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Letter to the Editor

Sherwin-Williams Reports Q2 Profit Up 15%

Net income increased $16.3 million, or 14.8 percent, to $126.4 million in the second quarter and $37.0 million, or 26.2 percent, to $177.9 million in the first six months of 2004. Diluted net income per common share for the second quarter of 2004 was $.87 per share compared to $.75 per share in 2003 and $1.22 per share for the first six months versus $.95 per share a year ago.

Net sales in the Paint Stores Segment increased $102.9 million, or 11.0 percent, to $1.04 billion in the quarter and $190.3 million, or 11.5 percent, to $1.84 billion in the first six months versus the comparable periods last year. Continuing strong domestic architectural paint sales to contractor and do-it-yourself (DIY) customers during the second quarter and first six months of 2004 accounted for most of the sales improvement.

The Paint Stores Segment operating profit increased $21.2 million, or 17.3 percent, to $143.8 million during the quarter due primarily to the increased sales volume and strong selling, general and administrative expense control. These efforts more than offset a lower gross margin caused in part by increasing raw material costs. For the first six months, this Segment's operating profit increased $43.8 million, or 28.7 percent, to $196.3 million due primarily to the incremental sales volume and strong expense control.

Net sales of the Consumer Segment increased $25.8 million, or 7.5 percent, to $371.7 million in the second quarter and $76.8 million, or 12.5 percent, to $688.9 million in the first six months versus the comparable periods last year. The second quarter and first half net sales gains were due primarily to continuing strong product programs and acquisitions. Operating profit of this Segment increased $3.6 million, or 5.4 percent, to $70.0 million in the quarter and $13.7 million, or 13.0 percent, to $119.1 million in the first six months.

The Automotive Finishes Segment's net sales increased $10.2 million, or 8.4 percent, to $131.5 million in the second quarter and $24.1 million, or 10.6 percent, to $251.8 million in the first six months versus the comparable periods last year. The positive effect of favorable currency exchange fluctuations relative to last year increased net sales of this Segment by 0.1 percent in the second quarter and by 1.5 percent for the first six months of 2004. The net sales gains were primarily due to new product introductions, improving international sales and the April 2004 acquisition of a majority interest in a Chinese automotive coatings company.

Operating profit in this Segment improved $0.9 million, or 6.0 percent, to $16.3 million in the second quarter and $2.8 million, or 11.0 percent, to $28.2 million in the first six months. This Segment's operating profit in the second quarter improved primarily due to the sales increase, sales of higher margin new products, improvements in the automotive international businesses and inclusion of the Chinese acquisition. These benefits more than offset the effect of increasing raw material costs. For the first six months, operating profit of this Segment improved for the same reasons as the second quarter although the benefits were not as negatively impacted by raw material cost increases.

Net sales in the International Coatings Segment, stated in U.S. dollars, increased $7.3 million, or 10.6 percent, to $76.1 million in the second quarter and $25.9 million, or 20.4 percent, to $152.5 million in the first six months versus the comparable periods last year. Favorable currency exchange fluctuations relative to last year increased net sales for this Segment in U. S. dollars by 6.9 percent in the second quarter and 13.2 percent in the first six months. A highly competitive market continued to constrain sales in South America while sales in the U.K. remained strong.

Second quarter operating profit for the Segment in U.S. dollars was $1.3 million compared to $0.6 million a year ago due primarily to volume increases and expense control. For the first six months, the Segment realized an operating profit of $6.0 million compared to $0.4 million in the first six months of 2003. The first half increase was due primarily to the net sales gain, operating efficiencies related to additional manufacturing volume, tight expense control and favorable currency exchange rates.

The company purchased 1,500,000 shares of its common stock during the second quarter of 2004 bringing the total purchased to 3,350,000 shares for the first six months. The company had remaining authorization at June 30, 2004 to purchase 13,673,000 shares. Commenting on operating results for the second quarter and first six months of 2004, Christopher M. Connor, Chairman and Chief Executive Officer, said, "We continue to be encouraged by the strength of the Paint Stores Segment's architectural paint sales. We are also encouraged that our product finishes and industrial marine coatings businesses continue to improve.

"In the Consumer Segment, we believe that many of our retail customers experienced moderate paint demand due to weather-related issues that impacted our second quarter and year-to-date sales to those retailers. The cost containment efforts implemented over the past few years helped the Consumer Segment improve their operating profit in the second quarter this year in spite of increasing raw material costs.

"Domestically, our Automotive Finishes Segment's sales continue to grow in the collision market through new product introductions and the opening of new branches. We are encouraged by the improving operations of the international portions of our Automotive Finishes Segment. In the International Coatings Segment, we are pleased with the operational performance of our U.K. subsidiary. We are encouraged by the sales progress of our South American subsidiaries, stated in local currencies, and our local management teams' initiation of actions to improve profitability.

"We expect that achieving the same level of year-over-year sales and profit comparisons as the Company did in the first and second quarters of 2004 will become more challenging in the third and fourth quarters of the year due to the improved level of sales and profits experienced in the last half of 2003. We are launching new products, actively pursuing new customers, opening stores, enhancing the shopping experience in our stores and increasing the productivity of our operations to improve sales and operating income in all operating segments of our business. We anticipate that achieving these business goals will result in increased third quarter net sales in the high single digits versus last year's third quarter. With net sales increases at that level, we expect diluted net income per common share in the third quarter will be in the range of $.88 to $.93 per share compared to $.82 per share earned in last year's third quarter. We commented on April 29, 2004 that we expected our annual net sales increase for 2004 would be up in the mid-to-high single digits over 2003 and diluted net income per common share for 2004 to be in the range of $2.54 to $2.62 per share. We are raising our expectations of the annual net sales increase to the high single digits for 2004. With the increased sales expectations, we are also raising our expectations of diluted net income per common share for the year 2004 to a range of $2.58 to $2.66 per share compared to $2.26 per share earned in 2003."

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