales increased 4.1% to $4.38 billion. Sales increases in the quarter and year resulted primarily from selling price increases and gradually improving architectural paint sales volume to residential repaint contractors and DIY customers.

Comparable store sales increased 8.6% in the quarter and 3.8% in the year. Regionally, in the fourth quarter, our Southwest division led all divisions, followed by Midwest division, Southeast division and Eastern division. Sales by all four Paint Stores divisions increased in the fourth quarter and full year.

Segment operating profit for Paint Stores Group increased 12.4% to $134.8 million from $119.9 million in the fourth quarter last year, due primarily to lower year-over-year impairment charges, higher selling prices and volume gains that more than offset higher raw material costs.

For the full year, Paint Stores Group operating profit increased 3.2% to $619.6 million, due primarily to higher selling prices and volume gains that more than offset higher raw material costs. Segment operating profit for the fourth quarter increased to 13.5% from 13% last year. Profit margin for the full year 2010 decreased to 14.1% from 14.3% in 2009.

Turning now to our Consumer Group. Fourth-quarter external net sales increased 6.2% to $255 million from $240.1 million in the fourth quarter last year. For the year, Consumer Group sales increased 5.9% to $1.3 billion from $1.23 billion in 2009. Consumer Group sales increased in the quarter and the year reflecting moderately higher demand in some of the segment's retail, industrial and institutional customers.

Segment operating profit for the fourth quarter increased $21.5 million to $26.1 million. For the year, segment operating profit increased to $204 million from $157.4 million in 2009. Segment profit improvement in the quarter and year resulted primarily from increased sales and cost savings resulting from prior year manufacturing site rationalization, which more than offset higher raw material costs. As a percent of net sales, Consumer Group's operating profit in the fourth quarter increased to 10.2% from 1.9% last year. For the year, operating margin improved to 15.7% from 12.8% in '09.

For our Global Finishes Group, net sales in the fourth quarter increased 46.4% to $640.1 million and sales for the year increased 26.5% to $2.09 billion due primarily to acquisitions, higher sales volume, favorable currency translation and selling price increases.

Acquisitions increased the Group sales in US dollars by 31.8% in the fourth quarter and 14.8% in the year. Currency translation rate changes before acquisitions increased sales in US dollars by 1.1% in the quarter and 4.5% in the year.

Global Finishes Group segment operating profit in the fourth quarter increased to $28.8 million from a loss of $1.1 million last year. The group incurred trademark and asset impairment charges totaling $6.5 million in the fourth quarter 2010 compared to asset impairment charges and a loss on the dissolution of a foreign subsidiary totaling $25 million in the fourth quarter last year. Segment operating profit for the full year increased to $123.7 million from $65 million in 2009.

In addition to the net change in fourth-quarter impairments and dissolution costs, the increase in segment operating profit for the quarter and year resulted primarily from higher sales volume, good expense control and favorable currency rate changes that were partially offset by dilution from acquisitions and higher raw material costs.

Currency translation had no significant effect on segment profit in the quarter and increased segment profit $8 million in the year. Acquisitions reduced segment profit $3.1 million in the quarter and $10.5 million in the year. As a percent of net sales, Global Finishes Group's operating profit was 4.5% in the fourth quarter and 5.9% for the year compared to 3.9% for the full year 2009.

I would now like to comment briefly on our balance sheet items. You'll find more balance sheet information on our website under sherwinwilliams.com, Investor Relations, Press Releases. Our total debt on December 31, 2010 was $1.04 billion, including short-term borrowings of $388.6 million. Our cash balance at the end of the quarter was $58.6 million compared to $69.3 million at the end of 2009.

Total borrowings to capitalization were 39.4% at year-end versus 35.4% at the end of 2009. Long-term debt to capitalization was 24.7% compared to 34.4% on December 31, 2009. For the full year 2010, we spent $125 million on capital expenditures. Depreciation expense was $140 million and amortization expense was $35 million. For full-year 2011, we anticipate capital expenditures for the year will be approximately $120 million to $130 million. Depreciation will be about $140 million and amortization approximately $40 million.

I will conclude with three brief comments on the status of our lead pigment litigation. In the California public nuisance suit, California Supreme Court ruled it is permissible for cities and counties to retain contingent fee council to aid them in their suit against foreign manufacturers of lead pigment. In late February, the trial court will determine how the suit will proceed.

There were two noteworthy developments in Wisconsin. First, a Wisconsin Court of Appeals upheld the judgment in favor of the defendants in the Thomas case, a personal injury suit tried in 2007. Second, a Federal Court judge in Wisconsin ruled the risk contribution theory adopted by the Wisconsin Supreme Court in the Thomas case to be unconstitutional, violating defendant's right to due process. This ruling is now on appeal to the Federal Court of Appeals for the Seventh Circuit.

That concludes my review of our results for fourth quarter and full year 2010. So I'll turn the call over to Chris Connor who will make some general comments and highlight our expectations for 2011. Chris?

Thank you, Bob and good morning, everybody and thanks for joining us today. I think we are going to look back on 2010 as a positive transition year for our Company and the domestic paints and coatings industry as we bounced off the bottom. The US recession that began in 2008 technically ended in mid-2009, but the recovery in most of our end markets didn't begin until almost a year later and its strength and sustainability remain in question.

We finished 2010 with consolidated sales growth in the high single digits thanks in part to three acquisitions and multiple price increases taken in response to persistent raw material cost pressures. All three of our reportable segments grew sales organically in the year. Volume growth was modest, but also positive across all segments, the first time in several years I have been able to say that.

There was considerable disparity in the strength of demand across end markets, distribution channels and geographies. In North America, sales to our residential repaint contractors and DIY customers to our paint stores showed the greatest improvement.

Nonresidential repaint activity also picked up moderately in the second half. The strength in our Global Finishes Group business was more broad-based with sales growth across most productlines and in most geographic markets.

If 2010 did mark the end of the four-year slide in domestic coatings industry volume, we believe the recovery from here is likely to be slow and erratic. Most forecasts for new construction in the coming year call for modest increases on top of the low base established in 2010. Home maintenance and remodeling activity, which was a relative bright spot last year, should continue to improve the overall economy and consumer confidence. Industrial coatings volumes will grow in line with a somewhat more robust recovery in manufacturing and infrastructure investment.

Unfortunately, the one area that we are most confident we will see significant year-over-year increases is raw material costs. Strong global demand for certain commodities, most notably titanium dioxide, as well as limited capacity, will keep upward price pressure on these materials for the foreseeable future.

Key petrochemical feedstocks, such as propylene, have risen sharply over the past month, which will have an adverse impact on the market price for monomers, latex and solvents. These conditions will drive the market basket of raw material higher in 2011. Based on what we see today, average raw material costs for the paint and coatings industry is like to be up in the low double digit range in 2011.

We cannot control the economic environment we operate in, but we can effectively manage our response to it and we have. Throughout last year, we took many difficult steps to help minimize the impact of rising commodity costs and raw material shortages on our customers and our business. These included redistributing raw materials and finished goods between plants, distribution centers and stores, implementing priority production plans and buying certain materials on the spot market to maintain acceptable service levels.

The resulting higher operating costs combined with the rising raw material costs put pressure on our margins and we've responded with necessary price increases. The normal lag between rising input costs and the realization of our price increases resulted in declining gross margins in each of the past three quarters.

Our full-year SG&A expense as a percent of sales declined 60 basis points on a consolidated basis and was lower across all three segments. Much of the incremental SG&A spending in absolute dollars was a result of acquisitions and expansion of our Paint Stores platform, investments that we are confident will drive future top-line and bottom-line growth.

For the year, we generated $707 million in net operating cash, slightly more than 9% of sales. Free cash flow, which is operating cash minus CapEx and dividends, came in at $425 million. During the year, we invested approximately $360 million to complete three acquisitions. Two of these companies strengthened our position in the global wood finishes market and provide a strong platform for growth in Eastern and Western Europe, as well as Asia Pacific. The third acquisition establishes us as the market leader in architectural paint in Ecuador.

Our working capital ratio increased 11.9% of sales at year-end from 10.7% at the end of 2009. Backing out the working capital from the three acquisitions completed during the year, working capital at year-end was essentially flat at 10.8% of sales.

Last year, we also continued to invest in our control distribution platform opening 49 stores in new markets to drive penetration and share growth. At the same time, we consolidated an additional 13 redundant store locations for a net increase of 36 stores. Our paint store count in the US and Canada and the Caribbean now stands at 3390 locations compared to 3354 one year ago. Our plan for 2011 calls for net new store openings in the range of 50 to 60 locations.

In the fourth quarter, we acquired 1.53 million shares of the Company stock for treasury bringing our full year total to 5 million shares at an average cost of $75.14 per share and a total investment of $375 million. At year-end, we have remaining authorization to acquire another 5.75 million shares.

Over the past year, we also returned more than $156 million in cash to shareholders through quarterly dividends. 2010 marked our 32nd consecutive year of increased dividends per share, a string we intend to continue. This year, at our February meeting of the Board of Directors, we will recommend approval of a dividend payout rate for 2011 that will keep our record of consecutive annual dividend increases in tact.

Looking ahead to 2011, the outlook for many of our end markets is stable to improving and we believe we are well-positioned to continue to grow share. Counteracting this improving demand environment is the fact that raw material cost inflation is likely to remain a challenge and volume will be negatively impacted due to the loss of architectural paint gallons at Wal-Mart.

Our outlook for the first quarter 2011 is for consolidated net sales to increase in the mid to high teens compared to last year's first quarter. With sales at that level, we estimate diluted net income per common share in the first quarter will be in the range of $0.48 to $0.58 per share compared to $0.30 per share earned in the first quarter of 2010.

For the full year 2011, we expect net sales will increase by a high single digit percentage versus 2010. With annual sales at that level, we estimate diluted net income per common share for next year will be in the range of $4.65 to $5.05 per share compared to $4.21 earned in 2010.

Again, thanks for joining us this morning and now we would be happy to take your questions.

(Operator Instructions). Kevin McCarthy, Bank of America.

Yes, good morning. If I look at your sales growth and back out currency and the effect of acquisitions, it looks like it was up about 9.5%. I was wondering if you could comment on how much of that would be attributable to volume versus price given the various increases you have had flowing through.

Kevin, the balance would be a little more volume than price.

Okay. And then, Chris, with regard to your outlook for 2011, what is embedded in that with regard to the US architectural industry gallonage that you would foresee this year?

Yes, Kevin, we don't have a lot of economic forecasting thinking that we do here. We look at the things -- information that you have seen. We think that housing starts are likely to be up slightly perhaps in the low 600,000 range. We think existing home turnover will probably be fairly flat, plus or minus about 5 million units. So with all those things kind of baked in there in a more normalized kind of maintenance schedule, it is probably going to look more traditional than the range of low single digits that we have seen in a typical environment, albeit off a lower base.

Great. And then lastly if I may on acquisitions, you mentioned a $0.05 dilution in the fourth quarter. Can you I guess comment on the integration there and how you would see the accretion flowing as 2011 progresses?

This is Sean Hennessy and when you take a look at the progress we are making, we feel pretty good about the progress we are making. But as we mentioned on the last call, the acquisition in total will be slightly dilutive in the first quarter and for the full year, they will be slightly accretive for the year. And when we look at that slightly means less than $0.05 a share.

Thanks very much.

Jeff Zekauskas, JPMorgan.

Hi, good morning. I think you said that, in 2011, you expect your consolidated sales to grow by a high single digit rate. And I was a little bit puzzled by that because if your prices are up roughly 4% to 5% and there is a 3% acquisition benefit and you think the market is growing 2% to 3%, you get numbers like 10% or 11%. So is it the case that your forecast really includes no volume growth for next year? I don't know how else to make sense of your high single digit change.

Let me just take a first pass at it and then let Sean comment as well. The headwinds that we are seeing going into next year are going to be around the market uncertainties. We have commented things are looking a little better and we like to believe next year will continue to show some recovery. But the recovery that we have experienced has been extremely choppy. So as we sit here now to be able to indicate that all of next year is going to be a steady, smooth recovery, we are not quite sure we are prepared to make that comment.

Also, as we discuss with the investment community at some length during the middle part of this year, Wal-Mart's decision to eliminate our architectural paint program is going to have a significant impact on the Consumer segment. We commented that it would be less than $100 million, but still that is going to be a substantial gallon numbers for us to overcome. So those two things have some headwind. Sean, do you have some other comments for Jeff?

I think Chris said it perfectly. I think, Jeff, when you continue to do your model and you try to back into some of kind of a unit volume, that is when you realize the Wal-Mart effect on the volume.

And then lastly when you think about what you might earn for next year, are you including additional increases in acrylics and TiO2 or does your model really just include all of the increases that we have seen so far as they come into the new year?

Are you talking about the cost impact to us or the pricing that we might take to the market?

In other words, you think that you'll earn somewhere between 465 and 505 and that is based on some kind of sales growth and some kind of raw material expectation and I was wondering whether your raw materials expectation anticipates additional Ti02 prices, increases that we haven't seen yet or additional acrylic prices increases that we haven't seen yet or does it simply include what we have seen so far?

It includes what we have seen so far, plus what we think will happen in the raw materials. So as you know, when you are doing a forecast, what you know so far is 100% certain, but we do have forecasts in there for different materials and so forth and we are looking at the basket of raw materials of the paint industry to be up in the double-digit area. So when you take a look at that, that will include some type of a forecast for certain things and certain increases that we think will come throughout the calendar year 2011.

Okay, great. Thank you very much.

Chuck Cerankosky, Northcoast Research.

Good morning, everyone. Sean, looking at the working capital, it looks like it was managed very well in the quarter and the year, especially with the higher unit sales and rising raw material costs. Can you talk about what is working there and what the outlook might be for 2011?

We felt pretty good about the year. With the acquisitions, we were in the high 11%s, 11.7%, up from 10.7% last year. Without the acquisitions, we are at 10.8% with those factors. That did cause us to be a source of -- I am sorry -- a use of cash this year versus last year [of stores], but we think two things are going to occur over time. We think the acquisitions -- we are going to be able to again start to approach 11% in total.

Just like a couple years ago, (inaudible) a couple years, they are not as quick on outside domestic fourth quarter as well as versus the international, but we think eventually we are going to get back down into the 11% range. And domestically, we are pretty happy with what we're able to do with the inventory and our receivables. And when you look at the receivables, we feel pretty good thinking about the market that we have just come through. But again, we think it will take us a couple years, but we will get back down in that 11% range.

I guess part of the offset with the rising raws is payables go up as well as -- as well as the inventory on hand.

Yes, our payable number did come in very strong.

Okay. You have got short-term debt of $388 million, an increase from last year. What are your plans for that and where do you think that will go in 2011?

I think we have been trying to get into the 60/40, 60% fixed, 40% floating. We are able to get closer to that. Last year, we were about 98% fixed. The two things we are trying to get to are floating to take advantage of the short-term rates and secondly, to get some nondomestic debt to create some natural hedges in some of these countries that we are in now for currency hedges.

So we look at -- the gross debt was around $1,000,000,050 billion. Net was just below $1 billion. We think that next year will be slightly higher than that 1,000,000,050. So somewhere in the $1,000,000,050 to $1,000,000,125 billion. But we also expect our EBITDA to grow, so we think that our leverage will not be much higher than we are today.

Chris, a question for you regarding DIY sales in the fourth quarter. Are those re-emerging as a more significant or is that reemerging as a more significant end market given what has happened to housing starts?

As we commented, Chuck, in the body of the call, the strength, particularly (technical difficulty) business has been in the res repaint, which would include both the professional painting contractors and DIY and we had a very strong DIY in actually third and fourth quarters in our stores this year.

Is that due to it getting stronger because people are choosing to do more or there's just less new home construction allowing it to show up a little more clearly?

I think the rebounding consumer confidence and the deferred maintenance and decorating that we have been talking about for a number of years is starting to have an impact more than the new residential home construction starts.

Okay and then last question back to you, Sean, you have got a lot of things going on in the other income area with somehow dividend and royalty income becoming an expense item versus an income item a year ago. You had the interest expense up quite a bit partly because of the share repo, but it all boils down into a very big increase in the administrative cost line that you show in your segment reporting. Can you put together what the pieces are that expanded that number and how much of it was noncash and were the gain from the sale of closed manufacturing assets appeared in the P&L?

The year-over-year change in the (inaudible) segment appears larger due to the fact that, in 2009, Chuck, our administration expense was down as a result of adjustments in compensation and related expenses, including stock-based compensation.

The change is less dramatic when compared to 2008 and 2007. The primary contributors to the higher administration expense in -- higher interest expense, including the repurchase of those long-term debt and the year-to-year change in compensation and benefits, including the change in stock-based compensation.

You also bring up a couple of other things there. We did sell three non-utilized assets and we had a gain on that. That was cash positive. We took the proceeds in and we were able to reduce some of accruals that we had there for ongoing maintenance of those types of -- as well as the gain on the sale.

We also had a hit on our rabbi trust for that long-term deferred compensation, which is not a cash use. It is just an accrual and over time, we will probably get that back over time because of the investments that we have made.

So to get back to those three plans, the proceeds from them we will see in the cash flow statement, but the gain showed up in what line item?

All other.

All other, okay. So the gain is there. So this compensation, year-over-year compensation adjustment --

Is in the SG&A in the admin segment.

Yes, okay. So that is a very big item.

Yes.

All right, thank you.

Don Carson, Susquehanna International Group.

Chris, a question on sort of channel shifts. Paint Stores volumes were up for the first time this year. You were flat for the first nine months. So -- when the market was up. So are you regaining share through the Paint Stores Group or do you think that you will continue to see more competitive big boxes?

Yes, Don, we are confident that the Stores Group has, in fact, gained share this year across a number of the segments that we monitor. Volumes were actually up third and fourth quarter through that segment. And as we commented, while we have seen some nice performance out of the residential repaint, contractor and DIY, even in the segments that were off for us, new residential construction, commercial contractors, etc., we are confident the results we show were stronger than what the market felt. So that source model continues to be a [shared ramp] for us.

And to what extent do you think you are benefiting from decision by other people to reduce their overall stores count?

Well, clearly, we monitor that carefully, Don, the gap between our total store count versus the other folks that we compete against in this space. This has been a rough three to four-year cycle. We have seen quite a number of independents go out of business and a number of the other super regionals reduce their store count. We have continued to have a positive store addition number each and every year through the cycle.

And a question for Sean. What do you see as the full-year benefit in 2011 from your manufacturing rationalizations in the Consumer Group over the last 18 months or so?

I think that what we have said is -- because you are going to see it in the gross margin -- but we think it was slightly higher than $20 million to $25 million.

Okay, thank you.

Gregory Melich, ISI Group.

Hi, thanks, guys. I wanted to talk a little bit about the outlook on the cadence of your price increases. So we had 16%, a lot last year. It looks like you got a normal amount of that through so far. As you go into this year, do you expect gross margins -- it seems like in the first (inaudible), you expected them to be down as much as they were in the second half of 2010. Is that a fair way to think about it or am I --

We are going to try to avoid going down the model, Greg, and this is Sean, we (inaudible), especially at the beginning of the year, we try to give you some outside looks at the sales of what we think -- in the sales and EPS. But a lot of times -- as in the past, we mentioned after the second-quarter call, we have given you some type of guidance on gross margin and other things.

When we see we have a better view of selling prices, what you're asking about and also raws (inaudible), what Jeff was saying. We have got a better view of what is going to hit in the current calendar year. But I think we are going to avoid giving any kind of guidance on gross profit at this time.

So maybe then a different question, which is just looking at the pricing. In the past, it has usually taken maybe a year to sort of get through your normal 75%, 80%. Do you think that is still the case or has something changed in the last year or two in the market out there where it's either -- it's able to happen faster or slower or --

Yes, as you mentioned, we put three price increases in. We put the first one in in April and then again in August and both of those are really reacting just like historical. We feel that we have had enough time looking at the market. We think that it is running correctly, just like normal.

When you take a look at December 6, it is not that we have seen anything abnormal, it is just that December is our slowest month and we will probably give you a little more color on that at the end of the first quarter. But it has just since December 6, December is our smallest month, I will avoid talking about that. But we think that the market forces are still in place that when the gross margin -- raw materials go up, eventually we will get it back in the selling price.

And a follow-up on the Consumer Group, the big expansion in margin there, would you say that the benefits that you saw, maybe quantify them in dollars, is that now pretty much behind us where you have been able to take that business up to a new level of efficiency at this run rate or --

Yes, I think that we have realized 100%. It did come in tapered. We did start to see some in late '08, throughout '09 and now with '10, we are at a fairly good run rate.

Great. Lastly, on the SG&A dollars last year, up I guess a couple hundred million, could you just -- I think you said a majority was acquisition. Could you give anymore precision like that, like two-thirds or a dollar amount would be helpful?

We commented, Greg, that it was between the new stores and the acquisitions and that is as much guidance as we are giving.

But a majority -- the acquisitions I think were a majority of it. Was that right?

Thank you.

John Roberts, Buckingham Research.

There are still a lot of small competitors in the industry that I would assume have a harder time maintaining service levels in this environment and are not as sophisticated pricing. So why not take the Wal-Mart volume and try to accelerate your professional stores volume, add more stores this year, do something strategic?

That has been the goal every year for the last 145. We certainly aren't throttling back on that at all. We talk about a net new store count this year of -- in the 50 to 60 range. There will be some still remaining closures from our big acquisition run in the middle of the last decade, but we are getting up to a closer kind of a gross opening run that we have had historically and rest assured that team is aggressively out looking to grow gallons.

That just doesn't seem like they are growing enough to absorb the Wal-Mart capacity that you have got available.

They are never growing fast enough. You sound like us.

Okay. And then secondly, could you talk about the things that are in your control to do to mitigate some of the raw materials like changing container strategies or changing suppliers or changing formulations, what you are doing internally that is within your control?

We will comment on some of the broad themes of controls that we do have. At the outset, let me comment that the significant raw material supply relationships that we have, for the most part, are really critical to the final manufacturing products that we make. So the ability to drastically change those relationships is not strong nor do we want it to be. And so we're really talking about some of the items around the fringe.

And you mentioned a number of them. Through formulation, we can find some way to optimize the formula to use less of these. We can bring other raw material suppliers up to paint grade levels and quantify and qualify their raw materials as a source or capable of moving some of our purchasing from various suppliers. We're able to bring some of these raw material productions in-house as we do make some resins inside the Company. So there is a variety of strategies at play here, none of which will be significant to put a real dent in the numbers that we have commented on.

Thank you.

Bob Koort, Goldman Sachs.

Hey, guys. This is actually Brian Maguire on for Bob. As you mentioned, your raw material prices have continued to move up. So far in 2011, we have seen propylene and titanium dioxide continue to go up. Is it too early to think that we might see another price increase in the spring or do you think that the December one kind of covers you for the first half of '11?

We have been real clear about this, Brian, in terms of giving the Street great transparency into our pricing activities, when we take them, the amount we have taken, etc., when we announce the (inaudible) specific date. Sean just commented on December 6, (inaudible) our prospective price increases, we don't comment on that, not until we have thought through the process and spoken with our customers first, etc.

So the pricing that we have announced in the fourth quarter of last year is intended to carry us into this new year and we will just have to wait and see how the raw material pricing unfolds and whether or not additional pricing is required.

I think you can rest comfortably that historically you can see the Company has always had the same discipline here that pushing back against raws first, trying to see if we can mitigate that internally through our own operations and then finally failing those two steps, we will go to the market for pricing if we need to. At this point in time, there is no intentions or plans for further price increases.

Okay, thanks. That's helpful. And I was also wondering if you have seen any disruptions or loss of sales so far from the adverse weather we have had so far in January?

Yes, the Eastern Seaboard has particularly been hard hit. Our stores do in fact feel that. There are days when it's a struggle to get them open or lack of customers through the front door. You will rarely hear this Company talk about weather. We believe that weather comes every year. You're going to have these storms that are going to go through. They may impact a given week or month or even quarter, but over the greater year, it's just not anything we are concerned about.

Okay, one just housekeeping item. What kind of tax rate are you guys assuming for 2011?

This year, we were around 31.7% and we think it is going to be slightly higher than that, but we still think it is going to be in the mid to low 30%s.

Okay, thanks guys.

Stephen East, Ticonderoga Securities.

Good morning, guys. When you talked about -- Chris, you talked about raw materials overall being up low double digits. What percentage of your selling price is that as you look out into '11? Last quarter, you talked about TIO2 being 20% to 30% and so it was impacting about 6 percentage points, something like that.

As a rule, Stephen, the basket of raw materials and a typical architectural gallon of paint account for about half of the selling price. So the 12% raw material cost increase would dictate a 6% selling price increase on a like gallon of paint to keep the gross margin dollars consistent on that product. Is that the question?

Okay. Yes, that is the question. Thank you. And if you look at your guidance, obviously, you are looking at a decline in margins, at least net margin, versus 2010. Two questions on that. One, is that sort of the new normal or is that just a temporary until your pricing can catch up to your raw materials? And is -- it is primarily occurring -- that decline in margin primarily occurring at the operating margin or is there a lot of below-the-line noise for us?

Yes, when you take a look at -- first of all, I will mention the gross margin, we don't think it has changed. I think two years ago we hit -- I'm sorry -- last year, we hit 46% and in 2009, our long-term goal is we think that we can eventually get back at and above that to a new peak.

When you look at operating margins, we feel the same way. We don't think it is a new norm. We have looked at -- when you look at 2007, 2008, we have commented eventually we think that we have put the Company in position that we can get at and above those margins.

So when you talk about the guidance for next year, I think when you first go out there at the beginning of the year, you have a lot of puts and takes and you don't just have one scenario. You will have three or four. And it used to be we -- at least a couple years ago, we actually got up to 12 when our guidance was as wide as $1, between $3 and $4.

So we are at $0.40. We have about three or four different scenarios and what ends up happening is we start to see how the year starts out. We start to get a better feel for what we think the raws are going to be for the year and the selling prices and [a lot of things ramped] and then we start squeezing it down and give you a little more answer and color on that. But that is really where we are at with the guidance.

Okay. That is fair enough. And just two quick little things. One, could you talk about the commercial trends and then two, Sean, I appreciate fixed versus loading in trying to capture the low floating rates. But we are at generational lows for interest rates. At what point do you all say, for the better good of the Company, both longer term, we probably need to move away from that 60/40 split fixed versus variable?

I think when you take a look at it, a couple years ago, we went out and did a five-year deal at 3.1. We are monitoring the market right now and we watch commercial paper and the dealers right now. We are able to get one, three, six-month commercial paper and as well as overnight. So we feel the commercial paper market is still fairly robust at well below half a point of interest. So we think that is still pretty good for the shareholders. When we start to see that tighten up, we probably would do what you said.

And then, Stephen, your question was on the commercial market trends?

Yes, sir.

Our expectation here again, with the same caveat about the lack of economic forecasting that we hold ourselves accountable for, in looking at the same kind of industry data that you can see, we believe that nonresidential construction, the spending to that will be flat to down moderately. It has been pretty low. There's not a lot more to fall there and we do think, however, that nonresidential occupancy rates and turnovers are going to improve a little bit and that will help the stronger market, which is the maintenance side of it anyway. So all in, perhaps the commercial side of this business should have a flat to slightly up year.

Okay, thanks a lot.

Dennis McGill, Zelman & Associates.

Thanks for taking my questions. Just firstly, Sean, without getting into specifics for the year and not looking for an absolute number here, but if we think about the price increases going through the way they typically would and what you've seen already with raw materials and how those will flow out of inventory, can you talk to the pace of margin contraction or expansion through the year? What would be sort of the most challenging period for the year as things play out under a normal scenario based on what has already happened?

Well, I think under a normal scenario, you would say the first quarter would be the best situation because we were anniversarying three price increases. But we are also taking -- after April, we start to anniversary that first price increase. So the actual effect of selling prices on the volume will be the highest in the first quarter and then (inaudible) annualized and then it'll be reduced.

So when you take a look at [stats], the year-over-year sales and then the year-over-year selling price increases, but really when we take a look at how the raw materials flowed in and out, it has been anything but normal. So I think it is hard right now to say exactly which quarter is going to be the highest or where we are going to see the lowest peaks.

Okay, that's helpful. Just to help maybe clarify that from the raw material increase, the double digit for the year, can you give us a sense where those exited 2010 on a year-over-year basis?

It's below that double digit and the fourth-quarter raw materials were up -- the highest quarter increase that we had.

Meaning the year-over-year increase, ending the year with higher than the average --

It was accelerating through the year, exactly right.

Okay. On the Consumer segment, just to clarify, Sean, did you say that $20 million to $25 million from restructuring was a benefit in '10 or the carrythrough into '11?

2010. What we realized in 2010 and now we have -- and I have also said that we have realized 100% of that.

Okay, and so when we think about '11, realizing you'll have the volume challenge of Wal-Mart, you didn't mention pricing in your comments of the benefit in the fourth quarter there. So I know you don't want to speak by segment for price, but when we think about profitability in that segment looking forward, is there a scenario where you can see operating margin improve without replacing the Wal-Mart volume?

I think so. I think that segment is also working on selling price increases and so they are out there today working on that and then they are getting some. So that is part of the effectiveness that we talk about when we say what, over time, we eventually get to and why it takes a little bit longer, but when you take a look at [that] segment out there implementing price increases.

And then just lastly, Chris, I don't know if you can take a stab at this or if you know specifically, but on the non-res building, construction or commercial, what would be the slip between the maintenance and new construction for your business?

Dennis, this is Bob. New construction is a very small piece of the commercial market. Probably similar to new construction in residential versus residential repaint, maybe 20% or below.

Okay, great. Thanks a lot, guys.

P.J. Juvekar, Citi.

Yes, hi. On a bigger scale, during the downturn, you try to get more DIY business in your store. Was that DIY business down at a lower price point than what a contractor would come in?

No, the opposite.

Because you had lowered some prices to get the DIY consumer in.

I think the DIY consumer is moved by promotional activity. That has been a forever marketing strategy in our industry. We were aggressive in our promotion schedules to the DIY consumers to our stores this year. That again has been consistent. However, the DIY pricing starts at a considerably higher level than what a professional painter would buy similar products for. So even with discounting, that mix would have been positive as we switch to DIY.

I can tell you, in each of the four quarters, the DIY gross margin was higher than the painting contractor gross margin in the Stores Group and that was true for every quarter last year even with the discounting.

Thank you. Thanks for the clarification. And just quickly are you developing any paint that uses less TIO2 and was wondering if you have gotten any trials and what the findings were.

Sure, all the time we're working on those types of opportunities and there is a lot of nice technology out there that is helping extend the use of titanium in the formulation so that less can be used to achieve the same types of performance. Some of those products are winding their way to market, some are in tests and I think there will be continuing signs in that regard, not only from the paint manufacturers themselves, but other raw materials suppliers that see the same kind of tightness in the titanium environment.

This too, P.J., has been historic in our industry and as we've gone through these titanium cycles in the past, other raw material technologies have emerged that help mitigate the use of that. So I would expect that we will continue to see more of that going forward.

So what would you say this TIO2 usage, would that be 5% of your paint, less or more than that?

Again, I think there was an earlier question about what strategies do we have and we made the comment that these types of movements are really around the edges of the core body of products that we sell. So I would be hesitant or reluctant or even unprepared to comment on that percentage, but I don't think you are far of in terms of thinking it would be very de minimis in the under 5% range.

Okay, thank you very much.

Eric Bosshard, Cleveland Research.

Good morning. I was wondering if you could make a little bit of sense of your earnings guidance. Once you increase -- on a year-over-year basis, it is relatively material, especially in light of the full-year increase you are talking about. When you think about the acquisition impact, which is dilutive in the first quarter and then the balance of the year becomes much less dilutive than it was a year ago or year-over-year incrementally impactful to earnings, I guess I am just trying to figure out what factors are influencing what appears to be a more cautious Q2 to 4Q guidance growth relative to the 1Q guidance.

When you take a look at the first quarter, this is Sean, first of all, the Obama care, in the first quarter last year, we really had to take a $0.10 hit in our tax rate in the first quarter and so a couple things. The $0.30 really is $0.40 and so the increase is not as dramatic and the first quarter (technical difficulty) in the first quarters (inaudible) dramatic because it is our smallest quarter.

So when you take that into consideration and some of the things that went the other way where we were able to sell those assets, we are going to go up against that in the fourth quarter. We have some other things that we are going to go up against in other quarters. It just seems like this probably was one of the biggest movement quarters. Quarter-by-quarter, we had a lot of different moving parts. But when you take a look at it, that Obama care is dramatic in the first quarter.

But even if you take out that and you take out the roughly $0.25 of net expenses that impacted '10 that won't recur in '11, even when you pull that out, full-year earnings on an operating basis are up roughly $0.40. I think the mid-midpoint of $0.15 of that is in 1Q. It just seems that even looking at (inaudible) and pulling out what you rightly pointed out was the 1Q effect, it seems like there is more in 1Q than you are assuming in 2Q to 4Q on a disproportionate basis. Is there any factor that influences that?

A couple of other things that really effected it, we also had -- in another quarter, we actually had a $9 million sale of -- we sold an asset, a small asset, but that was $9 million worth of goodness in one quarter. I mentioned again in other quarters where we are going up against the sales. And then environmental expense. When we (technical difficulty) we are going to be doing a lot of remediation this year in our Chicago site, hopefully completing that this year or the first quarter of 2012.

So those are the type of things that are going on and can change quarter-by-quarter, but the first quarter was again back to Obama care. I understand what you're saying, but there is just a lot of other things that we take a look at. And at the end of the first quarter and second quarter, then we will probably have a better idea what is happening with selling prices and raw materials.

And secondly, just some clarity, was the volume growth in 4Q similar to 3Q or better than 3Q?

Slightly above.

And was that broadly based or was there one piece of the business that contributed to that?

I thought that was pretty broadly based. All three segments, as we commented, Eric, had improving volumes and to Sean's point, these are slightly above -- these are modestly positive volume numbers in the low single digits. So all three went in the right direction.

Thank you.

Dmitry Silversteyn, Longbow Research.

Well, I've gotten into the afternoon, but (inaudible).

Sorry about that, Dmitry.

Okay, as long as I am on here. When you look at the margins that we saw in the fourth quarter, particularly in the Consumer and the Global Group, they were -- or the decline in sequential margins was less than it was a year ago and you mentioned some one-off things that seem to have impacted that performance last year. Was it all related to that or did the businesses change fundamentally and the reason why you didn't lose money in the one operation, it was actually able to deliver margins that were better than 50 basis points than the other operation.

I think when you take a look at the Consumer segment, it is sort of a combination of both. We've had some one-time hits last year. We also had the sales in there, but also I go back to deploying (inaudible) rationalization. So I think there was some business changes that we are able to maintain and so forth, but that's really the big piece there. The big piece in Consumer was those one-time and that's why you saw it go from 1-9 to 10. 1-9 was probably understated because of the hits and so forth. Stores Group, the 50 basis points, 13 and 13.5 that was -- I mean you sit there and see that impairment last year, that was probably the majority of that 50 basis points.

Historicals, I understand. I was just -- the Consumer Group and the Global were --

On the Global side, I would tell you again, in the fourth quarter, we went from minus 3.10 to 4.5. Again, last year, really the impairment, but even with that impairment, we did see the improvement in ROS. So we think that that is probably a good run rate. Last year, we were talking about that -- 3.9 was depressed. This year, at 5.9, again without the acquisitions, and if you add back -- we had some nice improvement in the ROS and we think the ROS is on its way here on the Global Group.

Sounds good. And then I just had a question, if you look at the balance sheet, you have seen days sales outstanding have increased throughout the year and kind of finished up, what, is it almost 70 days higher than they did a year ago. Inventory turns have dropped a little bit and we are a little bit slower than normal throughout the year. Is this just a function of raw material inflation or a function of acquisitions and the margins and the working capital requirements that those businesses bring with it.

Yes, and every time we do an acquisition, we see this. If you go back when we did Duron (inaudible), our working capital went from around 11 to 13.5. As we continue to integrate those, we actually got that close to 11 and we did seven acquisitions a few years ago and that drove it back up to 12.5, 12.7. We actually were able to get back down to the 10.7 last year. So without the acquisitions, our DSO was up slightly and our inventory days were actually down slightly. And as Chuck pointed, we also -- the raw material inflation that we have seen in our raw materials really was offset a little bit by the payable number. So the payables covered the inflation somewhat, but we feel pretty good about our working capital with our balance sheet.

And just final question, are you kind of (inaudible) long some of the key raw materials given the experiences with some disruptions and lack of availability last year or is there just not even enough material available in the market for you to build a little bit of a cushion against future price increases or availability issues?

When we take a look at our production plan, because we got asked this a few years ago, we pre-buy and today, we just don't have the warehouse space. But what we're doing is we have adjusted our production plan and tried to -- usually in the first quarter, this is where we build our inventory to go into the high sales season and we are going to do everything we can to slightly be higher than where we would have been normally and higher than we were last year.

Okay, thank you very much.

Ryan (inaudible), Citigroup.

I was wondering if you could comment a little bit on the acquisition wins and how you see yourself with your current ratings and potentially giving up the current ratings to make an acquisition on a larger scale?

Well, first of all, Ryan, I think our ratings are fine and Sean commented earlier about the capital markets availability to us and we feel like we have terrific access if there were deals out there that were appropriate, strategic and added significant value for our shareholders. Having said that, the type of deals that we have historically done have been much more bolt-on and additive to our existing businesses and haven't required significant capital resources to get done. So we don't really find ourselves or feel that we are constrained at all in that regard.

The acquisition environment is still better than it was three or four years ago. We are looking at a number of deals. We have talked about consistently our interest in continuing to build out our control distribution footprint in North America, as well as adding to our industrial coatings strategy on a global basis and there are a number of opportunities out there for us to think about.

Thank you.

Andrew Dunn, KeyBanc Capital Markets.

I apologize. I got disconnected for just a second, so if you guys touched on this, again, I apologize, but just real quickly, going back to the pricing issues, you guys are pretty close to your contractor customers. As you deal with them, do you get any sense at kind of what level of price increasing you might get a pushback from them saying we just can't push this through to our customer base anymore?

And then just as a real quick follow-up on the kind of store count issue, I think you guys had talked about kind of the northwestern part of the United States, maybe even Canada moving forward. Are you guys still pretty optimistic on those areas?

Well, first of all, Andrew, on the first part of your question, the pricing that we get pushback on from our contractors is half of 1%. These are not folks that are excited to get these nor are we excited to pass them on. So they are doing their job as they should, which is to push back a little bit.

As we have talked about the economics of this industry, you recall that a typical paint job is 80% to 90% labor cost, 10% to 20% materials. So as distasteful as these are, their ability to absorb it, modestly raise their pricing and cover their entire material cost is something that has been easy for them to do. So as Sean said earlier in the call, the price increases that we have implemented last year have all continued to go in on a fairly historic level and we would expect that to continue going forward.

In terms of our store count, you are accurate when we talked often about on our density map, the western part of the United States, partly western Canada, as well as all of Canada for that matter are areas we could heavy up our stores. You are seeing that both in our new store openings as well as our acquisition interests.

Thank you.

We have no further questions at this time. I will now turn the floor back over to Mr. Bob Wells for closing remarks.

Terrific. Thanks again, Claudia. Let me wrap up the call this morning by asking you to save the date of Thursday, May 12, 2011 on your calendars. That is the day that we will host our annual financial community presentation this year at the Waldorf Astoria in midtown Manhattan. The program will consist of our customary morning presentations with questions and answers, followed by a reception and luncheon. Again, that date is Thursday, May 12 and we will be sending out invitations and related information in the weeks ahead.

As usual, we will be around today and tomorrow to take your follow-up calls. Thanks for joining us this morning and thank you for your continued interest in Sherwin-Williams.

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