Sherwin-Williams Company Earnings Call Insights: Exterior Paint Performance and Gross Profit Dollars

Sherwin-Williams Company (NYSE:SHW) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Exterior Paint Performance

Ghansham Panjabi – Robert W. Baird: Chris, you the interior versus exterior paint demand sequential you pointed out, do you think the exterior performance was approximately tough comp from a year ago or is that just all the more unfavorable weather in March across the country?

Christopher M. Connor – Chairman and CEO: Well, the answer is yes to both of those, I mean that was the whole point and we saw reasonable seasonal exterior sales gains in our southern markets, but it was in northern markets that were painting up by last year that really saw a decline in next year gallons. Take those two together we’ve delivered a flat exterior performance for the Stores Group.

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Ghansham Panjabi – Robert W. Baird: Then can you just parse out what you are seeing residential versus commercial the best as you can tell?

Christopher M. Connor – Chairman and CEO: Yeah, I think as we have been commenting that for something, it is the residential portion of this architectural market that are rebounding both of the new construction, as well as in the repaint. Commercial tends to lag that. We’ve begin to see some lift in commercial repaint is occupancy rates improve, not some much a lift yet in the new construction portion of that business.

Ghansham Panjabi – Robert W. Baird: Then just one final one on Global Finishes, for the second quarter last year with the very, very strong performance from a margin perspective. You think that a tough comp, do you think margins will be up in Global Finishes year-over-year during the second quarter above ’13?

Sean P. Hennessy – SVP, Finance and CFO: I think when we were pretty happy with the operating margins and Global Finishes we have done something to actually help that business. We don’t give guidance by segment, but we were not surprise a Global Finishes operating margin improved this quarter.

Gross Profit Dollars

Aram Rubinson – Nomura Securities: Couple of questions one just housekeeping if you can help us with the gross profit dollar growth you sometimes share with us by segment would be great.

Christopher M. Connor – Chairman and CEO: Gross profit dollars were $37,663,000. The Consumer incremental $2,891,000 and the Global Finishes Group $13,734,000. And then LACG was negative it was dilutive $793,000.

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Aram Rubinson – Nomura Securities: One or two other quick things, if I could the two year volume trends underlying seem to be quite strong if you did at the end so what we had calculated as 13, quick kind of two year volume up near 16 and we had about 8, 9 in last quarter and 4 the quarter before that is that kind of proper gauge of underlying momentum in the business.

Christopher M. Connor – Chairman and CEO: I think you are directionally correct Aram.

Aram Rubinson – Nomura Securities: Then the last thing is on SG&A last year your SG&A as a percent of sales by quarter you did 35.5 in the first quarter and 31.5 in the second quarter, you did about 20% more sales in the second quarter than the first, so my question is this. If your volumes in Q1 were to grow by 20% over a few year period of time, why wouldn’t their SG&A ultimately get to where your Q2 SG&A rate is today.

Christopher M. Connor – Chairman and CEO: Because what ends up happening is that our SG&A rate is a step function, and so to get that 20% sales volume that you speak of, we probably have more stores or we’ll probably have more reps, we’ll have more SG&A that will flat line itself against the quarters. If that occurs, you are going to see to get that 20% increase in the first quarter. Actually you also get a second quarter pop also. So, that sales curve really – that’s why a lot of times when people asked what’s your fixed versus variable. We think the fixed is lot higher, because store manager, assistant manager all those things are fixed and that sales curve – to get that 20%. Now, if you are saying structurally, we were able to get to 20% more without any additions to stores, reps or other things then you’d see it drive down, yes.

Aram Rubinson – Nomura Securities: Okay. Yeah, because I noticed you are still running about a little less than 70, let’s say, the SG&A growth provided by revenue growth is maybe a good function to – are you still trying to be in that kind of (55%, 67%) kind of percent range?

Christopher M. Connor – Chairman and CEO: Yes.

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