宣偉 (SHW) 2012 Q1 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of first-quarter 2012 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, Finance and CFO; (inaudible), a Vice President (technical difficulty) and Corporate Controller and Bob Wells, Senior Vice President, Corporate communications.

This conference call is being (technical difficulty) 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, May 9 at 5 p.m. 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 statements whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the Company's earnings release transmitted earlier this morning. After the review of first-quarter results, we will open the session to questions. I will now turn the call over to Bob Wells.

Thanks, Jackie. In order to allow more time for questions, we have provided balance sheet items and other selected information on our website at www.sherwin.com under Investor Relations, First-Quarter Press Release.

Summarizing overall Company performance for the first quarter 2012 versus first quarter 2011, consolidated net sales increased 15.1% to $2.14 billion, due primarily to higher paint sales volume and selling price increases. The combination of acquisitions and currency translation had little effect on sales in the quarter.

Consolidated gross profit dollars increased $112.4 million for the quarter to $909.8 million. Gross margin decreased 40 basis points to 42.6% of sales from 43% in the first quarter last year. Selling, general and administrative expenses for the quarter increased $66.6 million over first quarter last year to $557.7 million. As a percent of sales, SG&A decreased to 35.5% in the quarter this year from 37.2% last year.

Interest expense decreased $338,000 compared to first quarter last year. Consolidated profit before taxes in the quarter increased $47.6 million, or 50% to $142.3 million. Our effective tax rate in the first quarter this year was 29.6% compared to 27.9% in the first quarter of 2011. For the full-year 2012, we expect our effective tax rate will be in the low 30% range compared to last year's rate of 40.4%. As a reminder, our 2011 income tax expense included a one-time income tax charge of approximately $75 million to satisfy our settlement with the IRS.

Consolidated net income increased $31.9 million to $100.2 million. Net income as a percent of sales was 4.7% compared to 3.7% in the first quarter last year. Diluted net income per common share for the quarter increased to $0.95 per share from $0.63 per share in 2011.

Looking at our results by operating segment, for our Paint Stores Group in first quarter 2012, sales increased 20.9% to $1.12 billion from $929.3 million last year. Comparable store sales, that is sales by stores open more than 12 calendar months, increased 20.4%. The increase in sales for the segment was due primarily to higher paint sales volumes across all end-market segments and higher selling prices.

Regionally, in the first quarter, our Midwest division led all divisions, followed by the Eastern division, Southwestern division and Southeastern division. Segment profit for the group increased 63.7% to $112.7 million in the quarter as higher sales volume and selling price increases more than offset higher raw material costs and SG&A spending. Segment operating margin increased to 10% from 7.4% in the first quarter last year.

Turning to the Consumer Group, sales in the first quarter increased 8.6% to $320.4 million as a result of selling price increases and volume increases. Segment profit for the Consumer Group increased 34.6% in the quarter to $55.3 million. Segment profit as a percent of external sales increased to 17.3% from 13.9% in the same period last year. 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.

For our Global Finishes Group, sales in US dollars increased 11% to $483.1 million in the quarter, due primarily to higher paint sales volume, selling price increases and acquisitions. In the quarter, acquisitions increased net sales by 3.9% and unfavorable currency translation rate changes decreased sales by 2.3%.

First-quarter segment profit increased 47.3% to $28.6 million due to higher sales volume and selling prices, partially offset by higher raw material costs. Currency rate changes and acquisitions had no significant impact on segment profit in the quarter. As a percent of sales, segment profit increased to 5.9% from 4.5% in the same period last year.

For our Latin America Coatings Group, first-quarter net sales increased 7.1% to $208.6 million, due primarily to selling price increases and higher sales volumes, partially offset by unfavorable currency translation. Currency translation rate changes decreased sales in US dollars by 5.6% in the quarter.

Stated in US dollars, segment profit in the quarter increased 14.5% to $19.9 million, due primarily to higher sales volume and price increases, partially offset by raw material cost inflation. Currency translation rate changes decreased segment profit by $1.4 million in the quarter. As a percent of net sales, segment operating profit was 9.5% in the quarter, compared to 8.9% in the first quarter 2011.

Turning now to the balance sheet, our total debt on March 31, 2012 was $1.32 billion, including total short-term borrowings of $677 million. Total debt on March 31, 2011 was $1.34 billion. Our cash balance at the end of the quarter was $25.5 million compared to $53.9 million at the end of first quarter 2011. Total borrowings to capitalization were 46.7% at the end of the quarter versus 45.4% at the end of the first quarter last year. Long-term debt to capitalization was 22.8% at the end of the quarter this year compared to 22.4% last year.

In the first quarter 2012, we spent $32.8 million on capital expenditure. Depreciation expense was $37.9 million and amortization expense was $6.6 million. For the full year this year, we anticipate capital expenditures for the year will be approximately $130 million to $150 million; depreciation will be about $150 million; and amortization will be about $30 million.

I will conclude this review with a brief comment on the status of our lead litigation. In California, the Santa Clara case involving eight cities and counties in California and five former lead pigment manufacturers continues to move through the discovery phase. A pre-trial hearing is scheduled for May 22 and the court has set a trial date of September 10, 2012. Once discovery is completed, the parties will have the opportunity to file dispositive pre-trial motions.

That concludes our review of the results for first quarter 2012, so I will turn the call over to Chris Connor who'll 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. The pre-announcement we issued on April 9 took some of the suspense out of today's release. Our practice is to update guidance when it becomes apparent that we will exceed the top end of our original EPS range by the greater of 10% or $0.10 per share. Our results in the first quarter easily cleared both these hurdles.

In response to our pre-announcement, it also gave us insight into some of the questions you are likely to have regarding our results for the quarter. I am sure you'll have some additional questions, but let me take a few minutes to address the obvious ones, namely the sustainability of the strong demand we experienced in the quarter, the current trajectory of raw material costs and the success of our recent price increases.

Starting with the demand front, first-quarter consolidated volumes net of acquisitions grew at the strongest pace we have seen since the first quarter of 2004. Compared to our performance in the first quarter of last year, demand strengthened in virtually every product category in every customer segment in every geographic region. While it is difficult to quantify the impact that favorable weather in the United States had on first-quarter volumes, we are certain it did have some positive impact. We are equally certain that the strong sales trends in the quarter are an indication that market demand is, in fact, improving.

Let me offer a couple of data points from our Paint Stores Group that I think supports these conclusions. First, exterior paint sales volumes grew at a faster pace than interior, which does suggest an early start to the exterior painting season. However, both exterior and interior grew at double-digit rates in both revenues and gallons.

Second, we looked at our sales results by geographic region. As Bob pointed out in his comments, our two northern Paint Stores divisions turned in the strongest year-over-year sales increases, which would again suggest some weather impact. However, three of our four divisions grew sales by more than 20% and the fourth was up in the high teens. Spread from the highest growth rate to the lowest was just over 5 percentage points.

We think this data confirms that there was likely some weather benefit in our first-quarter results, but equally convincing evidence that fundamental demand in the market is strengthening. Even with the volume improvement we saw in the quarter, the good news is that the market still has a long way to go to get back to what we consider to be sustainable levels.

Sales volume growth, particularly by our Paint Stores Group, was the overriding reason earnings came in above our initial expectations. Consolidated gross margins in the quarter declined 40 basis points year-over-year, primarily due to the annualization of the raw material inflation we experienced in the last nine months of 2011.

Although the price of high-grade chloride titanium dioxide continues to rise, the magnitude of the price increase announcements has diminished in recent quarters and global demand for [CAVII] has softened. It remains to be seen whether these increases will be fully implemented. At this point, however, year-over-year raw material cost inflation appears to be on pace with the high single digit to low teens rate we anticipated for the year with most of the pressure coming from titanium dioxide.

We continue to make progress in implementing the price increases required to offset these raw material cost headwinds. In the quarter, pricing contributed just over half of the increase in our consolidated sales. As our Paint Stores Group makes further progress on the October and February announcements, the impact of pricing on revenues should increase modestly in the second quarter. Again, which should result in sequential gross margin expansion. It appears that the first quarter will be our most challenging quarter from a cost price standpoint.

Working capital for the Company, which is inventories plus receivables minus payables, decreased as a percent to sales to 12.7% from 13.9% in the first quarter of last year. The change in working capital accounts and the increase in net income each added approximately $30 million to net operating cash in the quarter. This increase in net operating cash was offset by a payment of $59 million to the IRS to complete our 2011 tax settlement.

During the quarter, we acquired 1.8 million shares of the Company's stock for treasury at an average cost of $100.44 per share for a total investment of $181 million. On March 31, we had remaining authorization to acquire 19.25 million shares. Yesterday, our Board of Directors approved a quarterly dividend of $0.39 per share, up from $0.365 last year, keeping our string of 34 consecutive years of dividend increases intact.

We also continued to invest in our control distribution platform during the quarter. Paint Stores Group added five net new stores, bringing our total store count in the US, Canada and the Caribbean to 3455 stores compared to 3397 one year ago. Our plan continues to call for Paint Stores Group to add approximately 60 to 65 net new store locations during 2012.

Looking ahead, we remain cautious in our outlook on raw material costs, but are increasingly convinced that the improvement in market demand we have seen over the past few quarters will prove durable. We anticipate that our consolidated net sales in the second quarter will increase 10% to 15% 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 $1.92 to $2.07 per share compared to last year's record performance of $1.66 per share.

For the full year 2012, we expect consolidated net sales to increase over 2011 by a high single digit to low teens percentage. With annual sales at that level, we've increased our expectation for full-year diluted net income per common share to be in the range of $5.75 to $6.05 per share compared to $4.14 per share earned in 2011.

Again, I'd like to thank you for joining us this morning and now the team would be happy to take your questions.

(Operator Instructions). PJ Juvekar, Citigroup.

Yes, hi, good morning. Your SG&A spending was up almost 10% year-over-year. I was wondering if there was any pull-forward or promotions or marketing expenses from spring season into 1Q.

PJ, this is Sean Hennessy and we marginally spent a little more SG&A on merchandising and advertisement, but really no pull-forward. I think that the advertising plan that we had planned in the first quarter we ended up doing. I think the majority of that, when you take a look at that SG&A increases, with the sales increase that we had, I think the hours in the stores and you start seeing us putting more service hours in the stores to make sure that the customer service is maintained. So our SG&A did go down as a percent of sales; it did have an increase as a percentage you did mention. When the gallons are going that way, you are going to see us continue to add service in the store to make sure that the proper customer service is handled.

Okay. Secondly, what are you seeing in the DIY versus the contractor channel and is the contractor business coming back sustainably in your opinion?

Yes, PJ. Both of those segments, as we commented, had strong quarters for the Company. Speaking on our Stores business specifically, the DIY business also enjoyed a double-digit sales, which is consistent with the performance we have been seeing in the DIY side of that now for the last five or six quarters.

The good news in the quarter, and the one that we have been saying should come at some time, was the strength in the contractor segment. Again, across all segments and for us, that would be the new residential painting contractor, the commercial painting contractor, property management, residential repaint. All these segments are clicking and generating strong sales and volume gains.

Thank you.

Kevin McCarthy, Bank of America-Merrill Lynch.

Yes, good morning. Chris, with regard to your same-store sales growth of 20.4% in Paint Stores, will you elaborate on how much of that might have been derived from volume versus price in the quarter roughly?

Yes, I think we have been commenting, Kevin, that our price impact in the stores business had been in the high single digits over the last kind of third and fourth quarter of last year. That trend continued into the first quarter of this year. So slightly more than half of that lift for the Company in the segment for the quarter was volume.

Okay, great. And then given the trends that you are seeing on raw materials, have you taken any very recent price actions since the 8% increase that I believe you were implementing for Feb. 1 or would that be likely in your view?

No additional pricing activity has taken place since the February announcement through our stores. As is our practice with the investment community, we don't pre-announce any pricing activities. We cover that off with our customers first and then provide great transparency to you. So no comment on that at this time.

Fair enough. And then finally, Chris, on the splits on exterior architectural coatings versus interior, I think you mentioned that both were up double digits. Would you care to comment on the magnitude of that spread and how that would compare to normal trends with an eye toward disentangling the weather effects?

Yes, it is a little meaningless in the first quarter because historically our interior gallons are much, much greater as they should be at that time of year than exterior gallons, so the percentage improvement one relative to the other kind of skews that. Now, I think the point that we'd like to make sure that the investment community understands is that the interior gallons were up double digit and that really gives us the confidence of the underlying strength in the market. So exterior gallons outpaced that. It was a good quarter for that, but it's the interior numbers that really drove the quarter.

Okay, thank you, Chris.

Jeff Zekauskas, JPMorgan.

Hi, good morning. I was wondering about your Latin American operations. Do you use chloride-based TiO2 there or sulfate-based TiO2?

Predominantly chloride.

And is there very much of a price difference between chloride-based TiO2 these days and sulfate-based TiO2 on average?

Jeff, I don't have any data at my fingertips on the spread. I do know that a spread has opened up between chloride and sulfate. I don't know what that spread is on the spot market.

Okay. And then lastly, are you looking at any large acquisitions this year or what is the probability that Sherwin-Williams might make a multi-billion dollar acquisition in 2012?

Jeff, I think inappropriate to prospectively comment on acquisitions. I think the best guidance for you is to look at the historical way the Company has approached that. Our track record has been to really find these terrific bolt-on acquisitions that strengthen our control distribution platform in the Americas or add technology to us. And to the extent that we can continue to find those that add shareholder value, we will do those. I think that is all we have to say on that at this time.

So a big acquisition, the probability would be pretty small?

Well, just the logic of how many of those targets remain in the industry. So I wouldn't care to comment on that one way or the other.

Okay, good. Thank you very much.

Dennis McGill, Zelman & Associates.

Hi. First, Chris, I just have to compliment you on knowing the underlying chemical makeup of the TiO2 in Latin America.

Thanks.

Impressive. So just one big picture question. You gave great data to understand the breadth of the recovery. I guess just in your professional opinion, kind of the gut reaction, what is the best answer as to why? Why do you think it is so broad-based and what has happened of late that has kind of turned the corner for the consumer?

Yes, Dennis, we have been commenting for a while about the unsustainable gallon volume numbers for the American architectural coatings industry and as you recall, after a rough start to the year last year with negative volumes, flattening out in the second, slightly up in the third and then trending better in the fourth, I think we commented on the fourth-quarter call that that momentum would be continuing to carry through. We are confident there was pent-up demand for normal maintenance and decorating that was -- needed to be addressed. And I think as we just said, four years is an awful long cycle to go through that past cycles would show that this would start to rebound.

We expected the contractors' share of the end market would rebound back towards the 60% more historical run rate level and that having gained share in the downturn that we'd be in a good position to capitalize on it. And all those factors kind of started to come to fruition in the first quarter.

Okay, appreciate that. And then the second comment, I'd imagine you'd normally only dream about double-digit volume growth. So now that you have seen it, and you have seen how the cost structure reacts, what would you say relative to your expectation heading into this year about your ability to lever volume and what you've found in the first quarter relative to that?

Yes, I think we feel pretty good about the leverage that we had. If you look at the flow-through that stores had, I mean I think we have been commenting for many, many years that, when we give volume, we have flow-through and years ago, we used to talk about 3% and once we got past 3%, you would see it. And then after the downturn that Chris talked about with the volumes in North America, and when you take a look at the increases in the floats that we had in the first quarter, we feel pretty good about the operations and then if gallons continue -- will continue to flow through through operating profit.

So Sean, is it fair to say that what you saw in the expense leverage is what you would have expected for this given level of volume?

Yes.

Okay. Appreciate it. Thanks, guys.

Chuck Cerankosky, Northcoast Research.

Good morning. Great quarter. First question, in looking at the 260 basis points of margin improvement in the Paint Stores segment in the quarter, I don't think you got any help at the gross margin line there, so it was all leverage. Sean, what kind of -- what does that tell us about the opportunity for further margin expansion or the cadence thereof over the rest of this year?

Chuck, as I'm sure you recall, 15.5% operating margin was our peak at Stores Group and that happened in 2007. And as the volume went down -- last year, we were in the 13s%. So we take a look at it; we think that -- we always felt that the 15.5% was not just a one-time event. I think that we thought that eventually we could get back to that point in ways that we've structured and the way we've continued to build out the Stores Group, we feel that that is not the ceiling, that we think eventually we will be above that 15.5% operating margin.

You think you hit it this year?

Well, we don't forecast --

Time will tell.

-- segments and so forth, but I will tell you what, the first quarter is up 2.6. We were at 13.1% in the year. If we did that every quarter, we would be at 15.7%. We are not forecasting or --

We are not giving guidance for that though, Chuck.

I read you, I read you, but it was pretty impressive. Am I right though, you had gross profit margin pressure in Paint Stores in the quarter?

Yes. In the Q, when you get a chance -- when we submit our Q in an add-on line, you are going to see that the incremental gross margin dollars were up $80 million. And that will be what we like and so right there, you will see that -- that will show you that's where we were.

All right. When you look across your various paint lines, whether it is DIY or contractor brands or it's Pratt & Lambert or Dutch Boy or Sherwin-Williams, with the price increases that we have seen, what quality levels were your customers buying in the quarter? Maybe there is not a general answer to this, but were they trading up for quality? Were they affected? Was product mix affected by price?

We have commented on that historically, Chuck and I think the same trends are in effect here. We've continued to enjoy a modest shift mix towards better quality products. Again, as the contractor business has strengthened, they tend to be a high-quality purchaser. They've reduced their labor costs. So all good news there; nothing new to report.

All right. And in the rest of the year, you are going to have -- well, I guess more for the second quarter, but a 10% price tailwind. With this kind of volume growth, it seems to me your sales expectation is a little conservative. Would that be a fair way to characterize it?

We have also got some -- we are taking a look at the currency and someone mentioned Latin America Group earlier. Latin America group had a pretty sizable currency and you look at what is happening with the real, you look at what happens with the Mexican peso and then the euro. Last year, the euro was about $1.34. Right now, we are watching the euro, so (technical difficulty). I think we don't do (technical difficulty) segments, but I think if you look at the segments, that will probably tell you that, of all the segments, we think probably Stores Group is going to lead us (technical difficulty) in the second quarter.

All right. Thank you very much.

Bob Koort, Goldman Sachs.

Hi. It's Brian Maguire on for Bob this morning. And yes, congrats on the great first-quarter numbers and thanks for all the detail on trying to extrapolate the seasonal shift impact. Just one other data point on that I was hoping you could provide. Maybe just comment on the inter-quarter trend you saw there and how those volume numbers really trended, particularly at the end of the first quarter when you got into some more normal weather patterns and maybe even into April if you have got any data you could share.

Yes, I think that the quarter was pretty steady throughout all three months, which, again, back to your comment, Brian, should give some comment to the underlying market strength as opposed to the particular weather. The best day we had in the quarter was February 29 because leap year goes up against nothing (inaudible). When you are a retailer, leap year matters, but other than that, it was just really a very solid quarter throughout the entire three months.

Great. Yes, thanks. And then looking at the difference between the Consumer growth and the Paint Stores growth, you try to extrapolate the volume growth in Consumer. Maybe it was low single -- low to mid-single digit volume growth, but it seemed like maybe a half to -- a third to half of what it was at the Paint Stores. How do you kind of reconcile the big difference in the volume growth between those two channels?

There is a couple things. We don't -- the reason we always -- when we try to give you a flavor for the comp stores really for pricing, we don't really release unit volume gallons, just volume throughout Consumer because, in Consumer, you have Thompson there, you have Minwax, you have brushes, rollers, caulk, spray and things. So unit movement is really tough to see, but there is no doubt that the Stores Group was definitely stronger than in the Consumer, but there was a lot of other moving parts in that Consumer relating to a lot of other productlines.

Okay. And then just one last question if I might on your inventory levels. Have you been building inventory or -- we've heard from some of the TiO2 producers that they continue to see destocking in their chains. And have you tried to take advantage of some of the softness there to do some pre-buying or building your inventory levels? I guess you are kind of peaking on your inventory levels now as you head into the more normal painting season, but any sense and any change versus a year ago in inventory?

We always build inventory in the first quarter if you watch. We do have enough capacity to supply every gallon of paint that we sell in June, July and August. So there is such a sales curve in our business. In the first quarter, we are always going to build inventory.

If you look at it, we feel pretty good about where our inventories are. We had more inventory in finished goods last year, but last year, there was a lot of concerns about titanium dioxide shortages or raw material shortages and that's really what drove it last year.

We find that pre-buying or doing different things with different raw materials, the efficiencies of our operations, we are better off instead of having more invested, the amounts that you are going to pre-buy or pre-produce really doesn't change a great deal versus trying to find locations to bring that inventory in and handle it multiple times. So we feel this quarter was a pretty normal quarter. It went up against last year where we did pre-build some finished goods inventory, but this year's pretty normal and we feel pretty good at where we are at.

Great. Thanks again.

Don Carson, Susquehanna Financial.

Thank you. A question first on guidance. You beat the midpoint of your original first-quarter guidance by about $0.30, yet you are only taking up your full-year guidance by about $0.38. And as we get into the seasonally strong second quarter, shouldn't this emerging volume recovery both in the overall market and contractor sales lead to more earnings leverage?

Don, I would tell you that typically -- and we talked about the sales curve here -- the first quarter is our lowest and smallest quarter. So when you put that gallon through, that has a nice effect on us. I think that typically I would tell you very few times that we changed our full-year guidance after the first quarter up or down because sometimes we will actually say a good week in June takes care of the month of February -- a bad month of February. But here, when you sit there and take a look at it, the first -- the full-year guidance, there is a lot of different things moving in and out and you typically -- the first quarter, we will see what happens in the second and third.

Someone had just mentioned to me that the last time we had 20% comp store gains were back in 1994. So to sit there and say that that occurred at the smallest quarter of the year, will that continue in the larger ones, but it has only happened once in the last 18 years. So to project that out to the next three quarters, we don't have that in our guidance.

A question for Chris on your view on the overall market. I think by your numbers, you are showing 612 million gallons of US volumes last year for the industry, which was down slightly. What kind of a recovery do you see this year in percentage terms and do you still think that maybe 700 million plus is a normalized level for the US market?

Yes, Don, we are absolutely convinced that over 700 million gallons is the normalized volume level for the US market. That would indicate that housing starts would be back over 1 million, 1.2 million, 1.3 million perhaps. Existing home turnover numbers would be back to more normalized run rates in the plus or minus 6 million units per year and then a more normalized maintenance and decorating schedule.

So as we come out of this historic downturn in volumes and to your point, negative again last year to 612 million, we think there is a several year ramp-up here of maybe two or three times the GDP growth, that has been the historical growth rate for architectural gallons. And to Sean's point, it is very difficult after one quarter and the lighter quarter of the year to indicate that that is going to be that strong going forward.

We do take great comfort in all the anecdotal conversations that we have with thousands and thousands of painting contractors in our stores every day and listening to them talk about the work they have lined up for the year, the fact that they are hiring crews and adding painters to their teams, their purchases of the kinds of equipment and materials that they would need for a busy season are ramping up as well. So all these would indicate to us that that 612 million gallon number that the industry saw last year should, in fact, be moving towards the positive direction and time will tell how long it takes us to get back up over 700 million gallons.

Thank you.

Dmitry Silversteyn, Longbow Research.

Good morning. I just or -- I guess it is still good morning. Just wanted to follow through on the raw material situation. You gave kind of your expectations for the year, which you have maintained at high single digit to lower teens. If you look at the impact raw materials had on your quarter, can you talk about both on year-over-year and quarter-on-quarter basis what you saw and what you expect to see in the second quarter?

Yes, Dmitry, without getting too specific, the first quarter would obviously have the most annualization impact in it from the inflation that we saw in 2011. So with a high single digit to low teens expectation for the year, even if there was very little incremental inflation from Jan. 1 to March 31, you would expect that first-quarter raw material costs would be at the high end of that range for the year.

On a year-over-year basis?

Yes.

Okay. And versus the fourth quarter, your raw materials have gone up, but I would imagine that the fourth-quarter raw material purchases flowed through your P&L in the first quarter. So was raw material actually a benefit to your margins in the first quarter?

No.

No, there was some incremental inflation from 4Q to 1Q sequentially.

Okay. Was there a deflation in 4Q versus 3Q of last year, do you remember?

No. Each quarter -- each quarter with the increase of our raw materials, the increases occurred. Same quarter was higher than the first quarter. The third quarter was higher than the second quarter and the fourth quarter was higher than the third quarter.

Okay, so you didn't see the raw material declining in the fourth quarter like most other petrochemical purchasers have seen?

We didn't necessarily make that comment with reference to any specific component of the raw material basket, but the basket in total inflated each quarter last year, primarily driven by titanium dioxide.

Got it. Okay, that's helpful. Okay and second question, you know, obviously double-digit rate of growth may not be sustainable. Certainly I don't think it's sustainable for the year, but do you think at least high single digits is possible as we get into the second quarter; that in other words whatever external paint demand was pulled into the first quarter should not, as you mentioned, it wasn't meaningful enough to impact, assuming weather cooperates, the normal painting season in the second quarter?

So you are still looking -- I am assuming you are still looking for close to double-digit growth in volumes in the second quarter of the year as well.

We did forecast sales at 10% to 15%, and I think that that is the consolidated number. And I think that when you take a look at it, Chris mentioned how much the selling price was for the stores group, but I think that you can make your thoughts on that.

And then a final question. Given that you probably have more volume leverage, I would assume, in your store group than in the consumer group, and your store group volumes look like they were stronger year over year in terms of growth versus the consumer group, what is accounting for the fact that your margins in the consumer group expanded so much more than they did in the Paint Store Group?

Well, I think number one they had a nice sales gain, and I think that they have been working on some margin improvements. And I think that if you look at the stores group, we were increased on our SG&A. We are doing that, whereas in the consumer group you don't see it.

And then the takes, as the consumer group is making the paint for the Paint Stores Group, and so when you see that volume increase you will see that they do get the benefit of it.

On the gross margin side, but not necessarily on the -- not necessarily on the operating margin side, right, because you don't have the fixed cost of your stores in the Consumer Group.

Right, which is why I am saying that, yes, the one went from 7.4% to 10% which is pretty strong, we feel pretty good about it. Consumer actually grew faster than that, and it is because of the incremental SG&A that went into stores.

Got it. And that incremental SG&A, was that just sort of one-time campaigns and setting up posters and new displays, or is this going to be an ongoing thing?

It was headcount. I mean it is ongoing. And we did put more hours into the store to satisfy the customers' needs.

So as long as there is good demand, you expect to continue to pay your guys overtime, which is a high-class problem to have.

Right.

Not so much overtime but just when we say putting hours in, we are ramping up. We are hiring more people and staffing these stores at a better level, Dmitry.

Got it. Thank you very much, guys.

Eric Bosshard, Cleveland Research Company.

A question on gross margin. We saw the volume [profit] to help stores in the first quarter. In terms of the gross margin recovery, I think you have talked about 43% to 46%. I was just interested if that is still the range you are targeting and how you think the pace of recovery plays out back towards that as we move forward; not necessarily talking about the second quarter but over the medium term?

I think that the long term, we still believe the 43% to 46% is a good number and in the meantime, in the short term, I think that, or midterm, whatever you want to call it, we think that we've talked about the first quarter really being the toughest when it comes to this raw material annualization. We think that we are probably going to start seeing some better comparisons to last year. Last year, we came in at 42.7% for the year. So on a quarter-by-quarter basis, I think you're going to see better comparisons and I think you will see the first one in the second quarter.

Great. And then secondly on the SG&A -- and on the SG&A (inaudible) SG&A growth and understanding 1Q, there were a few moving parts, but can you talk a little bit about the discipline of how SG&A should grow relative to either sales dollar growth or volume growth? I know you talked a little bit about that last quarter, but can you just sort of refine how we should be thinking about that?

Yes, I think that, and this is where you get into -- we are always looking to get improvement in that operational efficiency, so we look at our gallons per full-time equivalent. We also look at sales per full-time equivalent. Some of those have been tougher to watch because of the selling prices have gone over the last two to three years. You can imagine it was easier to get sales per full-time equivalent increase than it was gallon per full-time equivalent.

So it is hard to give you a metric that I would say here is how you should build your models and here's why. When you take a look at where we are, a lot of times on the plant side, we know pretty well where we are going to be in total capacity and where we are in capacity utilization because around the country you might have stores that are in different spots of their utilization. So as those gallons grow in certain parts and you can imagine we are very tight when it comes to the fourth quarter and first quarter on overtime and part-time hours. When the demand came and there was demand everywhere, you saw SG&A and hours growing in the Midwest division and Eastern division.

So I think that probably the best metric I can tell you, if we have those kinds of gallon gains for the short period, you are going to see our SG&A grow in the 6% to 8% to 9%. When that starts coming down then I think you will see that go down.

Great, thank you.

[Nils Wallin], CLSA.

Good morning. Thanks for taking my question. First off, I guess is there a way either quantitatively or qualitatively to break out the type of demand you saw, how much of it you thought was pent-up demand, how much of it was the normal type of growth you would see from maintenance and property management?

Yes, that is a good question. I don't know that we have much more data to offer you than kind of the historic growth of the industry. We've long believed that architectural paint volumes move pretty much in lockstep with GDP growth. So to the extent that the market is growing, the broader economic market is growing at a 1% to 2%, gallons should move at that pace.

Sherwin has long believed that we can gain share in any cycle and that we would grow at 2X that and then you put our kind of strong gallon performance for the quarter and figure out that some of that is rebound and pent-up demand and some of it is outperforming our competitors. Not quite sure that I can offer much more than that.

Okay, fair enough. It looks like you have built out more stores or expanded more stores in the Southwestern division kind of year-over-year or at least 2011 versus 2010. And I am wondering is that a conscious decision because some of those areas were the most hurt during the downturn, so you figured those will be the ones that will rebound the quickest? Or is it lack of representation or share gains?

Yes, we take a long-term view on the right markets to be putting our stores in. I think we have shared with the investment community a density map that shows that the western part of the United States is where our household penetration is at its lowest level. Last year's numbers reflect a little bit more of a focus in California real estate development and strong store count adds in that market drove that number.

Thanks very much.

Aram Rubinson, Nomura Securities.

Hey, everybody. Good morning. Thanks for taking my question. Two things. One is would you mind giving us a little bit more color on that gross profit dollar that you gave us for the Paint Stores Group for the other divisions, if you don't mind?

Sure. What is going to happen is -- and just give me a few seconds here. Stores Group was 80 and the incremental gross margin dollars in Consumer was 60 and in the Global Finishes Group, I think it is right around 10. And then you have (technical difficulty) over in the Latin America Group, 16. Or I'm sorry, I said that wrong -- 3.

Okay, so 80, 60, 10 and 3?

Yes.

Thanks for that. Two other quick ones, just to follow up. I appreciate that opening stores is a difficult task, both between situating them and also having human capital to open them professionally. There are companies like Dollar General that are opening 650 stores while you guys are opening 60. So in other words, it is probably possible to open more effectively. Wondering when you will step on the gas and what you still need to see and how high is up maybe on that metric for you.

Well, our hat is off to Dollar General. Two stores a day for a year, that is a hell of a pace. So we have run as hard as 100 to (technical difficulty) 120 at our peak and I think that we have commented the last couple years that with the significant downturn in the market, we kind of considered ourselves at idle speed at this 50 to 60 store pace.

Our expectations are that that number will begin to ramp up. We expect to do more this year than last year and I think that we are going to continue to do more going forward.

Okay, thanks. And then the final question, if you don't mind, is just a comment on the administrative segment. It looked like a very high number, $74 million. I think that was the -- maybe there was one other quarter that was that high in the past 10 quarters. What should we think in terms of modeling for that since it is a little bit less of kind of a straight line? How can we think about that number for the year?

Yes, I think that when you take a look at that $74 million, we're up $22 million, so we are up over 40%. Last year, at around 243 for the year. I don't think we are going to grow and 40%, but I could see that growing at 10% to 15% for the year.

That's real helpful. All right, well, thanks and good luck into the next quarter.

Thanks a lot, Aram.

(Operator Instructions). Chuck Cerankosky, Northcoast Research.

Yes, Sean, just as a follow-up, looking at the others items in your P&L, the foreign currency gain was a nice swing in your favor. Was that cash or is it just a function of booking assets held outside the US?

It was the latter and it was really just an intercompany asset between us and Mexico with the Mexican changes there. So that is where -- you are right. The 5 million versus last year's 1.3 million, but it was the pound from Great Britain and the Mexican peso, but it was the assets on the balance sheet.

Thank you.

At this time, there are no further questions. I would like to hand the floor back over to Mr. Bob Wells for any closing remarks.

Thanks, Jackie. As a reminder, our annual financial community presentation is scheduled for Wednesday, May 23. It will be held at the Park Plaza Hotel in Boston. The program will consist of our customary morning presentations with questions and answers followed by a reception and lunch. And if you haven't signed up and would like to attend, there is still time. Please send me an e-mail at rjwells@sherwin.com and I will reply with a link to our registration site. Thanks again for joining us today and thank you for your continued interest in Sherwin- Williams.

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