Friday, May 25, 2007

Notes From Sherwin Williams (SHW) Investors Conference

On May 22nd. Sherwin Williams (SHW) held an investor conference at the company's headquarters.

Lead Paint was the first topic: Inside Council Dale Normington addressed the gathering after CEO Chris Connor stated, "While Rhode Island has been a little bit of a hiccup, we think there is a light at the end of the tunnel"

Mr. Normington:

Rhode Island:
"It would seem inappropriate to say, but I do take great pleasure in announcing that after almost 8 years we finally get this out of the hands of the judge who was handling this in Rhode Island and to the Supreme Court. There is no question the court will hear our appeal and that will happen in the next year." (8 to 10 months)

The appeal will be five parts running concurrently:
1- Contingent fee
2- State is appealing win Arco got
3- state will appeal contempt citation against RI AG
4- Appeal of legal issues by Sherwin
5- Appeal of trial issues by Sherwin

"For those who saw the trial and seen the judge's opinions", according to Normington there are a "plethora of issues" both legally (market share, product identification, contingency fee, public nuisance) and from the trial (jury instructions, issues with witnesses, evidentiary rulings and opening and closing arguments and more) to address.

Issue of remedy(Special Master). "There is no plan in place and there will not be one for quite a while." The scope of any remedy "I can assure you will be thoroughly debated"

Two full days of oral arguments are expected in Q1 of next year and he expects a decision before they adjourn in June 2008.

A "win" is a new trial or a reversal based on legal issues of allowing trial to go forward to begin with.

"Sherwin Williams currently has third party action against landlords and judge has not announced when those trials will go forward"

"Localities heeded the siren call of Motely Rice"

Asking for a Federal Constitutional review of Trade Association (LIA) involvement being a function of free speech. Sherwin is claiming free speech activities cannot be a basis for liability.

"Ohio product liability law prohibits prosecution without product identification and there is no product identification available in lead paint cases" Meaning there is no way to identify the maker of the paint that may have poisoned children. Localities have argued this law does not apply here, Sherwin obviously feels it does. Common sense would lead one to believe it does also.

Federal judge in Ohio will review contingency fee legality. A decision is expected in 30 days.

"If Federal judge rules contingency fee illegal under federal constitutional grounds, we can argue that ruling enjoins all localities from using contingency fee council"

"Judge ruled cities cannot use contingency fee council. Localities may not be able to go forward without contingency fee council"

"Cities have requested a stay pending review". Judge will rule this week or next on stay request.

The Business:
CEO Connor: "We have lots of opportunities ahead of us". Perhaps giving insight into future plans for Sherwin, Connor then said, "Our model transports to other regions of the world."

Paint store expansion has been "very successful" and will continue "for the better part of the decade".

My takeaway:
Official at Sherwin are actually relieved to be in the appellate process and seem very confident in the direction the lead pain litigation is headed. Why? I guess it may be because when all is said and done, they did nothing wrong and eventually truth and what is right always wins. It may not be easy or quick, but it happens.

The tone of the business talk was one of expansion. Whether it be through the acquisitions of more local dealers to expand the paint stores or international to open more markets, Sherwin is not sitting still. While not specifically stated, it is clear that Sherwin is intent on being the #1 paint and coatings company in the world. They plan to "aggressively pursue" expansion in China and India, markets where the current coatings landscape in very "fragmented" and ripe for consolidation. According to Connor, the companies affirmation of guidance and Q1 share buybacks should illustrate their confidence in both the results and the value of shares.

This is a very exciting time to be a Sherwin shareholder. The company is on the cusp of finally ridding itself of the lead paint albatross and is correctly looking towards the future. I think one will look back at this period of time several years from now and view it as the seminal point in which Sherwin vaulted itself from a huge regional to a huge worldwide presence.


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