宣偉 (SHW) 2010 Q1 法說會逐字稿

Good morning. Thank you for joining Sherwin-Williams' company review of first quarter 2010 results and expectations for the second quarter and full year. With us on today's call are Chris Connor, Chairman and CEO, Sean Hennessy, Senior VP, Finance and CFO, John Ault, Vice President of Corporate Comptroller and Bob Wells, Senior Vice President of Corporate Communications. This conference call is being webcast simultaneously in listen-only mode by v call via the Internet at www.sherwin.com . And archived replay of this webcast will be available at www.sherwin.com beginning approximately two hours after this conference call has concluded and will be available until Wednesday, May 12 at 5:00 P.M., eastern standard time.

This conference call includes certain forward-looking statements as defined under US 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 statements whether as a result of new information, future events or otherwise. A full declaration regarding forward looking statements is provided in the Company's earnings release transmitted earlier this morning. After the review of first quarter results, we will open the session to questions. I will now turn the call over to Bob

Thanks, Jackie. In order to allow for more time for questions, we've provided balance sheet items and other selected information on our web site, www.sherwin.com under investor relations first quarter press release. Summarizing overall company performance for the first quarter 2010 versus first quarter 2009, consolidated net sales increased 1% to $1.565 billion, due primarily to favorable foreign currency translation rate changes partially offset by a decline in domestic paint sales volume.

Consolidated gross profit dollars increased $11.4 million for the quarter, to $692 million. Gross margin increased 30 basis points to 44.2% of sales from 43.9% in the first quarter last year. Selling, general and administrative expenses for the quarter were essentially flat compared to first quarter 2009 at $612.9 million. As a percent of sales, SG&A decreased to 39.1% in the first quarter this year from 39.3% last year. Interest expense decreased $600,000 compared to first quarter last year.

Consolidated profit before taxes in the quarter increased $8.6 million or 16.8% to $59.5 million. Our effective tax rate in the first quarter this year was 45.2%, compared to 26.7% in the first quarter of 2009. The first quarter rate this year reflects a one time increase in income tax expense of $11.4 million related to the Healthcare and Education Reconciliation Act passed by Congress in March of this year which raised our effective rate by 19.2% for the quarter. For the full year 2010, we expect our effective tax rate will be approximately 35%, including the effect of the healthcare legislation. Last year's rate was 30%.

Consolidated net income decreased $4.7 million to $32.6 million from $37.3 million in the first quarter of 2009 due to the healthcare tax effect. Net income as percent of sales was 2.1% compared to 2.4% in the first quarter last year. Diluted net income per common share for the quarter decreased to $0.30 per share from $0.32 per share in 2009. The tax impact of the healthcare legislation reduced diluted net income per common share by $0.10 in the quarter.

Looking at our results by operating segment. Sales for our paint stores group in the first quarter 2010 decreased 5.3% to 850.9 million dollars. Comparable store sales or sales by stores open more than 12 calendar months decline 5.4%. The decrease of sales in the segment was due primarily to a decline in paint sales by volume and nonpaint sales volume.

Regionally in the first quarter, our midwest division led all divisions followed by eastern division, southeastern division and southwestern division. Segment profit for the group decreased 15.6% to $47.8 million in the first quarter 2010, due primarily to lower volume. Segment operating margin decreased to 5.6% from 6.3% in the first quarter last year, due primarily to lower volume and raw material cost increases that were partially offset by deductions in SG&A.

Turning to our consumer group. Sales in the first quarter increased 1.4% to $292.1 million. The increase was due primarily to new product introductions, partially offset by soft DIY demand at some retail customers. Segment profit for the consumer group increased 24% in the quarter to $37.5 million. Segment profit as a percent of external sales, increased to 12.8% from 10.5% in the same period last year. The improvement in operating margin was due primarily to continued stringent expense control and cost reductions related to facility closings completed during the past year that were partially offset by raw material cost increases and reduced fixed cost absorption from lower manufacturing and distribution volume.

For our global finishes group, sales in US dollars increased 16.2% to $421.1 million in the quarter. Due primarily to higher paint sales volume and favorable currency translation rate changes. In the quarter, favorable currency translation rate changes increased net sales for the group by 10.3%.

First quarter segment profit increased 333% to $23 million due to higher sales volume and good expense control. Foreign currency rate changes reduced segment profit by $1.1 million. Segment profit as a percent of sales increased to 5.5% from 1.5% in the same period last year. The improvement in operating margin was due primarily to improved operating efficiencies and tight expense control that were partially offset by unfavorable foreign currency rate changes.

Turning to the balance sheet. Our total debt on March 31, 2010, was $1,041 billion including total short term borrowing of $245 million. Total debt on March 31, 2009 was $1.08 billion.

Our cash balance at the end of the quarter was $91.2 million compared to $42.2 million at the end of first quarter '09. Total borrowings to capitalization were 41% at the end of the quarter versus 40.5% at the end of first quarter 2009. Long-term debt to capitalization was 34.7% at the end of the first quarter this year, compared to 16.5% last year, due to the issuance of $500 million in 3.08% senior note used to retire short-term debt. In the first quarter 2010, the company purchased 400,000 shares of its common stock in the open market. At March 31, 2010, the company had remaining authorization to purchase 10.35 million shares of its common stock.

Also in the first quarter 2010, we spent $25.4 million on capital expenditures. Depreciation expense was $33.1 million and amortization expense was $6.7 million. For the full year 2010, we anticipate capital expenditures for the year will be approximately $100 million to $115 million. Depreciation will be about $147 million and amortization will be approximately $26 million. I'll conclude my remarks on the quarter with a brief update on the status of our lead pigment litigation.

In California, the State Supreme Court will decide whether it is permissible for cities and counties to retain contingent fee counsel to aid them in their suit against former manufacturers of lead pigment. Briefing in this case is completed. Oral argument is now scheduled for May 5, 2010, with a decision most likely coming in the summer of 2010. In the Gains case, a single Plaintiff personal injury suit was tried to a jury in Jefferson County, Mississippi, beginning in June of 2009. The jury returned a verdict in favor of the Plaintiff.

The company has filed a notice of appeal with the Mississippi Supreme Court as we believe a number of significant errors were committed during the trial. Briefing has now begun with our opening brief due by May 27. Further briefing by the parties will continue into the fall. No hearing date has been set yet in that case. A decision is not expected until at least late 2010 or early 2011. That concludes our review of the results for first quarter 2010, so I'll turn the call over to Chris Connor who will make some general comments and highlight our expectations for the second quarter and full year. Chris?

Thank you, Bob. And good morning, everybody. Thanks for joining us today. First quarter of 2010 got off to a pretty rough start. Two months into the year our sales were lagging behind both budget and last year and our profit was tracking well short of plan.

Judging by our first quarter guidance, we expected a slow start to the year. In January and February, we're tracking in line with that guidance. Then in March, the storm clouds parted both literally and figuratively and the pace of business began to improve. Whether as a result of pent up demand from January and February, unseasonably warm March weather or more fundamental improvement in inmarket demand in some segments, our sales in March closed a gap from the previous two months and we finished the quarter essentially on budget and on plan.

The sales momentum we saw in March was absolutely encouraging and the fact it appears to be carrying over into April is even more encouraging. Not surprisingly, there was considerable disparity in the strength of the March rebound across market segments, distribution channels and geographies. In North America for example, the most favorable trends were in the residential and commercial repaint markets, although we did see some improvement in new residential business for the first time in many years. DIY sales to our own stores and most of our external retail partners turned positive in March after very soft months in January and February.

The rebound in our global finishes group business was more broad based with sales growth across most product lines and in most geographic markets. If there's a downside to the strengthening industry demand it's that it will likely keep pressure on the raw material supply chain. Cost pressure caused by the current tight supply of propilean, ethylene, acrylic acid, titanium dioxide and other raw materials is not likely to abate until the second half of the year.

If you take a look at a year-over-year raw material cost comparison by quarter, input costs troughed in the second quarter of last year, 2009, then rose steadily through the second half. We believe they're likely to peak in the second quarter of this year then ease somewhat in the second half. If this outlook is correct, our most difficult comparisons are likely to be in the second quarter. At our year end 2009 conference call, we predicted that the coatings industry would experience annualized year-over-year raw material price inflation in the low to mid-single digits in 2010. Given the recent pricing actions by most of the major raw material suppliers, we now believe a mid to high single digit percent increase is a more realistic expectation.

Despite this change, we think we're in good position to continue to improve the profitability of the company. Based on our initial raw material outlook, we took only limited pricing action in January and February on some of our industrial product lines. In March, we revised our outlook for raw materials and at the same time announced corporate price increases across most of our architectural lines effective April 1 to help mitigate the mounting cost pressures.

Assuming normal implementation of these price increases, combined with our efforts to reduce manufacturing and distribution costs and increase our productivity, the impact of raw material inflation over the course of the year should be controlled. In the first quarter, we continue to invest in our controlled distribution platform. Our paint stores group added several new stores bringing total store count in the US, Canada and the Caribbean to 3,357 locations compared to 3,339 one year ago. Our plan continues to call for paint stores group to add approximately 40 to 50 new store locations during the year and significantly reduce the rate of redundant store closings.

We made further progress in our management of working capital, reducing our working capital ratio to 12.4% of sales from 12.8% of sales in the first quarter of last year. Additionally, during the quarter, we used the company's cash to buy back 400,000 shares of our stock and we increased the dividend rate to $0.36 per share from $0.355 per share last year.

Our balance sheet remains fiscally sound and capable of financing our planned business operations and growth well into the foreseeable future. Effective April 1, we completed the acquisition of Sayolat (phonetic) Industrial Wood Coatings from Arch Chemicals, headquartered in Peamore, Italy. Sayolat (phonetic) is one of the largest manufactures of wood coatings in Europe and technology leader in polyurethane, water, and UV coatings for the joinerring, furniture and cabinets industry. The company operates several manufacturing sites across western Europe along with a comprehensive network of sales, technical and distributor representatives serving clients in Asia and the United States.

Net sales for Sayolat (phonetic) in 2009 were $147 million. Looking ahead to the second quarter, we anticipate that our consolidated net sales will increase in percentage terms in the high single digits compared to last year's second quarter.

With sales at that level, we expect diluted net income for common share the quarter to be in the range of $1.55 to $1.70 per share compared to $1.35 per share in the second quarter of 2009. For the full year 2010, we are increasing our sales guidance range to mid to high single digit percentage growth over 2009 compared to our previous range of low to mid-single digits. With annual sales at this new level, we've raised our expectation for diluted net income for common share for 2010 to a range of $4.20 to $4.60 per share including the unfavorable tax impact of healthcare legislation compared to $3.78 per share earned in 2009.

Before I open the call to questions, I'd like to take a moment to acknowledge the contributions of a valued member of our management team who's participating in his last earnings call today. John Ault, our Vice President and Corporate Controller is retiring after an outstanding 34-year career with the company. Now John usually doesn't say much on these calls but for many years he's had a strong voice within the Company and with our Board of Directors. He plays a supporting role in our external communications but internally, he has always taken the lead to ensure the timeliness and integrity of our financial statements. Oversee the Company's compliance and its ever changing regulatory environment and safeguard our reputation with the financial community.

John is humble, good natured and unassuming. He's also smart, meticulous and unflappable, which in this day and age makes him a pretty good guy for a CEO and CFO to have around. For the past eight months, John has been grooming one of our up and coming financial executives, Al Mistishen (phonetic) to assume the responsibilities of Corporate Controller.

As anyone who knows John would expect, he has done a commendable job and Al is well prepared for the transition. He has big shoes to fill. I want to take this opportunity to thank John on behalf of our company and it's shareholders for his many contributions over the past 34 years. John may be leaving us, but the influence he's had on this company will benefit our shareholders for years to come. Thanks, John. Again, at this time, we'd like to thank all of you for joining us, and we're happy to take your questions.

Thank you. We will now be conducting a question and answer session. (Operator Instructions) One moment, please, while we poll for questions. Thank you. Our first question's coming from Kevin McCarthy at VOAML

Yes, good morning. How are you?

Good morning, Kevin.

If I look at the comparable store's decline of 5.4% in paint stores, is there a net weather impact in there or not when you consider the storms that start the quarter and the rebound that you referenced in March? What is your feeling there?

Yes, Kevin, you know, we're pretty consistent about not really pointing to weather is an indicator of any business trends. We commented that March was a much better weather month. February and January were worse. We would expect there was very little weather in the first quarter then previous March's. Certainly January and February were worse. So all in all there was very little weather in the first quarter.

Okay. And then on the price increases, would you quantify the magnitude of the increases in the paint store segment and then when we net that out, you know, I guess on a company-wide basis versus the raw material inflation that you referenced, Chris, what is your expectation for gross margin here as the year progresses?

The price increases, Kevin, that we announced through our stores group were in the range of 3% to 5% depending on customer segment and product skew. None of that was in the first quarter, and we're just now beginning to see the effects of that roll out. Our expectations are that the pricing activities will behave as they have historically in the past. We would expect to have, you know, some significant percentage of that realized in the next couple of quarters as in over the remainder of the 12 to 18 months to roll this out. We'd probably get up to 75% implementation. We don't give guidance per line on the P & L throughout the course of the year, so there's not a gross margin guidance number that we're giving at this point in time. I think it's baked into the overall earnings guidance that we're providing.

Okay and then final question if I may. In the consumer segment, you referenced some new product introductions. What were the size of those, and should we expect any dropoff in the second quarter, you know, following that launch?

Kevin, there was a broad variety of products launched. There were no standouts in terms of major contributors to their volume growth. Typically in a year, they'll introduce a pretty broad range of new products.

So you shouldn't correspondingly see the dropoff of that. These were not huge selling items.

Nothing lumpy in there with, you know, initial stocking of the channel. Okay. Thank you.

Thanks, Kevin.

Thank you. Your next question is coming from PJ Juvekar of Citigroup.

Yes, hi. Good morning.

Good morning, P J.

Chris, despite store business remaining weak, you're adding new stores. Can you tell us where are these stores being added? Are these new geographies that you're adding?

Yes, P J. The new markets that we'll be adding stores in are really broad based across the whole store's platform, which would include United States, Canada and the Caribbean. As you know, we've shared with the investment community that we have opportunities in Canada and the western half of the United States for a little bit more rapid expansion and these new stores are coming in that area as well. And then we also have every market still has still an opportunity. So I think the broad base of store growth throughout the course of this year would be throughout all those geographies.

Okay. And when contractors come to your stores, they typically have an account and you extend them credit. Are you seeing any credit growth to contractors?

Yes, we are. If you look at our DSO was very good in the first quarter, but you can see the absolute dollars of our receivables were also higher. So we are seeing activity.

Okay. And you had talked about a specialty focusing on foreclosures. Selling paint to the new foreclosed homes. Can you give us some update on that activity in that group? Thank you.

Sure. I think a lot of that effort again is through our storage group. And particularly as the new residential market has softened, we've been able to shift some of our resources and direct our sales force and others to focus on calling those contractors to do more of the residential repaint which would include some of the foreclosure activity. I think in my comments, PJ, I indicated that that was one of the strong areas for the Company in the quarter and we saw a nice lift in that in space. I think we're beginning to make big progress there.

Thank you.

Thanks, P J.

Thank you. Your next question's coming from Dennis McGill of Zellman and Associates.

Good morning, everybody.

Good morning, Dennis.

Just want to ask a couple questions on market share and your outlook on the revenue side. Realizing you have a different exposure to the end channel than what you might see from some of the other competitors. Wondering when you think about sort of the recessionary impact of a shift from professional contractor to DIY. Are you seeing that trend moderate at all or at least stabilize recently?

Yes. It's real early to make that call, Dennis. I think we have indicated to the investment community that the updated data points from the end of 2009 were the contractors account for 55% of architectural purposes and the diy market, 45%. That trended down a few more points towards the diy again in '09 from its '08 levels. Time will tell whether that's the talk and starts to move back up or whether there's more to come. I think our expectations are that given the significant amount of new construction lack in the marketplace that's a pretty normalized expectation of how that volume would shift and some of that new construction comes back, we'd expect to see this, you know, trend back up towards its normal 60/40 ratio in favor of the contractor. You know, early signs, and these are very early signs as we indicated in the month of March and into April, the contractor segment as Sean commented in the receivables market is really starting to pick up. Time will tell and we'll share that number with you at the end of the year when we have it.

Is there any way to get a sense on the contractors' side if nonresidential or commercial maintenance is picking up at all? We know the new construction site's going to be down for a while but have you been able to piece through from your customers anything happening on the maintenance side?

Hopefully,Dennis, and when we talk about the residential repaint and the commercial repaint segments being up in the first quarter, that's exactly what we're talking about.

Sorry, I missed that. And when you think about your guidance, one of the moving variables is obviously the acquisition closing and the benefit you'll get from that. Can you maybe talk about just organically how much better you see revenue this year relative to a couple of months ago?

Well I think you know for the full year, we'll tell you I'd probably do it in reverse instead of going organic, you know what the total guidance is. And if you take a look at the acquisition being an annual $147 million that Chris mentioned. We only have it for three quarters, so I would say if you're looking around $115 million to $120 million, we'll hit our P & L from now till the end of the year. In the third -- in the second quarter, it's going to be a full impact for the quarter. For the year it's going to be three quarters versus a full year. So it will be about 1.5% to 1.7%. For the full year and probably just slightly over 2% for the second quarter, you back that out of our guidance and I would tell that you even the full year when we were at low to mid adding in 1.7%. Now we're at mid to high so the organic growth had to be stronger. And I think that's pretty good.

Okay. Look forward to seeing you guys in a few weeks.

Thanks, Dennis.

Thank you. Your next question is coming from Jeff Zekauskas with JPMorgan.

Hi, Good morning.

Hi, Jeff.

Just, first question is, in terms of your share repurchase intentions, your shares have moved up nicely and you bought 400,000 shares in the quarter. Have you bought any since the quarter closed? And, you know, is this likely to be a period where your share repurchase activity falls off?

You know, Jeff, the only way we can buy stock between the end of the year and prior to when we release earnings and actually three days after we release earnings, we're locked out. We consider ourselves blacked out just like an insider would be. The only time we do is occasionally when we think something abnormal's going to occur, we put in a 10b51 plan that allows us. So therefore, no, we haven't bought any stock between month and now. I would tell you that our stock repurchase when you look at this price, we still think that when we take a look at it, the stock we've purchased over the last ten years and prior to that has all been accretive. We think that we buy the stock and a long-term basis and I guess I would just say last year in the first quarter we bought 500,000 shares. This year, we bought 400,000. At the end of the year, we bought 9 million shares. So as we produce cash throughout the year, we're going to be looking for acquisitions just like last year. Void of acquisitions, we're going to be buying stock. The one thing I will tell you is there's a remote chance that we will have cash on our bill sheet at the end of the year in a greater amount than we do today at last year end.

That's very clear. Secondly in terms of the increase in your sales guidance for the year, you know, from low to mid to mid to high, you know, could you break that up into acquisition price and volume?

Well, I think when you take a look at it, the acquisition will be between 1.5% and 1.7% in both locations. And I think price, you know when it comes to price and volume, I think Chris said it. We do expect a little bit more price than we did, but we still expect more volume for the year than we did at the last call. But we don't really have a break out for you.

It just seems to me that if your average prices are going up three to five or even half of three to five and you've got one to two and acquisitions, then it would seem that your volume expectations would be unchanged insofar as you want to make these calculations consistent or is it that you're saying that, you know it's mid to high for the year but maybe you can do better than that.

I think first of all on the pricing, let's remember that it takes us a while to get this in. We're talking about an architectural price increase. On the stores, the other price increases that were effective January 1 were already baked in. I think your estimate about what the price impact's going to be on the year is a little high. We definitely moved our volume expectations up and providing this new guidance.

Lastly, were your prices on average up for the quarter or down or flat?

Up slightly. Chris mentioned we did raise prices on January 1 on some products but when you take a look at it, very little.

Thank you very much.

Sergey Vasnetsov of Barclays Capital.

Good morning.

Good morning, Sergey.

A lot of questions have been asked already, what's the view on acquisitions in the US and specifically in China?

Yes, Sergey, we don't comment on any prospective deals we may be working on. I think we have shared with the investment community that we have an appetite for expanding our industrial products primarily primarily outside of North America. That would include Asia Pacific. I would remind the investors that the Asyerlack industrial -- the Sayerlack acquisition and the extent that there are more bolt-ons in that part of the world, we would be interested in that part of it.

What's your currency on the US real estate market?

Not good. New construction is essentially come to a standstill. We don't think there's a major mall under construction anywhere in the United States. Occupancy rates are not good, either, which limits improvement and build out types of expenditures that we would see. I think the guidance that we've been giving throughout the last three or four quarters has been the declining commercial market that we saw last year, I think, was off in the high 40% is likely to take another turn down in 2010. So all the guidance we're giving is predicated on a very soft commercial market for this year. Both new and repaint.

Okay. Thank you.

Thanks, Sergey.

Thank you. Our next question's coming from Chuck Cerankosky.

Good morning.

Good morning, Chuck.

Best of luck to John Ault as he retire from Sherwin. Looking at your capital, do you think you are going to continue to be able to manage that number down, that ratio down as business improves or when do we another way to ask it when do we expect it to start absorbing a little bit of cash?

We expect it over the in e two quarters to absorb cash. I would say that it will be a use of cash in the fourth quarter but not as great as it has in the fourth quarter. We still expect it to be a lightly use of cash.

Thank you. Chris, in looking at some of your industrial OEM and markets, can you give us a little detail on those?

Yes. I think on the OEM side, chuck that's looking a little bit better. We saw a little less in that business in the first quarter and the prospects in meeting with these customers is they're feeling much better about the coming year. Protective many Marine which some of the industrial markets for us as well also saw a little bit of a lift on the repaint cycle, so those markets where people are required to maintain properties as we've talked about in the past is not an infinite ability to put that off. So that's coming back a little bit as well. The new components on the industrial commercial side as we just talked with Sergey's comments are hurting that business a little. All in, both the protective and Marine OEM finishes are looking better now than they were, say, three, four months ago.

Finally, you talk about opening 40 to 50 new paint stores this year. What's the net number that you're looking at for the year? Is it any better? I don't know if you disclosed what the closures were going to be. Sort of what are you looking for in fiscal '10?

There's going to be a dozen closures plus or minus maybe a little higher than that number. So the net should be somewhere in the 30 to 45 range. It's a hard number to peg when you are closing stores because you have lease issues to get through as well, but I think that's pretty much where we're going to end up.

All right. Thank you. Great quarter.

Okay, Chuck.

Thank you. Your next question's coming from Don Carson of UBS.

Good morning.

Good morning. You're more positive on volumes now. I know you talked in the past how you think we kept a small architectural volumes. Do you think we can get up to 600 million gallons? As commercial's still a dreg, you see it contributing to a positive next year. What do you now think of as normalized volume for the US architectural market and do we get there in 2011 or is that more of a 2012 event?

Yes, Don, I think the 600 million gallons for the year might be a tad aggressive from what wear thinking. The year ended at 550 in a few. A normalized year would be 1% to 2% gallon increase. So if we run it at 3% to 4% or even a 5% gallon increase that would be a nice rebound. That would take us about halfway from 550 to 600. So that number seems a little bit of a stretch to get there. And don't forget that, you know, when we're having a normalized year of 1 to 2% that's what the commercial new construction market behaving normally, which it's not. The rebound on the repaint cycles will lift it higher than the normal run rate and 600 seems a little bit of a far out reach at this point.

How about next year? When I say normalized it's not the increase but sort of if we get back to more normal levels of demand.

I think the market's got to run at a higher rate for a couple of years just to get back on normal footing. So if we ran it at 3%, 4% down growth this year, I think we could expect to do that again in '11, and maybe into '12 or '13. The housing market needs to come back up to north of a million new starts to sustain what our country will need. Commercial construction won't stay down forever like it is today so I think there's a couple good years here that we could be heading into.

And a question on operating leverage with your new lower cost structure. What should we think of the EPS benefit of each 1% increase in volumes?

You know, Don, we don't really share that, but I would just probably guide to you take a look at what happened between 2002 and 2007. In the short term, we actually think the flow through and EPS growth would be slightly higher than what we were able to do in that time period.

Thank you.

Thanks, Don.

Thank you. Our next question is coming from Dimitri Silverstein of Longbow Research.

I'd like to follow up with higher expectations in interprets of volume guidance excluding the acquisitions. You know, you're looking at about a 1% growth, a little bit over a 1% in the consumer business than you actually saw mid-single digit decline in the store business. There was a lot of catch up in March that happened. Is it the funds that's receiving coming out of March and April that you think will be sustainable going forward that gives you confidence to expect to actually raise your volume expectations going forward? And your earnings increase expectations,that also driven entirely by volume?

Dimitri, on the sales number, the two factors that are causing us to raise this, the first one we haven't talked mowch about this yet on the calls, our global group which had aer terrific quarter for us. Given the visibility we have into those businesses going forward and we've significantly raised our expectations of that team's ability to deliver improved revenue. Likewise on the stores, and you point out a 5% decline, but you know, the comparisons ease for this group and we start to see contractors ramping up and the businesses that were bidding on and providing coatings for at this moment, we've taken a significant -- we've taken a tick up in our expectations of what's going to come out of that storage business. Turning to the earnings number, Sean, maybe you want to comment on that.

When we look at the flow through percentages and what we've been able to do over the years and then plus what we did to our company to right size the company by closing facilities and closing stores. When you look at the incremental gallons that Chris just mentioned, we feel we're going to do a nice job of bringing those to the bottom line.

Certainly if you can continue to manage doing what you are doing in the consumer group where the revenues are up what about $4 million and the profit was up $7 million, that's a pretty good leverage. On the global group, just to get a little bit better -- is that the portion of better or is it the Marine and maintenance portion of the business that are doing better?

All those segments were better. The real driver was the architectural businesses throughout Latin America.

Okay. All right. Thank you.

Thanks, Dimitri.

Thank you. Our next question is coming from John Roberts of Buckingham Research.

Good morning, guys.

Good morning, John.

Do you think the new store openings will accelerate? You're opening roughly the same number as last year which is a low level. The closings are simply rolling off, aren't they, because you haven't made any major acquisitions of store change in a while.

That's correct. These are still some of the earlier part of the last decade. The reason the tail on that is a number of these locations require in their lease language that are not allowed to close. So as the leases expire, we're able to get out of the last few stores. I don't think there's a lot of upside of the gross store numbers that we're talking about. It takes a period of time to negotiation and then the permitting and buildout, et cetera. We've got a good visibility into what that number's going to be by year end. I think our expectations are that for the year, that's the right number. And we'll probably be ramping up slightly into the '11, '12 period as the market continues to rebound.

Secondly, I think it used to be that 90% of paint demand was paint on paint. Right just for repaint and maintenance activities. The new construction part just got to be a bigger part and obviously got to be much more volatile. Is the turn around just simply characterized as the new construction now got small enough again so that maintenance is taken over as a driver?

Yes, that's clearly what we're looking at in this environment right now, John. We think actually new construction has shrunk the below kind of a more of a sustainable run rate. It's typically in the 15% range, it actually got north of 20% and up into the mid-20's. And now we think it's running into about 10% to 11%. So we're probably below where we ought to be, but clearly, repaint becomes a bigger portion of the market. And that will be the driver this year.

Thank you.

Thank you.

Thank you. Or next question is coming from Eric Bosshard of Cleveland Research.

Good morning.

Good morning, Eric.

In terms of the store business, I think the margins expanded in the second half of last year with down double digit comps. I know the first quarter of the margins were actually down on less worse comps. Can you help explain if there's anything to learn or understand better in terms of why the margins got a little bit worse while the sales got a little bit better in the storage business?

The only thing is that really we're closer to the break-even, Eric. Years ago, when we had sales at one time, I'll tell you, if you go back 15 years, our stores group had negative margins in the first quarter. Ann we used to lose money in the first quarter. And sales continue to grow and we went way past the break-even point for each quarter. We had nice profit in the first quarter. But with the volume, you know, curve that we have, even with the negative 5.4, which is closer to to the break-even point than we were a year ago and we're well below where we were four years ago.

Okay. Secondly, in terms of the 2Q guidance, I think you commented that the input costs compare sounds like it's probably the worse 2Q and the stage unit of pricing starts in Q2 but obviously grows through the year. And so what are the factors that allow you to give guidance for an impressive amount of earnings growth in the second quarter considering the price cost comparison seems like it'll be the most difficult in 2 Q.

Yes, and I think if you'll notice, we really didn't give you any type of a range on sales. But we did give you a range with this volume and, you know, even with the acquisition with the volume, the amount of price we get there. We have a $0.15 differential in the range really dealing with mostly the gross margin. So, but even if we look at the low end of the gross margin, we feel we're at the low end of the range. So that gives us a confidence to put the range out there that we did.

I think you're also seeing, too, Eric, the leverage that promised the street on the back half of all of the work to right size the organization. So the plant closings, the distribution center closings, the store closings, the head count reductions, all those things are in now and starting to show the kind of benefit that we had anticipated.

Historically it's taking maybe a year to offset higher costs to stabilize gross margin. Is there a reason why that would happen slower or fast their time?

I would tell you that, you know this one I think is going to act pretty much the same as in prior years. You know, the interesting thing is I will tell you in the one thing that's a little different this time is the staging. It used to be we with under all segments and different product lines, we were consistent or in a very small band of when we put them in. Chris did mention we did take some products up January 1st. So, you know, but most of them April 1. So we'll see how that affects it.

Thank you.

Thanks, Eric.

Thank you. Our next question's coming from Steve O'Neil, Hilliard Lyons.

Good morning.

Good morning, Steve.

You mentioned Latin America. I wondered if you could detail the performance of any of your other international markets?

Well as you know, the company does not have a significant nondomestic revenue stream maybe 15% of our revenues and Latin America accounts for two-thirds of that. Our Chinese business would primarily be servicing the OEM customers. We discussed that on one of the earlier questions that that business is starting to pick up. But again, it's a very small base, not a lot to move the needle. We have a small architectural business in India. That, too, is doing well. So really, as we said across all segments and geographies in that global group, they're moving in the right direction.

And then secondly, what kind of factors give you confidence that the raw material pressures will peak at mid-year?

It's, well, a couple things, Steve. One is that a lot of the pressure we're seeing right now is due to tightness of supply and some commodities that we think we understand that the supply's going to get better as we go through the years. So that's the principal driver. You know, it's talking to our suppliers.

I just wonder you see a rebound in volume, you know, translating into increase and demand for the raw materials. I didn't know if that would offset some of that.

You know. there certainly will be an increase in market volume as Chris indicated earlier. It's going to probably be very modest so the pressure will be light.

Okay. All right. Thank you.

Thanks, Steve.

Thank you. Your next question's coming from Chuck Cerankosky with NorthCoast Research.

Chris, I had a follow-up. I was wondering if you could comment on how some of the store brands are doing that you service or supply out of the consumer segment?

Yes. The quarter for those guys was relatively flat. We made the comment that the number of retailers, you know, was kind of a mixed bag. Some were doing okay. Some where are struggling a little bit. You know, the architectural paint brands in that group obviously are the largest ones and, you know, kind of track right in line with the performance for the group. Our Thompsons and Minwax brands don't tend to be heavy first quarter products anyway so we'll see how they start to unfold in the second quarter. Bob was clarifying our comments relative to some new product placements and a lot of the nonpaint brands like our pretty brushes and tylon saw some nice placement in some of the skews. Overall, all of them are doing about the same and slightly better and we'll see how the year unfolds.

I guess, Chris, what I was getting at are the store brands doing better than say the Dutch Boys?

The private label that we do for them? I don't think there's any significant change for those sales patterns.

All right. Thank you very much.

Thank you. (Operator Instructions) Our next question is coming from Mike Sison from KeyBanc.

Geat start to the year.

Thanks.

You talked to your contractors, are they feeling any better these days in the US? Has sediment improved and maybe to some degree getting any sense they're hiring?

Yes and yes. There's a lot more activity that they're seeing relative to the last couple of years, and I would think that quite a number of them are starting to bring on, you know, part time and casual labor to help round out the repaint businesses.

Right and when you take a look at the rebounded March, any sense of how much of that was maybe just restocking and is that going to continue into April and May?

Yes, we gave very little impact on March to restocking. Whether, you know, the customer segment through our stores doesn't stock, so that's not a factor there. And the retailing partners that we're privileged to do business with, they're all savvy operators and, you know, keep these inventory levels at the appropriate amounts and expect us to be the back stop so they don't have to "restock. " So, I don't think any of March lift was on restocking.

Great. Final question. When you take a look at the commercial markets, maybe a historical perspective or, you know, your thoughts going forward, what do you need to see to see that part of your business stabilize? Are there -- does there tend to be deflection point when you see that side of the business rebound?

Yes, Mike. The principal drivers that we watch are occupancy rates and specifically retail an office space occupancy rates which decline to almost an all-time low in 2009 and in some segments and particularly apartment buildings, it's starting to rise now. And most of the forecasts say that all three of those categories, apartments, office and retail should rise some by the end of the year, but they've got a long ways to come back before you're going to see any meaningful building.

Got you..

Rising occupancy will help the repaint market.

Okay. Great. Thanks, guys.

Thanks, Mike.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Very good. Thank you. Thank you all for joining us today. We greatly appreciate your continued interest in Sherwin-Williams. We look forward to seeing many of you on May 6 here in Cleveland at our annual financial community presentation. And in the meantime, I will be available all afternoon to take your calls for follow-up questions as they arise. Thanks again for joining us today.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.