宣偉 (SHW) 2011 Q1 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of first quarter 2011 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 Vice President of Finance and CFO; Allen Mistysyn, Vice President, Corporate Controller; and Bob Wells, Senior Vice President of Corporate Communications. This conference call is being webcast simultaneously in listen-only mode by Vcall via the Internet at www.sherwin.com. An archive replay of this webcast will be available at www.sherwin.com, beginning approximately 2 hours after this conference call concludes, and will be available until Wednesday, May 11 at 5 PM Eastern Standard Time.

This conference call will include certain forward-looking statements as defined under US federal securities laws with respect to sales, earnings, and other matters. Any forward-looking statements speak 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 Board 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 this session to questions. I will now turn the call over to Bob Wells.

Thanks, Jackie. As usual, in order to allow more time for questions, we provided balance sheet items and other selected information on our website at sherwin.com under Investor Relations first-quarter press release. Summarizing overall Company performance for first quarter 2011 versus first quarter 2010, consolidated net sales increased 18.5%, to $1.86 billion, due primarily to acquisitions and selling price increases. Acquisitions increased consolidated net sales 9%, and positive currency translation added 1.2%. Consolidated gross profit increased $105.4 million for the quarter, to $797.4 million. Gross margin decreased 120 basis points to 43% of sales, from 44.2% in the first quarter last year. Selling, general, and administrative expenses for the quarter increased $78.2 million over first quarter last year, to $691.1 million. As a percent of sales, SG&A decreased to 37.2% this year, from 39.1% last year.

Interest expense decreased $895,000 compared to the first quarter last year. Consolidated profit before taxes in the quarter increased $35.2 million, or 59%, to $94.7 million. Our effective tax rate in the first quarter this year was 27.9%, compared to 45.2% in the first quarter of 2010. And as a reminder, last year's first-quarter tax rate reflected a one-time increase in income tax expense of $11.4 million related to the Health Care and Education Reconciliation Act, which raised our effective tax rate by 19.2% for the quarter. For the full year 2011, we expect our effective tax rate will be in the low 30% range compared to last year's rate of 31.8%. Consolidated net income increased $35.7 million to $68.3 million. Net income as a percent of sales was 3.7% this year, compared to 2.1% in the first quarter last year.

Diluted net income per common share for the quarter increased to $0.63 per share from $0.30 per share in 2010. The tax impact of health care legislation reduced last year's first-quarter EPS by $0.10 per share. Looking at our results by operating segment, sales for our Paint Stores Group in first quarter 2011 increased 9.2%, to $929.3 million, from $850.9 million last year. Comparable store sales, that is sales opened more than 12 calendar months, increased 8.9%. The increase in sales for the segment was due primarily to higher selling prices and improving demand in residential re-paint and protective and marine markets. Regionally in the first quarter, our Southwest division led all divisions, followed by Southeast division, Eastern division, and Midwestern division.

Segment profit for the group increased 44.2%, to $68.9 million in the first quarter 2011, due primarily to selling price increases that were partially offset by higher raw material costs. Segment operating margin increased to 7.4% from 5.6% in the first quarter last year. Turning to the Consumer Group, sales in the first quarter increased 1%, to $294.9 million. The increase was due primarily to selling price increases and the timing of seasonal shipments to some customers that were partially offset by the loss of business at a large retail customer. Segment profit for the Consumer Group increased 9.7% in the quarter, to $41.1 million. Segment profit as a percent of external sales increased to 13.9% from 12.8% in the same period last year, and the improvement in operating margin was due primarily to continued tight expense control and price increases that were partially offset by raw material cost increases.

Finally, for our Global Finishes Group, sales in US dollars increased 49.6% to $630.2 million in the quarter, due primarily to acquisitions, higher paint sales volume, selling price increases, and favorable currency translation rate changes. In the quarter, acquisitions increased net sales by 33.3%, and favorable currency translation rate changes added 3.6%. First-quarter segment profit increased 60%, to $36.8 million, due to higher sales volume and good expense control. Foreign currency rate changes and acquisitions increased segment profit by $1.6 million. Segment profit as a percent of sales increased to 5.8% from 5.5% in the same period last year. Turning to the balance sheet, our total debt on March 31, 2011, was $1.34 billion, including total short-term borrowings of $678.4 million. Total debt on March 31, 2010 was $1.04 billion.

Our cash balance at the end of the quarter was $53.9 million, compared to $91.2 million at the end of the first quarter 2010. Total borrowings to capitalization were 45.4% at the end of the quarter versus 41% at the end of the first quarter 2010. Long-term debt to capitalization declined to 22.4% at the end of the first quarter this year, compared to 31.4% last year due to the repurchase of $137 million in long-term debt back in 2010. In the first quarter of 2011, we spent $27 million on capital expenditures. Depreciation expense was $37.3 million, and amortization expense was $6.4 million. For the full year, we anticipate capital expenditures will be approximately $150 million to $160 million. Depreciation will be about $140 million, and amortization will be approximately $40 million.

I will conclude my remarks on the quarter with a brief update on the status of our lead pigment litigation. In the California public nuisance suit, no timetable has yet been set for discovery. Since our year-end 2010 call, the city of Los Angeles has withdrawn from the litigation, while Ventura County has joined. On April 19, the Mississippi State Supreme Court heard oral argument on our appeal of the $7 million personal injury award in the gains personal injury suit. We expect a decision in the next 90 days to 120 days. That concludes our review of the results for first quarter 2011, so I will turn the call over to Chris Connor, who will make some general comments and highlight our expectations for second quarter and full year. Chris.

Thank you, Bob, and good morning, everybody. Thanks for joining us today. We anticipated that 2011 would get off to a strong start, and that was reflected in our first-quarter guidance. This expectation was based on the relatively easy comps we faced over the first 3 months, and on the actions we took last year to manage our cost structure and implement necessary price increases. Our first-quarter sales of $1.86 billion was the largest opening quarter in our Company's history by almost $60 million. What makes this milestone a little less gratifying is that very little of the incremental sales came from core volume growth. The majority are from acquisitions we completed last year, the multiple price increases we took in response to rising raw material costs, and moderately favorable currency translation.

Core volume was only slightly positive in the quarter. There were some relative bright spots. Domestic, residential re-paint sales, both DIY and Pro, continued to outperform the other architectural segments. Protective and marine coatings demand is picking up in many markets. And, and our automotive finishes, product finishes, and Latin-American coatings businesses all delivered solid volume growth. But, the continuing volume declines in domestic new construction and many non-residential repaint segments, coupled with the loss of business at one of our large retail accounts, erased most of this positive volume's momentum. At this point, we remain cautious in our outlook for domestic market demand over the remainder of the year.

In the second quarter, we'll also begin to annualize some of the price increases and acquisition revenue, which will make comparisons more difficult going forward. First quarter was also a strong quarter in terms of our earnings improvement. Even after adding back [to] last year the $0.10 per share tax impact of the health care legislation, first quarter of 2011 earnings per share was up more than 57%. Consolidated gross margin declined 120 basis points year over year due to the rapid increase in raw material costs and gross margin dilution from acquisitions. Looking ahead, the impact of higher raw material costs will likely get worse before it gets better. On our last call, we predicted that in 2011 the coatings industry would experience annualized year-over-year raw material price inflation in the low double-digits, 10% to 13%.

Given the recent upward trend in propylene and the aggressive pricing actions taken by many of the raw material suppliers, particularly the [Ti02] producers, we now believe a mid-teens percent increase is more realistic. If you look at year-over-year input cost comparisons by quarter, raw materials began to rise in the second quarter of last year, then accelerated in the third and fourth quarters. Given the rate and timing of increases so far in 2011, the year-over-year increase in raw material costs is likely to be greater in the second quarter, with the rate of increase moderating somewhat in the back half. Which means raw material costs are likely to be an even stronger earnings headwind over the balance of the year. First-quarter SG&A spending was up over last year, and most of this increase was reflected in our budget.

The largest contributors to SG&A growth were the 3 acquisitions, new stores opened since first quarter of last year, the timing of advertising expenditures, and increases in compensation expense in Global Group and Paint Stores Group. As a percent of sales, SG&A declined 190 basis points in the quarter compared to the last year. Our working capital also increased in the quarter. Backing out working capital from acquisitions, our core working capital increased to 13% of sales from 12.4% last year. Most of the increase was the result of a concentrated effort to build inventory ahead of raw material price hikes and protect against potential material shortages. Of the $189 million increase in finished goods inventory, only $47 million of that was from acquisitions. Raw material inventories also increased $45 million net of acquisitions.

During the first quarter, we continued to invest in our controlled distribution platform. Paint Stores Group added 7 net new store locations, bringing our total store count in the US, Canada, and the Caribbean to 3,397 locations, compared to a 3,357 a year ago. Our plan calls for Paint Stores Group to add approximately 50 to 60 new store locations during the year, while the number of store closings should fall back in line with our typical low-to-mid-single-digit pace. During the quarter, we used the Company's cash to buy back 1.1 million shares of our stock, and increase the quarterly dividend rate to $0.365 from $0.36 last year. On March 31, we had remaining authorization to purchase 4.65 million shares of our stock. Our balance sheet remains fiscally sound and capable of financing our planned business operations and growth for the foreseeable future.

In spite of the challenges we're likely to encounter over the balance of the year, our plan calls for continued improvement in sales and earnings. We anticipate that our consolidated net sales in the second quarter will increase 8% to 13% compared to last year's second quarter. With sales at that level, we expect diluted net income per common share for the second quarter to be in the range of $1.65 to $1.75 per share, compared to last year's record earnings performance of $1.64 per share. For the full year of 2011, we expect consolidated net sales to increase above 2010 levels by high single-digit percentage. And with annual sales at that level, we are reaffirming our guidance that diluted net income per common share for 2011 is expected to be in the range of $4.65 to $5.05 per share, compared to $4.21 per share earned in 2010. Again, thanks to all of you for joining us this morning. And now, we'd be happy to take your questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from Eric Bosshard from Cleveland Research.

Two things. First of all, on the price-cost situation, you commented about gross margins in 1Q and 2Q, but can you comment on your thoughts of when and how you get caught up in getting a balance and a recovery in gross margin?

Good morning, Eric, this is Sean Hennessy. Back to your point, just to remind everyone, when you look at the Company as a whole, the price mix, we had slight positive volume. Most of it was price. The other thing that we would probably point out to you when you look at our gross margins, is the gross margins on these acquisitions were really the majority of, in the first quarter, the declines of 44.2% down to the 43%. Our core was close to making it up in the first quarter. But, as Chris pointed out, with the rapid increases in the second quarter compared to the first quarter, we think that for the full year, when you take a look at our gross profit with the acquisitions and so forth -- we've shown that you slide in the past. When you have these rapid raw material increases, when we first get those, we do have a decline our gross profit.

To finish that, knowing that this is historically how it works, that it goes down and then back up, can you talk about the confidence and perhaps the [timing] of the recovery, the second half of it?

Yes, I think when you take a look at the second half of the year, we start to anniversary the acquisitions. And when you start thinking about the way this has worked in the past, we feel very confident that eventually we will be able to recover the raws and probably would, from my comments, I would say that we're now starting to talk about 2012 before the gross profit percent gets back into the '10 and '11 percent.

Just a follow-up if I can. On the volumes, 2Q to 4Q last year, you saw some volume growth, and you commented that there was just slight volume progress this quarter. Can you talk a little bit about what's going on there, and perhaps about what's going on excluding the impact of the Wal-Mart business?

I think that volumes for the Company, Eric, were slightly up in the quarter, as we commented. Our store volumes through our comp stores was essentially flat. So I think kind of what we've been seeing, is we've been commenting for awhile is that there's some strength in the residential repaint segment, but we're still seeing year-over-year declines in demand and new construction markets and some of the non-res repaint commercial, specifically. All those things are getting us around this flat volume kind of sense of where we're headed. I think our guidance for the second quarter would indicate, if you can kind of back out sort of that acquisition impact and the pricing impact, another modest volume expectation in the second quarter as well. And that's really the visibility that we don't quite have yet for the remainder of the year, to see if that's going to rebound or not. At this point in time, we think it's going to be a [relatively] modest year for volume.

Very good. Thank you.

Our next question is coming from Jeff Zekauskas of JPMorgan.

Good morning. You had up operating profit in your consumer business, even though your sales were flat and your raw materials were up at some double-digit rate. How did you do that?

I think [was] a couple things there, Jeff. You see the inventory increase. I think we had a really nice conversion rate in the first quarter because of the amount of gallons that we made. We put a lot of that into -- but the efficiencies were there [where we transferred. Secondly, what they were able to do with some of the price -- you just think about Wal-Mart. We've talked about that being in the range of $70 million to $80 million. If you take a look at it by quarter, if you're straight line on that, you're pretty close. They had a sales gain even going up against that Wal-Mart. We think that has more to do with timing. But, they did pretty well with getting the selling price in, the volume, and then their costs were -- they did a nice job on it.

And then lastly, do you have a strategy now in titanium dioxide in the sense that none of the small Ti02 players really have the financial strength to build new capacity. DuPont seems, at least at this juncture, a little bit slow in adding capacity. So, what will you do? Do you just grin and bear it? Or, do you try to work with some Ti02 producers to get a de facto vertical integration? What do you do?

There's a number of things we're working on, Jeff, to deal with the increasing raw material cost pressures. Grin and bearing it among them, by the way. But, there are whole host of projects underway from a technical standpoint, to improve the efficiency of titanium's performance in a can of paint so we can use less of it. There are lesser-quality titanium manufacturers that are stepping up their consistency. They can get those products into paint grade. There's a whole host of activities underway, and I think what invariably ends up happening when we see historically the same kind of titanium cycle when pricing and operating margins in the business get too inflated, capacity comes back on. Or, people will cut price and look for market share gains inside the industry. DuPont's earnings was released this morning. Their numbers on their performance chemical segment were off the charts, incredible. I think that bodes well for some additional activity in this industry, whether it's capacity coming on or some price variance. So, we'll see what happens. If history is our guide here, this is a cycle that will have a back end to it. And it's our intention to be in pretty good shape when we get there.

Okay. Thanks very much.

Thank you. Our next question is coming from P.J. Juvekar of Citigroup.

If you look at your raw materials into 3 buckets, resins, pigments and solvents, can you size for us ow much each of that bucket is [up]?

We haven't broken it down that way, P.J. First, obviously, we always talk about industry raw material [experience] rather than our own. And we prefer to keep it as an overall basket of materials, because there's a lot of movement within the basket, and we'd prefer not to get into that level of detail. Suffice it to say that, it's been pretty well document how much Ti02 is up. If we see kind of the mid- to upper-end of that range of inflation applied to Ti02, it gets to us to the 8% to 9% inflation on the total basket. So, with our mid-teen outlook, it tells you we anticipate pretty significant cost pressures across the rest of the basket, and most of that is propylene-related.

Okay. Is the Consumer Group seeing less price increases than the Paint Stores Group? Is that the kind of resistance you're seeing in the Consumer Group from customers?

No, I think, P.J. , we've been consistent. When we take pricing to the market, we're very transparent with the investment community, relative to the pricing that we announced through our Stores Group. We give you down to the tenth of a percentage point and the exact date we take it out. We don't share that same transparency with the Consumer Group, given the ongoing discussions we have with large retailing partners. But, take comfort in the fact that these raw material cost pressures we're feeling are across all of our products, and our disciplines here would be intact. And, we would expect our Consumer Group to be in the market with pricing in the same relative range at the same relative timing that we announce to our stores. And that, in fact, has been the case. And, they have been successful in getting pricing

Sure. One quick clarification question, Sean. Did you say that you pulled forward some production in the Consumer Group from 2Q into 1Q?

Yes, when you look at our inventory, we did allow the inventory to rise. Last year, we wanted to do 2 things. We wanted to make sure that we serviced our customer. Last year there was a lot of concerns about whether we were able to do that with some of the raw material shortages after the Rohm and Haas and Dow conversion. So, we've built inventory higher and also helped us bring some of the raw materials in before the big rise.

Okay, thank you.

Thank you. Our next question is coming from Don Carson of Susquehanna Financial.

Thank you. I have a couple questions on volumes and channel shifts. As I look at the [DOC] information, it seems a little puzzling. They show up 7% last year. I still have yet to find a coatings manufacturer with 7% volume increases. But, even if you assume it was up a few points, your paint stores were flat, they seemed to be flat in the first quarter. Does this reflect, again, DIY taking share away from the contractor? I would have thought that with Glidden closing a lot of stores, that you would be the best positioned to benefit from that shift as well. Maybe you can comment on market share shifts and market shares.

Of course. And, by the way, Don, you know this. We agree with your assessment that the Department of Commerce numbers for 2010 don't make a lot of sense. If you look at our customer mix within our Paint Stores Group, we're 85% contractor and roughly 15% DIY. Our DIY business has actually been growing pretty dramatically. So, if we were the same mix as the market, we'd probably be gaining share across all segments. We're confident that we are not losing share, we're gaining share in the contractor market. But, it's just the mix that's causing us to grow at a rate equal to or maybe slightly behind the market, as opposed to losing share in these segments.

And then what about the impact of Glidden closing stores? Why wouldn't we see more of a benefit in your Paint Stores Group?

I think Glidden has, in fact, over the last several years, been reducing their store count in North America. I think you see in some pockets where there was a Glidden store of some volume gains that we see that spread over the stores that are in that same market. Again, to Bob's point, these big commercial store locations that would be gathering business from that are still feeling the impact of a slower, non-residential market out there. So, the repaints for institutional and commercial properties are lagging. The construction for both new res and new commercial is lagging. And, we're weathering through that storm at the same time that we're able to generate very substantial earnings improvement.

Thank you. .

Thank you. Our next question is coming from Trey Grooms of Stephens, Inc.

This is actually B.J. Dicky in for Trey today. I had a question on consumer promotions within the Stores Group. It seems like we're hearing that, just channel checks, you may be getting a little bit more promotional on the consumer side. I know 2 weeks ago, you ran a 3-day sale nationwide that was 40% off on all stains and paints, which I believe was a lot higher than what you had previously been running. We're also hearing that the frequency of these promotions might be occurring more often. So, just want to get your thoughts on if that is in fact the case. And then also, what you are seeing [for] the results of that.

I think Bob briefly commented that we have seen a really nice rebound on our DIY business to our Stores platform. That really began sometime in the middle of 2010. The Company did adopt a little bit more of an aggressive promotional stance at that point in time in an attempt to [trigger] buy. We have found that the DIY consumer, particularly, in this downturn is a little bit more sensitive to price promotions, and so we've implemented a little bit more of aggressive program there. Stains and paints off, percentage off, has been typically the way that we've gone at that. The percentages off have been pretty consistent throughout our promotional history, so 40% is not dramatically out of line with what we've done historically.

In starting a little bit earlier this year than we might have in the past, our first-quarter promotion, the one you referenced that we ran a few weekends ago, is a little bit early for us. But, throughout the remainder of the year these will be fairly consistent, pretty much lined up with exactly the same kind of promotional periods we had in 2010. I don't think this is any significant shift in change in terms of how we market or what our expectations would be. Suffice to say, that the margin performance that we have on this DIY business is terrific. And so, generating more footsteps through the door, even at these percentage discounts, is really good business for the Company.

Great. Just a follow-up question related back to the Ti02. Can you get into how you typically contract? Is that 90 days? We're hearing in the industry there may be some changes there. Just some comments on how that contracting is. Thanks.

Yes. I think that this has changed over the last decade or so. Used to be you would contract your volume out around 80% to 85%, and you'd be in the spot market for 10% to 15%. Now, I think it's a more fluid situation. You're making agreements of how much you are going to be able to get from different people at different prices. We don't basically have a contract, per se, any more. Probably more agreements that you look at, and so I think pricing, though, they're pretty public about when they're going out with these prices. They've also said, which I've heard from different people where they say that there's 60 to 90 days worth of pricing protection which we've never said, but we've heard that they've said. We didn't disagree with it, but whether that changes or not, we don't know. But, I would say it's more on a quarterly-by-quarterly basis right now.

Okay, thank you.

Thank you. Our next question is coming from Greg Melich of ISI.

Two questions. First, on the SG&A. You were down about 200 [bips] year over year. Could you just tell us how much of that was from acquisitions the way did you on gross margin, which was helpful? Then I had a follow-up on pricing.

Greg, I don't have in that front of me, quite honestly, because we really didn't do much work to break that out. Just like from Chris' comments, it is a large piece of it, but I don't have that broken out.

Okay, so it was a chunk like it was on gross margin, but also SG&A would have still been down even if you back out acquisition.

Yes.

Because you're getting the leverage from the [price increase].

Right.

If I remember, on the fourth-quarter call, it was too early to say whether the 8% price increase late last year was sticking or behaving normally. Now, we're a few months into it. Is it sticking? Is it behaving the way it normally does?

Yes, that price increase went in well. In fact, of all 3 price increases last year, it was probably the most effective.

Was the last one?

Yes.

And does that mean then that if raws continue doing what they are doing that you could consider going earlier? Or, is the fact that the volume[effect] on [another] one? Or, is it the fact that the volume remains so-so in the industry? Do you feel like that's limiting you at all?

We've always commented, Greg, that our pricing activity to our customers is always a raw material-driven event. We've taken pricing in periods of declining volume in the industry as well as accelerating volume. So, that won't have that much of an impact on us. We will be paying really close attention to this continuing raw material cost index, and if it continues to run ahead of us, we'll probably have to take additional pricing.

Right. Thanks a lot.

Thank you. Our next question is coming from Kevin McCarthy of Bank of America Merrill Lynch.

Sean, a couple questions on the tax line and the fluctuations there. A quarter ago, I think you pointed to mid-to-low [30s%]. It looks like you've come in closer to [28%]. I was wondering if you could comment on the variance there. And if I understood your comment this morning correctly, it sounds like would you expect it to perhaps resurge in the balance of the year. I'd be curious as to what might be driving that as well.

The way the tax rules changed, the accounting for the tax rule, was about 5, 7 years. Discrete items, which used to be, I would say, smooth over the year, no longer the case. And so, as discrete items come in -- and we had a couple of discrete items come in in the last 2 weeks of March that caused us to be a little lower in the first quarter than what we originally thought. Not a great deal. But because the first quarter, the profit before taxes, the lowest number of all 4, when you get a discrete item, the effective tax rate could change dramatically with the same dollar amount in the first versus the second versus the third. But, you're right, when we sit there and look at our full year what we think, and the guidance we gave, which is in the low 30s%, that will tell you that our tax rate is going to be over 30% when you put the last three quarters together.

Okay. And then a second question, if I may, for Chris, on the Consumer segment. I apologize in advance. It might be tough to answer because it was bit general. But, with regard to the prior loss at Wal-Mart, do you see today attractive opportunities to replace that volume in a counter-punching sort of fashion? Or, is that perhaps sub-optimal, and better to remain disciplined given the sacrifices you might need to make to do that?

Obviously, we are selling into a really consolidating retail customer base there. There are just a handful of people of scale left in that industry versus a decade ago, where there were dozens and dozens of fairly robust regional home center chains. We really have a consolidated group. We have been consistent in our comments that we have compelling products and brands and opportunities, we think, add real value to 1 of those major players. We continue with an aggressive calling effort on them constantly. They're good customers of ours today, with our Minwax and Thompson and Krylon and other products that we sell into them. If there was ever an opening, we'd be happy to fulfill it with the caveat, to your point, of maintaining our discipline here. So, we have a growth strategy in this Company in North America through our own paint store channel that provides us a lot of runway ahead. But, we'd be happy to be a partner with one of these folks under the right circumstances. Time will tell.

Okay, fair enough. Thank you.

Thank you. Our next question is coming from Chuck Cerankosky of Northcoast Research.

Good morning, everyone. Chris, repeatedly we're hearing more and more about the marine business, and your report is one of the stronger industrial coatings areas. Can you talk about that a little bit. What's driving it.

Our protective and marine business has been performing nicely over the last several quarters. I think we have talked consistently with the street relative to the fact that in down cycles this is an area that maintenance really can't be deferred for long periods of time. A lot of the stimulus money that went into our country and other countries around the world is starting to wind its way into paint portions of those projects. And so, we're seeing a nice lift in that business, literally around the globe, both in the US businesses as well as our Global Group segment. In our vernacular, Chuck, because the industry refers to it as protective and marine, we're much heavier in the protective side of that than the marine side of it. So, while we do have some businesses that have some application characteristics for parts of ocean-going and groundwater vessels, our lift in this business is mainly coming from the protective side, where we're coating steel and concrete in a corrosive environment.

All right. Just clear up a couple of things. The Wal-Mart business impact in the first quarter, Sean, did you say that you could more or less annualize that for the rest of the year?

Yes, what I was saying is, we've given you the annual number of $70 million to $80 million, and that by quarter is relatively straight-lined.

Got you. Also, I've looked at my notes, and they could be wrong, but I thought your original guidance for CapEx was about $20 million lower for 2011. Is that the case? Have you raised CapEx guidance?

We raised CapEx around $20 million. You're 100% accurate. We've looked at some of the things, including possibly in our flight department that needed to be upgraded. And so, with the way that industry [is at,] we might take advantage of where prices are to do a couple of things there.

Any other parts of the Company that are going to get the additional capital dollars?

No, that's the majority of it.

All right. You had what looks like a $4.4 million gain from an asset sale. What segment was that contained in?

That's in admin, and basically that was the old paint plant that we had in Newark, in New Jersey. We had some of the entries in the fourth quarter of last year, and then this year it was the rest of [it], but that's the end of it.

So, that didn't flow through any of the 3 operating segments.

No, not at all.

Debt is up quite a bit year over year. All that went into working capital and inventory?

First of all, you have to realize we did take on quite a bit of debt, non-domestic debt when we did those acquisitions outside the country, especially the Europeans. So, we have those. Secondly, just because of the ramp-up in the working capital, our cash flow, our net operating cash, was actually backwards $153 million versus last year's approximately $100 million. So, the working capital demands made us have a little more debt on the books.

All right. And then last year in the quarter, for our purposes we added back $0.08 of non-operating items, mainly for that debt retirement cost or debt repurchase cost you did in the second quarter. Anything like that going on in the second quarter of this year we should be aware of, or even all the rest of the year?

No, not at all. We don't see anything to that magnitude. The other thing we did point out, though, is I know everyone added back $0.08, but we had a few things going the other way that would reduce that $0.08 that we have to go up against. But I know where you got the $0.08.

All right, thank you very much.

Thank you. Our next question is coming from Dmitry Silversteyn of Longbow Research.

Good morning. I just want to make sure that I understood what you were saying about the store pricing going up. It looks like if I back out the flattish to maybe up 1% volume growth and maybe a little bit of mix improvement as more DIY traffic has come through, that pricing was up about 7.5%. Is that about the range that I should be thinking of it the rest of year?

You're in the range, Dmitry.

Very good. Secondly, on the corporate expense line, there seems to be a lot of volatility there over the last few years. Can you give us some of the bigger moving pieces that we possibly can use to forecast what your corporate [expense] would be?

I think some of the bigger pieces -- over the last couple of years we've done a few things, and we've tried to do a few things. Number 1is environmental expense. I would say that we've really made a conscious effort in the last 7, 8 years really to try to get, for lack of a better term, no further action letters from the local and the national EPA. At some of the larger locations that we've had, that we've put in our [queue], and if you gate chance to read the footnote regarding the environmental expenses. Two years ago, we went down a path of a piece of property in Bound Brook, New Jersey that worked with EPA to try to get to the point where long term it's no longer a contingent liability. We also did it late last year with a Newark, New Jersey paint plant. We also did a lot of this work in Chicago as well as down in Emoryville. So, we're hoping in that the next few years we're going to be through the majority of those assets. That has caused a lot of the fluctuation.

Then, we've had a lot of different things in that admin line that has gone back and forth, with interest expense and some of the other things and what Chuck just mentioned, the warrants that last year in the second quarter was $0.08. And I'm sure Chuck, if he were still on the phone, he would tell you in the fourth quarter there was also a piece there. Then we've also taken a look at the assets, and last year we were able to sell a couple of assets of plants. When we went through the right-sizing of the Company a few years ago, there was couple pieces of real estate that we felt that really we didn't need any more. And so, depending on where we were on the book value, we were selling different assets throughout. The inventory of those type of assets are down, we're getting closer to the end of it. I think we're done doing adjustments to our debt. So, I think going forward it's going to be a lot less volatile than we've had in the last 3 to 4 years.

In terms of modeling it for quarterly purposes, can I assume that it's going to be somewhere in the low [$50s million]?

Yes, think that probably when you take a look at the full year, I think the full year, you still to have go against those warrants that Chuck mentioned in the second and fourth quarter, but I think that it's probably not bad of a modeling.

You also mentioned in your prepared remarks that in that the second quarter, besides the accelerating raw material negative comps that you are going to see, you're also starting to annualize acquisitions and price increase. I understand the acquisition part of it, but to the extent that you got new pricing in your stores, some were close to, let's call it mid-single-digits, 6%, 7%, something like that in the December-January period of 2010. Which price increase annualization were you referring to? Because that sounds like it's just getting started.

On April 1 of last year, we took approximately a 4% price increase through our Stores business. So, until we get back around to April 1 of this year, we had that price increase flowing through the system. There was another 4% in July, and then an 8% in December. So, we've been essentially operating in3 price actions, Dmitry, over these last several months. And the furthest back one of those is now going to anniversary off. So, we're essentially running on 2 price increases now.

Okay. I understand. That's all the questions I have, thank you.

Our next question is coming from Dennis McGill of Zelman & Associates.

The one thing, Sean, I was hoping could you help me with on the gross margin impact from the acquisitions, you mentioned the sequential impact. But, I think that the acquisitions would have been in the majority of the fourth quarter. So, I'm trying to understand is that a seasonal difference between the core business and the acquisitions? Why would there still be a sequential impact with that mix?

This goes back -- April 1, we're also anniversarying the Sayerlack acquisition, the 1acquisition. Last year, gross margins are lower than our core. And so, when you start to go up against on a comp basis -- we had it in the second quarter of last year and we have it in the second quarter of this year --

[You have to] sequentially, yes.

Yes, when you take a look at sequentially, the acquisitions don't have the biggest sales bell-shaped curve as well as our other business. So, our core business the first quarter is one of the lowest. It's the end of the bell-shaped curve. Theirs is more of a straight line, so you're right, they're going to have more impact in the first quarter than they're going to have in the second, third, or even the fourth.

If anything, does that mix shift then go the other way as we move into the middle part of the year? Goes from being a headwind to --

Yes.

On a year-over-year basis --

You just have a larger piece of the core at a higher gross margin. That's why it won't have as much of an effect.

Right, okay. And then just more generally, Chris, if you want to take this. Just commenting on the residential repaint business, as you moved through the quarter, did you see any differences? And can you talk at all a little bit about spring and how the spring has opened up, typical to versus typical seasonality?

The first quarter, obviously, is a very low quarter for res repaint. There's literally no exterior house-painting season through that portion. So, I think the kind of volume numbers that we've been commenting on in our Paint Stores Group particularly, where we see the majority of that business, is relatively flat. Would indicate that it was not falling off the charts and certainly not rebounding dramatically. We're just getting into the season now. We have had some rough weather. We see that in the fact that our exterior paint sales are lagging behind, where they would typically be at this time. So hopefully, that's indicating some pent-up demand, and we'll have a much better feel for that at the end of the second quarter, Dennis.

Okay, thanks.

Thank you. Our next question is coming from Bob Koort of Goldman Sachs.

It's Brian McGuire on for Bob this morning. Just to come back to pricing, and I know you don't like to tip your hand on pricing before you make a public announcement. But just thinking philosophically about how you think about pricing, has that changed over the last year? As you said, some of your suppliers, particularly your Ti02 suppliers, have been more public in announcing their price increases, and they've also been pretty open about the frequency with which they should be coming down the line in the next year or 2, periodically every 3 months or so. Has that changed your thinking about your timing of announcing price increases and maybe doing them more frequently and on the basis of some kind of formula when you do see your raw material go up? And then also, as the biggest architectural paint Company in the US, has your thought around being a leader on pricing in this kind of raw material environment changed over the last year?

I would say, Brian, that our philosophy on pricing has not changed, that, again, we remain a raw material-driven pricer. When we get these pressures, we've always begun with the process by pushing back to see if we could mitigate it from the supplier to us. Secondarily, what efficiencies we can bring in-house to absorb it. And then third, and finally, taking it to the customer base. In terms of are we thinking about going on a more frequent timing basis, I would say 3 price increases in calendar year 2010 would be indicative of a willingness to go on a more frequent basis when the market demands to us do that.

And finally, you're absolutely correct, that our practice here has been to be careful about talking to our customers first, and then advising the street of exactly what we've done by percentages, on [base] et cetera. At this point in time, we've not announced any additional pricing for calendar year 2011. We will be monitoring the raw material environment, and if we feel that we need to do that, we have shown in the past the discipline and the courage to get out and take the appropriate pricing when we need to. In terms of whether we're leading or following, that's never been a concern or a thought for us. Again, it's really driven on where we specifically are in our raw material basket issue.

Okay, thanks. And then one follow-up on Ti02 supply and availability. I understand the industry is running close to 100% operating rates now, even in a period with demand, especially in North America, for architectural coatings still way below prior peaks. Could you comment on your ability to continue to get Ti02 supply if we were to have a sharp rebound in demand? It doesn't seem like it's coming in 2011, but -- and you as being 1 of the bigger ones in the industry, I think you'd be okay. But, how firm are those contracts, and are you having discussions [with your] suppliers?

I think Sean's comment and the notion of a contract with these suppliers, that really isn't perhaps the right way to think about it. However, I would tell you that we have great confidence and comfort that the titanium dioxide that we need to get through this year is in good shape. No availability concerns.

And then beyond this year --

It's a little further out than we have relationships or negotiations with these suppliers. I would expect that these folks will be able to keep pace with us for the foreseeable future.

Okay, thanks for taking my question.

Thank you. Our next question is coming from Greg Goodnight of UBS.

Good morning, gentlemen. I was wondering if you would comment on the game plan to get the margins up on the acquisitions that you went through in 2010. Several times on the call you mentioned their contribution to revenue, and then their contribution to EBIT was quite disproportionate. Are you expecting improvement with the market? Is there some self-help program that you are going do? Could you walk me through that a little bit, please?

Yes. I think what we've mentioned in the past, when you look at this wood business and the wood coatings business, the product finishes, we lump Sayerlack. When we look at this business we talk about Inchem, Becker and Sayerlack acquisitions over the last few years. Over time, we think that we've looked at the infrastructure and we've looked at the type of sales they're making through these facilities. We think that most of it is wood, but there's some opportunities for other substrates, whether that be plastic or metal. As we do a few more acquisitions, when you take a look at some of the other things that we've done over in Europe, we think that over time we're going to be able to put more product through these plants, and we're going to get the sales up.

The gross profit percents may not grow dramatic, never get to the exact position where we are in our core. But, we think they will run at a lower SG&A as a percent of sales is, and eventually we can get up the margins. What we've talked about, is that when we do an acquisition in the United States, when you think about Duron, [MAB]. Columbia, even small ones like VHT, over time we can do those relatively quickly. We start getting the margins up 12 to 15 months. What we've said is our game plan is going to be a little bit longer, because we don't have the other assets in Europe or Southeast Asia that will do it. So, we think it's going to take us a little more time, probably almost double, the 15 months that it takes us inside the United States. But eventually we'll get there.

There are no restructuring options that could accelerate that process?

Yes, there's restructuring opportunities, Greg. We're less than a year into these acquisitions, and there's all kinds of integration activities underway and consolidations, and those will continue to run for awhile. Typically, when you first undertake those, there's a cost associated with them, but you will see the lift in the back side of it. We're still very optimistic about these acquisitions. They're performing ahead of our expectations at this point in time, and they will be [contributive].

Okay, thank you very much, gentlemen.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Mr. Wells.

Thanks, Jackie. I would like to close today by reminding you that our annual financial community presentation is scheduled for Thursday, May 12, at the Waldorf Astoria in Midtown Manhattan. If you have not signed up, but would like to attend, there's still time. Send me an e-mail at rjwells@sherwin.com and I'll reply with a link to our registration site. We'd love to see you there. Thanks again for joining us this morning, and thank you for your continued interest in Sherwin-Williams.

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