宣偉 (SHW) 2012 Q4 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of fourth-quarter and full-year 2012 results and expectations for 2013. With us on today's call are Chris Connor, Chairman and CEO, Sean Hennessy, Senior Vice President - Finance, and CFO, Allen Mistysyn, Vice President and Corporate Controller, and Bob Wells, Senior Vice President, Corporate Communications. This conference call is being webcast simultaneously in listen-only mode by Vcall via the internet at www.Sherwin.com. An archived replay of this webcast will be available at Sherwin.com beginning approximately two hours after this conference call ends, and will be available until Thursday, February 21, 2013 at 5.00 PM Eastern time.

This conference call will include certain forward-looking statements, as defined under US federal securities laws. With respect to sales, earnings, and other matters, any forward-looking statement speaks only as of the date on which such statement is made. 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 Company's prepared remarks, we will open the discussion to questions. I will now turn the call over to Bob Wells.

Thanks, Jessie. Good morning, everyone. In order to allow more time for questions, we have provided balance sheet items and other statistical data on our website, Sherwin.com, under Investor Relations 2012 year-end press release.

Summarizing overall Company performance for the fourth-quarter and full-year 2012, consolidated sales for the fourth quarter increased 7.3% to $2.22 billion, due primarily to higher paint sales volume through our paint stores group and selling price increases. For the full year, sales increased 8.8% to $9.53 billion. Sales from acquisitions increased consolidated net sales approximately 0.9% in the quarter and year. Currency translation rate changes decreased consolidated net sales 1% in the quarter, and 1.8% for the year. Consolidated gross margins in the fourth quarter increased to 45.5% of sales, from 42.8% of sales in the fourth quarter of 2011. For the year, gross margins increased to 44.3% of sales from 42.7% last year. The increase in gross margin for the quarter and year was due primarily to higher selling prices, and the positive effect of higher production volumes, partially offset by higher year-over-year raw material costs.

Selling, general, and administrative expense in dollars increased $74 million in the fourth quarter compared to fourth quarter last year, and increased as a percent of sales to 37.3% from 36.4% in the same quarter last year. For the full-year 2012, SG&A expense increased $234.8 million to $3.2 billion, but decreased as a percent of sales to 33.5% from 33.8% in 2011. Incremental SG&A from acquisitions, new stores and customer service investments accounted for the majority of the SG&A increase in the year. Impairment charges for the planned conversion of various trademarks totaled $4.1 million in the fourth quarter and full year 2012, compared to $5.5 million in 2011. Interest expense for the quarter increased $2.2 million to $11.9 million. For the year, interest expense was $42.8 million, compared with $42.5 million in 2011.

Our effective income tax rate for the fourth-quarter 2012 decreased to 32.7% from 88.8% in the fourth quarter of 2011. As a reminder, fourth quarter last year, income tax expense included a one-time after tax charge of approximately $75 million to satisfy our settlement to the IRS. For the year, our effective tax rate was 31.1% in 2012, compared to 40.4% in 2011. Excluding the IRS settlement, our full-year 2011 effective tax rate would have been 30.3%. Consolidated net income for the quarter increased $102.7 million, to $117.2 million. For the year, net income increased $238.3 million to $680.2 million. Net income as a percent of sales in the quarter increased to 5.3% from 0.7% last year. For the year, net income as a percent of sales increased to 7.1% from 5% in 2011. Diluted net income per common share for the fourth-quarter 2012 increased to $1.12 from $0.14 per share in the fourth quarter 2011. For the year, diluted net income per common share increased 56.8% to $6.49 per share from $4.14 per share in 2011.

Now I would like to review our performance by segment. Sales for our paint stores group in the fourth quarter of 2012 increased 9.8% to $1.25 billion. For the year, net sales increased 13.2% to $5.41 billion. Sales increases in the quarter and year resulted primarily from higher paint sales volumes across all customer segments, and slightly higher year-over-year selling prices. Comparable store sales increased 9.2% in the quarter, and 12.5% in the year. Regionally, in the fourth quarter, our southwest division led all divisions followed by southeast division, midwest division, and eastern division. All four paint stores divisions recorded positive sales in the fourth quarter.

Segment operating profits for the paint stores group increased 36.1% to $181.5 million from $133.4 million in the fourth quarter last year. For the full year, paint stores group operating profit increased 33.5% to $861.8 million, from $645.7 million in 2011. The increase in segment profit for the quarter and year resulted from higher paint sales volumes, and selling price increases, that were partially offset by higher raw material costs and SG&A expense. Segment operating profit margin for the fourth quarter increased to 14.6%, from 11.8% last year. Profit margins for the full year 2012 increased to 15.9% from 13.5% in 2011.

Turning now to the consumer group, fourth quarter external net sales increased 1.4% to $255.8 million, due primarily to acquisitions, partially offset by lower sales volumes to most of the group's larger retail customers. For the year, consumer group sales increased 3.7% to $1.32 billion, from $1.27 billion in 2011, as a result of higher selling prices and acquisitions. Acquisitions increased net sales by 6.5% in the quarter, and 3.2% in the year. Segment operating profit for the fourth quarter decreased to $23.3 million from $30.2 million last year, due primarily to a more normal seasonal reduction in our internal finished goods inventory, compared to fourth quarter last year and to higher raw material costs that were partially offset by selling price increases. For the year, segment operating profit increased 24.6% to $216.4 million, from $173.7 million in 2011, due primarily to selling price increases and improved operating efficiencies, partially offset by higher raw material costs. As a percent of net sales, consumer group's operating profit in the fourth quarter decreased to 9.1% from 12% last year. For the year, operating margin increased to 16.4% from 13.6% in 2011.

For our global finishes group, net sales in the fourth quarter increased 5.1% to $487.1 million, due primarily to higher sales volumes and selling price increases, partially offset by unfavorable currency translation. For the year, global finishes group sales increased 4.4% to $1.96 billion, due primarily to selling price increases, higher sales volumes, and acquisitions, partially offset by unfavorable currency. Acquisitions increased the group's sales in US dollars by 1.8% in the year. Currency translation decreased sales in US dollars by 1.4% in the quarter and decreased sales by 3.5% in the year. Global finishes group segment operating profit for the fourth quarter increased to $34.1 million from $13 million last year. For the year, segment operating profit increased to $147.2 million, from $90.3 million last year. In the quarter and year, higher selling prices, volume growth, and good expense control more than offset raw material cost inflation.

Unfavorable currency translation and acquisitions reduced segment profit $3.4 million in the quarter, and $11.9 million in the year. As a percent of net sales, global finishes group operating profit was 7% in the fourth quarter, compared to 2.8% last year, and 7.5% for the year, compared to 4.8% in 2011. For our Latin American coatings group, net sales increased 5.2% to $231.5 million in the quarter, and increased 0.9% to $836.1 million for the full year, due primarily to higher year-over-year selling prices and increased sales volumes, partially offset by unfavorable currency translation. Currency translation decreased sales in US dollars by 6.7% in the quarter, and 10.2% in the year. Stated in US dollars, Latin American coatings group segment profit in the quarter increased 14.3% to $30.1 million. For the year, segment profit increased 7.6% to $81.2 million. In both the quarter and year, segment profit improvement resulted primarily from price increases and higher sales volumes, partially offset by higher raw material costs and unfavorable currency translation. Currency translation decreased segment profit $2 million in the quarter, and decreased profit $9.7 million in the year. As a percent of net sales, segment operating profit was 13% in the fourth quarter, compared to 12% last year, and 9.7% for the year, compared to 9.1% in 2011.

I will conclude this review with a brief update on the status of our lead mitigation. The Santa Clara case, involving claims of public nuisance brought by ten cities and counties in California against five defendant companies, continues to move forward. At a recent pretrial hearing, the judge presiding over the case set a trial date of June 29, 2013, to allow the parties more time to complete the discovery process, and file positive pre-trial motions. That concludes my review of our results for fourth-quarter and full year 2012, so I will turn the call over to Chris Connor, who will make some general comments and highlight our expectations for 2013. Chris?

Thanks, Bob. Good morning, everybody and thanks for joining us today. 2012 was a year of many milestones for Sherwin-Williams. For the year, we set all time high water marks for consolidated sales, net income, earnings per share, and net operating cash. We also reported record sales of earnings per share in each of the four quarters during the year, and three of our four reportable segments established all-time peaks in sales and segment profits this past year. Additionally, our paint stores grew close to the 3,500 store mark, and we recruited more than 1,000 college graduates into our management training program, both all-time highs. Finally, late in the year, we announced a definitive agreement to acquire Comex. Once this transaction is completed, it will be the largest acquisition in our Company's history.

These milestones and others we have celebrated in 2012 were the direct result of our decision to stay the course, and to stick with our strategy, when market conditions collapsed back in 2008 and 2009. Since that time, we have continued to invest in new distribution and new product technology. We continued to invest in quality and productivity initiatives across our supply chain, we continued to recruit bright motivated men and women into our management training programs, and prepare them for leadership assignments. We believe the effects of these investments are cumulative, and the outcomes we achieved this past year are repeatable. It's pretty obvious, based on our SG&A spending in 2012, and particularly in the fourth quarter, that the pace of these investments actually increased throughout the year. While the higher SG&A did dampen earnings, we believe the timing on these investments couldn't be better.

Most of the $235 million increase in SG&A for the year fell into one of three buckets. The largest was our investment in new stores, including new sales and customer service employees, which accounted for more than half of the overall SG&A increase. The second bucket was incentive compensation, which was higher this year, as our selling organization and field management shared in the benefits of their record results. The smallest bucket was acquisitions and infrastructure investment, including IT. If you believe that 2012 marked the beginning of a sustainable recovery in many of our end markets, now is the ideal time to build sales and customer service capacity, which is precisely what we did.

In 2012, our paint stores group added 70 net new stores, bringing our store in the US, Canada and Caribbean to 3,520 compared to 3,450 locations one year ago. Our plan for 2013 calls for new store openings in the range of 70 to 80 locations. We also hired 1,140 new sales and customer service employees, to bolster our store staffing and improve our territory coverage. Our Latin American coatings group added 11 net new stores during the year, for a total now of 276 locations throughout the region. These investments in new stores, store staff, and rep coverage pay for themselves in a very short period of time.

Consistent investment relies on strong dependable cash generation. Again, in 2012, our net operating cash increased $152 million to $888 million, or about 9.3% of sales. If you add back the cash settlement paid to the IRS that Bob mentioned earlier in the first quarter of this year, cash from operations for the year approached 10% of net sales, our long-term objective. A portion of this increase came from our continued progress in working capitol management.

Our working capital ratio declined at 10.8% of sales at year-end from 10.9% of sales at the end of 2011. In anticipation of closing the Comex acquisition in the first half of 2013, in December, we placed $1 billion of new debt in 5 and 30-year maturities at a blended average rate of 2.1%. As a result, we finished the year with an uncharacteristically high cash balance of $863 million. During the fourth quarter, we acquired 800,000 shares of the company stock for Treasury, bringing our full year total of 4.6 million shares and an average cost of $121.25 per share, and a total investment of $558 million for the year. At year-end, we have remaining authorization to acquire another 16.5 million shares.

Over the past year, we have returned $161 million in cash to shareholders through quarterly dividends. 2012 marked our 34th consecutive year of increased dividends per share, a string we intend to continue. This year at our February meeting of the Board of Directors, I will recommend approval of a pay out rate for 2013 consistent with our policy of 30% of prior-year's earnings per share.

I will close my comments this morning by highlighting yet one more all-time record, our guidance for 2013. Our full-year guidance calls for diluted earnings per share in the range of $7.45 to $7.55 per share, a 15.6% increase at the midpoint, on mid-single digit sales growth. For the first quarter, we're expecting earnings per share in the range of $1.03 to $1.13, a 13.7% increase at mid range, on top of a strong first quarter in 2012, and we'll accomplish that in low single-digit sales growth. Neither of these ranges include any earnings contributions from the Comex acquisition, but do include approximately $21 million of additional interest expense on the incremental debt. While some numbers on the street are above these ranges, this constitutes the largest increase in full-year earnings guidance in both dollars and percentage terms in our Company's history. While our expectation for top-line growth may appear modest, it will come almost entirely from volume. Nearly all of the impact from our previous price increases is annualized, and our guidance this year anticipates very little incremental pricing.

We begin each year with some level of uncertainty, and 2013 is no exception. Despite the steadily-improving health of many of our end markets, and the positive trends we have seen in the cost of certain commodities, we remain cautious. Market demand and volume recovery has been erratic across geographies and end markets, and we expect that will continue. Currency translation is also likely to remain a headwind to sales and earnings throughout the year, particularly in our Latin American markets.

Our raw material basket has many moving parts as well, but in total, it remains biased towards inflation. While we have seen some easing in titanium pricing over the back half of 2012, propylene, the key raw material feedstock, has increased 30% from $0.55 per pound last quarter, to $0.72 per pound today. This will keep some upward pressure on the price of monomers and latex in the first half of 2013. Based upon our assumptions of improving price stability in titanium, and increased volatility in propylene, we would expect average year-over-year raw material cost inflation to be in the low single-digit range in 2013. Our visibility in each of these areas improves significantly as we go through the year, and as always, we'll adjust our expectations accordingly. Again, I would like to thank you for joining us this morning, and now the team will be happy to take your questions.

(Operator Instructions)

Our first question comes from line of Ghansham Panjabi of Robert W Baird. Please proceed with your question.

Congratulations on a strong finish to the year. Can you give us a sense as to what your full-year 2013 assumes for the US paint balance for the industry, and if you could take it one step further in terms of expectations for existing and new home sales?

Well clearly we're most optimistic about the US architectural market, and we do believe that residential will probably be the strongest driver in that market, again. As a reminder to everyone on the call, US architectural gallons typically grow at a range in the range of GDP. Even in a recovery year, if you consider 1.5 to 2 times that rate, you are still in, probably, the 3% to 4% range for US architectural volume.

This is Sean Hennessy. On top of that, when you talk about this gallonage, when you start looking at this guidance, again last year we'll just talk about stores, stores for the year, the selling price was up mid single digits. This year we really have very slight pricing in our guidance this year, so we're going up against that pricing that we had last year, and so the sales are really more indicative, a higher percentage of unit growth.

Switching to global finishes, were buyers for the quarter in line with the expectations? It seemed to be a little bit stronger than 4Q of 2011, and if you can parse out the various verticals, how they performed during the quarter? Thanks so much.

Actually global finishes, when we take a look at the quarter, performed very close to what we had expected, and I will tell you that the sales were in the high end of the range. It really because of stores being a little stronger than what we thought. As far as the three segments, I am not prepared -- I don't have, looking at the automotive and so forth. We're not prepared to go through that.

Thanks.

Next question comes from the line PJ Juvekar of Citi. Please proceed with your question.

There has been significant M&A in paint. With your Comex deal, PPG acquiring Akzo's US business, do you expect that pace to continue? What does it mean for margin to the industry if you remove some of these underperforming businesses?

Obviously we don't expect the pace like that to continue. Those were two extremely large deals on our industry and the universe of properties of that size and scale are diminishing. So, as we have commented for many years, PJ, from our M&A strategy there is an awful lot of small, bolt-on, both technologies and controlled distribution plays, so I think that's more likely what you'll see going forward.

I don't know that these two deals will have a significant impact on margin. The bigger issue on margins in our industry as we have shared with the investment community, has the been impact of raw material cost pressures and the ability to pass those along over a period of time. And I think those dynamics will continue to play out pretty much unchanged regardless of these potential acquisitions that may or may not close.

The other thing PJ, this again is Sean Hennessy, when you speak of operating margins, I would say that a lot of this, the infrastructure, the admin cost, percent of sales, those are things that you are going to see. You are going to see operating margin from us expand from these, but more from infrastructure and those type of SG&A efficiencies.

Secondly, you mentioned there was normal inventory decline in the consumer group. Was there destocking by your channel partners, behind us, and do you see it (inaudible) in 2013? Thank you.

We try to use the word internal. I am just going go back a year. If you remember in the third quarter 2011, we did bring the inventory in line. The reason we did that is in the first half of the year in 2011, we were anniversarying the shortages in some products that we needed. We overspent in 2010, so we won't have the inventory to build in 2011. And third quarter, we allowed that inventory to drop, which depressed consumer group's operating margin. What we said at that time is, this was a little abnormal for us in fourth quarter, when you look at the year. So, you look at the third-quarter 2011 in consumer, the operating margin was depressed. The fourth quarter was a little higher than normal. Now, we're anniversarying those situations.

So it's internal inventory. Our inventory remained fairly flat in the third quarter in consumer, and then it dropped in the fourth quarter, which is more normal for our sales curve and our history of our Company. So this year, the third quarter operating margins for our consumer was very strong. This year the fourth quarter was depressed, and for the full year, the consumer group had really nice operating margins. Next year, I don't expect that third- and fourth-quarter adjustment to occur again, so it will be more normalized next year.

Thank you.

Next question comes from the line of [Chris Nasella] of RBC. Please proceed with your question.

Maybe, can you break your sales growth guidance directionally at least between the segments for 2013?

I think that if you take a look at it, I would prefer not do that. I mean, we really don't do that, but I think what you can probably tell that we're [sort of] group with the unit volume will probably be the strongest.

Then just for 2012, what's your best guess on how that volume through the stores was split between new build and repaint?

I would say it was probably very consistent, Chris with the kind of overall market environment. We have said for a long period of time that the new construction market would account for somewhere in the 20% to 25% demand for architectural coatings. That was probably a little depressed from that number because we still have not seen the kind of rebound, both in housing as well as commercial go. But let's assume in the high-teens was the amount of gallons that were used for new construction. The remainder would have been for maintenance and redecorating.

Thanks.

The next question comes from line of Don Carson with Susquehanna. Please proceed with your question.

Thank you. Just a couple of questions. One, just a clarification on volumes. Of the 12.5% same-store sales growth in paint store sales groups this year, were you saying about half was price, half was volume?

More than half but very, very close because of that mid single digit.

More than half of volume, Don.

So, are you forecasting volume to be relatively flat? Is that what's implied, or that the growth will be equivalent from 2013 to 2012 is in terms of volume outlook for paint stores group?

You say volume flat, flat to 2012?

Growth rate the same.

Right.

One additional question. Chris, did I hear you say you expect TiO2 to stabilize this year?

Yes, Don. We would expect TiO2 pricing to be more stable in 2013 than we have seen over the past few years.

Then a final question. I know you have tough comps in the first quarter. I was a little surprised you are still expecting some low single digit growth. Is that, maybe you can just give us some more background on why you think you are going to get growth over such a tough comp?

Bob commented that we really had confidence in, particularly the North American residential repaint market, and you know we have been accelerating in that space. We have been seeing the return of the painting contractor to a higher percentage of the purchase architectural coatings throughout the year. Those trend lines are continuing. So despite the fact that we got a pretty high hurdle to jump, we're giving the kind of guidance from the clarity we can see in the quarter, and we expect to be able to hit these numbers.

Thanks Chris.

Thank you. The next question comes from the line of Kevin McCarthy with Bank of America Merrill Lynch. Please proceed with your question.

Chris, I appreciate the disaggregation of SG&A that you provided. If we put the Comex deal on the side for a moment, do you think that the up lift in 2013 on the SG&A line will be similar to what you experienced in 2012? Perhaps you could comment on a forward-looking basis on some of the three bucket sites that you mentioned there and what that looks like for this year?

Yes. If you look at SG&A for the year it actually was down as a percent of sales. And the fourth quarter had a little bit of acceleration. Overall it was kind of discipline that we typically bring to managing that part that I think was at play throughout the year. We did comment about the decision to continue to heavy up. I think we began the year with a little lower store count expectation and accelerated to go get to that 70 stores in the 4 fourth quarter.

40 of our 70 stores actually came in the fourth quarter this year, in terms of their opening, so we were a little late in the year and heavy handed in that particular area. That's been pretty typical for the way that the stores flow in for us in past years, as well. In our expectations for next year, that SG&A will continue to improve as a percent of sales. We're going to continue to make these investments. We'll put in more stores next year than this year, as we guided. So, I think that it's been a pretty consistent track record here and it should continue again into 2013.

Second question. I think in the past you have commented a bit on your efforts to minimize the amount of TiO2 required as a Company to the extent that makes sense through reformulation efforts in certain cases. Can you provide an update on that? Is it ongoing? Where do you stand now? Is there more to take out in 2013?

I think we have commented Kevin along with a number of other of our global coatings competitors who are also purchasers of this material that there are a lot of activities underway to try to eliminate the amount of titanium load needed in a typical gallon of paint. We have talked about the ability to make those conversions to lower grades. Titanium, particularly outside North America and those activities are at play, as well.

I think the numbers you hear, the perhaps 5% to as much as 10% of the titanium eventually can perhaps be displaced, is not an inappropriate target. We have also commented that given our focus on the professional painting contractor, and unwillingness to really change a lot of the raw material content in these products, more likely to be a lagger on that path, because this will be more future products as opposed to our current product line. I can tell you that all those activities continue to be underway with our R&D team.

Thank you very much.

Thank you. The next question comes from the line of Nils Wallin of CLSA. Please proceed with your question.

Just curious about the store growth that you had this year and your expectations for next year. Are you focused on particular regions, and how would those regions compare with where you will bulk up once the Comex deal gets approved?

Nils, as we had commented throughout our time here that the store growth will come literally across the entire geographic footprint that we have identified, stores group managed in Canada, the US, the Caribbean. We have around 160 district managers, each of whom go over real estate plan. We don't have a single one of these districts that considers themselves fully penetrated.

So we have opportunities literally in every market across the United States. Typically what we do is try to do about 70% of our store openings annually would be typical fill-ins, where we're giving one store to each of these districts, and about 30% of that count would be more of a heavy up concentration in markets where we're underpenetrated.

We shared with the investment community that throughout all of Canada and the western markets of the United States are where those underpenetrated markets are for us, so we'll continue to heavy up in those bases. If we're successful in concluding the Comex transaction, their 300-plus store count beautifully lays over that density map and really strengthens our Canadian and western market store count. Even with those stores, however, we'll still be far from what we would consider to be full penetration.

So, the notion of continuing to add the stores at about this pace for years and years to come would remain part of our strategy. We have been talking about the ability to get to 5,000 stores throughout this North American geography, and with the addition of the Comex stores plus the 80 stores we're planning to open this year, 70 to 80 stores we have in the guidance, we would still be below 4,000 stores. So, long way to go.

Yes. Thanks. Then just on your incremental margin in the paint stores group, was quite strong this year, around 30%. With new products bulking up on your SG&A, do you think you will be able to continue that same sort of incremental margin, or operating leverage in 2013 and beyond, or will it decelerate some?

Just as you mentioned, the outer west margin that we did run the store group this year was an all time high eclipsing the prior by 15. It was 15.5. The prior high this year, 15.9. When we used to talk about the 15.5 years ago, we would say we don't think that's the top. We think if we continue to get admin as a percent of sales down and other types of admin costs, we think we can beat it. We feel the same way about the 15.9. I don't think that next year our management -- we still believe that we're going to have incremental flow through that's very strong, as long as the market continues to recover.

Great. Thanks very much.

Thank you. Our next question comes from the line of Dmitry Silversteyn with Longbow Research. Please proceed with your question.

Good morning. A couple questions if I may. I am trying to understand your revenue guidance in light of what you are talking about improving markets. You are starting out with mid single digit growth in paint, and you are going to end the year overall with low single digit growth, so, there is a deceleration coming after the first quarter. To follow up on earlier question the first quarter seems to be most difficult comp on year over year basis. I would like to understand with contractors coming back, with commercial construction accelerating, with the housing market continuing to do better, why would you expect a slowdown in your growth rate as the year unfolds?

You know, I am pulling out the press release. I think in the first quarter we began in low single digits and mid single digits for the year. That would tell you that the second, third, and fourth quarter is going to be stronger than the first quarter, as far of year- over-year comparison.

Secondly, if you sit there and say, well if you start adding the two years together. Again, the first quarter last year was the quarter, if you remember the stores had approximately 20% comp store gain and nearly half of that was price, whereas for the full year we ended up in the mid single digits for price. So, as we go along, we're going to go have that hurdle of the price not helping us, as we go along. So, when you go from the first quarter at low single digits to mid, we see exactly, probably a little differently than you do.

Your press release is correct, but I think what you have said on this conference call you may have misspoken. That's what I picked, was the opposite. With the press release it makes sense. You start out slow and you accelerate as the year unfolds. My second question is on the guidance range you provided. $0.10 for the first quarter and $0.10 for the year. I guess I am surprised by either too tight of a guidance for the year, or too loose of a guidance for the first quarter. How do you feel about that? It seems there should have been a wider guidance for the year, but perhaps you'll feel better as the year unfolds in the total development of the market?

I think it goes back to, Dmitry, I don't know when -- I've lost track of when you started covering us, but prior to 2008, we used to give $0.10 guidance. For the range. When you take a look at what's happening, we actually one year came out with $1 range, we said our APS would come in between $3 and $4.

I remember that.

And we actually came in at $3.78 that year, and when you take a look at it, it was because of the variability that was going on in raws and the market, and there was a lot of different things that were going on in 2009 and 2010, and as we said back then, we got a lot of pressure, you widened it too far. So we said, as we get more and more clarity, you'll see us reduce the size of this range.

So the way to interpret this is that the market seems to have subsided into a more normalized behavior, that's more predictable from a historical basis?

Correct.

That's what I needed to know. Thank you.

Thank you. The next question comes from the line of Dennis McGill with Zelman & Associates. Please proceed with your question.

My questions will be easier.

They never are, Dennis.

My first one was just trying to piece apart the guidance. It's a little tricky right now, because you're not factoring in any benefit from Comex, but obviously, you're taking a hit on the interest line, and I just wanted to think through some of the moving parts. On the share repurchase, you would think you're going to probably pull back with the deal ahead of you. Are you factoring anything related to share repurchase into the guidance?

Dennis, that was the hardest part to do this guidance, because whether we complete the Comex deal or not, we're going to pay that interest.

Right.

But we do have a factor, we have a couple of different scenarios. When Comex occurs and so forth. I will tell you our guidance right now does show stock repurchase.

Okay. And just on the tax rate, what should we assume there?

We're a little higher than what we experienced last year with the adjustment for the IRS, and this year, we came in at 31.1%. We think we're going to be a little higher than that 31.1%, but no higher than 33%.

So I think if you run that through in the top line assumption, and some of the things you talked about, maybe it's modest margin expansion for the full year, and it sounds like you expect SG&A to be down on a year over year basis percentage of sales. So can you maybe just help us bridge that on the gross margin line, what you're assuming, and that guidance on the low-single digit raw material inflation, how that sorts out with some of the other actions that you have?

I really don't want to go through line by line and tell you our guidance, but I think, mathematically, I think it's pretty easy to do if you use a tax rate a little higher than we have today. Interest, $20 million-some higher than today, and you back in and use a slightly smaller share count, it's going to tell you what operating margin, there is going to be improvement there, and so, if you show the SG&A as a percent of sales improving, and I think you get back into the gross margin, that there's going to be gross margin improvement this year.

Okay. I guess on some of the top line, I think Chris, you made a comment that maybe you're a little bit more conservative, or conservative on the end channels, given some of the volatility that you've seen lately. Is that true across the domestic markets? Is there any one area where you are seeing more volatility or maybe more hesitancy among customers that things may be a little less confident in the recovery?

I think the government actually came out this morning with GDP estimates for the fourth quarter, which were retracted, and so when you look at our more commercial, our protective and marine segments, commercial starts, those were things that we had a little less clarity at, Dennis. I think our guidance and our confidence really stems from this residential REIT thing, domestic North American housing market, and that can carry us through a lot of rougher spots. As we said, as we get into the year, and we start a little better market dynamics unfolding, we'll be able to comment on that, but for right now, I think we're really relying on this residential repaint market to be the driver.

That's helpful. Thank you.

Thank you. Our next question comes from the line of Matt McGinley of ISI Group. Please proceed with your question.

On the consumer segment, last quarter you had stated that some of the weekend that you had there was across most product types and channels. Is that still the case, and what do you think is still driving that unit weakness in that segment?

I think we did exactly say that, Matt, that our sales both to our customers and their out-the-doors lagged the same sales performance that we're seeing for our own stores. Time will tell, as we get into the selling season and through the winter, whether or not the spring paint season picks up for these folks, but our share position there has been maintained, with the exception of the Walmart business, which we've commented on in the past. We did take some additional private label business there, that was shifting from our manufacturer to a competitor's sourcing. That was somewhat of an impact, but even factoring that out, this was a fairly flat-performing segment for us.

What do you think the long-run organic growth rate should be within that segment?

We've commented for a long period of time that our expectations are flat, low single-digit sales growth for this group, and this comes from the dynamics of the competitive landscape that we've created for ourselves in the United States, so particular retail partners that we enjoy the business, we benefit when they grow and improve, and time will tell how that all shakes out.

And a quick one on the inventory. Your inventory is basically down a little bit year-over-year. Was that primarily driven by the decline in raw material cost, or are your unit inventories still down year-over-year?

Our unit inventory is down. We're in pretty good shape with inventory, but there was improvement with terms, and so forth.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Chuck Cerankosky of Northcoast Research. Please proceed with your question.

Nice quarter, and year. When we talked about this environment that you're seeing, Chris, for 2013, with the flatter price outlook, do you expect competition for volume to be a little more aggressive, because price is not making up the difference for some paint manufacturers?

We've been blessed with great competition for 147 years, Chuck. We absolutely expect that there will be competition for these gallons, and we've faced that dynamic every single year, and we would expect to be in that same environment again, this year.

But you think with less price inflation in there, it gets a little tougher, Chris?

I'm not sure that I do. I think it's tough when you have price, and it's tough when there isn't price. We've been in these environments before. Even within the last several years, we've had periods of time where there was, I think we went 22 months without a price increase, back before this titanium run. So, we got through that segment, we had gallon gains in there, against these same competitors that you're talking about. It really comes down to the quality of the product, the distribution support, the caliber of the field selling organization. These are all areas where we've been muscle building, and we would expect to actually be in a little stronger position this cycle than we were the last time, given the expansion of store counts and the widening of the gap of our service capabilities.

All right, and one for Sean. When you're talking about the guidance for 2013, do you have any expenses in there for the Comex transaction, simply for what you have to spend on ahead of getting the deal done, similar to the debt financing?

Very little, Chuck. I think that you could imagine that we have some advisors that we are working with, but I would say it's going to be really immaterial to our first quarter.

So we would see those, immaterial in the first quarter, are you still expecting a close by the end of the quarter?

That's in the hands of the government. We're not really able to comment on that. We would love to be able to make that date work, but time will tell.

So let's see the bulk of the transaction costs, and separating those from any integration costs, we'll see the bulk of those when you close?

Yes. The quarter that we close, you're going to have the inventory step-ups, you're going to have some other expenses, one-time-only expenses. That quarter will definitely be, will be dilutive from the Comex acquisition because of those first-quarter expenses. Then it will start to be accretive.

Thank you.

Thank you. Our next question comes from the line of Bob Koort of Goldman Sachs. Please proceed with your question.

It's actually Brian Maguire on for Bob today. Chris, I just wanted to clarify your comment on pricing for 2013, and I heard you say that there wasn't going to be any real benefit from pricing in 2013. I just wanted to see if you're talking about no incremental price increases from here on out, or would that mean that you wouldn't see the benefit from just anniversarying the price increases you've already done. In other words, is there truly no benefit year-over-year, or just no benefit from here on out?

I made the comment, we didn't anticipate any pricing activity in the year, given where we see the raw material basket at this point in time. That guidance is as good as the word of our raw material suppliers, and as we have commented frequently, we really are a raw material input cost pricer to our customers, so if we're able to maintain these kinds of raw material costs as we're entering the year, or whether we're forecasting the year, then we would anticipate very little pricing activity. Our last price increase was actually in February of last year. So, there is a little bit of pricing still, we're at the very tail end of integrating that, so for the most part of this year, there won't be any lift from pricing activity.

Great, and just a follow-up, as it relates to the gross margin outlook, then if pricing is going to be flat to up modestly, and it looks like your raw outlook is for low-single digit inflation. I don't think about there being much fixed costs in your model, it being more of a variable cost model. Does that imply your thinking currently is roughly flat to modestly up gross margins?

No, I think, when you start taking a look at, this is when you start asking sequentially, it's probably your answer there, sequentially, or you can see that. But I think if you go quarter-over-quarter, that first quarter, our gross margin was really depressed because the raws were anniversarying and so forth, and we were putting the price increase in, but we do expect to have gross margin improvement in the first quarter, or else we wouldn't be able to get over that great quarter we had. Sequentially, I can understand your answer there it.

Brian, our margins have always been helped, too, as volumes increased. Your point about the fixed cost of the company. These incremental gallons start going through this entire supply chain. That has an impact on it as well, too. Per Sean's earlier answer to Dennis, if you do the math on that, you get what we would expect to be another good year of gross margin improvement for the Company.

In North America, two of your larger historic competitors are apparently merging later this year. Do you anticipate any change in competitive behavior, or how will that dynamic influence you going forward?

Given the status of their acquisition as well, which has not been finalized, I think it would be inappropriate to make any comments about that at this time.

Thanks very much.

Thank you. The next question comes from the line of Aram Rubinson with Nomura Securities. Please proceed with your question.

Question is on the gross profit dollar line. Can you give us, by segment, the delta in gross profit dollars that you often do?

Sure. In the Paint Stores group, it was $96.2 million, in Consumer group it was actually backwards $1.3 million. In the global finishes group, $26.9 million, and in the Latin America group, it was an increase of $4.4 million.

It looks almost as if, in your Paint Stores group, that you've gotten back everything that you gave away last year in the fourth quarter?

I will tell you right there, you're accurate.

One other question, just on reinvesting. Clearly, the acquisition of Comex is a major reinvest. You've talked about raising SG&A for new stores on reinvest. Where are we in other areas of the Business? You've mentioned in the past that we don't need any capacity to come on board, I assume, from manufacturing. Is that still the case, and if you weren't doing the acquisition, how many stores would you have opened organically?

I don't think the store opening organic has been impacted at all by this acquisition. We are steady on this page. 80 is a great number. That's probably the sustainable number, as low as 50 to 60, as high as 100. Over a long period of time, 80 sounds right in the sweet spot on this march up to 5,000 stores. There has been no capacity constraint or corporate constraint on our stores group to hold them back from growing at an appropriate pace, so I don't expect that to change.

Regarding other investment opportunities, Aram, around the world for us, we have commented that after a fairly robust M&A period building out infrastructure both in Europe and Asia Pacific to service our OEM product finishes businesses that we feel comfortable with the infrastructure we have. Future acquisitions would likely be more smaller technology bolt-ons than they would be for brick and mortar.

Same can be same of Latin America, where we also have pretty good infrastructure. We still remain interested in building all those businesses, and we'll look for the appropriate deals to do. North America still remains the key market where we have the ability to open stores at this pace, and so that's where we can see to really focus our efforts going forward.

If I may, the other thing that we definitely are investing in is IT systems. If you have tracked our Company for quite a while back in the 1990s working capital was in the high teens, almost 20%. We think what really helped operations do that was IT. They think we're starting to see some of that. That's going to help our cash flow. I think down the road, as we continue to try to improve our cash generation for sale. So, I think we're also doing that around the world.

Before I go, is it okay to ask for the inventory adjustment dollar amount that you usually take at the end of the year if it's available.

It's not available. We're not there yet.

All right. Good luck this year. Thank you.

Thank you. The next question comes from the line of Charles Dan with Morgan Stanley. Please proceed with your question.

Just a follow up on the SG&A spending. It looks like the unallocated portion or the administrative line was up significantly this year in dollars, and as a percentage of sales. To the extent that's where some of the incentive comp or infrastructure spending is, is that the sort of the right level to think of as a base going forward or was it impacted by the timing of incentive comp as the share price was rising? Just helping us understand what the new base is going forward there.

Everything you said really accurate. Really this segment, when you talk about the infrastructure we just talked about with IT, as well as the compensation including that stock based compensation, this is where the growth occurs. I think from that standpoint, you will see that over time flatten out, especially on the infrastructure spending. It will begin to reduce.

The other thing that's in this group, or in this segment is our interest expense. Our interest expense has been flat the last two years, in that $42 million to $43 million range, with the $1 billion debt that will go up $20 million. So I think that any efficiencies we had in some of the other areas are going to be offset by the interest.

It sounds like, just to follow up that, if you excluded the interest expense you would expect the remainder to go down?

Yes. Over time, yes.

Thank you.

Thank you. Our next question comes from the line of Duffy Fischer with Barclays. Please proceed with your question. Mr. Fisher, your line is now live. You may proceed with your question.

Congratulations on a great year last year. One of the strongest pillars of the story has been your ability to get price and offset the raw mats. Surprisingly, in the last probably 45 days, the biggest raw mat, the petrochemicals and propylene in particular have jumped I think meaningfully higher than most people would have guessed four or five months ago. Was it just a bad timing? Or why wouldn't we be able to get some price on the back of that big raw material increase this year?

I think as we commented Duffy, we look at the basket of raws as they impact the Company as opposed to any one individual segment. We comment about individual segments when they drive the entire basket up, but as we have given guidance about what we expect that total raw material impact of the Company to be this year that would not be the level that would cause us to take pricing to our customers.

Okay. Fair enough. Then if I remember, you used to sell some Pratt & Lambert paint through the Ace Store system. How big is your business, Pratt & Lambert, and other stuff that would go through that, that may be at risk with the deal that Ace is doing with Valspar?

You have a good memory. We have had over the years a number of independent Ace dealers take on the Pratt & Lambert product line. In this environment that Ace operates in they can endorse programs and make it available to their coops through their distribution channel. But most of these independent dealers do carry products that they buy outside of that Ace relationship. So, we do not have a big exposure at Ace at this point in time, and the number of dealers that do carry Pratt & Lambert may or may not elect to continue with it, per their announcement of their new paint partner. So, time will tell, but that will not be an issue that you will hear us commenting on as impacting the Company.

Perfect. Great. Thanks.

Thank you. Our next question comes from the line of Eric Bosshard with Cleveland Research Company.

You talked about in the fourth quarter, step-ups in SG&A investments across the business. I am curious what the target is in terms of the pay back from that, if it's market share or if it's volume growth. What are you thinking that the pay back might look like relative to those investments?

I think that's why I also mentioned the cash flow earlier, Eric. I think some of the IT spending that we did will actually help our working capital and actually help our cash generation outside the country. We have been working on that for many years. Again, 40 of the 70 stores came in to, were open in the fourth quarter. So, that's a high percentage in the fourth quarter.

I think down the road, I think they'll perform just like all the other stores do. I think that just timing has caused this. We expect to hopefully gain market share, as we continue to open stores. I think you're going to see the same timing from the stores. I think in the next year or two you will see nice cash flow coming out of our non-domestic group.

Great. Secondly, a year ago, I think the guidance for 2012, the initial guidance you ended up exceeding by a pretty meaningful amount, perhaps a dollar a share. I am curious if you look back a year ago and think about the factors you were considering and where the year ended up, what did you do, or what played out differently in 2012 that allowed you to exceed by such a wide margin your original expectation?

I would tell you $0.97, it was $5.52 to $6.49. When you take a look at it, a couple things occurred. Number one was our sales performance at stores. I think that stores really had a great year. I think number two was the margin improvement in our global finishes group. I think that was stronger than what we had expected, and I think that integration, where the fourth quarter of 2011 was a little heavy in SG&A because of that integration. I think that you look at that Global Finishes group and what they were able to do, I think those were the two areas. The Latin America group did improve, and consumer, I think was fairly close to what we expected.

Okay. Thank you.

Thank you. Our next question comes from the line of Silke Kueck of JPMorgan. Please proceed with your question.

I was wondering whether I could try one more raw materials question, if you are not tired of it yet.

Of course you can.

So, what you said is this, that your TiO2 prices seemed more stable in 2013. So, in a way if they stayed stable from where they were end of 2012, that really would mean that there's still a significant benefit on the year over year basis in the first half of 2013, right?

Yes, there was a decline in TiO2 pricing in the back half of 2012 which put TIO2 pricing below, certainly below 2012 peak at year end.

And my memory was propylene prices are set. I know they're back at $0.77, but the same thing happened last year. As you look at propylene prices for February, March, April, I think they were like $0.77. Maybe they were $0.76. So, on a year over year basis, propylene cost may not be, I see how sequentially they'll move, but on a year over year basis, those comparisons may not be as difficult as you make them out at first sight.

I think a low single digit inflation expectation across our total raw material basket is not, I don't think that's a dire outlook. Certainly not relative to our expectation over the past few years at this time in the year.

Okay, yes. I can understand how you are reasonably confident, that the 45% gross margin is probably sustainable for at least another six months or so.

I think that's right.

Okay. The second thing is I wanted to understand what really happened to volumes on the Consumer group side. Because this is now the second quarter in a row our volumes were negative. And what exactly is happening? I didn't detect these volume declines anywhere else.

It's mostly Walmart, Silke. As we commented, we have been losing share inside that four wall there.

I thought you gave that up already.

The branded material was replaced by Glidden immediately, and a significant portion of Walmart's buy has been private label under their Color Place brand name, and the process there was that was to be phased in over a period of time. We were going from some percentage of distribution that we supply to significantly lower, and those adjustments were taking place in the third and fourth quarter. That's really the head wind that our Consumer group was facing.

Oh I understand. Sorry, I forgot that. And has anything changed in your goal to explore the Canadian stores market, now that PPG owns Glidden stores there?

Our intentions have always been to continue to organically open stores throughout Canada, following our stores model. One of the real bright spots in this potential Comex acquisition is a brand called General Paint that operates out of British Columbia. And that will bring a significant store count boost to our plans in Canada. So, we would expect to make significant progress in Canada this year organically, and maybe a little shot in the arm when we get this transaction closed.

Oh can you share what the Comex exposure is in Canada?

General is the brand name. Store count in Canada was 78 stores.

And a last question is a TiO2 question. I wanted to ask it with raw materials and I forgot. Has sulfide-based TiO2 from China made a difference to the global supply demand balance at all? I understand that Sherwin uses chloride-based TiO2 but I was just wondering whether you had a view.

Silke, clearly chloride producers have been talking about soft market conditions and weak demand all year long. And whether that is truly weak global demand or less than robust demand, partially offset or partially satisfied by increasing sulfide capacity is hard to tell. But we suspect that it might be some of the latter.

Okay. I think that's all I have. Thank you very much.

Thank you. Our next question comes from the line of John McNulty with Credit Suisse. Please proceed with your question.

Just one quick question. When we look at the sales growth that you saw, and earnings growth that you saw in the paint store, or throughout your businesses, the Paint Store group, [Lanaham], consumer side they vary pretty significantly. If you have any information of data on it can you let us know which one Comex might have mirrored more likely through the fourth quarter and 2012. Was it closer to paint store-type growth or was it more similar to the Lanaham growth?

I think it's probably a hybrid of both of those. Their model would indicate that because they have such a strong distribution network aimed at selling to professional painting contractor, they would have participated in more the Mexican market growth scenario, and we think Mexico actually is a pretty good place now. Their GDP outperformed the US this past year, their housing markets and their Commercial Construction businesses were stronger than ours were. So, their performance should mirror closer to that.

We have not commented on this private company's results yet, and we will, obviously when we close, give you a lot more than transparency there, John. I think at this point in time, I think you have to look to the Mexican GDP market and know that Comex would be a good proxy for the same kind of businesses, housing et cetera, that we enjoy through our stores business here.

Fair enough. Thanks for the color.

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

Thanks, Jessie. Let me wrap up this morning by asking you all to save the date of Thursday May 23 on your calendars. That's the day we'll host our annual financial community presentation at our headquarters in Cleveland, Ohio. The program will consist of our customary morning presentations with Q&A followed by a reception and lunch. Again, that date is Thursday, May 23rd. We'll be sending out invitations and related information in the weeks ahead. Thanks for joining us today, and thank you, as always, 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, and have a wonderful day.