Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Greetings, and welcome to the Sherwin-Williams Company's second quarter 2005 earnings results conference call. Today's call is being recorded. At this time for opening remarks I would like to turn the call over to Conway Ivy, Senior Vice President Corporate Planning and Development. After his remarks Chris Connor, Chairman and Chief Executive Officer; Sean Hennessy, Chief Financial Officer; John Ault, Vice President and Corporate Controller; and Bob Wells, Vice President Corporate Planning and Communications will be available for questions. Gentlemen, you may begin.
CONWAY IVY, SVP-CORPORATE PLANNING & DEVELOPMENT, SHERWIN-WILLIAMS: Thank you, Megan. Good morning, everyone. Thank you for joining us today for the review of our second quarter 2005 results and our expectations for the remainder of the 2005 year. 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 approximately two hours after this conference call concludes. It can be accessed at www.sherwin.com and will be available until Monday, August 1, 2005 at 5 p.m. ET. Before proceeding, I'd like to remind you that during this conference call we will make certain forward-looking statements as defined under the U.S. 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 declaration regarding forward-looking statements is provided in our earnings release transmitted earlier this morning. After the review of our results, we will open this session to questions.
Summarizing the Company's overall performance in the second quarter of 2005 versus second quarter 2004, consolidated net sales increased 21.5% to $1.97 billion. This result reflects strong sales performance by stores opened more than 12 months, acquisitions, and improved Automotive and International segment sales. Consolidated gross margin for the quarter decreased to 42.6% from 44.6% for the same period last year. This decrease resulted primarily from raw material cost increases, most notably TiO2, steel containers, acetones and various solvents that were partially offset by price increases and improved manufacturing absorption. SG&A as a percent of sales decreased to 30.2% from 31.8% in the same period last year reflecting the combined impact of strong sales growth and tight expense control. Interest expense for the quarter increased $4.2 million to $13.6 million as a result of short-term borrowings primarily to fund acquisitions. Other expense net increased by $8.9 million due primarily to an increase in provisions for environmental remediation activities. Income before taxes increased 24.4 million or 12.5% to $219.6 million. Net income increased 21.2% to $153.2 million from $126.4 million in the second quarter of 2004. Diluted net income per common share for the quarter increased 24.1% to $1.08 per share, compared to $0.87 per share in 2004. The increase of $0.21 in the quarter resulted from $0.10 per share improvement in operating performance, $0.06 per share contribution from acquisitions, $0.08 per share from the lower effective tax rate resulting primarily from favorable tax rulings, and $0.03 per share from a reduction in the average number of diluted shares outstanding. These increases were partially offset by a reduction of $0.06 per share due to increased environmental provisions.
In reviewing our performance by segment for second quarter 2005 versus second quarter 2004, I will start with our Paint Stores segment. Sales in our Paint Stores segment increased 26.4% to $1.3 billion. This was due primarily to strong gains in architectural paint sales to contractors, increased sales to do-it-yourself customers, and to stronger industrial maintenance and product finishes sales compared to second quarter last year. Regionally, our Southeastern division led the sales performance followed by Southwestern division, Midwestern division, and Eastern division. Our Chemical Coatings division achieved strong sales growth during the quarter. Comparable store sales or net sales from stores opened more than 12 calendar months increased 14.5% during the second quarter. This figure includes sales of industrial maintenance coatings and product finishes, both of which had favorable comparisons. Operating profit increased 30.3% to 187.4 million from 143.8 million in the second quarter 2004. Operating margin for the quarter improved to 14.3% from 13.9% last year. This improvement resulted from strong sales volume growth, effective SG&A expense control, and higher selling prices that partially offset higher raw material costs. The operations of Duron Incorporated accounted for 2.6% of the segment's operating profit in the quarter. Paint Stores ended the quarter with 3,011 stores in operation in the U.S., Canada, Mexico, Puerto Rico, and the Virgin Islands.
Turning now to the Consumer segment for the second quarter of 2005 versus second quarter 2004, sales increased 11.9% to 14 -- $415.9 million. Acquisitions completed since the second quarter of 2004 accounted for approximately 9.7% of the second quarter 2005 net sales increase. During the second quarter sales increases resulting from new product introductions, paint sales volume growth, and higher selling prices more than offset the elimination of a paint program by one customer and sluggish sales at some of our retail accounts. Operating profit for the Consumer segment declined $5 million to 65 million, compared to second quarter 2004. Acquisitions added $8.5 million to the segment's operating profit. Continuing significant raw material costs increases in the quarter were only partially offset by higher selling prices, tight expense control, and favorable manufacturing absorption related to the increase buy and through the Paint Stores segment.
For our Automotive Finishes segment, sales for the second quarter 2005 increased 9.2% to 143.6 million from 131.5 million in the second quarter of 2004. This increase was primarily due to favorable currency exchange rates that added 3.1% to net sales in the quarter and to higher selling prices. Operating profit for this segment improved 7.6% to $17.5 million, compared to 16.3 million in the second quarter of 2004. The increase in net sales and tight expense control only partially offset the negative impact of significant raw material cost increases on operating margins. In terms of our International Coating segment in the second quarter of 2005, this segment posted a 22.5% increase in net sales to $93.3 million from 76.1 million in the second quarter of 2004. Favorable currency exchange fluctuations …