宣偉 (SHW) 2013 Q1 法說會逐字稿

Good morning. Thank you for joining The Sherwin-Williams Company's review of the first-quarter 2013 results and expectations for the second quarter and full year. With us on today's call are Chris Connor, Chairman and CEO; Sean Hennessy, Senior Vice President of Finance and CFO; Allen Mistysyn, Vice President - Corporate Controller; and Bob Wells, Senior Vice President - 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 www.Sherwin.com beginning approximately two hours after this conference call concludes and will be available until Thursday, May 9, at 5.00 PM Eastern Time.

This conference call will include certain forward-looking statements as defined under federal securities laws with respect to sales, earnings, and other matters. Any forward-looking statement speaks only as of the date on which such statement is made and the Company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. A full declaration regarding forward-looking statements is provided in the Company's earnings release transmitted earlier this morning. After review of the first quarter results, we will open the session to questions. I will now turn the call over to Bob Wells.

Thanks, Robert. 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, first quarter press release. Summarizing overall Company performance for first quarter 2013 versus first quarter 2012, consolidated net sales increased 1.4% to $2.17 billion, due primarily to higher paint sales volume in our Paint Stores Group. Acquisitions increased net sales 1% in the quarter which was fully offset by unfavorable currency translation.

Consolidated gross profit dollars increased $53 million for the quarter to $962.9 million. Gross margin increased 180 basis points to 44.4% of sales from 42.6% in the first quarter last year. Selling, general and administrative expense for the quarter increased $21 million over first quarter last year to $778.7 million. As a percent of sales, SG&A increased to 35.9% in the first quarter this year from 35.5% last year. Interest expense increased $5 million compared to the first quarter last year due to an increase in long-term debt to finance the Comex acquisition. Consolidated profit before taxes in the quarter increased $26.1 million, or 18.3%, to $168.4 million.

Our effective tax rate in the first quarter this year was 31% compared to 29.6% in the first quarter of 2012. For the full year 2013, we expect our effective tax rate will be in the low 30%s compared to last year's rate of 30.4%. Consolidated net income increased $16 million to $116.2 million. Net income as a percent of sales was 5.4% compared to 4.7% in the first quarter last year. Diluted net income per common share for the quarter increased to $1.11 per share from $0.95 per share in 2012.

Looking at our results by operating segment, sales for our Paint Stores Group in the first quarter 2013 increased 4% to $1.17 billion from $1.12 billion last year. Comparable store sales, that is sales by stores open more than 12 calendar months, increased 3.2%. The increase in sales for the segment was due entirely to higher paint sales volumes across most market segments. Regionally, in the first quarter, our Southwest division led all divisions, followed by Southeast division, Midwest division, and Eastern division. Sales were positive in three of the four geographic divisions. Segment profit for the group increased 15.1% to $129.7 million in the quarter as higher sales volumes and gross margin improvement more than offset higher SG&A spending. Segment operating margin increased to 11.1% of sales from 10% in the first quarter last year.

Turning to our Consumer Group, sales in the first quarter decreased 3.7% to $308.6 million, due primarily to the previous disclosed elimination of some paint business with large retail customers that was partially offset by acquisitions. Segment profit for the Consumer Group decreased $1.3 million to $54 million in the quarter from $55.3 million in the first quarter last year. Segment profit as a percent of external sales increased to 17.5% from 17.3% in the same period last year. The improvement in operating margin was due primarily to continued tight expense control and operating efficiencies driven by volume growth in the Paint Stores Group.

For our Global Finishes Group, sales in US dollars increased 0.8% to $486.8 million in the quarter, due primarily to selling price increases and acquisitions, mostly offset by unfavorable currency translation. In the quarter, acquisitions increased net sales by 1% and unfavorable currency translation rate changes decreased sales by the same amount. First-quarter segment profit increased 18.5% to $33.9 million, due primarily to higher selling prices and improved operating efficiencies, partially offset by unfavorable currency and acquisitions. The combination of currency translation and acquisitions reduced segment profit by $1.8 million. As a percent of sales, segment profit increased to 7% from 5.9% in the same period last year.

For our Latin American Coatings Group, first-quarter net sales decreased 2.1% -- 2.9% to $202.6 million, due to unfavorable currency translation that was partially offset by selling price increases. Currency translation rate changes decreased sales in US dollars by 6.6% in the quarter. Stated in US dollars, segment profit in the quarter increased to $20.8 million from $19.9 million last year. Good expense control and higher selling prices more than offset a $1.7 million drag from unfavorable currency translation in the quarter. As a percent of net sales, segment operating profit was 10.3% in the quarter compared to 9.5% in the first quarter of 2012.

Turning briefly to the balance sheet, our total debt on March 31, 2013, was $1.7 billion, including short-term borrowings of $68.3 million. Total debt on March 31 last year was $1.32 billion. Our cash balance at the end of the quarter was $613.9 million compared to $25.5 million at the end of first quarter 2012. In the first quarter of this year, we spent $31.2 million on capital expenditures, depreciation expense was $38.9 million, and amortization expense was $7.7 million. For the full year 2013, we anticipate capital expenditures for the year will be approximately $130 million to $150 million, depreciation will be about $150 million, and amortization will be about $30 million.

I'll conclude this review with a brief comment on the status of our lead litigation. The Santa Clara case involving claims in public nuisance brought by 10 cities and counties in California against five defendant companies continues to move forward. The judge presiding over the case has set the case for trial on June 24, 2013. That concludes our review of the results for first quarter 2013, so I'll turn the call over to Chris Connor, who will make some general comments and highlight our expectations for second quarter and full year. Chris?

Thank you, Bob. Good morning, everybody. Thanks for joining us today. There's been a lot of volatility in the market in recent weeks around US housing and building materials. It seems that every new data point is being dissected for clues about the durability of this recovery. While a few of the recent indicators appear to be heading in the wrong direction, most notably, the NAHB Builder Sentiment Index as well as March single-family housing starts and residential permits, the majority of the data still points to a robust and sustainable recovery. I think our sales results in the first quarter support that conclusion. Although our revenue growth was only 1.4%, keep in mind the 15.1% sales increase in the first quarter 2012 was an extremely difficult comparison.

Aside from the obvious difference in weather this year, the calendar was also a challenge. We lost the equivalent of two full business days in the quarter compared to last year, and Easter week fell in March this year versus April last year. Despite these expected headwinds, our consolidated revenue and volume were both positive. The purest read we have on the health of the domestic market comes from our Paint Stores Group. With all the challenges we faced in Q1, our comp-store sales grew more than 3%.

If you look at interior paint sales versus exterior, you get an even better perspective on the difference between first quarter '12 and '13. Sales of interior products this year increased almost 10% on top of strong double-digit growth last year, while exterior sales were slightly better than flat. The relative softness in our exterior business was not only a drag on revenue and volume compared to last year, but also on mix because exterior paint commands a higher average price per gallon and higher gross margin. This mix shift resulted in volume growth that was higher than revenue growth for the quarter.

Obviously, our Paint Stores Group wasn't the only segment affected by the weather and calendar. The loss of business days in the quarter reduced shipments across all segments of the Company, and winter weather significantly affected demand for protective and rain products as well as architectural. We commented on our first quarter call last year that unseasonably warm weather doesn't create demand for paint, it creates opportunity to paint. The good news this year is that normal seasonal cold and wet weather doesn't destroy demand for paint, it simply postpones it. And we are encouraged by the demand trends we've seen so far in the second quarter.

This was our fourth consecutive quarter of year-over-year gross margin improvement, clear evidence of the progress we've made in containing raw material costs and recovering the gross margin erosion we experienced in 2010 and 2011. We expect this trend to continue, although the rate of improvement should diminish as we go through the year. Based on what we saw during the first quarter, we've tempered our raw material cost outlook for the year. Industry average pricing for most of the key raw materials used in paint and coatings continues to moderate as TiO2 pricing has remained stable and propylene, a key feedstock for resins, latex, and solvents, has come off its February highs. We now believe average annual raw material costs for the industry will be flat with 2012 versus our January outlook of low single-digit inflation.

Our working capital, which we measure as inventories plus receivables minus payables, decreased as a percent of sales to 11.7% from 12.7% in the first quarter last year. The reduction in working capital, combined with the increase in net income in the quarter, more than offset the $80 million cash contribution we made to our ESOP plan to satisfy our agreement with the Department of Labor. Taking all this into account, net operating cash in the quarter increased by almost $64 million compared to first quarter last year. During the quarter, we acquired 0.5 million shares of the Company's stock for treasury at an average cost of $162.88 per share, for a total investment of $81.4 million. On March 31, we had remaining authorization to acquire 15.95 million shares. Yesterday, our Board of Directors approved a quarterly dividend of $0.50 per share, up from $0.39 last year.

Our Paint Stores Group added nine net new stores during the quarter, and our plan calls for full-year store openings in the range of 70 to 80 net new locations. Today, our total store count in the US, Canada, and the Caribbean, stands at 3,529 locations compared to 3,455 one year ago. This year-over-year increase in store locations, along with the investments we made in store and territory staffing in the back half of last year, resulted in a 40-basis-point increase in SG&A as a percent of sales in the quarter. As our revenue growth accelerates, our SG&A will decline as a percent of sales, and we expect to finish the year below the 2012 level of SG&A as a percent of sales.

We remain optimistic that US architectural paint market volumes, primarily in the residential segments, will strengthen as we get into the prime painting season. Our outlook for second quarter 2013 is for consolidated net sales to increase in the range of 5% to 9% compared to last year's second quarter. With sales of that level, we expect diluted net income per common share for the second quarter to be in the range of $2.50 to $2.60 per share compared to last year's record $2.17 per share. For the full year of 2013, we expect consolidated net sales to increase over 2012 by a mid-single digit percentage. With annual sales at that level, we are reaffirming our expectation for full-year diluted net income per common share to be in the range of $7.45 and $7.55 per share compared to last year.

Finally, I'd like to comment briefly on our progress on the Comex acquisition. We completed the regulatory review process in two of three countries. Although we remain confident that this transaction will close, it is impossible to predict the timing at this point. We remain hopeful that it will be some time in the second quarter. As you would expect, we are making productive use of this interim period to prepare our Company for a seamless integration and a fast start, once the transaction is complete. Until that time, I'm sure you respect the fact that we cannot disclose information about Comex operations, financial performance, or additional details of the transaction. Again, thanks to all of you for joining us this morning. And now we'd be happy to take your questions.

Thank you. We will be conducting the question-and-answer session.

(Operator Instructions)

One moment please while we poll for questions. Ghansham Panjabi, Robert W. Baird.

Chris, the interior versus exterior paint demand differential that you pointed out, do you think the exterior's performance was a function of the tough comp from a year ago or is it just all the more unfavorable weather in March across the country?

Well, the answer is yes to both of those. I mean, that was the whole point. And we saw reasonable seasonal exterior sales gains in our southern market but it was the northern markets that were painting outside last year that really saw a decline in exterior gallons. Take those two together, we delivered a flat exterior performance for the Stores Group.

And then can you just parse out what you're seeing residential versus commercial as best as you can tell?

Yes, I think as we've been commenting that for some time, it is the residential portions of this architectural market that are rebounding both in the new construction as well as in the repaint. Commercial tends to lag that. We've begun to see some lift in the commercial repaint as occupancy rates improved, not so much a lift yet in the new construction portion of that business.

Okay. And then just one final one on global finishes. For the second quarter last year, it was a very, very strong performance from a margin perspective. It seems like a tough comp. Do you think margins will be up in global finishes year-over-year during the second quarter of '13? Thanks.

Yes, I think we were pretty happy with the operating margins and global finishes. We've done some things to structurally help that business. And we don't give guidance by segment, but we were not surprised that Global Finishes operating margin improved this quarter.

Aram Rubinson, Nomura Securities.

Good work on the results. I can't believe your exterior paint volume was actually up this year, but --

Thanks, Aram.

A couple questions. One, just housekeeping, if you can help us with the gross profit dollar growth you sometimes share with us by segment, it would be great.

Sure. I've got it right here. The Stores Group, the incremental gross profit dollars were $37,663,000. The consumer incremental, $2.891 million; and the Global Finishes Group, $13.734 million; and then LACG was negative. It was diluted $793,000.

Thank you. One or two other quick things, if I could. The two-year volume trends underlying seem to be quite strong if you did 3% against what we had calculated as a 13% would put that two-year volume up near 16% and we had it about 8%, 9% in last quarter and 4% the quarter before that. Is that a proper gauge of underlying momentum in the business?

I think you are directionally correct, Aram.

Okay. Thanks. And then the last thing is on SG&A. Last year SG&A as a percent of sales by quarter, you did 35.5% in the first quarter and a 31.5% in the second quarter. You did about 20% more sales in the second quarter than the first. So my question is this, if your volumes in Q1 were to grow by 20% over a two-year period of time, why wouldn't the SG&A ultimately get to where your Q2 SG&A rate is today?

Because what ends up happening is, is that our SG&A rate is a step function. And so to get that 20% sales volume that you speak of, we'll probably have more stores, we'll probably have more reps, we'll have more SG&A that will flatline us up against the quarter. If that occurs, you're going to see to get that 20% increase in the first quarter -- actually you also get a second quarter pop also, so that sales curve really -- that's why a lot of times when people ask, what's your fixed versus variable? We think the fix is a lot higher because store manager or assistant manager, all those things are fixed, and that sales curve to get that 20%. Now, if you're saying structurally, if we were able to get to 20% more without any additions in stores, reps or other things, then you would see a drag down, yes.

Okay. Yes. Because I noticed you're still running about a little less than 70% -- let's see, the SG&A growth divided by revenue growth is maybe a good function, too. Are you still trying to be in that 55%, 67% range?

Yes, yes.

Okay, all right. Thanks, guys. Good luck.

Bob Koort, Goldman Sachs.

Could you help decompose the same-store sales into a price volume component?

Yes. That's a pretty easy answer, Bob. There was absolutely no price in the comp store performance this year.

And then what's your expectation -- I think, Chris, you mentioned that none of these seasonal patterns or weather patterns alter underlying demand. So would you expect that in the Midwest and East, you're going to see a much better comps versus the Southwest and Southeast in the second quarter?

Yes. Absolutely. I think that's implied in our guidance for the quarter's revenue being up 5% to 9%. As you'd expect, our stores numbers will outpace that. And that will be a result of the northern divisions also starting to participate in the same robust rebound we're seeing in these residential markets across the whole country.

My last one, if I could, quickly on raw materials, can you give us a sense for what the residence time is between on the outside of seeing propylene price move up or down and when it might reveal itself on a cost of goods line? And then secondly, you seem a little bit more less aggressive about what's happening in TiO2 prices than maybe we've seen in the market. Is there some reason you wouldn't be fully benefiting from the sell-off in those prices?

Bob, this is Bob. Let me take the second part of the question first. TiO2 thus far this year, I mean it certainly came down in the back half last year, but thus far this year, it's been relatively stable. And you know there are at least three producers in the market right now with price increase announcements. So we mentioned that there was a fair amount of volatility and -- that there was a fair amount of stability in TiO2, but we do not that necessarily believe that it goes down in the back half from here.

Time will tell. On propylene, the rule of thumb that we've been using is that it takes about 90 days for a move in propylene to get fully into the raw material basket, much faster on the solvents side of the business than on the resins and packaging side. So 90 days, I think, is a pretty good rule of thumb to see the move in propylene fully priced into the raw material basket.

Is it possible on quick spike that you could have actually missed that or no (multiple speakers) first quarter?

We see it on -- you'll see it on solvents. Whether a quick spike up and back down gets into the acrylic chain or into plastic packaging, maybe not.

PJ Juvekar, Citi.

The big boxes seem to want a piece of the contractor business. I think one of your competitors is starting a new program at Lowe's. Now historically, these big boxes haven't had much success with contractors. So how do you see that playing out this time?

Well, PJ, I think we've long said that we have tremendous respect for these competitors. And they have compelling product lines and offerings and are continuing to see what we see in the market which is that the shift towards the professional painting contractor is the primary purchase of architectural paint. I think we've been competing with these folks for almost 20-some years now. Recognizing these same demographic trends and the data results that we shared with you, the entire investment community would indicate that painting contractors continue to remain remarkably loyal to the dedicated paint store channels. So it's incumbent upon us that are in that space to continue to enhance the product offering, the service, the reasons that have kept them loyal there. And we'll take on this next challenge as we have all the other ones over the past 20 years.

Thank you. And I think you've gained share with homebuilders during the downturn. So as the new residential construction picks up, should we expect better volume growth from you compared to the industry?

Yes.

Can you just give us what share did you gain during the downturn?

I think we've talked about just the top 25 US homebuilders and what our relative position has been there as opposed to any strict share number. And as the industry went into the downturn, a lot of these large builders consolidated purchasing activities from regional offices into a consolidated office. And Sherwin was uniquely in a position with a national footprint to be able to service these folks regardless of what part of the geography they were operating in. So as a result, we're proud to comment that well north of 20 of the top 25 builders now are good Sherwin's customers and quite a number of them are exclusive with us. So as they come back up, that's a much stronger position than we were in the last time we went through one of these housing rebounds.

Okay. And I just have a quick clarification question, maybe for Sean. In this consumer group segment, you talk about loss of a large retail customer. You've talked about Walmart business in the past that you lost. Is that the same continuing issue here?

Yes. We continue to have a step down function in the fourth quarter. It's affected us negatively and again in the first quarter, it affected us negatively.

But wasn't the initial Walmart business lost a couple of years ago and that [you would have recovered] by now?

Yes. But as we -- it was not a complete severing. What it was, was a discussion and a movement from [DFCs], if you remember, we had the majority. There were two other paint companies in there. Those are the two they did go cold turkey on those, but on us it was a [walk]. Now they have the majority and we had another step function that affected us in the fourth quarter for this year.

Specifically, PJ, it's in the private-label segment. So you're correct that the Glidden brand immediately replaced our brands. It's been this private-label piece that's been a little less visible and is stepping down exactly Sean just took you through.

Chris Masela, RBC.

I just want to circle back on your comments that you're encouraged by the demand trends in the second quarter. Is it just that your order books are strong for some of bigger projects or is it a little more broad-based than that?

Yes, it's more broad-based than that. We don't typically have an order book per se. It's more of a -- it's the anecdotal evidence of the painting contractors that are in our stores. We get some future look at the types of products they're buying that our non-paint. So for example, we've always talked about spray equipment sales as being a good leading indicator of the confidence that painting contractors as they're heading into the paint season. Here again this year, on top of pretty robust numbers last year, our spray equipment sales are doing terrific. And we just are cognizant that these men and women have a lot of work lined up. They're hiring painters, they've got a full load ahead of them, and a lot of confidence that it's going to be another repeat performance for a solid residential repaint year.

Okay. And just on Comex, I appreciate the deal hasn't closed and you don't have the full financials yet, but can you just remind us of the accretion potential that you expect and the trajectory to get there?

Sure. What we said is we feel that the first 12 months will be accretive, slightly accretive because of the closing costs, the inventory write-up and some of the other GAAP requirements. But then after that, we believe that if we close here relatively short period of time, we're looking at $1 accretion the first full year we own it.

Don Carson, Susquehanna Financial.

Chris, a question on gross margin potential. You started off a year with some pretty strong gross margins even though your exterior mix went against you. So do you think you can be on track to equal that 46% gross margin peak you had back in '09?

I think we've been talking about continuing to move towards that. I don't think we're giving guidance that we're going to be all the way back of north of 46%. A 180 basis points improvement we're making right now in this quarter will start to moderate as we did start to have some margin recovery in the back half of last year as well, too. So that might be a little high but we'll be moving towards that number.

Okay. And then just a question on industry volumes. The DOC doesn't put their series out anymore, but you've talked about maybe getting to normalized of 700 million to 750 million gallon market number in the US. Where did we end last year? And what market growth are you looking for this year?

Don, this is Bob. The American Coatings Association put out an estimate of volume [to us] for full-year 2012 that was in the mid-3% range. Our estimate was closer to 3% flat, so somewhere in that range feels right. That would have put us in the 630 million to 640 million gallon range. So still probably incremental 100 million gallons to come back to the market over some recovery time frame.

Kevin McCarthy, Bank of America.

Chris, you affirm the guidance range for the year of $7.45 to $7.55. And I'm wondering if your embedded assumptions therein for existing home sales and housing starts are any different today relative to what they would have been exiting the fourth quarter?

No. I don't think we've really changed that assumption or impact on our guidance. We commented in my opening comments about the numbers were jumping all over the place. I think there's enough other weight in this business, primarily in the maintenance of each projects that are really the key driver for us, so we're still confident that we've got the right market dynamics to deliver the numbers that we're projecting.

The other thing, Kevin, if you look at housing starts over the course of 2012, they ramped up over the year so that the exit rate from that year was a pretty good indicator of where we were going to be at least at the start of the year in 2013, so we weren't operating blind.

Kevin, this is Sean. Many -- for the last few years, many years we never really changed guidance for the full year. After the first quarter, it goes back to the other question. You look at the sales curve, I think that even last year up for the first quarter because it was so dramatically changed it slightly. But when you really take a look at it we all usually wait till after the second quarter, which is a large quarter for us.

So, Sean, to follow-up, it sounds like your raw material forecast has improved relative to what it would have been. Is it the case that you're being relatively conservative in keeping the range the same since it is early in the year? Or rather, is it the case that there's some offsets that you're cognizant of that would equilibrate it back to flat?

Yes, I think I wouldn't use the word, conservative. I think I'm going to have to -- there's a lot of moving pieces in these forecasts and there's a lot of ongoing volatility on the price of the many key raw material input. So again, we'll have better visibility on the year for raw materials as well a lot -- all the lot of the other factors after the second quarter.

Okay. And then final question, if I may, just to drill down a little bit more on your exterior coatings experience. If we were to lump together the Southwest and the Southeast, what would those exterior volumes look like relative to the Midwest and the East? Just trying to get a sense for what the magnitude of the variance is there within the Company, if there's anything you can share?

I would comment that we were down double digits in the northern markets, and the southern markets were a more normalized sales growth.

Nils Wallin, CLSA.

Just curious on the loss of the business at Walmart. When will this anniversary?

Well, I think that, again, as in all of our -- Walmart's a great customer. We're in there, we're showing them different products. We hope it never -- hope it's not very soon. But I would tell you that with this change, each -- this year, I think that the last time you'll see the effect of the Walmart will be at the end of the third quarter. It [did] affect us in the fourth quarter, so this change in the distribution centers from us to the other supplier will anniversary in the third quarter.

And by losing this business, is there actually a benefit on the mix at all? Is this a low margin business? Are you -- are they -- you probably don't want to lose the volume but maybe on the positive side, it may not be the best in terms of margin?

You know what? When you look at the Consumer Group margins, it did help the gross margin percent. It definitely did not help the gross margin dollars. And if we had a choice, we'd rather have the dollars, but -- and it was good business. You had another supplier who wanted it because of the price, the SG&A and the operating margin was nice business for us.

Great. Thanks. And just finally on Global Finishes, it looks like over -- when you layer in the drag from Forex, that the obviously margin improvement year-on-year has been quite strong. And you point to operating efficiencies. Is there -- can you drill down a little bit more? Is there some capacity rationalization? What's driving this improvement so much on the operating efficiency side?

Yes, we talked last year, Nils, about the fact that after a fairly robust acquisition schedule over the past couple of years that we were in the phase of really rationalizing and justifying the manufacturing distribution portion of that, particularly in Europe. So there was some rightsizing of operations that we needed to address. That's primarily behind us as we head into this calendar year. We've also commented a little bit about the pricing disciplines that have been part of a Company's operating mantra in North America that we needed to get implemented in Europe and we've seen that take place as well, too.

So most of this comes from our European operations. We still have the opportunities ahead of us and some final little clean-ups, both in Asia-Pacific as well as Europe, but I'm pleased to see that this group is really on the right track. We've long said that we believe we can get this business into a double-digit return on sales operating margin performance, and we're making good strides toward that.

Matt McGinley, ISI.

On your guidance, you imply a pretty healthy step-up in the margin rates in the second quarter. It almost looks like it could be 2006 or 2007-type levels. Would you expect to continue to build that margin from a gross margin standpoint or would you leverage SG&A? And given the investment that you're making in the stores, at what level of sales today do you think you need to leverage SG&A?

Well, I think that for the second quarter, where we are in the step function of the SG&A, I think you're right about the guidance. I think there's got to be efficiencies and you're going to see the SG&A as a percent of sales show improvement. I think going back to Chris' remarks by the end of the year, we believe that SG&A, we expect it to be lower as a percent of sales. I think that tells you [0.4%] in the first quarter; I think we have to track improvement in each of the following three. Gross margin, same thing. Echoing Chris' remarks, we felt that gross margin will show improvements. I think we're going to see it in both, so I think we're at volumes that we're going to see efficiency.

Great. And I have one on Mexico as a market. Can you tell us a little bit about how the trends are in your stores in Mexico? Is that a better market generally then maybe the rest of Latin America or the US? And from a timing standpoint with this Comex deal, is there a certain date that if you can't close it by, it would not be accretive where the math wouldn't work out on a current year basis?

Matt, this is Bob. Let me handle the first half of that question, that is just the overall market environment in Mexico. Mexico had a rough year in 2012 due to some foreclosure activity but long-term, it is going to be a very attractive market. The rate of household formation per capita is much higher than that of the US. It's a young market with more than 40% of the population under the age of 34, and per capita income and GDP is growing. So from a construction and maintenance standpoint, Mexico is going to be a very attractive market and our business in Mexico has been performing well.

And as we speak of Comex and our expectations when we said, that's why we continually use the word, 12 months, and that is in the current year. We believe that to be slightly accretive in the first 12 months and -- but you're right, the first quarter's going to be dilutive and as the later it goes, the less chance it will be accretive for the calendar year 2013 because of the closing. And you're right, there is a date that we cross that it won't be there. So instead of sharing that date, we'd best rather wait until we can close and we can give you a lot more in details.

Ivan Marcuse, KeyBanc Capital Markets.

Thanks for taking my questions. Most of them have been answered. Just real quick, on the Brazil market, your volumes are flat in Latin America. Have you seen -- there's an expectation that you're going to have the Olympics, World Cup, et cetera, and that you should see construction pick up. Have you seen any signs of that? And what's your outlook for that business going forward?

Yes, we're putting some stadiums in Brazil as we speak so there's definitely work that's happening. I think Brazil, by their own admission, would tell you that they're behind on their schedule of their construction projects, so there should be some acceleration as we get closer to the 2014 date. The slowdown and softness in the Brazilian economy is much broader than just preparing for these games. The housing's been off a little bit, the construction's been off a little bit. I don't think that this administration has been as productive for the country's GDP as the previous one and I know that was a concern of theirs. But here again, as Bob has commented on the long-term prospects for Mexico, we remain bullish on the long-term prospects for Brazil as well, and continuing to strengthen our operations down there.

Great. And then last question, I know this is small, but is there -- do you have any business in Argentina? And is that impacting that segment at all?

Yes. We do have business in Argentina. We've been in the country for over 80 years. Argentina's been a middle-of-the-road performer in our Latin American operations and I think they're doing fine.

Chuck Cerankosky, Northcoast Research.

Nice quarter. If you are taking a look at the rest of the year, Chris, how would you describe the need or lack thereof for pricing in the Paint Stores Group in the US?

Yes. I think to our comment about [flat] raw materials for the remainder of the year, that would typically be the environment that we hold pricing in. We've made no indications of our intentions to the contrary. As you know, Chuck, our policy's always to let our customers know first. And shortly thereafter, we'll be open and transparent with the investment community. This date, we've got nothing to share with you.

All right. With regard to Industrial Coatings markets, how would you describe those in the first quarter and the outlook for the rest of the year?

Yes. I think from the Protective Coatings, which -- are you talking about Protective or more OEM?

More Protective but OEM, I would lump in with that question as well.

I think we commented on Protective Coatings as a soft quarter for us and most of that is related to bridge and highway painting activities that were delayed due to weather this year compared to last year. Much as we've commented on the exterior gallons struggling, that impacted this business segment as well. But the underlying requirement and demand for these products and the maintenance environments where it can't be delayed, it still looks pretty good to us. We expect that business to rebound and continue on through the year. And the OEM product finishes segments which are embedded in the Global Finishes Group, particularly North America, continue to do nicely. A little softness in the European market demand driven by the general softness in that part of the world, but again, overall a pretty good story for us this year.

Jeff Zekauskas, JPMorgan.

Your administrative costs fell about $4 million or $5 million year-over-year in the quarter. And that was in spite of your interest costs for the quarter going up about $5 million. So your net administrative costs, or your pure administrative costs, look like they fell about $10 million. Why did they -- in the quarter, why did they do that? And what's your outlook for that line for the year?

Jeff, as you know, when you look at that administrative, we've had, over the last two to three years, we've had some major growth in that area. And we continue to talk about some of the projects, IT projects, things that we were working on and investing in. And we see that we're still working on a few of those projects, but we're trying to complete some of these and look for some efficiencies.

You're also right. When you look at the interest, I think that's the core without Comex, because of the $1 billion we did borrow at around 2 -- a little over 2% is going to cause us to have interest rates -- interest expense up $20 million [primarily] in the quarter. I think that first quarter there was a few things that were -- we started to see with this, but I think we're still going to see some improvement without interest. But throughout the year, but without the Comex acquisition occurring, but it won't be as dramatic as it was in the first quarter.

Okay. And then lastly, everybody has different ideas about where paint raw materials will be. Yours are that they'll be flat for the year and I guess mine are that they'll be lower for the year. If it turns out that I'm right, that is that raw materials are lower for the industry in general, do you think average paint prices in the consumer business will decrease or in the contractor business or the contractor market generally will decrease? Or do you think that they would hold flat even in the declining raw material environment?

Well, Jeff, we hope you're right. (laughter) And I would tell you that in past cycles like this, we've commented that we will see overall lower pricing, particularly in bid business where large projects, when contractors are out bidding for that, they'll be giving competitive quotes and we'll see folks go for a gallon and market share enhancement, so --. As we have in past cycles, we would expect to see lower year-over-year pricing quoted on that type. And as a reminder, we think that represents about 20% of the typical demand of architectural products.

The vast majority of our products, which we would call our typical shop account pricing, we've had a track record of being able to hang onto that pricing in that environment. So if that remains flat and the 20% drops a little bit, you might see a little bit year-over-year deflationary pricing. On the consumer side of that, I don't know that we have as much insight into that or as much exposure to that, frankly, and add much and beyond the comment on your analysis.

John Roberts, UBS.

Could you update us a little bit on some of your initiatives like Emerald and you've now [lapped] yourself on HGTV. How are some of those programs going?

Yes. We've been thrilled with both of those introductions, John. Thanks for asking. Emerald is at the very high end of our architectural product line, both on interior and exterior. Not that it would ever be the primary mover of product, but it does set the bar, and we give that mix shift up the chain as we talked about it in years past. So meeting Company's expectations for gallon growth and I would say that HGTV probably doing a little bit better than that. We commented, I think not so much on this call but the past several calls, that our DIY performance inside that Stores Group has been outperforming the industry.

We believe we've been gaining share slightly from a low base. And HGTV clearly is helping the Company skew to a lower age customer group. We can see that in our demographics through our POS information we get, and all of that just portends to a better future. We're introducing customers to the advantages of shopping in the specialty paint store earlier in their paint buying career and they tend to be loyal to that cycle, so HGTV's been a big win for the Company.

And then in your regional breakdown that you had, Bob, the Eastern region was most impacted by weather it seems. I assume exterior was down a lot there. Was interior up in the Eastern region even though the total region was down?

No, John. I don't know the answer to that.

Charles Dan, Morgan Stanley.

First of all, just so we're all using the right numbers, can you tell us what interest expense you have for the full quarter that's in your guidance?

Well, I won't share for the guidance, but I think our interest expense and we have right here on the P&L, it's right here -- I'll tell you right now. Our interest expense was $15,311,000; last year was $10,337,000.

Okay, so that's a good run rate for the second quarter as well?

Yes.

Okay, fine. My second question is on your -- it seemed like the cash drag in the quarter from building working capital in advance of the painting season was much less this quarter than it has been historically in prior years. Is that just reflective of lower raw material costs or more efficiencies or what's explaining that? Or was it just something that's going to leak into the second quarter this year?

I think that two years ago, we commented that we built inventory in the first quarter of 2011 much higher than we had in the past, and it dealt with raw material availability and so forth. In '12, we felt a little less pressure as far as availability and we allowed -- we had a more normal build and this year, I would say we've addressed it. And we feel pretty good about the deficiencies in our supply chain and we feel pretty good. I don't think -- I think this is probably going to be more of the normal curve going forward.

Eric Bosshard, Cleveland Research.

Obviously, with the weather, it's hard to sift through the volumes in 1Q, but as you think about the full year, '13 relative to '12 in terms of the architectural growth, you talked about what the government and your sense of gallon growth was last year. But what I'm interested is, your customers, what your sense is of the growth rate of '13 relative to '12 for the industry and your relative market share performance in '13 relative to '12?

Well, I would say, Eric, that the industry growth rate, as we've commented historically, should run in that 1% to 2% from architectural and because we're below pace here, we've said that double that is a reasonable number to start with. So let's assume that industry is going to have gallon growth in the 3% to 4% range and we've been comfortable saying that the stores business can run into 1.5 times that pace, so our expectation would be that our gallons this year are going to be north of 5%.

As you look at the first four months of the year, what are the pluses and minuses relative to that? What do you see that gives you positive thinking about that and where do you have concerns in regards to getting to that level of gallon growth in 2013?

We don't have any concerns about getting to that gallon number in 2013 right now.

John McNulty, Credit Suisse.

With regard to the SG&A jump that we saw year-over-year which looked like it was about $20 million or so, how much, if any, of that is tied to preparing for Comex that might not be something that recurs going forward once you've actually closed on the acquisition?

Yes, very small, less than $2.5 million really in preparation of Comex. One of the -- you're right, it was up around $21 million, so less than -- probably around 10% of the growth was due to Comex.

Okay. And then if we think about getting back to normal paint volumes in the industry in that 700 million to 750 million gallons area, so that's about a 15% to 20% increase in the volumes from here. Regardless of the timeframe, but in -- could -- if assuming we get there, how should we think about what your SG&A growth to get to that -- like to manage through that level?

I think and again, it used to be that we used to -- you would see the growth rate -- you can go back to 2002, 2007 to see what it grew back in that timeframe. And we used to have a dynamic -- I'm thinking that our SG&A used to grow at around 45% to 55% of sales increase.

Volumes or sales like where we're just pulling price out of that?

Sales.

Okay. And then just a last question on your CapEx guidance of $130 million to $150 million, does any of that include the potential for at least some of the early changes in the Comex stores, assuming that you do any of them this year?

No. We've kept our guidance -- all our guidance and reporting and so forth Comex-free. So that when we do close in a lot of these numbers and that's one of the numbers that will increase.

Dennis McGill, Zelman & Associates.

I'll be quick. Just on the same-store sales number that you provided us, Chris, you mentioned the days issue year-over-year, is that number adjusted for days when you guys reported to us?

No. That's actual.

Okay. So you're talking about 2 points higher if it were?

Yes, it's 3%, a little over 3% comp store performance in the face of fewer days.

Got it. Okay. And then when the Comex deal does close, how do you guys expect to communicate some of the numbers to us as far as and I guess aside from just updating guidance, is there a way that you're thinking about talking about the business or the level of information that you expect to provide on the business to us?

Well, clearly, on the quarter call, immediately following the transaction, we'll be taking you through a great detail. Sean, do you want to add some color?

What we had planned, if we would have closed before the financial [community] presentation would have been fantastic. We would have taken you through a few more things. There are different requirements where we have to show some of our numbers with the history. And we will, at that time, you'll see 2012, if we owned it since January 1, 2012, and you'll see the quarters as well as that year. So then on an ongoing basis, I'm sure that we'll have some type of -- you'll see our sales with and without the acquisition and we'll show you the EPS effect of that also.

Dmitry Silversteyn, Longbow.

It's just barely good morning. [Most of my questions] still have been answered. First of all, on the consumer part of the business, can you give us a little bit more detail between the acquisition component and the FX component -- or, I'm sorry, the price mix component?

I'm sorry, but --

Consumer, Dmitry?

In consumer, you talked about acquisitions having an impact and then you talked about volumes being down. So I'm just trying to figure out getting a price-mix movement or was it flat like it was for the Paint Store Group?

I would tell you that we reported that division is down 3.7%; without the acquisition, we would have been down 8.6%. And I would tell you on pricing, I would tell you that you look at that, it was pretty consistent with stores.

Okay. Thank you. That's helpful. Excuse me. Secondly, in your global business that's now becoming a more profitable part of the operation and obviously, that's probably where the most profit improvement in terms of the magnitude in the margin improvement opportunity that you have left. Can you talk about the geographic mix of that business right now between Europe, Asia and the Americas? And you talked about the continuing restructuring and some cost actions that you can take in Europe. So we're just -- so I'm just trying to understand how relatively sized these businesses are.

Yes. The United States/North American component of that segment still exceeds more than 50% of volume that we generate. Europe would be the second-largest continent of scale, and then Asia-Pacific would be the third. I would say that you step down by half and half again as you go through that analysis.

Okay. So something like 30% and 15% or somewhere in there, 30% and 20%, whatever it works out to be?

You're close.

Okay. All right. And then finally, you talked about still having a [couple of] opportunities left to repurchase shares as far as shares outstanding. What's your outlook on the pace of that share repurchase? You talked about your dollar cost averaging and being fairly consistent, but your share count actually has gone up sequentially versus the fourth quarter. So is there an incentive to bring it back down to below 2012 levels?

Right. And when you look at the absolute number, our share count is down but as the price of our stock continues to go up, we have a dilutive effect on stock options. So over the course of the year, we're going to eliminate that, but we got caught on the price of the stock and so forth. We really don't have -- so I think on a year-to-year basis, you'll see stock options not being dilutive but just think that the way the stock price went into first quarter, it caught us after we were basically in a blackout. And -- but I will tell you in general, our stock buybacks, once the Comex acquisition occur, will be lower than it has been in the few -- in the last decade on an annualized basis but it will be enough to make sure that stock options are not dilutive.

[Somil] Mehta, IIFL.

Thank you. I just had a quick question on the India market where you've recently started the business to be local, in short, dealing with the transaction in the (inaudible) to have the strategy in India? That's one of the emerging markets.

Yes, I think we've commented that the Company's strategy going forward is really to be focused on developing the architectural business in the Americas and supporting our Industrial Coatings businesses around the world. India was a small architectural business that we took into the country a number of years ago. We made some assumptions about the country's readiness for the type of quality architectural products that we manufacture. Those proved not to be accurate, so after a very short and very small investment, we decided it was best to pull out and wait for a better day. And we executed a transaction with the Berger Paint Company and we're out of India at this point in time.

Richard O'Reilly, Revere Associates.

I might ask you to repeat yourself on something, but I want to go back to the two-year trend. And I'm looking at the same stores, up 3% versus 20%. That would imply some low double-digit growth rate, something greater than what you would think the market would have supported. What do think your normal same-store growth should have been or will be if you can exclude all the noise that might be in there?

Well, we've talked, Richard, over a longer cycle of being able to provide guidance by these segments. But we said that the Paint Store Group should be a relatively high single-digit revenue performer over the long cycle. And we build that by talking about some pricing, some new store additions and then comp store performance, which tends to run in the mid-single digits, 4%, 5% range, and we build the rest of that to get to that higher percent. So over a long cycle, when an industry is growing at 1% to 2%, we think this comp store business can grow at a 4% to 5% pace.

And clearly, in this environment when we are having a rebound we would expect to outperform that. Two things are happening here. Not only are the gallons coming back, as we've talked about on this call already, but the mix shift is going back towards the painting contractor where it had been drifting back towards the DIY, primarily as the new construction markets come back on board, that tends to skew entirely to painting contractors and that's a good trend for this comp store number as well.

Thank you. There are no further questions at this time. I will now turn the floor back to Bob Wells for closing comments.

Thanks, Robert. I'd just like to close by reminding everyone that our annual financial community presentation is scheduled for Thursday, May 23, at our headquarters in Cleveland. The program, as usual, will consist of our customary morning presentation with questions-and-answers followed by a reception and lunch. And regardless of the timing of the close of the Comex transaction, we intend to discuss more detail about the strategic fit of this acquisition, more about what the combined organization may look like in our previous experience in integrating acquisitions of this type.

In addition, we've got lots of other worthwhile information to share, so please join us. If you have not signed up and would like to attend, there's still time. Send me an e-mail at rjwells@sherwin.com and I will reply with a link to our registration site. Thanks again for joining us this morning and thanks for your continued interest in Sherwin-Williams.

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