宣偉 (SHW) 2011 Q2 法說會逐字稿

Good morning, thank you for joining The Sherwin-Williams Company's review of the second-quarter 2011 financial results and expectations for the third quarter and full year. With us on today's call are Chris Connor, Chairman and CEO; Sean Hennessy, Senior Vice President Finance and CFO; Al Mistysyn, Vice President, Corporate Controller; and Bob Wells, Senior Vice President, Corporate Communications and Public Affairs.

This conference call is being webcast simultaneously in listen-only mode by Vcall via the Internet at www.Sherwin.com. An archived replay of this webcast will be available at www.Sherwin.com beginning approximately two hours after this conference call concludes and will be available until Wednesday, August 10, 2011 at 5 p.m. Eastern 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 statement speaks only as of the date on which such statement is made and the Company undertakes no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise.

A full declaration regarding forward-looking statements is provided in the Company's earnings release transmitted earlier this morning. After the review of second-quarter results we'll open this discussion to questions. I'll now turn the call over to Bob Wells.

Thanks, Claudia. In order to allow more time for questions we've provided balance sheet items and other selected information on our website at Sherwin.com under Investor Relations Second-Quarter Press Release.

Summarizing our overall Company performance for second quarter 2011 versus second quarter 2010, consolidated net sales increased $211.7 million or 9.9% to $2.35 billion due primarily to selling price increases across all segments, acquisitions completed in the past 12 months and improved sales by our Global Finishes Group. Acquisitions increased net sales by 5.1% in the quarter and favorable currency translation rates increased consolidated net sales 1.7%.

Consolidated gross profit dollars increased $50.9 million for the quarter to $1.0227 billion. Gross margin decreased 200 basis points to 43.4% of sales from 45.4% in the second quarter last year. Selling, general and administrative expenses for the quarter increased 9.3% to $755.6 million. As a percent of sales SG&A decreased to 32.1% in the second quarter this year from 32.3% last year.

Interest expense for the quarter was $11.7 million, a decrease of $14.6 million compared to second quarter last year. Consolidated profit before taxes in the quarter decreased $2.2 million or just under 1% to $257 million. Our effective tax rate in the second quarter this year was 30.3% compared to 29.9% in the second quarter of 2010. For the full year 2011 we expect our effective tax rate to be in the low 30% range compared to last year's rate of 31.8%.

Consolidated net income decreased $2.6 million to $179.1 million from $181.7 million in the second quarter of 2010. Net income as a percent of sales was 7.6% compared to 8.5% in the second quarter last year. Diluted net income per common share for the quarter increased to $1.66 per share from $1.64 per share in 2010.

Looking at our results by operating segment, sales for our Paint Stores Group in the second quarter 2011 increased 4.3% to $1.3 billion. Comparable store sales, or sales by stores open more than 12 calendar months, increased 4%. The increase in sales for the segment was due primarily to selling price increases implemented during the past year and improved domestic architectural paint sales to DIY customers, residential repaint contractors and property management contractors.

Regionally in the second quarter our Southwestern division led all divisions followed by Midwestern divisions, Southeastern division and Eastern division. Sales by all four paint store divisions increased in the second quarter compared to last year.

Paint Stores Group segment profit for the quarter decreased 2.5% to $206.6 million from $212 million in the second quarter last year. And segment margin decreased to 15.9% from 17% last year due primarily to continuing raw material cost increases that were only partially offset by selling price increases.

Turning to our Consumer Group, sales in the second quarter decreased 8.4% to $375.6 million due primarily to the loss of a portion of a paint program with a large retail customer that was partially offset by selling price increases.

Segment profit for the Consumer Group decreased 23.9% in the quarter to $61.4 million. Segment profit as a percent of external sales decreased to 16.3% from 19.7% in the same period last year due primarily to higher raw material costs that, again, were only partially offset by selling price increases and lower volume throughput in our manufacturing and distribution operations.

For our Global Finishes Group, sales in US dollars increased 39.5% to $678.9 million in the quarter due primarily to acquisitions, selling price increases, higher paint sales volume and favorable currency translation rate changes. In the quarter acquisitions increased Global Finishes Group net sales by 22.5% and favorable currency translation rate changes added 5.9% to net sales in US dollars.

Second-quarter segment profit increased 15.3% to $46.1 million due primarily to higher sales volume and currency translation. Favorable currency rate changes increased segment profit by $3.3 million in the quarter and acquisitions had no significant impact on segment profit. As a percent of the net external sales, Global Finishes Group segment profit was 6.8% in the quarter compared to 8.2% last year due primarily to gross margin dilution from acquisitions.

Turning to the balance sheet, our total debt on June 30, 2011 was $1.2249 billion including total short-term borrowings of $571.1 million. Total debt on June 30, 2010 was $908.6 million. Our cash balance at the end of the quarter was $71.6 million compared to $48.4 million at the end of second quarter last year.

Total borrowings to capitalization were 41.2% at the end of the quarter versus 37.2% at the end of second quarter 2010. Long-term debt to capitalization was 22% at the end of the second quarter this year compared to 29.1% last year.

In the second quarter 2011 we spent $42 million on capital expenditures, depreciation expense was $37.5 million and amortization expense was $6.7 million. For full year 2011 we anticipate capital expenditures for the year will be approximately $150 million to $160 million, depreciation will be about $150 million and amortization will be about $30 million.

Finally, 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 discovery has commenced and will take place over the next eight to 10 months, after which the parties will again have the opportunity to bring dispositive motions based on the evidence that comes out of that process. A September 2012 trial date has been set by the judge and, as it now stands, the case will be tried to a jury in Santa Clara County.

We are still awaiting a decision from the Mississippi Supreme Court in the Gaines case. The court heard our appeal of that $7 million verdict on April 19 and the decision could come at any time.

That concludes our review of the results for the second quarter 2011, so I'll turn the call over to Chris Connor who will make some general comments and highlight our expectations for third quarter and full year. Chris?

Thanks, Bob, and good morning, everybody, thanks for joining us today. You know, with one important exception, the second quarter turned out very much as we expected. Domestic paint sales volumes were down modestly from second quarter 2010 due to the loss of a portion of our business with Walmart and a tough second-quarter 2010 comparison for our Paint Stores Group in the domestic architectural market.

As expected, our Global Finishes Group delivered solid volume growth across all product lines. Revenue from the acquisitions we completed last year came in on budget and we continue to make good progress in implementing the price increases we announced over the past three quarters. As a result, our consolidated sales for the quarter finished comfortably in the middle of our guidance range of plus 8% to 13%.

Likewise our SG&A spending was also on budget for the quarter, both in dollars and as a percent of sales. Interest expense was down year over year as expected and our tax rate for the quarter was comparable to last year.

The one line on our second-quarter P&L that didn't go quite as we expected was gross profit. Proportion of the 200 basis point gross margin contraction we recorded was due to dilution from acquisitions, which was no surprise, but the frequency and magnitude of raw material cost increases in the quarter, particularly in titanium dioxide, continue to outpace our ability to recoup in the short term.

On our last earnings call I made mention that the impacts of higher raw material costs would likely get worse before they got better. At that time we predicted that the coatings industry would experience average annualized year-over-year raw material price inflation in the mid-teens for all of 2011.

Over the past three months we've revised our internal raw material cost projections three times. We now believe a year-over-year raw material increase in the high teens to low 20% range is more realistic.

As we've discussed in the past, when raw material costs rise we have a duty to our customers to push back on our suppliers to avoid or postpone these increases, if failing that, to focus internally in ways to offset higher raw material costs. But the rate of increases we've seen over the past six months have overwhelmed these efforts and left us with few options.

In early June, again, we announced additional price increases in the high-single-digit range across most of our product lines. Although we are in the early stages of implementing these increases, they should help to offset the raw material cost increases we incurred in the second quarter. Not surprisingly, price realization in our Paint Stores Group is running ahead of our other segments.

The raw material environment is also affecting our management of working capital. The change in our working capital in the first half of 2011 increased $177 million and total working capital rose to 14.9% of sales. Approximately $90 million of this increase went to fund working capital requirements of our acquisitions.

Backing out the working capital from acquisitions, our core working capital increased to 14.4% of sales from 12.3% last year. This was primarily the result of higher raw material costs in work-in-process and finished goods inventory, combined with a concerted effort to build inventory ahead of raw material price hikes as well as protect against potential material shortages.

In the first six months of 2011 we generated $108 million in net operating cash, which was down from the first half of last year due primarily, again, to the working capital increase. Although respectable in this environment, first-half net operating cash is below the level we have achieved in recent years. We remain confident that over the long term the Company's capable of generating net operating cash in the range of 10% of net sales.

We continue to invest the Company's cash to purchase shares of our stock for treasury, increase our cash dividend and expand our control distribution platform. During the quarter we invested $41.7 million of the Company's cash to buy back 500,000 shares of our stock bringing the year-to-date total to 1.6 million shares. At quarter end we had remaining authorization to purchase 4.15 million shares.

So far this year our Paint Stores Group has added 18 net new stores, 11 of which were open in the second quarter. This brings our total store count in the United States, Canada and the Caribbean to 3,408 stores compared to 3,360 one year ago. Our plan calls for Paint Stores Group to add approximately 50 to 60 new store locations through the year while the number of store closings should fall back in line with our typical low- to mid-single-digit pace.

Our decision to continue to expand our control distribution platform throughout this cycle was affirmed by the latest wave of our annual Painting Contractor Survey. Survey results indicated that the market shift from contractor to DIY has abated and that contractors remain steadfastly loyal to the specialty paint store channel, and increasingly to Sherwin-Williams.

Our store growth over the past three years combined with solid new product introductions, marketing programs and sales initiatives have resulted in steady marketshare gains in most contractor segments and double-digit DIY sales growth in six of the past eight quarters.

In Global Finishes Group the steady stream of acquisitions and related integration work often overshadows the outstanding results they're achieving in their core businesses. Excluding acquisitions this team has delivered five consecutive quarters of double-digit sales growth in protective and marine coatings, OEM product finishes, automotive finishes and architectural coatings. Our balance of sales outside of North America now stands just shy of 25%.

Looking ahead, our second-half volume comparisons should ease somewhat, but raw material costs will continue to be a headwind to earnings. We are cautiously optimistic that domestic architectural paint market volumes, primarily in the repaint segments, will turn positive over the balance of the painting season and global demand for most industrial coatings will continue to expand.

Our outlook for the third quarter of 2011 is for consolidated net sales to increase 10% to 15% compared to last year's third quarter. With sales at this level we expect diluted net income per common share to be in the range of $1.65 to $1.75 per share compared to $1.60 per share in 2010.

For the full year 2011 we expect consolidated net sales to increase in the high-single-digits to low teens over the previous year. With annual sales at that level we are updating our diluted net income per common share expectations to be in the range of $4.65 to $4.85 per share compared to $4.21 per share last year. Again, thanks to all of you for joining us this morning and now we'd be happy to take your questions.

(Operator Instructions). John McNulty, Credit Suisse.

Yes, good morning. Just a couple questions on the raw material front. It looks like -- obviously TiO2 is still racing higher, but it does look like propylene and some of the acrylics chain is starting to break down. I guess I'm wondering how you're thinking about how those two balance each other out over the second half of the year.

Well, John, first, as you know, we buy the majority of our raw materials in the first half. So any relief in propylene-based materials in the second half will have somewhat of a muted effect on our raw material basket for this year.

Secondly, propylene has come down in recent weeks, but only -- it's still above the level that it was in January 2011, if my data is correct. So we've seen a hump this year, but in terms of year-over-year relief, it's got a ways to go I think before it gets down to the average cost of 2010.

Okay, and then just one follow-up. I know typically it seems like demand for coatings is relatively inelastic with regard to price, but as you I guess indicated in your opening remarks, it seems like we're in an unprecedented environment at this point in terms of how much you have to put through on price increases.

Are you seeing any push back at all that would say that maybe we will see a little bit more elasticity of demand around price? Or is it still going to be inelastic, but your customers are just kind of aggravated by it?

John, this is Sean Hennessy and we watch that question carefully. We continue to look at how the mix of products and so forth -- and the increase of raw materials is, as you said, unprecedented. But we still believe over the long term eventually we're going to be able to recover these raw materials in the market place and recover our gross margins.

Great, thanks very much for the color.

Thanks, John.

Kevin McCarthy, Bank of America-Merrill Lynch.

Yes, good morning. I was wondering if you could compare and contrast your price realizations in the Paint Store segment versus your other distribution channels.

I think when we take a look at it, as we sort of mentioned before, we think that the price realization, recovering those raw materials into the market are -- we're in a better position inside the Stores group versus Global and the Consumer group. And that's why usually they start to recover the gross margin quicker and it's still going in that same kind of direction.

Just any thoughts regarding the magnitude of that differential, how much more price you're able to get through your own stores versus big boxes, for example?

Yes, I think, Kevin, what we've talked about is when we announced pricing we've said that we take very similar pricing increase levels across all segments of the Company. And I think in terms of timing and ultimate implementation that's where we see a little bit of difference. For the most part when we're all done with all of these they're all very close to each other in terms of their range.

Okay, very good. And then just a follow-up, if I may, on the volume side. Chris, how would you characterize industry volumes at this point for US architectural coatings on a year-over-year year basis?

In the first quarter, Kevin, we did get a look at some of the federal government information on architectural coatings for the United States; it was down north of 4% in gallons. We think the second quarter will also be soft as well when we get that data; we've not seen that yet. And as a result of that our gallon performance has outpaced that and we're confident that we're gaining share.

Very good, thank you.

Stephen East, Ticonderoga Securities.

Thank you, good morning, guys. If you look at the suppliers of TiO2 and I know DuPont has announced another price hike and I don't know when that starts to flow through. But is there -- I know you all have looked at China a lot. Is there a way to move the Chinese manufacturers from low-grade to high grade? And if so, how long does that process take, etc.?

Stephen, we have a lot of work being done right now in our industry and certainly here at Sherwin on that very subject. There are a number of what here to four have been lesser grade titanium suppliers that are rapidly working to get their quality levels up. We have quite a bit of that material in various stages of testing both in laboratories as well as in manufacturing facilities and time will tell.

China is one of the locations, Eastern Europe is other. And I think at price levels where they are today for titanium we're seeing far more interest in capacity coming on stream and development happening.

Is this more, Chris, a 2012 type event?

I think you're starting to see it trickle into our products right now. It's just not going to be a substantial enough volume to make much of a difference in offsetting the increases that we've been talking about now up into the low 20% range.

Okay. And then switching gears a little bit. The general demand picture looking at domestically residential versus commercial, and then if you look at the global demand versus the US?

Yes, I'd say that architectural demand in the quarter just completed was trending positively throughout the quarter. April was difficult. Weather across the United States was not favorable to the exterior house painting season, May wasn't much better. And we began to see some nice performance in June and that's continuing as we go forward.

We made the comment on our call just recently that we thought that the second half of the year would see better volume comparisons in the domestic architectural businesses. Likewise, the global businesses have been doing terrific. And we've been seeing strong double-digit gains in architectural and OEM and automotive, all the things we commented on. So, the US is lagging that and we think the second half will be better.

Okay, I appreciate that. One last quick question. Administrative, your loss dropped pretty sharply. How should we look at that over this year and next year?

Yes, I think when you take a look at the administrative loss, year to date we're down right around $13 million. Our interest was down $15 million a year ago, we did expense -- we brought in some 100 year notes, we expensed some warrants. We have a smaller traunch of that in the fourth quarter.

We think that the administrative expense through the remainder of the year will be down this year, probably slightly less than what the effect of those two are. And then probably next year, taking a look at it, we'll start growing that again probably a little -- slower than sales.

Okay, thank you.

P.J. Juvekar, Citigroup.

Yes, hi, good morning, Chris.

Good morning, P.J.

You know, you kept opening new stores in the downturn. So two questions. First, is this a contrarian strategy that when the upturn comes you'll have more stores? And then secondly, are these new stores more DIY friendly?

Yes, I think obviously, P.J., we're expecting an upturn and mathematics would indicate that we absolutely will have more stores when that begins to happen. Not only just in a gross number for our count, but also in a comparison to our competitors. As we've commented, the gap between us and the remaining specialty paint store operators is widening. So that will continue.

As we've also commented in the past, P.J., we have a number of different types of stores beginning with the neighborhood Paint Stores that we're most noted for which would in fact be aimed at servicing the DIY customer as well. All the way up to store locations that are in more industrial locations to service professional painting contractor needs.

Various markets have needs for different types of stores at different times. I don't think we're opening any more of a percentage of our stores towards this DIY market than we have in the past. Having said that, the ratio of these neighborhood Paint Stores or these more industrial stores is probably -- 80% to 90% of our stores fall in that category, as would our new store count this year also be in that 80% to 90% would be focused on DIY as well as servicing the residential paint contractors.

Okay. And then secondly, I think your annual price increases in your Stores group that was announced was between 15% and 20% over the last let's say 12 months.

Over the last three price increases consolidated?

Yes, something -- if you combine all those. How much of that do you think actually stock? I know it takes time for you to get through all the pricing.

Yes, you know, when we take a look at it -- again, in April one of those did fall off, June we did put another price increase out there. So a little bit of a timing differential. But over the long term we still believe we're going to get between 70% and 75% of these.

The last December we're two quarters into that. And when we look at that we usually -- after about two quarters we're in the 55% range and we're right there and eventually we're going to get all 75% of these.

Okay, helpful, thank you.

Thanks, P.J.

Jeff Zekauskas, JPMorgan.

Hi, good morning. Did gallonage grow in the stores business in the quarter year over year?

No, it didn't. It did not grow, it actually declined.

Sort of flat to down-ish or was it a little bit more than that?

A little bit more than that.

A little bit more than that, okay.

And, Jeff, when you take a look at last year, this was -- as Chris' opening comments in his remarks, this was the quarter we expected if we were going to go against any quarter that was going to be difficult. We had that new housing credit and that caused a lot of activity over a two- to three-month period and we were going up against that.

And in the quarter I think you took something like a $12 million pre-tax charge for the pay down of your debt. What income item does that show up in, income statement item?

Interest expense. If you take a look at our interest expense for the quarter, Jeff, I'm going to pull that out real quickly. The interest expense in 2010 for the quarter was $26,340,000, this year it was $11,747,000.

So in other words, if we took out the charge your interest expense would have been zero?

Probably the change -- no, no, the $15 million was in 2010. So the $26 million would have gone down to about $11.5 million last year. And we're at $11.7 million in interest expense this year. So the change is very small, but the expense would not have gone down to zero.

I don't mean to belabor it, but I thought that the number that you reported in the quarter was $11.7 million, which includes the charge.

No, no, no, that is the amount of interest that we paid in the third -- for the three months ending June 30, 2011. The charge we took to bring back that -- to pay down that 100-year note occurred last year.

Forgive me. And then lastly, it sounds like the reason why you're a little bit more pessimistic about your earnings outlook this year has to do with the inflation in raw material costs. When do you think your prices catch up to your raw materials?

Yes, I think that it's absolutely raw materials, Jeff. I mean we're feeling very good about most of the segments of the Company and the way that they're headed and we think we're coming into a better second half on volume.

We've been very clear with the investment community about the unabated run-up in these raw material costs. We took pricing again in June to the market. And as Sean has commented, this price increase will go in as the others have. As you know, it takes us the better part of nine to 12 months to be fully implemented and at full implementation we'll have about 75% of it in.

So, if all raw material cost increases stopped today we would be somewhere into the first half of next year to have our pricing catch-up.

Okay, thank you very much.

Dennis McGill, Zelman & Associates.

Hi, good morning, guys. The first one kind of hinted on what you touched on there, Chris, on the last question with feeling comfortable with a lot of the end channels, the guidance range for top-line is still pretty wide when you back into it for the second half of the year. So just wondering how we should think about that and I guess how you guys are thinking about it in the context of guidance as to why you didn't tighten that up or if there's anything particularly concerning you that leaves that range pretty wide?

I think that we're still in a market that is clearly bouncing along the bottom on housing and new construction. We have a pretty good view into the repaint activities that are going to be taking place. And I think the range reflects the fact that there's still quite a bit of uncertainty in this market.

Okay. The second -- just having to do with the exterior categories, realizing that hopefully is just a one-time drag. Any way you can quantify what your exterior products did during the quarter just to get a sense of how big of an impact that was?

Yes, we don't give that number out specifically, but I think we have commented that in the quarter specifically, given the impact of unseasonable weather pretty much across the entire eastern half of the United States, tornadoes, hurricanes, floods, significant rain, that our exterior gallons definitely lagged the quarter's performance. And as we also commented, we saw that start to rebound in May and June was a much better month for us.

Okay. All right, thanks again.

Saul Ludwig, Northcoast Research.

Good morning, guys. In the admin section was there any reversion of any accrual for incentive comp, given your more modest full-year outlook?

No, I think when we take a look at it our compensation this year is up modestly. We do have the Global Finishes Group and some other segments that are doing very well with the Company, so we are still accruing at the same level, Saul.

Okay. And then I noticed the environmental you actually had a credit; that is sort of very unusual. How should we think about that -- A) why credit? And how we should we think about environmental going the rest of the year?

Yes, I think when you take a look at it, Saul, for the first six months we were at -- Environmental was $4.650 million. Last year was $4.722 million, so relatively flat. We think that Environmental for the year is going to be flat or just up slightly.

I would tell you it was timing. We have done a pretty good job of selling a couple different older facilities, and we just had some environmental accrued for some of that that we ended up reversing non-accruals in that quarter. But for the full year you can see it's right on with last year and we are going to be flat to up slightly.

Yes, gross margins you commented were down 200 basis points. And given your more favorable outlook for volume in the back end of the year and the price increases, would you still expect gross margins to be down but not as bad as the 200 basis point drop? Or do you think they could be comparable to where you were a year ago?

Yes, I think when you take a look at it, Saul, when we look at the Company in total and you look at some of the effects of the acquisitions and the rapid rise in raw materials, we've constantly talked about a range of 44 to 47. I think that when you look at where we are in the short term, we still think long-term we're going to get to that 44 to 47.

We think that with the effects at the acquisitions and with the rising raws, in the short term we might be in a 43 to 46. And so I think that this year, if I was putting a forecast out there, which we're not, but I would say you're probably looking more at the lower end of the 43 to 46.

And the final question, you've always we said that these price increases take nine to 12 months to get fully implemented. Can you just reeducate us, why does it take so long?

Yes, I can do that that, Saul. If you look at the effect (technical difficulty) of this pricing, in the first quarter we're getting a pretty good jump on these things and we see quite a bit of it in there. As you know, we honor our price commitments on quotes that we've given to professional painting contractors, industrial coating segments, etc.

Particularly when you take pricing at this time of year, in the middle of the paint season, you've got a lot of jobs that have been quoted and we stand behind us. So that's why you see a tail on these things, they just take a little longer.

And then just a final question. The volume decline that you experienced in the consumer sector, it looks like it could have been about 15%. To what extent was that all Walmart or was there also a decline in the non-Walmart business? And should we expect similar declines in the balance of the year as you anniversary the Walmart business?

When we take a look at that, it wasn't 100% Walmart. When we take a look at the business outside of Walmart, Walmart is performing just like we thought it was going to be. But in the first quarter I think we talked about -- I know we talked about the timing of shipments to some larger retailers that were positive for us.

So when we look at the total year-to-date, our consumer is just about flat ex Walmart. And I think when we look at the total year, except for Walmart, we think it's going to be right around that range.

Thank you very much, guys.

Don Carlson, Susquehanna Financial.

Yes, thank you. Chris, I just wanted to clarify a few volume issues. I noticed the DOC was out yesterday revising down both 2010 and the first quarter. I think they got to a more meaningful or realistic 1.4% rise last year and then down 3% in the first quarter.

So my question would be, were you down more than 3% in the second quarter given that the weather exacerbated some of last year's government stimulus comps? And for the full year I noticed you said you'd be up in the second half, but would you still expect full-year industry volumes to be flat or up?

And then finally, on your own volume initiatives, I know you've talked in the past about the potential for maybe making inroads into a big box. Just wondered if you could update us on any of those activities?

Yes, first of all the government data, Don, that is absolutely correct. And we've comment in the past that we have to be slightly suspect of this information because it does get revised, and very much appropriately this time, revised significantly downwards.

You referenced a 3% first-quarter decline, we actually saw 4.2% in the data that we were looking at and we think that's probably pretty close and certainly more accurate than what we were seeing from them last year. And as we also commented, our gallon declines were not at that level, even with the comment that Sean just did with the last caller regarding the impact on the consumer segment.

So our expectations are that in the second half of this year when the comparisons get easier, because we also commented that the second quarter last year was a positive gallon quarter for us, not so much in the third and fourth. We expect that we're going to have gallon flat to up and that we're going to be outpacing the industry over that period of time.

Regarding our opportunities at a big box customer, we've also been very consistent for a long period of time to advise that both the major big-box players, as well as a number of smaller regional ones, are all customers of ours and we have an ongoing concerted calling effort in there. We would welcome the opportunity at the right time with the right brand to play a role in there and we have nothing further to comment on that at this point in time.

Okay. And then just a quick follow-up on inventories. You mentioned that you built inventory. But I saw sequentially dollar inventory was relatively flat. Just wondering if you can talk about -- and I imagine, as you said too, it was inflated by higher prices of raws and finished goods. So what exactly went on with inventory? Were you continuing to build in in Q2 ahead of second-half raw material increases?

Yes, when we talk about this and we look at the second quarter our dollars were up, as you said, somewhat due to the raw materials. We were relatively flat. We actually built most of this inventory on a comparison basis in the first quarter -- this past quarter. We've maintained it relatively flat, but it's still higher than we were last year. And we usually start seeing it start to come down in the second quarter, but that's not what happened in the second quarter here.

Okay, thank you.

John Roberts, Buckingham Research.

Thanks. It's a little hard to tell how high you can get prices before you affect demand. But I think you've commented in the past that your highest priced paints were the best sellers, is some sort of comfort that you haven't reached a limit yet. Is that still the case?

Yes, John, I think that elasticity of pricing and demand is obviously something to watch extremely closely. We've commented in the past that through all these pricing activities we've taken over the past decade that we very carefully watch the mix inside the Company and are continuing to experience favorable or at least steady mix even with the pricing that we've had to take.

And then secondly, how is the HGTV rollout going? Have you got any early signs on whether it is impacting store traffic like you thought it would and your ability to maybe up-sell the customers when they come in?

Yes, we're very excited about this program. It officially launched in June and in preparation for that it had started to show up in our stores as early as April and May as we were getting material and point of purchase displays set in ahead of time.

I can tell you that through the first full month as well as a little bit of a pre-support it's on budget and doing well. July is tracking much stronger than June as we're now starting to see the advertising kick in. The HGTV programming as well as our own outreach to their database of followers has been robust and terrific. And we're seeing great foot traffic in the stores intrigued with the whole color offering and the idea.

To your point, there is some up-selling happening, as we would expect, as customers get in and understand that there are higher quality product choices. So I would say that from our perspective we're pleased with the early signs and it's tracking exactly as we had expected.

Thank you.

Robert Koort, Goldman Sachs.

Hi, this is Brian Maguire on for Bob. I just had a follow-up question on the inventory build and some of the pre-buying that you've been doing there that you mentioned. Can you kind of quantify the benefit you got or you think you got on that? Or maybe (multiple speakers) how much -- where (inaudible) gross margins have been without that pre-buying?

We don't have any kind of a metric that I can give you. I think that it's all in our forecast. But we specifically haven't done like a PBB on pre-buying.

Okay. And then just on the HGTV, another follow-up question on that. Was there significant SG&A spending in there in the quarter or will it be a little bit higher in the third quarter than it was in the second quarter?

Yes, we had some modest increases in advertising expense and some merchandising. Not significantly, I think that was all embedded in the SG&A, which was under control. And we would expect that to remain the case for the rest of the year, Brian.

Okay. And then just on couponing or discounting. Have you had to step up your level of discounting and couponing to get people into the stores?

We don't do couponing per se, but the paint industry, including Sherwin, has always used promotional activity, dollars and percentage off to drive traffic and sales, particularly during the height of the paint season. As we commented on the early part of the call, six of the last eight quarters we've had a strong double-digit DIY sales gain through our stores.

And so I would say that this goes back about two years ago where we started to be a little bit more aggressive with our promotional schedules. Those have continued pretty much at the same level over that cycle and it's helping drive additional traffic to our stores.

Okay, just one last one for Sean on the tax rate, it's come in I guess average about 29% in the first half. Is that still a good run rate for the back half or (multiple speakers)?

We think it's slightly higher than that, still in the low 30s, but just some timing of discrete items brought it down to that 29 (inaudible), but the second half will be slightly higher.

But lower than last year's kind of 33%?

Yes.

And back to the promotional activity, Brian, I would be remiss if I didn't tell you we're having our biggest sale of the year this weekend. So stop on by.

Yes, I'm going to pick up some paint this weekend then.

Well, we'll be happy to see you in the store.

Thank you.

Matt McGinley, ISI Group.

Good morning. In the SG&A dollar growth you had in the first half you're up about $142 million. How should we think about that growth into the back half of this year? Because a lot of that I assume is from acquisitions, does that rate fall off significantly or do the dollars kind of increase at that rate?

Yes, I think the third quarter we're still going against an acquisition. September we're fully annualized on those. I think that you'll see some fall-off but I won't call it dramatic. And then we have this Leighs coming in, but that's not that dramatic.

Okay. And then as a quick follow-up on the gross margin decline, you experienced the 200 basis points. How much of that was driven by the acquisitions versus raw material cost increases?

It definitely was affected negatively by the acquisitions, but we really don't break that out.

Okay. And then one last one. On the revolver that you issued the 8-K on last week, can you give any commentary on why you increased the capacity from $500 million to $1 billion and are you still intending to issue CP in the future or --?

I'll take it in reverse. We definitely are definitely going to continue to stay in the commercial paper. Right now at the low end we're paying less than 25 basis (technical difficulty) it's been a pretty good financing for the Company.

We took the opportunity, really we want it to be $1 billion. But 15, 18 months ago when we did the last one, the prices are so high and we still had the letter of credit CDS's, we still had $750 million of those. Now those will start -- one came off in June, another one will come out next year. So we thought with the prices coming down and we actually were able to take our $500 million up to $1 billion with lower costs. So as those come off we felt it was important to have it at $1 billion.

Okay, thank you.

Dmitry Silversteyn, Longbow Research.

Good morning, gentlemen. A lot of my (technical difficulty) have been answered, but I do have a couple follow-ups if I may. I think we were talking about -- when you talk about inventories and why it's going up -- that was from pre-buying, you had price increases. But then you also mentioned that you're trying to address or ensure that there were no shortages of materials. I mean last year we had the acrylic resin problems, what raw materials are in short supply this year? Is it just TiO2 being tight or --?

Yes, TiO2 is tight for sure and I think it's the year-over-year working capital impact of having that material versus the shortages we had last year that's impacting it more than any concerns we have about inability to get raws.

Got you. So in other words, last year the inventory was a little bit lower because you couldn't get the stuff that you needed, this year it's more normal?

That's correct.

Okay, I understand that. Second question on the -- you kind of provided some updates on how the global business is doing, particularly in Latin America. How are your acquisitions in Europe doing, the two wood coatings businesses you acquired in terms of where you are in integration and learning about the end market and perhaps getting other products into those plants beyond wood coatings? Can you update us on what's going on in Europe for you?

Yes, I'd be happy to, Dmitry, and I would tell you that both of the major wood acquisitions we made in Europe last year, Becker Acroma and Sayerlack, are performing well. They are on pro forma budget for the Company.

We are beginning the early stages, as you pointed out, of expanding from wood coatings into some of the other industrial OEM finishes that the Company has good technology and could share position in the United States. And the teams that we have on the ground in Europe are excited to have additional new product technology and opportunities to sell. So all that's going well.

I would comment further about, as Sean has commented in his answers to the gross margin questions, this is an area where we need to improve. We've seen a little bit of gross margin erosion with these businesses. I think that's not to be unexpected at a time of an acquisition.

We have larger customers with this business as opposed to the types of customers we enjoy through the controlled distribution and the stores business. And we've been a little more careful with pricing there until such time as we had calmed the waters on all the changes that are affiliated with the acquisition.

Our expectations are that the management teams are doing great. We have very much been able to retain the leadership that we had hoped to keep. And we're moving forward to fix and address some of these pricing issues to get that side of it back on track. Overall I'd say that the Company is very pleased with the way that these acquisitions are tracking.

That's very good, thank you. And then one final question. I'm sure you couldn't help but notice that there's a lot of M&A activity happening in the chemical space right now including some fairly large deals for public companies. How do you look at the M&A landscape?

I know you try to be incremental more than transformational, but given the cost of debt and given your strength of the balance sheet, given some of the struggles you're having with the architectural paint market, which may or may not resolve in the next few years, has your outlook and appetite for acquisitions changed?

I'd say it's been constant through this cycle, Dmitry. We've done four major acquisitions in the last 12, 15 months. We continue to be focused and disciplined about the types of businesses that we think would make sense for us to look for. We are talking to a number of interesting targets as we speak.

As you made mention, Sean has done a terrific job of making sure the Company has access to all the capital we might need to do that. And I think you should expect a very continual similar sized deals that we've been doing in the past years to continue.

Okay. But we shouldn't wake up one morning and find out a transformational deal?

Who knows.

All right, fair enough. Thank you.

Eric Bosshard, Cleveland Research Company.

Good morning. A couple things. First of all, the sales guidance in 3Q, I think you're guiding sales to grow faster than 2Q and the full-year sales guidance was increased from the prior guidance. Can you just talk a little bit about why in the conviction -- if you're seeing anything in the business that gives you that conviction?

A couple points there. As we've commented, the comparisons get much more favorable for us going forward, Eric. We had the toughest comparison quarter that we've just come through in the second quarter relative to the first-time homeowner tax credit program that really created a little blip of volume demand in 2010. And then a corresponding falloff of that in the second half of the year which we don't expect to happen this year.

Also, our own data would indicate that we're trending throughout this year in a better model. We've talked about how April to May to June changed and that July is remaining strong. So given the fact that we have significant volume through that store's platform which really drives that number, that's why we're guiding stronger.

And as well, Eric, we do have a little more price in the second half of the year than we had in the second quarter.

And is that, Sean, the explanation for the full year increase, this price is at the core of that increase?

Yes.

And then I don't know if you have any interest in helping us understand the delta between April and May and June. It looks like that the store volumes were down, the store gallons were down perhaps 3 points in the quarter. Can you give us any sense of how different April was relative to -- or April/may relative or to June?

You're right, we don't have any interest in helping you with that.

My other question then, the Global -- the acquisitions in the Global Group, I think you said they added roughly $90 million to sales and nothing to operating profit.

Yes.

I was wondering if there are any -- if there are any thoughts -- if there are any expenses that were quarter specific in nature for those businesses to make no money on that degree of sales. And I guess especially the thoughts in the second half of those businesses concerned to generating any degree of operating profit?

I think there were some expenses and I'll just say -- but I would not say that's the reason why at that level, that $90 million level. We did have some acquisition integration on the IT costs, some IT costs and so forth. But I wouldn't hang my hat on that. I would say it was more really due to the gross margin in some of these that that happened.

I think in the second half of the year they will be accretive. But now that we have Leighs I think that the Leighs will probably offset where we're at. So we're going to start to see accretion. And at the $90 -- $90 million quarters for those too. But Leighs will be a little dilutive -- will be dilutive, a little -- slightly higher than what they are right now in our forecast. That's what's going on with acquisitions.

Thank you.

Jeremy Brunelli, Consumer Edge Research.

Just a quick question on gross margins across the segments. In the 10-Qs you usually give us pretty good commentary first quarter, Paint Store Groups were up, Consumer Group up 700 bps, and then Global Finishes down 320. And we're lapping I think easier comparison Global Finishes and Consumer Group. Can you give us any color around the magnitude of the gross margin declines across the segments?

Yes, in fact we definitely will, in the Q we will have it. So right here I will tell you that Global Finishes Group and Consumer were down 1.7 -- 170 basis points for the quarter. And I know that Stores Group was up 1.4, 140 basis points. That takes Stores on the year-to-date basis to a 60 basis points decline. And if you give me 10 seconds here I'll give you that number for Consumer and Global. Consumer will be down 70 basis points year to date and the Global Group will be down 220 basis points -- I'm sorry, 200 points.

Great. And then just a quick follow-up on the DIY business. You've, in the past, talked about how there's a better margin differential from DIY to pro. So the question is can you give us a sense of the magnitude of the differential? And then I know historically pro represents 85-ish of your sales coming out of your stores. What is it kind of today? Is it much higher and should we continue to expect a benefit from that?

Yes, the mix in our stores remains -- is very much skewed to professional painting contractors. Given the strength of the DIY recently we may have come off of the 85-15 to maybe closer to 80-20 range. But it's not dramatically different.

And the gross margin percentages on our DIY business as we've become a little more professional are not substantially different than the kinds of margins we make on the residential repaint contractor, etc. Those kinds of mix changes are not impacting the margins near to the extent that the raw material prices are.

Great, thank you.

[Stuart Pulvirent], Merlin Securities.

Hi. Well, you've answered a lot of questions, but maybe on volume I had two that are related. One is how much of your volume goes to like federal, state and local governments? And obviously with budgets maybe maintenance is being deferred. And second, on the positive side, we did mention some of these unfortunate disasters around the country, but do you get a bounce once we -- everyone sort of collects their thoughts and starts rebuilding?

Yes, Stuart, we do enjoy quite a bit of business with various government facilities, both federal, state and local, across the country. And as a percent of our sales it's not significant. I don't know that number off the top of my head, but it would be single digits at best.

In terms of the bounce on the back side of natural disasters, that has typically been the case. These particular tornadoes that were on the ground in the Southeastern part of the United States during April and May were really quite strong, wide and lengthy periods of time did more damage than a typical tornado would.

And so we would expect we'd see nice rebuilding activity in those communities. Paint is the late cycle on that kind of construction, so perhaps later this year or certainly into early next year we'd expect to see some lift from that.

Thanks.

Mike Shrekgast, [Senexis Capital].

Yes, can you just -- can you guys talk about the professional pricing versus your do-it-yourself pricing? And when you offer these promotional events for do-it-yourself customers, does that not have any impact on how you're selling to the professionals?

Correct, it does not. And the reason being is that professionals buy every single day at various discount levels based on their size and volume. And typically those prices are better than what the retail DIY customer would buy even on promotion.

Okay, thank you.

Steven East, Ticonderoga Securities.

Thanks. Chris, just a follow-up on the commercial versus residential. Is commercial actually up year to date and what type of trends are we seeing? And about how much of -- what percentage of your US business is commercial?

Stephen, this is Bob. Commercial new construction is down this year. In square footage terms it's down high-single-digits year to date through June. On the repaint side we've seen a little recent strength in property management, but year to date gallon volume in the market in property management is likely negative.

Okay, all right. And how much of that -- how much is commercial of your business?

When we break down the market we talk about commercial or nonresidential business being about 30% of the repaint market and closer to 40% of the new construction market. And as a reminder today, new construction in total represents in the low teens percentage of total gallon consumption.

So if new construction is 14%, commercial would be about 40% of that, and that would leave high 80's -- 85% to 86% for repaint and nonresidential would be 30% of that. We would be skewed just a little more than the market toward nonresidential.

Okay, all right. And just DuPont's announcement this past week or so about TiO2 going up, is that -- I assume that's something new, it's not a regurgitation. And is that -- how long would it take for you all to typically see that?

Well, you're right, DuPont announcing titanium price increases is nothing new. We've been hearing that for -- on a quarter-after-quarter basis for literally decades. Obviously they have much more commitment to the enforcement of those price increases over the last couple years.

Again, we've been consistent with our communication to the Street. We've talked about the fact that the entire basket of raw material increases for the industry has been going up each quarter that we've given guidance -- we're now in the high teens, low 20s. The vast majority of that is in the titanium. It remains to be seen what kinds of impact we'll have going into 2012 and we'll be commenting on that as we get closer to year end.

Okay, fair enough. Thanks.

John Roberts, Buckingham Research.

Thanks. You commented that gallonage was down for the quarter in North American architectural. Was it down in June as well?

That's hard to say, John, because you're talking about for the industry, right?

Well, actually I was talking about you, but however you want to answer it.

Yes, I think we will go with the (multiple speakers).

(Multiple speakers) we're not going to start giving -- we just don't give monthly volumes or really at all.

We're pretty sure for the industry with gallon volumes in the first quarter being down low- to mid-single-digits against a really weak first quarter '10, the industry is going against a pretty strong second-quarter '10, it's very likely that gallon volume for the industry and architectural was down mid-single-digits or more.

Thank you. There are no further questions at this time. I'll now turn the floor back over to management for any closing remarks.

We'd like to thank you all once again for your participation on the call this morning. As always, I will be available over the balance of the day and week to take your follow-up questions. We appreciate you joining us and thanks for your continued interest in Sherwin-Williams.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. We thank you for your participation.