Strong sales growth in protective and marine coatings was not enough to spare Sherwin-Williams an unexpected drop in second-quarter profit, and the company has cut its full-year profit forecast because of rising raw material costs.
The largest U.S. paint retailer’s second-quarter net income fell 1.4% year on year to $179.1 million, the company reported last week. The company had been expected to report profit of $187.8 million, the average of seven analysts’ estimates compiled by Bloomberg.
One bright spot: The Global Finishes Group, excluding acquisitions, delivered its fifth consecutive quarter of double-digit sales growth in protective and marine coatings, OEM product finishes, automotive finishes and architectural coatings. Sherwin-Williams’ balance of sales outside of North America “now stands just shy of 25%,” Chairman and CEO Christopher M. Connor reported in a conference call.
|The Global Finishes Group, which includes protective and marine coatings, saw its fifth consecutive quarter of double-digit sales growth.|
The gains in Global Finishes also helped push diluted net income per common share to $2.29 per share in the first six months of the year from $1.94 per share in the same period last year. Acquisitions increased consolidated net sales 5.1% in the quarter and 6.7% in six months.
Pricing Disparity Cited
Sales for the three months ended June 30 were $2.36 billion, up 9.9% year on year.
Gross profit was $1.02 billion, up 5.2% from the 2010 second quarter. However, the gross profit/sales ratio fell to 43.4%, from 45.4% in the 2010 second quarter, while selling, general and administrative expenses rose 9.3% year on year to $756 million.
“Earnings in the quarter were at the low end of our guidance range due to high raw material costs versus the timing of our price increases,” said Connor.
Sherwin-Williams’ price increases have lagged behind a 20 percent surge in the cost of titanium dioxide, acrylic acid and other raw materials, according to Don Carson, an analyst at Susquehanna Financial Group.
“Prices still need to rise another 9 to 10 percent in order to offset” rising costs, Carson reported, according to Bloomberg.
Global Finishes Group
Net sales in the Global Finishes Group increased 39.5% to $678.9 million in the quarter and increased 44.2% to $1.31 billion in six months due primarily to acquisitions, selling price increases, higher paint sales volume, and favorable currency translation rate changes, Sherwin-Williams reported.
In the quarter and six months, acquisitions increased net sales in U.S. dollars by 22.5% and 27.5%, respectively, and favorable currency translation rate changes increased net sales by 5.9% and 4.8%, respectively.
The group’s segment profit in the quarter increased to $46.1 million from $40 million and increased in six months to $82.9 million from $63 million last year, due primarily to increased paint sales volume and favorable foreign currency translation rate changes.
The group acquired three companies over the last 12 months: Acroma and Sayerlack in Europe and Pinturas Condor in Ecuador. In July, Sherwin-Williams completed the acquisition of Leighs Paints, a leading UK protective and marine and fire protection coatings innovator.
Paint Stores Group
Net sales in the Paint Stores Group increased 4.3% to $1.3 billion in the quarter and 6.3% to $2.23 billion in six months, due primarily to selling price increases and improving domestic architectural paint sales to DIY and residential repaint customers. The group opened 18 net new locations in the first six months of the year and expects to open 50 to 60 new stores over the year.
However, the group’s segment profit decreased to $206.6 million in the quarter from $212 million last year, due primarily to continuing raw material cost increases only partially offset by selling price increases. Segment profit increased to $275.5 million in six months from $259.7 million last year.
Segment profit as a percent to net sales decreased in the quarter to 15.9% from 17% last year and remained flat at 12.4% in six months.
Net sales in the Consumer Group decreased by 8.4% to $375.6 million in the quarter and by 4.5% to $670.6 million in six months, due primarily to the end of the company’s deal with Wal-Mart.
Segment profit decreased to $61.4 million in the quarter from $80.7 million last year and to $102.5 million in six months from $118.2 million last year. Segment profit for the quarter and six-month period decreased as a percent to net external sales, due primarily to increasing raw material costs partially offset by selling price increases.
Demand Stays Soft
“Although domestic demand remains soft, we continue to invest in selling, general and administrative expenses to maintain customer service and are encouraged by the improvement in domestic DIY and protective and marine sales in the Paint Stores Group,” said Connor.
“We are pleased with the continued growth of our architectural, protective and marine, OEM, and automotive finishes sales in the Global Finishes Group. Our operating segments continue to control costs and implement price increases in an effort to keep pace with rising raw material costs.”
Per-share profit for the second quarter rose to $1.66 from $1.64 a year earlier, after the company reduced the amount of publicly traded stock.
The company acquired 0.5 million shares of its common stock through open market purchases in the quarter and 1.6 million shares in six months, with remaining authorization on June 30 to buy 4.15 million shares.
Full-year profit will be $4.65 to $4.85 a share—higher than the $4.21 per share earned in 2010, but a lower upper range than the $5.05 forecast on April 21.
For the third quarter, the company anticipates an increase of 10 to 15 percent in consolidated net sales compared to last year’s third quarter, said Connor. Diluted net income per common share for the third quarter is expected to be $1.65 to $1.75 per share, compared to $1.60 per share in 2010.
“For the full year 2011, we expect consolidated net sales to increase above 2010 levels by a high single digit to low teen percentage,” said Connor.