宣偉 (SHW) 2012 Q3 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of the third-quarter 2012 financial results and expectations for the full year. With us on today's call are Chris Connor, Chairman and CEO; Sean Hennessey, CFO; Al Mistysyn, Vice President and Corporate Controller; and Bob Wells, Senior Vice President of Corporate Communications.

This conference call is being broadcast simultaneously in a 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 Thursday, November 25, 2012 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 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 presented earlier this morning.

After the review of third-quarter results, we will open the session to questions. I will now turn the call over to Bob Wells.

Thanks, Kathy. As usual, 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 third-quarter press release.

Summarizing overall Company performance for the third quarter 2012 versus third-quarter 2011, consolidated net sales increased 4.8% to $2.6 billion due primarily to higher paint sales volumes in our Paint Stores Group and selling price increases.

Acquisitions increased consolidated net sales approximately 1% in the quarter and unfavorable currency translation rate changes decreased net sales 2.2%.

Consolidated gross profit dollars increased $112 million to $1.15 billion. Gross margin increased 240 basis points to 44.2% of sales from 41.8% in the third quarter last year. The increase in gross margin was primarily due to higher year-over-year selling prices, improved fixed cost absorption from increased sales volumes, and the slight sales mix benefits.

Selling, general, and administrative expenses for the quarter increased 5.2% to $799.8 million. As a percent of sales, SG&A increased to 30.7% in the third quarter this year from 30.6% last year. Interest expense was essentially flat at $10.4 million. Consolidated profit before taxes in the quarter increased $82.7 million or 31.8% to $343 million.

Profit before tax as a percent of sales increased to 13.2% from 10.5% last year. Our effective tax rate in the third quarter was 31.5% compared to 30.9% in the third quarter of 2011. For the full year 2012, we expect our effective tax rate to be in the low 30% range.

Consolidated net income increased $55.1 million to $235 million compared to $179.9 million in the third quarter of 2011. Net income as a percent of sales increased to 9% from 7.2% in the third quarter last year.

Diluted net income per common share for the quarter increased 31% to $2.24 per share from $1.71 per share in 2011. Unfavorable currency translation decreased diluted net income per common share $0.05 in the quarter. Acquisitions had no significant impact on earnings per share.

Looking at our results by operating segment, sales for our Paint Stores Group in the third quarter increased 9.6% to $1.55 billion. Higher paint sales volumes across all end market segments and selling price increases accounted for most of the increase in sales.

Comparable store sales, that is sales by stores open more than 12 calendar months, increased 8.9% in the quarter compared to third quarter last year. Regionally in the third quarter 2012, our Southeastern division led the sales performance followed by Southwestern division and Midwestern division -- I'm sorry -- Eastern division and Midwestern division. Two paint stores divisions reported sales increases of above 10% compared to last year.

Segment profit for the group increased $63.7 million or 26.9% to $300.6 million in the quarter as higher sales volume and selling price increases were partially offset by higher year-over-year raw material costs and selling, general, and administrative expenses. Operating margin increased to 19.3% from 16.7% in the third quarter last year.

Turning to our Consumer Group, sales in the third quarter decreased 1% to $348 million due primarily to lower sales volumes to most of the group's retail customers partially offset by acquisitions and higher selling prices. Third-quarter segment profit for the Consumer Group increased $16 million or 39.1% to $57.1 million due primarily to improved operating efficiencies and higher year-over-year selling prices that were partially offset by higher raw material costs. Segment profit as a percent of external sales increased to 16.4% from 11.7% in the same period last year.

For our Global Finishes Group, sales in US dollars also decreased 1% to $491.8 million in the quarter, due primarily to unfavorable currency translation rate changes and lower paint sales volume partially offset by selling price increases.

In the quarter, unfavorable currency translation decreased sales in US dollars by 4.6%. Stated in US dollars, third-quarter segment profit increased $8.8 million or 32.1% to $36.4 million. Higher selling prices and good expense control more than offset higher raw material costs and unfavorable currency rates changes. Currency rate changes decreased segment profit by $5.1 million in the quarter.

As a percent to external net sales, segment profit increased to 7.4% from 5.5% in the third quarter last year.

Finally for our Latin American Coatings Group, third-quarter net sales in US dollars decreased 4% to $208.7 million, due primarily to unfavorable currency translation rate changes partially offset by selling price increases and higher paint sales volume. Unfavorable currency decreased net sales by 13.8% in the quarter.

Stated in US dollars, segment profit increased to $21.9 million in the quarter from $15.9 million last year. Unfavorable currency translation rate changes decreased segment profit $3.7 million in the quarter. As a percent of net sales, segment operating profit was 10.5% in the quarter compared to 7.3% in the third quarter of 2011.

That concludes my review of our results for the third quarter 2012, so I will turn the call over to Chris Connor, who will make some general comments and highlight our expectations for the remainder of the year. Chris?

Thank you, Bob. Good morning, everybody, and thank you for joining us today. The third quarter was a solid quarter for Sherwin-Williams in terms of both sales and profit improvements. Consolidated sales increased almost 5% despite soft market conditions and currency headwinds across most of our nondomestic markets. We also had to overcome the diminishing effect from last year's pricing increases and a strong revenue growth comparison from the third quarter of last year.

Despite that, many of the financial metrics Bob just walked you through, notably the $2.6 billion in sales for the quarter, $235 million of net income, and $2.24 earnings per share are high watermarks for any quarter in our Company's history. Year-to-date, our flow-through on operating income is over 31%.

As encouraging as these results are for us, we still see room for improvement. Three of our four operating segments reported soft sales in the quarter and many of the end markets we serve for example, domestic commercial construction in particular have not yet emerged from recession. Although we have made progress on the gross profit line, our consolidated gross margin remains well below our all-time high of 46% on a full-year basis.

If you look at our third-quarter results by segments, they were pretty much in line with our expectations. Paint Stores Group once again delivered strong year-over-year sales growth at a pace that we believe is comfortably ahead of the industry. Roughly half of the segment's revenue growth came from volume.

Our investments in new store openings and superior store staffing continues to drive market share growth. Our Consumer Group, Global Finishes Group, and Latin American Coatings Group reported strong profit for the quarter despite weak demand in many regions of the world. Combined sales of the three segments declined slightly while combined profit increased more than 36%.

The silver lining around weakening international paint coatings demand is the effect that it has on raw material costs. Over the past six months, the price of high-grade chloride titanium dioxide has eased somewhat due to declining global demand. We've also seen a modest downward trend in the price of propylene, a key feedstock for monomers, latex, solvents, and containers. We believe these trends are likely to continue.

Based on these developments, we now expect average year-over-year raw material cost inflation for the paint and coatings industry to be in the mid single-digit range in 2012, down from our previous guidance of mid to high single digits.

Although the rate of input cost inflation appears to be moderating, the 240 basis point increase in our third-quarter gross margin was helped by better operating efficiencies in our Consumer Group. Comparing our nine-month gross margin of 43.9% to last year's 42.7%, perhaps provides a better representation of the progress we've made in offsetting multi-year raw material inflation with price increases and mix improvement.

SG&A spending was up a $40 million in the quarter and increased 10 basis points in the percent to sales. Three of the largest contributors to this increase were the new stores opened in the past 12 months, higher incentive compensation as a result of strong financial performance, and incremental SG&A from acquisitions.

In the third quarter, we generated $367 million in net operating cash bringing our nine-month net operating cash to $569 million, an increase of $123 million over the same period last year. Year-to-date, cash from operations has increased $182 million to $628 million. Nine-month free cash flow -- and we measure free cash flow as net operating cash less CapEx and dividends -- was at $346 million.

We continue to use this cash to invest the Company, expand our control distribution platform, complete suitable acquisitions, increase our dividend, and purchase shares of our stock for treasury.

In the first nine months, our Paint Stores Group added 28 net new stores, eight of which were opened in the third quarter. This brings our total store count in the US, Canada and the Caribbean to 3478 locations compared to 3421 a year ago. Our plan calls for Paint Stores Group to add approximately 60 to 65 net new store locations during the year.

In the third quarter, we bought back 500,000 shares of our common stock on the open market bringing our year-to-date total to 3.8 million shares at an average purchase price of $113.96. On September 30, we have remaining authorization to acquire 17.25 million shares. Last week our Board of Directors approved a quarterly dividend of $0.39 per share, up from $0.365 last year.

It is increasingly obvious that the global economy is slowing and that risks in the US economy have increased accordingly. However, to date, paint and coatings demand in our domestic businesses has been resilient. We remain optimistic that US architectural paint market volumes primarily in the residential segments will remain positive in the fourth quarter of 2012 and well beyond. And domestic demand for most industrial coatings will continue to expand. The greatest challenges going forward are likely to be worsening market conditions in Latin America and Europe and increasingly difficult comparisons.

Our outlook for fourth-quarter 2012 is for consolidated net sales to increase in the mid single digits compared to last year's fourth quarter. With sales at this level, we expect diluted net income per common share for the quarter to be in the range of $0.98 to $1.18 per share compared to $0.14 per share in 2011, which included a (technical difficulty) per share charge last year for our IRS settlement.

For the full year 2012, we expect consolidated net sales to increase by a high single-digit percentage over last year. With annual sales at that level, we've raised our expectation for diluted net income per common share for 2012 to be in the range of $6.35 to $6.55 per share compared to $4.14 earned in 2011.

Again, thanks to all of you for joining us this morning and now he would be happy to take your questions.

(Operator Instructions). Jeff Zekauskas, JPMorgan.

Good morning. I guess I am struck by your overall incremental gross margin in the quarter which I think was about 95%. And it looks like your cost of goods sold didn't really change year-over-year. So I imagine that some of the raw material benefits that the industry are seeing are now making a larger impression on your income statement even in this quarter. Is that right?

I would not say that, Jeff, and I would tell you that -- I would like to paraphrase it this way and hopefully that will explain it. Raw materials are rising, your LIFO expense is catching up. It's always -- it's like trying to catch up and when you start to hit the peak, our LIFO Index will still be greater than 1 this year but that's what we continually talk about year to date because of all the different things that are going through that cost of goods sold. And what you are seeing is last year the raws were rising dramatically in the third and fourth quarter of last year, so our LIFO was catching up and that's why we continue to do some of those things.

So when I look at it, I think as Chris said, the 43.9 versus the 42.7, when you start doing those analysis instead of when we started looking at cap variances and LIFO and all the other things that are going on that are affected by those different things, I think that our year-to-date is probably a better indication. I think the fourth quarter, our gross margin will be higher than last year. I think our gross margin for the year will be at or slightly higher than they are year-to-date.

So I think you're going to see progressively our gross margin continue to get stronger and I think that's -- I think you're going to see that more in the future and I think that you can't look at the gross margin in the third quarter versus last year, that percentage and say okay, that's what we're going to see in the future.

Last year our compression in the fourth quarter was 42.8. That's why really -- I think there is a lot of confidence we are going to repeat last year but that's why I think year-to-date, we will actually see the 43.9 or slightly above that.

Okay, thank you very much.

Ghansham Punjabi, Robert W. Baird.

Good morning. Just going back to the store count of 28 versus your guidance, 60 to 65, is this sort of a timing issue or is there a larger store network that is available that is perhaps giving you some pause as you build out your stores?

This has been a historic pattern at Sherwin despite lots of attempts to the contrary. We'd like to lay these stores in in a little bit more of an orderly path, but for a variety of reasons, many of them outside of our control for example, real estate developers, communities getting permits passed, etc., this always tends to be a heavy fourth-quarter weighting.

So all the work that we've been doing on the single store real estate negotiations getting ready to open these stories they all just tend to kind of unwind during the fourth quarter, so we will hit that number through individual stores.

Okay, just sort of a higher-level question, so Europe isn't huge for you. And a lot of companies in different industries are sort of reassessing whether they want to be in Europe longer term. Just given what's happened there, does that change any of your strategy -- strategic ambitions for that market over time for Sherwin?

Yes, we've been pretty clear about our interest in Europe. We do not have an architectural paint -- a desire to be there for a variety of reasons. We are in the country to participate in the global industrial coatings businesses, primarily industrial wood coatings. And at this point in time, there's not been any indication that we would be strengthening our position over there. Happy to have the businesses we have and working hard to get them integrated and improve their operating margins.

Got it. Thanks so much.

P.J. Juvekar, Citi.

Good morning, Chris. Can you talk a little bit about the volume breakdown between the same-store channel and the consumer channel? It seems like there was a big dichotomy between the two channels, with contractor markets really turning around this year.

Then just a follow-up on that, do you expect the contractor market to grow at the same level next year as this year?

The first part of your question, P.J., is absolutely correct. The stores had a solid quarter again almost 10% sales gain and we commented that approximately half of it was from volume, so again outperforming we think the market conditions. And our Consumer Group had a soft quarter in sales and there was some pricing in there as well, so volumes were even a little softer than that. So there is that dichotomy happening.

We've been commenting about the rebounding residential markets in the United States. We are seeing really good numbers coming out now on new construction and as a result of that, I think the contractor is strengthening as a larger portion of the US architectural purchasing.

As far as the question of next year, we always give guidance on our January phone call when we really don't have any indication on the gallonage forecast for 2013. We will give you guidance in January when we report the full-year numbers.

Okay, just quickly on the same-store group, Chris, I think you had mentioned earlier at your analyst day that you are keeping your stores open longer, anticipating higher demand. Can you just give us an update on that? And also on your platinum paint, which is I think your paint plus primer for the contractor market. Thank you.

Yes, from a store hour perspective, P.J., we are always kind of looking at that and squeaking that and we marginally increased our hours across some markets a little bit later on weeknights, a little bit longer on the Saturday and Sunday. But I don't think that is a significant impact of the Company's overall performance.

Our recent innovative product launches in the stores have primarily been focused around Emerald, which is this high-end top of the line zero BOC Performance Product, which is really doing quite well for the Company. As a reminder, when we talk about new product sales, we are identifying those products that have been introduced and have three years of run life still and as a group, they account for less than 10% of our revenue. So while we are excited about this new product line and what it's doing in the market for our overall mix, it's not a dramatic mover for the Company.

Thank you.

Bob Koort, Goldman Sachs.

Good morning, it's actually Brian Maguire on for Bob today. I was wondering if you could comment on your level of inventory on titanium dioxide and maybe compare it to, say, normal levels of where you were a year ago? And then just kind of related to that as you mentioned over the last six months, high-grade chloride TiO2 prices have come down or at least moderated a bit and there's definitely a perception that they're going to continue to decline at the year-end and into the first quarter. So would you look to run down your inventories even further in anticipation of lower prices in the coming year?

No, we look at our inventory of titanium dioxide as a raw material. It's very comparable what it has been for the last few quarters including last year. We didn't dramatically change and I don't see us changing that any time soon. We turn our raw materials so quickly especially on some of these raws and as we go into the end of the season, the production plan in the fourth quarter will be normal and we are going make less paint in the fourth quarter than we have in any other quarter. And then in the first quarter, we will start to ramp back up but no plans on changing that normalized view of what we're going to do with our raw materials.

Brian, with respect to our expectations for TiO2 pricing from here, I'm sure it didn't go unnoticed that earlier this week one of the major TiO2 producers reported earnings and reported volumes in the third quarter down 18%. I suspect that probably the other global chloride producers experienced similar volume declines in the quarter and that would tend to put pricing pressure on TiO2 -- downward pricing pressure on TiO2.

To your point, we think that spot market pricing in TiO2 is probably down in the 10% range year-to-date and perhaps with quite a bit further to go.

I guess I'm just confused why you wouldn't try and run down the inventories more or is just the case that you are already kind of at safety stock levels now or do you expect prices to decline in response to the volume drops?

We don't really think about running raw inventories down based on costs. We run an efficient lean supply chain here. We're turning these raw materials multiple, multiple times a year. We store this stuff in slurry tanks and it really -- we have the raw material we need to make the paint we are going to make in the next week or two, so not a lot of room to run stuff down.

We'll turn titanium dioxide between 30 and 34 times a year, so you are talking a week and a half worth of supply. That's 10 days -- you sit there and say moving into five days, what is the net effect? It's not that great.

Okay, that helps a lot. Thanks very much.

Trey Grooms, Stephens Inc.

Kind of following on the TiO2 theme here, just some of your competitors have been out mentioning that they will be able to substitute a significant amount of their chloride TiO2 consumption with the lower-priced sulfate TiO2 and I know in the past you guys have said that you have a limited ability to kind of do that. Could you kind of give us an update where you stand on that today? And then also, what do you think the impact could be on TiO2 pricing as these coatings guys tend to do more substitution there? Thanks.

I think we've heard a number of our competitors comment about the ability to eliminate 5%, 10% perhaps of their annual chloride titanium demand based on replacement technologies, innovative chemistry, a whole host of practices. I think what we have commented is that we don't see that number being unreachable for us either. We just would be a later adopter.

Professional painting contractors demand for the consistency in our product means that some of these technologies will more likely wind their way into our next round of new products we launch as opposed to going into our core product line and replacing chloride with some of these other technologies.

Outside the United States, I think we can do that a little bit easier. We don't use tint base and in-store tinting as much. In Latin America for example, we do a lot more factory color blending and in that environment, you can switch from the chloride grade to the sulfide grade. So some of that activity is taking place as we speak. But I think this is going to be in the margin in terms of replacing it.

The bigger impact here is, as Bob has mentioned in the past, has been the softening in the global demand and as a result of that, pricings will come down.

Okay, thanks. A question on the Emerald line that you touched on earlier. Can you give us a little bit more color on kind of what the reception has been? It sounds like it has been pretty good but is that more kind of DIY focused or more contractor focused? Also kind of how the pricing differs there? Thank you.

Yes, it's rarely that we bring a product line out that doesn't have to serve all customer segments and there's a huge component of this product that we expect that residential paint contractor to find attractive and in fact that's exactly what's happening, Trey. We are seeing really good demand across that line.

Two things that we use to kind of measure the strength of a new product introduction for the Company. One would be are we kind of hitting the targets of gallons that we have set forth at its launch? And we are well ahead of that pace.

And secondarily and perhaps even more importantly, you hear us talk often about the mix shift inside our Company. As we bring these products out in the very high end of our product assortment, oftentimes we will see customers move up inside the other product lines what had been the finest product is now one level below and we are seeing nice buy-in gains in that product, which is a product we call Duration as well.

So counting all the kind of impact we like to see as a result of this kind of product launch and quite pleased with it at this point in time.

Great, thanks a lot.

Kevin McCarthy, Bank of America.

Good morning. Chris, if you had to hazard a guess, where would you see US architectural coatings industry gallonage finishing up for 2012? Just trying to get a sense of how far below normalized levels we are still at this point.

We think the growth number, Kevin, is probably going to be around 2% to 3%. I think we were commenting around 2% to 4% halfway through the year. It appears to be modeling a little bit, so on a basis of 615 million gallons for the industry last year, approximately 2% to 3% pop from there.

Okay, so if I take normalized at maybe 730 to 750 or so, it sounds like you are maybe 15% below. Is that fair?

That is fair.

Okay. Just as a follow-up, Chris, I would be curious to hear your updated views of what you're seeing in the private market. Since the Geocel deal, which wasn't all that large, you have been pretty quiet or disciplined, shall I say. With the downturn overseas, do you anticipate any opportunities to kind of reinvigorate acquisitions in overseas markets?

Yes, Kevin, I think we have stayed very disciplined around the strategic targets that we've shared up the Street repeatedly, namely architectural businesses in the Americas that can kind of strengthen our control distribution play or have really strong compelling brands throughout the Latin American markets. And then smaller bolt-on acquisitions to support our industrial coatings businesses, wherever they may be around the world.

The fact that we have had a little bit of softer period here on M&A has not had anything to do with our interest or the number of doors we are knocking on and the folks we are courting. And when we find things that fit those models and return the kind of disciplined returns we expect, we would be willing to pull the trigger.

We have commented that traditionally a lot of these architectural businesses are owned by private families and they tend to not want to sell into a down market but as things start to improve, they become a little bit more interested in valuing their other assets and so we would expect that maybe over the next couple of years, we will start to see a little bit more activity there. But nothing to report on today.

Okay, final question if I may and I will turn it over, is on tax rate. Sean, it's just been increasing up ever so slightly the last three quarters. Is that a function of geographic mix and do you have any preliminary thoughts on where you might be tracking for 4Q in 2013?

I think you are 100% right. Is geographic as our Stores Group and Consumer Group has done very, very well. I think that we still think that we are going to be able to maintain the tax rate in the low 30s but I would say we are going to be slightly below or slightly above next year where we finished the year this year.

Thanks very much.

John McNulty, Credit Suisse.

This is Abhi Rajendran calling in for John. Good morning. A quick question on rosin pricing. I guess with the softness in both TiO2 and even some of the rest of your basket, are there any areas where you are having to give back on pricing? Maybe you could just touch a little bit on that?

I think we have commented that in past cycles like this typically the industry has done a nice job of hanging on to pricing. It's sticky on the way up on price -- tough on the way up and rather sticky at the top. We did comment that we are still quite a ways below our long-term high in gross margin. So I think there's still work to be done here.

We would expect to see in the industry on large commercial projects heading into next year if in fact these raws continue to roll over, so we will see some lower prices quoted on these significant volume opportunities but again, that's somewhat consistent with past practices as well, so we will see how this one plays out, but that would be our expectation.

Okay, got it. Just a quick follow-up, could you talk a bit about any potential availability issues or upcoming increases in cost for your acrylics purchases?

We don't anticipate any tightening in those markets. Propylene has been trending down along with TiO2. We are paying a lower price for propylene per pound today than we were at the beginning of the year and that to us kind of signals ample supply in the market. So we don't see any problems with acrylic pricing or any of the petrochemical-based materials we buy being tighter going forward.

Okay, got it. Last quick one if I may. On M&A, I guess do you have any preferences as to smaller bolt-on acquisitions or are you looking at more medium-sized opportunities as well? Maybe you could just touch a little bit on that?

We like the ones that return the best profit for the shareholders regardless of size.

Okay, great. Thanks very much.

Duffy Fischer, Barclays Capital.

Good morning. Congrats on a nice quarter. I wanted to go back to the question on incremental and I was looking at incremental EBIT margins throughout the year. They've been very healthy kind of running anywhere between 23% and 47% this quarter. Could you split out in those incremental margins how much has kind of been the volume leverage and how much has been catch up on raw material price increases from a year ago?

I think when you take a look at our gross margin year-to-date, 120 basis points and you look at the volumes that the Stores Group has created year-to-date and Consumer's year-to-date results, I think that both of those well over 75%. I don't have an exact number as volume. I think that we do -- we get a lot more leverage on volumes than we do price because a lot of times price is really motivated by higher raw materials. So to answer your questions, it's -- the majority is volume.

Terrific, and then if you take a quick look forward to 2013, what do you see that this year might've been one-off. So we had the warmer Q1 so when we think about year-over-year comps going into next year, what things should we be looking out for that might not repeat either good or bad?

I think when you take a look at the first quarter, I think you said it correctly. I think we are not prepared to talk about next year but we think that the first quarter when you look at the sales increase and the gallon increase and the weather that we experienced, some of it had to deal with weather. I think over the full year, I think that might be timing. But I do think that we still feel that if the market in the total year goes up, we're going to gain market share. And so we think that's really our long-term thought. So we look at it. Besides that I don't think -- I can't think of anything that was -- I think this has been one of the more normal years except for the first quarter.

Great, thank you much, fellows.

Ivy Zelman, Zelman & Associates.

Good afternoon, guys. Congratulations on a great quarter. Chris, you mentioned that the domestic resiliency that you are experiencing should mitigate the slowing globally. And we certainly saw strength in the paint stores and obviously coming up from the underlying strength of the new construction market that you spoke to.

Can you dig in a little bit more for us understanding the end markets with respect to what's happening mass merchants versus retail or consumer-oriented customers, as well as sort of the non-res commercial markets?

We know public spending has obviously got major headwinds versus private spending. What you can drill in in any more detail and whether you are optimistic that you are seeing anything that would suggest things are going to lag like they normally do, the residential improvement and new construction?

Yes, so there's a lot to chew on there, IV. Let's start with kind of the mass merchants' performance. We reported that our Consumer Group had a soft quarter, and when we look inside our own stores at our own business, it was one of the poor performing of the segments inside that storage business. So I think there may be some softening there a little bit.

Hard to tell if it's just a blip for the quarter or a longer trend, what impact the election and the uncertainty is having in that area. I think it's a little early to make that call. Some of the more dependable segments that we can look at and think through and plan out on both residential, whether that's new residential or residential repeat, continue to be the real strength for the Company. These are segments that are performing high single digits, low double digits in terms of year-over-year performance in the quarter.

And as we commented briefly in the opening statement relative to the commercial market still is lagging, and we would expect that to be that way. It tends to follow housing, so if housing comes back, we would expect new commercial construction to rebound and that would be a little bit of a tailwind for the Company. We are encouraged by the housing start permit numbers that we saw out this week and to Sean's point, when we look at the next year I think we're feeling truly pretty good that this presidential market in the United States has still got a lot of runway.

If you broke out and looked at the business excluding public spending for non-res projects, would it look any different or is it also soft within the private spending market if you take it in sort of an aggregate look?

Right, when we break it down by SIC code and so forth that the softness is public and non public, Ivy.

Okay. Great, guys. I appreciate it. Thank you.

Aram Rubinson, Nomura Securities.

Thanks and I appreciate your taking my call. Hoping you can just shift from a couple things. One, you mentioned the efficiencies inside the Consumer Group. Can you give us a little bit more detail about what it is that you are doing to improve those efficiencies?

Then second, I know your SG&A growth as a percent of sales growth looked a little high in this quarter. I think you generally target that around 40% or 50%.

And then the last thing is if you can give us the gross margins by category at least those gross profits deltas that are so helpful every other quarter and I appreciate that. Thank you.

Sure. A couple things on the Consumer Group. I think just by putting gallons through those plants, I think that you gain efficiencies. We have many projects and they are ongoing, whether they are raw material delivery or fill lines and so forth and really a lot of singles and doubles there that continue to do very well for us.

As we continue to get other plants underneath that management team, Geocel and so forth, you're going to see improvements there. But number one is really just getting those gallons through and the efficiencies that those gallons will create.

The second question I think and hopefully I remember all three but your SG&A -- when you talk about the SG&A and I think that the SG&A, a lot of the SG&A growth we had was in the United States. And as we continue to develop new stores, as we continue to put new stores in, putting people in the stores, hours in the stores as well as we continue to spend in the admin segment out from our IT projects that eventually down the road will create higher cash flow for us in the nondomestic market.

So when the FX effect had so much effect on the sales in a couple of our segments in the US the SG&A will go up I think when you look at it as compared to sales. But I think if you look at it year-to-date and I know the 30.7 in the quarter versus 30.6, we're up 10 basis points but year-to-date on SG&A, we are down 60 basis points. And I think when you start to look at it on a year-to-date basis, those targets that we usually hit, we're a lot closer to that.

So I think that all the operating margins by operating segment, our operating margins are fine but things are going pretty well. On the Paint Stores Group, sales incremental margin dollars were $93.7 million. Consumer Group was $20.7 million. Global Finishes Group was a positive 3.9% and Latin American Group was actually negative 5.7%.

Thanks so much.

Greg Melich, ISI Group.

Actually this is Matt McGinley on for Greg. Could we go back to the Consumer Group for a minute. I'm still not sure I completely understand what happened with the units here. Did you see a draw down on the sundry product that you sell as well as the coatings? In terms of if you have access to point-of-sale data, are you seeing issues with sellthrough versus inventory depletion? And have the channel partners that you sell into there, have they perhaps attempted to reduce their inventories to try and push back on price or are you starting to have those conversations with those retailers?

Matt, on the mix difference between paint and various sundries I would say is very consistent across the board of all the baskets and material we saw that it was just a soft quarter. And I think that's more indicative of the kind of foot traffic and a little slower out the door performance.

As usual, this time of year we do see some inventory focus from some of these partners where they are trying to squeeze inventory a little bit and that happens frequently, so I don't think that we can point it entirely at that.

For the nine months numbers for all these categories, they are all positive and they are all doing well, so we will just have to see whether this is a falling off or just a little bit of a quarter blip here.

In terms of pricing, we are always having those conversations with our partners. They pay close attention to the feedstocks of these businesses, so I would expect that that's something we will be dealing with going forward.

Great, thank you. Then my second question is back on the SG&A. Given you've had pretty good sales growth and I understand that you have your -- you are doing investments -- there's new stores you are putting up (inaudible) and acquisitions and I would assume that the higher incentive expense wouldn't stay that high forever. But at what point would you expect to leverage SG&A at a higher level? Is it a -- should I think about it in terms of the unit growth? Should I think about it in terms of a sales level that you would achieve or I guess when would you have better SG&A leverage given the pretty high rate of sales that you experienced this here?

I think when you take a look at it, it's also where the sales growth has come in the Stores Group. I think that they will continue to invest. I think again you've mentioned a comp. I think that the comp -- but I think we have set the Company up that we are going to have a couple of years of nice SG&A growth -- not growth but improvement as a percent of sales.

We hit our high of 35.7 last year around 33.1 or 33.8. I think you're going to see some of that improvement over time. I think for the next period of time over the next couple of years you're going to see that SG&A improve.

What do you think that that would get to as a percentage of sales over time?

You know what? What we've commented is that we used to talk about a 33%, 33.5 and then we start seeing a 10, 20 basis points improvement. With the change we think we are probably at 33 and then you are going to start seeing that 10 or 20 basis points improvement and that's an annual number. I know we are below that through the first three quarters.

All right, thank you very much.

Eric Bosshard, Cleveland Research Company.

Good morning. Two things. First of all, you talked about gaining share a good amount in the architectural paint business I think that's sort of what you talked about. Can you talk about what's driving that and then also related to that, you've taken on -- I think there's a little bit more cautious view on growth, can you just again define what you are seeing different in terms of growth?

I think from a share perspective, there's a couple of things that we can look at. On an industry gallon data which used to be reported by the Federal Government is not anymore. We are cobbling together these points from raw material suppliers and other industry sources. Our sense is that the market is growing probably on a volume basis around 2% to 3%. And so we are able to look at the kind of gallons we're putting through our footprint here and feel comfortable that that is outperforming the market.

When we look inside the performance of the individual segments, these professional painting contractor segments are outperforming. Just as we saw those get harder hit in the industry downturn, they are the ones that are rebounding a little quicker as we're going forward. So our expectations would be that we continue to see that kind of share shift towards the painter and we continue to benefit from them.

On the second one, Eric, when you asked about our outlook, one of the things that we have commented on the last few calls is that's the gallons may continue to be strong but the selling price is going to -- is not going to be as strong. Think about a couple comments -- and I will tell you right now when you look at the third quarter to fourth quarter you heard Chris comment on the Stores Group, half of that growth was volume. Half of it was approximately price. We think that price between third and fourth quarter of 2012, we are going to have half of what we realized in the third quarter in the fourth quarter.

So we also think that the headwinds on the nondomestic will not be as strong and I think that all comes back to that mid single digits. So I think that it's not so much that we feel we are not that worried about we are getting a little worried about volume -- I think we are seeing less and less price and that Same Stores Group.

Great. Secondly, you talked about gross margin relative to the peak at 46. I'm just curious what you think the path from here to there is, what drives that and how long that path might be?

Yes, the path will be along the lines of the pricing, finishing off and as you know, the last price increase we've announced to our stores business was in February so that one is just about behind us. You're going to see the efficiencies through the whole supply chain adding some lift to that as volume continues to go through that fixed asset base in our Consumer Group and then obviously as the raws tip over and we can hang onto pricing for the earlier question, that will help us get there. Whether that happens in the span of a year or two or three, we're not making any comments on that.

We also need some help from non-stores and nonconsumer segments. I think when you look at the lower operating margins, I think some of the things we have done to improve especially in the Global Finishes Group, again we feel pretty good about the ongoing integration and we think that will help us with our gross margin as well as operating margin in the future. That will help us get back to the peak.

Great, thank you.

Chris Nocella, RBC Capital Markets.

Just in Latin America, you had very strong margins in the third quarter both sequentially and year-over-year. Maybe can you just help us understand how you will be able to achieve those margins and maybe give us your early read on demand in Latin America as we enter their seasonally stronger period now?

I would tell you right now, we have positive volumes in Latin America in the third quarter and you're right, the fourth quarter is stronger for us than the fourth quarter. Just having more of that will help us improve our margins in the fourth quarter versus third quarter. And I think it's going to be volume in there and also just we are continuing to work on selling prices in the Latin America Group.

Okay and can you just comment on your outlook for new store growth for next year?

We've been saying that we would expect to continue to increase that and ramp up. We identified kind of that 50 store pace or one store a week is kind of idle speed and as markets improved, that we would be ramping that back up. We haven't given guidance on that yet. We have said that over a longer decade period on a more immortalized run rate kind of 70 to 80 stores is the right average to be at.

So we will be north of the 60 to 65 number that we are going to do this year next year and we will give you some more clarity on that in the first-quarter call.

Great, thanks.

Charles Dan, Morgan Stanley.

Good morning. Just to clarify, did you guys have any LIFO liquidation benefit in the quarter?

I would say no.

It seems like you slowed down the pace of your share repurchases and brought down the leverage on the balance sheet. Can you give us some perspective on why that might have slowed and how we should think about the share count going forward?

Yes, I think when we look at stock buybacks, we are always talking about an utilized number. So far this year we have bought back 3.8 million shares, spent $433 million. That's about $100 million more than last year. We feel pretty good about where we are and I think that we probably bought it -- and we're watching a lot of different things right now. We are -- we like where our balance sheet is. Or balance sheet is in a pretty good spot if some of these assets would come available here in the fourth quarter or early first quarter, so we are watching that and that's what we've always said.

We don't see over time that our debt is going to go down. Our EBITDA has been strong, so we are still going to target that one to one when it comes to EBITDA. So over time, we will spend that money either on acquisitions or stock buybacks.

So we have looked at it. We still feel pretty good about where we are buying 3.8 year-to-date and that's what we do. We look a lot on an annual -- not a quarter-by-quarter number.

Thank you.

Ivan Marcuse, KeyBanc Capital Markets.

Thanks, guys. I just have a couple quick questions. First for the quarter, what was your material cost up year-over-year?

You know, maybe you are talking about the full basket but for us, we never comment on ours and usually we don't even comment on a quarter-to-quarter but usually on a year-to-date. I think what we have said is that our raw material basket beginning of the year, we were looking at high single-digit low teens and now we are saying that it's going to be in that low single digits, so -- you can probably tell that most of the increase was in the first half of the year.

Great, thanks. And then in the Paint Stores, I think you gave the gross profit dollar increase. What was the SG&A dollars?

That I will tell you -- I will have to look up the Q. I will grab it. I'll grab it out of the Q and then -- it's 27.4.

Great. Thanks. Then the last question is when you look forward, you have had great leverage that you've shown so I guess you're going to be in the high single-digit sales and then somewhere around 30% earnings growth. Would you expect the same -- would that ratio change going forward over the next couple of years or is there any reason it would or wouldn't?

I think as Sean commented on one of the earlier answers, it really is about volume. So to the extent that that volume number keeps going at that pace, that's the kind of leverage that we can get through the system.

Great. Thanks for taking my questions.

Chuck Cerankosky, Northcoast Research.

Good morning, gentlemen. Great quarter. I want to get back to the administrative costs and the SG&A costs. Sean, if I go through the segments and back out, a couple of adjustments you guys show those administrative costs. How much of that is including IT projects and acquisition-related SG&A that is allocated to the quarters or exclusive with allocated to the quarters and how much is -- has to be explained by other things?

I would say the majority of it is. As we mentioned before, especially in the admin segments, if you look at the admin segments through nine months, it was $54 million higher than last year. If you take out some of the environmental hits and disposition of assets, you are down to about the high 40s. Just about half of that is in compensation and probably another 30%, 40% of that is IT projects and investments and so forth. Especially on acquisitions, that eventually we think it's going to create higher cash flows from our nondomestic operations.

Now with the volume growth in the Stores business, how is the SG&A up? Because I would think that would be a good opportunity to leverage occupancy and in-store labor. Are there other things to consider?

Yes, we talked about the incentive compensation, Chuck. They were riding this market down and paying a lot of bonuses and as we've told you, we've got approximately that entire store's organization on a variable comp plan, so they are having a good year.

So incentive comp hits below the segments as well as within some of the segments.

That's true. Some of the variable compensation on RSOs and other things and annual bonuses held at the administrative segment.

But I wanted to correct something. When we did say that our SG&A in the Stores is up 27% (technical difficulty), you know, I don't want to give you the idea that our SG&A there didn't go higher as a percent of sales, but it didn't dramatically go down. But you sit there and take a look at it, the operating margin is up and it's been helped by margin as well as this here.

Okay.

I think what you are talking about the SG&A in total because of those dollars and then the other sales numbers were negatively affected by FX, those numbers tend to become more dramatic higher, (inaudible) not just [historical].

Okay, then on LIFO, could you give us what the LIFO charge was year-over-year, the comparable numbers?

I think LIFO, I'll tell you, I'm going to get back to you on that real quick.

All right, thank you.

Don Carson, Susquehanna.

Thank you, just two questions. One, just wondering why you are a little more cautious on overall growth. I think you said you thought total US gallons now is up 2% to 3%. You were thinking maybe 3% to 4% earlier in the year.

Then on the Stores, you talk about how Paint Stores Group -- contractors gaining share from the big box. But are you gaining share from some of your competitors in stores? I noticed that Akzo said their US store's volumes continued to be down year-over-year. Ben Moore is having issues, so just wondering how much you are benefiting there?

And does that create an opportunity to be more aggressive on store openings as competitors pull back a bit?

Regarding the US growth of the architectural market, I think we've been looking at some of our competitors' releases here and commenting about some softness in the US architectural market. We don't really have good data other than what comes lagging to us a little bit, so I wouldn't read too much into our earlier estimate was 2% to 4% and now we are 2% to Q3%. It could be very much in line with what we have been saying.

As Sean commented on one of the earlier questions, the volume numbers through our store business has been fine. We've just been seeing the impact of price roll back a little bit, so we are not feeling very cautious here in our guidance. We are feeling that we are still seeing the strong US residential architectural market and we are feeling good about the positioning companies and to capitalize on that increasing store counts for next year over this year.

So all those things are making us feel like we've got a long way to go here to capitalize on this rebounding residential market.

In terms of gaining share within the channel against some of the other small independent same store chain operators and/or regional or national operators as you mentioned, Akzo, yes, I think we would feel comfortable that we are doing that as well.

We know that just by store count, is one way to get at it, we have put these or are planning to have these 60 to 65 stores in this year. That will be a significant multiple of the rest of the competitors combined. And in fact, on those independents, we've seen quite a number of those stores. We think perhaps as many as 1000 of them have gone out over the last three to four years during this downturn. So clearly gaining share inside the paint store channel as well.

One more kind of color point on the residential repaint market, Chris mentioned in his opening comments that DIY was one of the market segments that was probably softer than most. Don't read that as decline in demand for residential repaint because residential repaint contractor volume is actually pretty strong. What we may be seeing is kind of this discretionary shift back toward the contractor and away from DIY.

Thank you.

Dmitry Silversteyn, Longbow Research.

I guess it's good afternoon now. I wanted to follow-up on a couple of questions or a couple of comments you made about the material pricing. You cited that propylene pricing is coming down and you implied that buying propylene. Are you in fact buying propylene or are you buying propylene derivatives?

The latter. We are actually buying propylene-based commodities.

Right, okay, is your -- is the products that you are purchasing, whether its resins or packaging or solvents, have you seen pricing there decline?

We have. It typically declines on a 90 to 120 day lag, so we are just starting to feel the impact of the decline in propylene, and as you know, the decline in propylene has been kind of a long, slow decline as opposed to a sharp drop.

Okay, so the important point is that you are seeing downstream product made from propylene starting to decline for you in price?

Yes, some of them.

Excellent, then the second question on the global sales, or the Global Group sales, I am sort of finding that the comment in the press release was confusing. You talk about the nine months or through the nine months year over year having about a 2.4% contribution. I think you said from acquisitions which implies that the acquisitions were negative in the third quarter. That doesn't make sense. Can you take me through the sales components in the Global Group?

I'll tell you what, how about if we go to the next question and we will come back -- give me a second to pull that out.

That's fine. My last question again has to do with the Consumer Group and sort of the declining volume and margin based on more gallons processed. I think that refers to the gallonage growth that you're seeing in your Store Group, which flows to the Consumer Group margin. Is that the right way--?

That's exactly right. The Consumer Group is the North American supply chain provider for the Company, so every gallon manufactured, distributed through the chain supporting their consumers external brands as well as other stores goes through that P&L. So you are getting the lift as volume goes through that controlled asset base.

We transfer that in a fully loaded price to our stores but as volume comes and efficiencies enhance, consumer can get the leverage on that operating margin and that's how they get to the numbers you saw today.

Wells: Dmitry, if I go back to that answer for the acquisitions, you're right. The acquisitions on nine months is 2.4% and it was zero for the third quarter. That's because we have annualized it.

Okay, so my calculation is correct. It just sounded --

Yes, we no longer put the quarter in there because we have annualized it. I understand what the confusion there was but no, it wasn't flat or down.

All right, very good. That's all the questions. Thank you.

Nils Wallin, CLSA.

Good afternoon and thanks for taking my question. The NAHB's remodel index came out and it's at above -- it is hat 50 and it's probably at one of the highest levels since 2005 and even in the peak. But most of it seems to come from the owner-occupied side as opposed to rental properties or major alterations. I am wondering if the rental part of that index or the major alterations if those move up towards 50, is that going to have a meaningful impact on your results?

Yes, it will. Multifamily is an important segment for us and unlike the owner-occupied residential, which can be a DIY project or any contractor project, typically in multifamily you are seeing a painting contractor being employed to do that so as that segment strengthens, that's good for our industry.

So then would you say most of your contractor business is then still focused on a single family as opposed to the multifamily or is there just a different mix there?

The weight in the country would indicate that we have probably 60% to 65% of American citizens are in an owned-occupied, 35% to 40% would be in rental properties. So to the extent that contractors are doing a lot of work in the residential repaint for owner occupants, that's still a larger segment for us but we still have a sizable business in this multifamily.

As that has improves, as occupancy rates improve, as turnover improves, because that is when you get the painting opportunity, those will all be drivers for volume for our Stores Group.

Thanks, then just one final question. The kind of softness in Global Finishes, I know that you've obviously highlighted regions outside of North America where you don't have as big a presence as some of your competitors. But I was wondering if you'd be able to drill down to say whether it was on the protected marine side or auto refinishes, if there was any differences there in those different end markets?

The biggest piece of business we have in this Global Finishes Group is our OEM product finishes. This is where we are coating durable goods in a manufacturer factory environment for sales and I think that has been probably the softer of the three segments. The protective and marine coatings, this is also embedded in here, has probably been the stronger of the three segments and automotive would be somewhere in the middle.

Got it, thanks very much.

John Roberts, Buckingham Research.

Nice quarter, guys. Can you hear me? One of your largest global competitors has some uncertainty in the executive suite right now and their US strategy has been a little bit debatable. Does that (inaudible) to maintain some flexibility here over the next couple of quarters to see whether or not they shift gears?

I think there's a lot of different things out there right now. I don't think specifically that asset is causing us to keep our balance sheet flexible.

How about your store openings? Do you want to wait to see what happens to store openings?

No, their store model has been diminishing as an impactful competitor and our plan is to continue opening stores are in line with our long-term strategy of building out our density, strengthening some of the weaker markets, and that doesn't change regardless of their actions.

Thank you.

Jeff Zekauskas, JPMorgan.

Thanks. I wanted to follow-up on the questions I asked an hour ago.

You started the talk and you're going to end it, Jeff.

In asking you about TiO2, I think Chris made a throw away comment where he said, well, I think there's a lot more room for TiO2 prices to fall and I was wondering why you thought that?

I think we are historians here, Jeff, as you know, and we've been through a number of these titanium runs in the past. I think if some of the earlier questions about the industry moving aggressively to try to find replacement technologies and a lot of that work is just coming to fruition as we see continuing softness in some of these global markets, if demand continues to remain weak here, history would indicate this commodity will continue to have some softness in pricing. Time will tell.

We are just starting the early tipping over points now. We see the spot market is retracted probably 10 percentage points plus or minus a little bit from the peak and our expectation would be that in past cycles that wasn't the end of the pullback that it would continue from there.

So what caused the tip in that TiO2 demand has been very, very weak now for almost a year? Then finally in the second or at the end of the second quarter, it sort of broke. What caused the break or how did the timing work?

I think it is all in demand. You know, we've talked about the price announcements that were put in by the industry softening beginning as early as last year about this same time where they had previously been getting 100% of their announced price increases for the better part of eight, nine, 10 quarters and then the fourth quarter won about 50% effectiveness similar to the first quarter and we think the industry basically did not take the second quarter announcement at all.

So it didn't just break recently. It's been softening now over the past 12 months as demand has been falling off and it's all about demand.

Okay, thank you very much.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Wells for any closing comments.

Thanks again, Kathy. Those of you who are still on the call have gone above and beyond the call of duty with an hour and 10 minutes. As usual, we be around today and all day tomorrow to take your follow-up calls. We would like to thank you once again for joining us today and thanks for your continued interest in Sherwin-Williams.

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