宣偉 (SHW) 2013 Q2 法說會逐字稿

Good morning. Thank you for joining the Sherwin Williams Company's review of the second quarter 2013 financial results and expectations for the third quarter and full year. With us on today's call are Chris Connor, Chairman and CEO; Sean Hennessy, Senior Vice President Finance and CFO; Al Mistysyn, Vice President Corporate Controller; and Bob Wells, Senior Vice President Corporate Communications.

This conference call is being webcast simultaneously in listen-only mode by [ZCalls] via the internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com beginning approximate two hours after this conference call concludes and will be available until Wednesday, August 8, 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 the statement is made for 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.

I will now turn the call over to Chris Connor for opening comments.

Thanks, Jesse. Good morning, everybody. Thanks for joining us today. Last night the Federal Competition Commission in Mexico voted 3 to 2 to withhold approval of our acquisition of Comex announced on November 12, 2012. At this time we are still reviewing the rationale for the commissions decision and will respond to their specific concerns in the days ahead. We have several [pass-forward] in our efforts to secure approval for this transaction, including an internal appeal to the Competition Commission and we are aggressively pursuing these options as we speak. Our legal representatives in Mexico are attempting to meet with key commissioners yet today.

You may recall that on June 24 we announced an extension of the original purchase agreement out to the end of August. Last evening, and again this morning, I spoke with Marcos Achar, CEO of Comex, and he confirmed their equal resolve to pursue all avenues available to secure confirmation of this transaction. We are clearly disappointed by this decision will remain resolute in our determination to address their objectives and proceed with the transaction. Obviously, we will be happy to answer your questions on this topic to the best of our ability after the review of our second quarter results.

Let me turn the call over now to Bob to walk you through our results for the second quarter and then I will be back with some closing comments. Bob?

Thanks, Chris. Summarizing overall Company performance for second quarter 2013 versus second quarter 2012, consolidated net sales increased $140.9 million, or 5.5%, to $2.71 billion due primarily to higher paint sales volume in our paint stores group. Acquisitions add 0.07% to net sales in the quarter and unfavorable currency translation rate changes decreased consolidated net sales by 0.03%. Consolidated gross profit dollars increased $83 million over second quarter last year to $1.23 billion. Gross margin in increased 80 basis points to 45.5% of sales from 44.7% in the second quarter last year. Selling, general and administrative expenses for the quarter increased 3.3% to $837.1 million. As a percent of sales, SG&A decreased to 30.8% in the second quarter this year from 31.5% last year.

Interest expense for the quarter was $15.1 million, an increase of $4.8 million compared to second quarter last year. Other general expense net decreased $2.6 million year-over-year due primarily to a reduction in provisions for environmental expense. Consolidated profit before taxes in the quarter increased $53.1 million, or 16.2%, to $380.9 million. Our effective tax rate in the second quarter this year was 32.5% compared to 30.5% in a second quarter of 2012. For full-year 2013 we expect our effective tax rate to be in the low 30% range compared to last year's rate of 30.4%. Consolidated net income increased $29.5 million, or 12.9%, to $257.3 million. Net income as a percent of sales was 9.5% compared to 8.9% in the second quarter last year. Diluted net income for common share for the quarter increased 13.4% to $2.46 per share from $2.17 per share in 2012.

Looking at our results by operating segments, Paint Stores Group sales in the second quarter '13 increased 8% to $1.61 billion. Comparable store sales, that is sales by stores open more than 12 calendar months, increased 7%. Regionally, in the second quarter, our Southeastern division led all divisions followed by Southwestern division, Eastern division and Midwestern division. Paint Stores Group segment profit for the quarter increased $66 million, or 24.7%, to $333 million from $267 million in the second order last year. Segment margin in the quarter increased to 20.7% from 17.9% last year.

Turning to our Consumer Group, sales in the second quarter decreased 1% to $393.7 million from $397.7 million last year. Acquisitions increased consumer segment sales 3.2% in the quarter. Segment profit for the Consumer Group decreased $1.7 million, or 2.1%, to $79 million in the quarter. Segment profit as a percent of external sales decreased to 20.1% from 20.3% in the same period last year.

For our Global Finishes Group, second quarter sales in US dollars increased 3% to $513.5 million. Acquisitions increased net sales in US dollars by approximately 1.1% while unfavorable currency translations had minimal impact on sales in the quarter compared to last year. Segment profit in US dollars increased 13.4% in the quarter to $54.5 million from $48 million last year. Acquisition had no significant effect on segment profit in the quarter while unfavorable currency translation rate changes reduced segment profit $2.4 million. As a percent to net sales, Global Finishes Group segment profit was 10.6% in the quarter compared to 9.6% last year.

For our Latin American Coatings Group, second quarter net sales in US dollars increased 6.3% to $199 million. Unfavorable currency translation rate changes decreased net sales by 2.8% in the quarter. [Savings] in US dollars segment profit in the second quarter decreased to $900,000 from $9.3 million in the same period last year due primarily to an $11.8 million charge to cost of goods related to an import duty assessment by the Brazilian government for the years 2006 through 2008. This charge was partially offset by selling price increases and higher paint sales volume. Currency translation rate changes had minimal impact on segment profit in the order. As a percent of net sales, segment operating profit was 0.04 of a percent in the quarter compared to 5% in the second quarter 2012.

Turning briefly to our balance sheet, our total debt on June 30, 2013 was $1.68 billion, including short-term borrowings of $50.7 million. Total debt on June 30 last year was $1.24 billion. Our cash balance at the end of the quarter was $741.1 million compared to $46.6 million at the end of second quarter 2012. Through the first 6 months of 2013, we spent $72.1 million on capital expenditures, depreciation expense was $78.3 million and amortization expense was $14.1 million. For 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 approximately $30 million.

I will conclude my remarks on the quarter with a brief update on the status of our Lead Pigment litigation. Trial began on Monday July 15 in the Santa Clara County case involving public nuisance claims brought by 10 cities and counties in California against 5 defendant companies. The judge presiding over the case has limited oral arguments by each side to 40 hours, including live testimony and cross-examination, which should be concluded before Labor Day. At the conclusion of the trial, the verdict will be determined by the presiding judge. There is no jury. At this point, we have no indication or sense of timing on a decision.

That concludes our review of the results for second quarter 2013 so I'll turn the call back over to Chris who will make some general comments and highlight our expectations for third quarter and full-year. Chris?

Thanks, Bob. We often say that our visibility with respect to end-market conditions and input cost trends improve significantly in the second quarter, and this year was no exception. This improving visibility over the past few months has revealed the mixed bag of stable to declining raw material cost, continued strength in the domestic residential markets, stagnant nonresidential and industrial activity -- all against the backdrop of continued global economic malaise. We've felt the effects, both positive and negative, of these disparate market conditions across different geographies and customer segments. I would say, however, that I'm generally pleased with our progress in most aspects of the business although the second quarter had its normal share of ups and downs.

On the positive side, our Paint Stores Group continues to perform well. Comp store sales growth is 7% -- likely out-paced the US architectural paint market in a second quarter, although we continue to see demand disparity across certain customer segments. Residential market demand in both new-build and repaint remains very strong and even in the month of June. Most of the non-residential markets, while positive, continue to lack the strength of residential. Protective and Marine, for example, a strong category throughout 2012, has softened thus far in 2013. Paint store segment margin for the quarter improved 280 basis points over the second quarter last year and eclipsed 20% operating margin percent-to-sales for the first time on record. This margin improvement was evenly divided between gross margin expansion and SG&A leverage.

Global Finishes Group also made solid progress in the quarter despite the challenging conditions in most geographies outside of North America. Revenues growth in the quarter was aided by an acquisition completed in the fourth quarter last year but the earnings improvement in the quarter came entirely from the core business. [Flow through] on organic revenue growth in the quarter was nearly 65% with notable improvement in both gross margin and SG&A. Although we are not satisfied with the current pace of revenue growth in this segment, as market conditions improve at home and abroad, Global Finishes Group margins should continue to expand.

On a less positive note, consumer segment continues to feel the effect of lost paint businesses at several retail customers, although they've worked hard to mitigate the impact the loss volumes on segment profit. Perhaps the greatest disappointed in our quarter was the $11.8 million charge to our Latin American Coatings Group. The charge is related to our handling of import duties on products brought into Brazil during the years 2006 through 2008. Although we believe our handling of import duties was consistent with a large number of multi-national doing business in Brazil, we elected to accept a voluntary amnesty program offered by the government to resolve this issue rather than incur significant legal expenses to contest it in court. In 2009 we changed our import duty process; however, the year subsequent to 2008 remained open to audit.

On the raw materials front, it is pretty apparent that the major chloride TiO2 producers were unsuccessful in implementing the price increases announced in the first quarter of 2013 to be effective early in the second quarter. Additional price increases were announced late in the second quarter with nominal effective dates generally around July 1. Increased plant utilization rates decreased inventory levels and optimism about third quarter TiO2 demand were cited as reasons for the increases. However, in all of geographic markets, TiO2 pricing held steady in July and we do not believe that market dynamics will change sufficiently over the balance of the year to justify the implementation of these creases in 2013. Although crude oil moved up during the second quarter, propylene, the [key feeds doc] for monomers, latex, solvents and containers remain relatively stable and we expect that to continue as well for the balance of the year. With our assumption of stable TiO2 cost and the current pricing of propylene, we expect average year-over-year raw material cost for the paint and coatings industry to be down low single digits in 2013.

In the first 6 months of 2013, we've generated $302 million in net operating cash, an increase of $100 million over the first half of 2012. Approximately half of the improvement in net operating cash was from the increase in net income in the quarter, the other half resulting from lower cash required to fund are working capital. Working capital, as we measure it, which is receivables plus inventories minus payables, decreased as a percent to sales to 12% from 12.6% in the second quarter last year. We continue to use the Company's cash to purchase shares of our stock for treasury, increase our cash dividend and expand our controlled distribution platform. During the quarter we acquired 800,000 shares of the Company's stock for treasury, bringing our total year-to-date repurchase activity to 1.3 million shares at an average cost of $178.86 per share and a total investment of $232 million. On June 30, we had remaining authorization to acquire 15.2 million shares. Yesterday our Board of Directors approved a quarterly dividend of $0.50 per share, up from $0.39 per share last year.

So far this year our Paint Stores Group has added 22 net new stores, 13 of which were opened in a second quarter. This brings a total store count in the US, Canada and the Caribbean to 3,542 compared to 3,470 one year ago. As we commented in April, we are ramping wrapping up our new store opening activity and our Paint Stores Group plans to add approximately 70 to 80 net new store locations during the year.

Looking ahead, remain optimistic that US architectural paint market demand, primarily in the residential segments, will remain strong as we go through the prime painting season. Based on this outlook, our expectation for third quarter 2013 for consolidated net sales increase in the range of 6% to 9%, compared to last year's third quarter. With sales at that level, we expect diluted net income per common share for the second (sic-see press release "third") quarter to be in the range of $2.55 to $2.65 per share, compared to last year's record performance of $2.24 per share. For the full year 2013, we expect consolidated net sales to increase over 2012 by 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 to $7.55 per share, compared to $6.02 per share earned in 2012.

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

(Operator Instructions)

Our first question is coming from the line of John McNulty with Credit Suisse. These proceed with a question.

Thanks and good morning. A couple questions just on the overall business fundamentals -- the volume for same-store sales number for your paint stores was 7% and I think when you adjust for Easter falling out of this quarter, unlike last year, it looks like it is more like a 5% type number, which seems a little bit lighter than what we'd expect given what's going on in the construction market. So I guess can you walk us through some of the puts and takes that might be driving those volumes maybe coming in a little bit lighter than expected?

Yes. So I will take a crack at that, John. First of all I think the 2% impact for Easter might be a little strong for us. It is not that strong of an impact and we have been commented about the mix change we've been seeing this years. So our gallon numbers actually were terrific and slightly higher than the sales number that we indicated. We are pretty confident that that is an improvement over what the market ran for the particular quarter. So from our perspective, we see that as a pretty good quarter for the stores group

Okay. Fair enough. And then just one quick question with regard to the guidance. You're reaffirming the guidance at this point, yet it is sounds like the raw material environment is better than what you were originally thinking, so are you starting to give some back maybe on the pricing side or are there other puts and takes that we should be thinking about? Is it's something around the timing of Comex potentially closing or what's the change there?

Yes, I think the guidance reaffirming has a couple moving parts in its. You are correct, the raw material environment certainly is looking better. But we've also just taken an $0.08 hit relative to this Brazilian tax. So holding the guidance at that level we think indicates our confidence in the strength of the second half.

Got it. Fair point. Thanks very much.

Thanks, John.

Thank you, the next question is coming from the line of Robert Koort with Goldman Sachs. Please proceed with your question.

Thanks. Chris I was wondering if you could help out on the consumer side. You referenced losing some business, a few retail customers, I guess we knew Walmart was a prominent one. Could you maybe give us a little color on the others? And then if we were to take that issue aside, why wasn't there better growth in the consumer given that, as you said, the residential markets were reasonably hot?

Yes, fair for question, Bob. Thanks for the call. We have commented repeatedly about Walmart as well as an earlier calls confirming an Masco comment about the displacement of the Sherwin-Williams Dutch Boy program out of Home Depot Mexico as Masco Behr moved that program into that country for the first time. So those are the two impacts that we are seeing for the division. And that's had a significant impact. If we back those two things out, we are marginally positive there. We have commented for many, many quarters now that this segment has a little bit of a tough road ahead of us given the strength of the stores organization in the same markets that they are competing with. And for to your comment about rebounding home programs, we made the comment that we were disappointed in the quarter so we expect this team to do better.

Very good. Thank you.

Thanks, Bob.

Ghansham Panjabi with Robert W Baird.

Hi, guys, good morning. Last quarter you commented on a big deviation in volumes which mean external/internal paint. I think a lot of that was weather-related. Can you just sort of update us on how that evolved during the second quarter?

Yes, this is Sean Hennessy. When you look at the volumes and that disparage between the exterior and interior that we had -- really because of the exterior first quarter 2012 that we had -- very, very strong. We saw a little more normal but experienced still -- because of rain -- different rain in certain segments but usually we don't talk about whether but because of that it wasn't all the way back to normal yet in that interior/exterior mix.

Okay. And then just one quick one on Comex as best as you can answer it. Can you point us towards some other transactions in Mexico that were blocked and ultimately went through closed -- perhaps some concessions? Do you have a sense of that?

No, we don't have any comments regarding those transactions at this point in time.

Okay, thank you.

Thanks, Ghansham.

Chris [Nucella] with RBC Capital Markets.

Hi, guys, good morning. Can you just give us a sense of how long you think appeals process could take with Comex? And I see some headlines suggesting the combination [that you have] the market share of maybe 48% to 58% but you can you remind us of your market share in Mexico and maybe what level you think they'd be comfortable with?

I can answer the appeal process because it's somewhat perfunctory, Chris. After a verdict like this, the parties have 30 days to issue a formal appeal. And then once the Chairman of the Commission has accepted the appeal, they have 60 days -- and those are working days, just to clarify that -- to render an opinion on that. It would be inappropriate for us to make any comments relative to what levels the market share of the Commission be influencing.

Do the comments deal without Mexico make sense? Maybe supplement it with a large share repurchase?

I think there are reasons for people to think through that. Our public statements are that we remain committed to completing the full transaction including both the Canadian, United States and Mexican side of the deal.

Thanks a lot.

Thanks, Chris.

Aaron Rubinson with Nomura securities.

Hi, guys. Sorry to hear the news on Comex. Understand your desire to go to the mat to get the deal done but two things around that and then a follow-up. One, are you able to buy back stock aggressively or are you in holding pattern as that relates -- whether it is a quiet period or other things like that? And then second, how can you make sure that you avoid distractions inside the Company so that if you go at this another couple quarters or 6 months that it doesn't affect your business in any unintended way? And I have a follow-up.

Sure. When you take a look of the fact -- we are in a blackout. We're in a black out for three days -- until three days after we've announced and we think we will continue with what we've been doing in the past. But as of today we, can't buy stock today.

In terms of avoiding distraction, Aram, we are the masters at avoiding distractions at Sherwin Williams. We've had lead law suites and all kinds of noise to contend with and here again we are blessed with really terrific leadership in our field of operations. Our folks are out selling paint today and taking care customers just like every other day. So while the folks on the phone or spending a little time on this issue, rest assured, the rest of the 40,000 folks are doing what they're supposed to be doing today.

And just around the California legislation, could you just comment as to whether or not you've reserved differently. The 10-Q usually comments on reserves for environmental and how you are treated that and whether or not the prior cases that have been dismissed are fair precedence or you think this one might be more unique?

No, we thank it is fair precedence. You think about Rhode Island and a lot of others -- Mississippi, Wisconsin, Ohio, New Jersey. We've never created a reserve for lead law suites.

Okay. Best of luck with everything, guys. Thanks again.

Thank you.

Kevin McCarthy with Bank of America/Merrill Lynch.

Yes, good morning. Chris, I think you had made a comment in your prepared remarks that your comparable store growth is 7% pain stores will likely outpace the market. So can you give us a sense of where you think the market is running at the industry level for gallonage and how much you might be exceeding that pace? Thanks.

Yes, we don't have good visibility into that, Kevin, until several quarters in our rear when some of the various reporting groups get some data out for us. We have commented that we believe our industry growth at a -- historically in pace with the GDP 1% to 2% as we rebound to a more normalized architectural coatings demand in our market. We've talked about that running at a little higher pace -- let's say 3% or 4%. We've seen growth for the industry maybe in the range of 5% here over the last couple years as we are seeing some of these rebounding quarters. But as I mentioned in the first call that John asked, don't forget that our gallon numbers were in excess of that 7% revenue numbers. So we will have a better sense here in a little bit but we are still pretty confident that the teams are doing great in the stores group in terms of taking gallon share.

Okay. And then second question, if I may, on the Latin American Coatings Group. I think you had a translation affect there on the top line but your press release seems to indicate there was no impact on segment profit. I guess it was my understand you hadn't been hedging. And perhaps you could help me understand how the bottom line would have been (inaudible -- background noise) in the quarter given the volatility in the local currency there?

Well I think we did have debt. I think that what we try to do over the years, especially in the last couple of years, is to bring cash forward, allow the debt there to be a natural hedge. And when you look at really -- for as still as where we were -- really add a major change in that quarter. So we were fairly hedged.

Got it. And then final question for Chris, if I may, just in terms of potential scenarios for redeployment of capital if indeed Comex ultimately does not go through. Care to offer any comments on what you are seeing in terms of the M&A pipeline? Are there other opportunities that you see out there in the private market that might be appealing alternatives?

Sure, Kevin. I think as deployment of capital goes forward here, regardless of the Comex transaction, frankly, you are going to see Sherwin continue to operate in its traditional fashion. We are not holders of cash. We'll put that work. We're comfortable buying backs stock as we've indicated over the years. There's always M&A opportunities for us. We have a disciplined approach and a strategic list of targets that would be of interest to the Company. Your comment about many of them being privately held family businesses dictates us on a certain path in order to try to get those to market. Those conversations have been happening in this time and will continue to happen. Nothing new to report at this time.

Very good, thank you.

[Neil Swalin] with CLSA.

Thanks. And good morning. Question on the actual timing of the Comex response I guess from the Mexican government. It seems like it -- given the amount of time that they had to respond it wouldn't be until late in the fourth quarter so is there any reason that they might -- you might be able to accelerate that so you get a little bit better clarity sooner?

Well, Neil, our intent will be absolutely to accelerate and we're approaching this with speed and urgency. It would be premature for me to comment because I simply don't know how quickly we can get them to engage and with that outcome might be.

Understood. In terms of Latin America, it seems like the second quarter has been a bit of a dip in the last two years. Is there anything changing in terms of seasonality or product mix that's causing that from the operating profit perspective?

We continue to do a lot of different things in Latin America. In fact, we just did a major IT project down there and Oracle was now turned down in Argentina on July 3. So we've been doing a lot of different things the last couple years. We keep moving on that project. We think that project is going to help us with working capital and reducing working capital as a percent to sales. And I think you're right about the second quarter because if you look at the year-to-date, last year our ROS in that segment was 7.4% through the first 6 months and first 2 quarters. This year with the adjusted -- if you had back the Brazilian import situation, we are at 8.2%. And we look at our forecast for the year and I'll just tell you, we think that we still see us improving and moving forward and ROS improving for the year.

Got it. That's helpful. And just a final one if I may. Does it -- when you look at some of what the competitors have put out there in terms of their growth rate in Latin America, it seems like you're doing a little bit better. Are there any share shifts going on or is it just not really comparable?

I think if there are share shifts they're minimal at best at this point in time.

Got it. Thanks for taking my questions.

PJ Juvekar with Citigroup.

Hi, good morning. Chris, you didn't mention weather in the wet Spring which would've impacted at least your exterior paint business. Did you make up any of the losses in June as the weather improved?

I think on the call, PJ, we made the comment that we've seen strength in the residential market, and including during the month of June. There was a lot of noise in the market relative to other impacts to the demand curve there. As Sean said in I think in one of his answers, we are not ones for giving weather reports on these calls. We expect to have weather issues in various parts of the geography in all quarters, frankly, and so the health and robustness of the residential markets, both new and repaint, are really core thing that we are looking at and providing confidence on. And we expect that over a cycle, weather will not be that big of an impact.

Chris, you talked about some pricing pressure in big commercial projects during the last call. Can you tell us if that is continuing? And if commercial is weak to get to 7% seems slow growth -- was residential up double digits?

Yes, on both counts. Commercial bidding activity in an environment like this where folks are going aggressively after gallons has always been tough. In an environment with moderating raw materials, we expect to see it even more so and that's been the case. And then your analysis on the residential impact being double-digits is also accurate.

And just quarterly -- have you have seen any impact from paint geared towards contractors [launch that] load? Thank you.

No, we have not. I don't think that program has been out there long enough to get any indication of the impact it might have.

Thank you.

Duffy Fischer with Barclays.

Good morning, fellows. I wanted to talk the incremental margin in the paint store business jumped really strong this quarter, up over 50%, where it had kind of been 38% in the first quarter. Can you walk through the buckets of what improved so well in that business as far as profitability relative to sales growth?

I would tell you, number one, we are starting to see SG&A improvement. I know that in the first quarter we had mentioned that in the first quarter 2012 the sales were so strong, we did not get all the SG&A service dollars into that first quarter that we should have had. And we had to go get that history in the first quarter of this year. And if you remember at the end of the first quarter we said hang in there because we thought that we would be flat to down slightly year-to-date and SG&A, which we finally did. But as those gallons go through the stores, this is the piece where we really feel good about our flow through and I think that it was just gallons going through with SG&A leverage. And that's really what created it.

Okay, great. So that feels like a good solid margin at above 20% is a good baseline as you would look at it. I know there's some seasonality with it but there's nothing -- okay, terrific

(inaudible) in the first and fourth quarter.

Fair enough. And then when you look at your business and the Comex business in Mexico, not so much around the deal but we certainly got a lot of bad macro news flows about the housing market down there and financing for housing. How would you handicap the health of the coatings market going into that today versus if you think about when you would have announced the deal?

It is clearly softer, Duffy, specifically around the impacts that you've mentioned. The government has redirected some of their support for various housing programs. And that's had an impact on some of the large home builders in the region. So we have felt that in our business moderately and I would suspect Comex has as well.

Okay. And then just one last question on Comex in particular, I remember, Chris, you talking about one of the really strong points of the Comex business was just the density that they had and if one of the fixes -- and again, this is a little bit of speculation -- but if one of the fixes that the government would ask for is the divestiture of some of the point of sales, is that a linear line or is there something asymmetric their where the business starts to lose some of it's attractiveness pretty quickly if you had to divest some stuff?

First of all, their business model is through an independent concessionario. 3,300 of these other Mexican businesses which operate these facilities are not owned by the Comex Company themselves. So that in and of itself may not be the solution. And again, as we've commented earlier, all those types of potential outcomes are just really speculative at this point in time and we prefer to wait and work through the normal channels here.

Okay. Fair enough. Thank you very much.

Thanks for your questions, Duffy.

Greg Melich with ISI Group.

Hi, thanks, guys. First on the gross margin expansion -- could you help us with how much of it was due to manufacturing leverage with the gallons coming through versus the price of raw material mixed dynamic?

I would say that the gallons coming through our plants -- when you look at the -- I'll just go to the very -- the 45 versus 43.8 on a year-to-date basis -- really the majority of it was just the strong sales -- the incremental sales. I would say the incremental gallons and incremental sales were really the -- they created that gross margin, not selling price.

And then I guess that ties into the next -- if gallons were up 8 -- residential stronger than commercial -- how should we think about the 8 versus the 7 in terms of that price? It's just basically just all mix? And mixed within those different categories or just mixed between the two?

I would say mixed with category, yes.

Okay, got it. And then lastly, you guided to a 6% to 9% growth number for the third quarter. I guess what's sort of taken that acceleration? Is there something easier compared or do you see anything specific in terms of orders or customer dynamic to give you that confidence?

I think if you look at it, we think we are fine. I think third quarter is looking a little stronger, but I wouldn't say that our sales in the second quarter versus 6 and 9 is that dramatically different. But I think we're going to be fine.

Okay. And then, Chris -- and I realize you can't say much on Comex, but just to make sure I got the timing right, you said the -- you've already extended the merger agreement to the end of August, would you expect to extend that again in the near term to give yourself more time given the 30 day for a formal repeal and 60 day review?

Yes, it is just premature to comment on that at that point in time, Greg. I'm sorry.

Okay, Thanks.

John Roberts with UBS.

Good morning, guys. In the Global Finishing segment where there's similarities or differences between auto refinish and the other businesses like product finishes -- I would've thought you might be seeing some benefit from the [Exalta] situation that the two business might have converged within that segment?

I think that when you look at the automotive, we had [Plena] which was an acquisition so the automotive piece was the strongest of the three pieces with or without the acquisition.

Okay. And with the material spending in the quarter on the Comex deal in your SG&A?

$0.01 to $0.02 a share.

Thank you.

Eric Crawford with Cleveland Research Committee.

Good morning. With some insight into where raw material costs are at this point, as you indicated, as you think about the map or the path on gross margin from here, I wonder if you could just give us some of your thoughts and strategy in thinking on where that goes?

Yes. I think when you look at the gross margin, for the first half of the year we were at 45 -- I think that without the Brazilian situation that we spoke of at 45.2. An we've continually said we're in that 43 to 46 range. And I would expect that our gross margin will come in between that 45 and 46 range. For the year.

There's been some discussion in the past of the range potentially being better in this cycle. I'm wondering as you think of the structural issues going on with input cost and also where we are in terms of volume and leverage and how do you think about doing better than that 43 to 46 range over the next 12 to 18 months?

Yes, I think that over this period I think, as we've commented in the past, we've always believed that eventually we'd be at 44 to 47 -- eventually 45 to 48. I think that right now it would be premature. One of the things that we were sort of waiting to see is after the Comex closes to really show the combined gross margin -- it would be effect in the short one. And we think it changes our long-term goal. So I think -- if that -- when that occurs, I think we will be in a lot better shape to give you some updated number.

In terms of -- related to this secondly -- in terms of the benefit from the input cost -- looking at better revenue growth and the planned incremental margin in the back half of year, should the profitability progress (inaudible) in the first half sustained or improved in the back half? How should that look as we work through the second have?

Yes, when you look at the first 6 months, I think that we are at 357 versus 313, that's $0.44. The midpoint of our range is $1 and I will tell you we are going to have to have a higher flow through improvement in the third and fourth quarter than we had in the first two quarters.

And then secondly, as it relates to the comments, I'm just curious what color you can give us on your interactions with the commission prior to last evenings decision from them. If you can just shed some light the interactions, the questions they've asked and give your response to the decision last night relative to those interactions?

Sure. Just briefly, Eric, on that point, we've been represented by outside counsel in Mexico City who specializes in working with this commission. They have had appropriate meetings with the commissioners. During the process, several of our management team have been able to participate in those discussions to help clarify points, provide data, et cetera. And so I would characterize that as being open and appropriate conversations.

Was that a surprise last night relative to the sort of countering tone of those discussions?

I'd be careful to not particularly use that word surprise. I think we will just leave it at disappointment.

Okay, thank you.

Dennis McGill with Zelman & Associates.

Good morning and thank you. Chris, just to clarify or maybe expand a little bit on the last question. So can you talk at all, even high-level, on some of the points of contention that the commission raised, things that you have to go back and look at or address just to understand what are the dynamics that the commission is focused on?

Dennis, as we commented, we got this report late last night. It was 144 pages in Spanish. We are going through that in great detail. At this moment, I think it would be premature to comment at this time unfortunately.

Come on, Chris. You've got to bone up on your Spanish.

(Laughter) No mas.

Okay, that's fair. On the business side within chain stores, can you just maybe comment a little bit more on what's striving the mix and whether that's a temporary dynamic within some of the categories or if that's the exterior/interior dynamic and how that plays out as you normalize out weather?

I think we've mentioned it before, I think residential has been a tremendously stronger than commercial and I think that residential has been fairly strong. So when you look at those two pieces, that's really what's been driving it.

You're saying that gallon mix on the residential side is lower than nonresidential or just new construction?

New construction in general is usually a lower average selling price. So as that continues to become a higher percentage of our sale, that drives gallons faster than sales.

Okay and is there --

Sorry. This is Bob. There is also still a slight interior to exterior mix different relative to last year. So it's like Sean said, the new construction plus an interior to exterior mix difference.

And is there a similar negative drag on the margin line?

No, the operating margins are strong.

I know there's Sean's (inaudible -- laughter). Is there a drag on there or is it just the top-line drag?

No, we've talked for a long time, Dennis, about the consistency of the platform of products (inaudible) so we are fine in that regard.

Okay. Appreciate it. Thanks, guys.

Thanks, Dennis.

Charles Dan with Morgan Stanley.

Good morning. First, I just want to clarify that the new unchanged EPS or the new unchanged EPS guidance -- that includes the $0.08 of Brazilian duty expense?

Yes.

Is that another way you have been raising guidance a bit if we hadn't run into that issue?

We've got a dime range and it is only $0.08 so it is in there.

All right. Okay. And then secondly, just again to clarify, the comments you made about the Mexican housing market getting softer versus when th Comex deal was announced. Can you just clarify the original arrangement had -- does it have a price adjustment if there is a mature change in that market and the performance? Because now we are talking with the range that you gave about a year going by -- it's before the potential closing.

As we continue to do the due diligence, and the market has changed, there's other things that have not changed and some of the things have gotten stronger. We continue to look at the performance. We look at what our -- what we expect to get a return on our assets that we put into this and internal rate of return. And we don't have an automatic adjustment for the market conditions. I think that as we've gone through, I think we are still -- if this closes anytime soon, even with the -- in our mind short-term market changes in Mexico -- we think this is going to create nice shareholder value.

And then lastly just two housekeeping questions. One, your administrative expense, excluding the change in interest expense, seems to be down in the first half of year, do expect that to continue to be down in second half or should we think about that going back up?

I'm sorry, go ahead.

No, go ahead. I can ask the second one after.

I would say that we expect even without the SG&A from the interest expense, the way you phrased that question, we think that the -- that expense will be up slightly in the year. We just think that with some timing and -- again we have some a couple IT projects that we are going to be working on in the (inaudible) also.

Okay. And then lastly, if you can just give the gross profit change by segment if you can --

Sure. Gross profit change by store group $83 million. Consumer Group was down $400,000. Global Finishes $8.6 million improvement. And the Latin America is down $9.2 million. And I just want to remind you that $9.2 million -- that's where the $11.8 million was expensed so it's going to cost a bit more.

Understood. Thank you very much.

Thanks, Charlie.

Ivan Marcus with KeyBanc Capital Markets.

Hi, thanks. Real quick, the residential recovery has been going on for a while now and I understand nonresidential tends to lack -- historically lag. Is this lag lasting a little bit longer than you would've expected or is this sort of in line with expectations and how would you sort of gauge your outlook for nonresidential based off of I guess historic trends?

Ivan, this is Bob. I think what we're seeing is that there are certain categories of nonresidential that have been real slow to start and that's not unexpected. Retail was severely over-billed during the last run up. We are seeing solid construction activity in multi-family housing. We are seeing a pickup in office. Some of the institutional categories, specifically schools and government buildings, have been slow to start. So it is choppy across sub-categories in the nonresidential market, but I think most of the nonresidential market is starting to pick up as expected. As a reminder, we do expect positive overall nonresidential volume this here in terms of square footage put in place.

Great. And then for the Mexican market, if you could remind me, what is the break down between I guess the total volumes in housing, new construction and repaint and how much do the builders -- do they dominate -- the large builders dominate the new construction in Mexico? How is that market -- how do the gallons breakout?

Ivan, it would be very similar to the United States architectural business model that we've commented on for a long period of time. The vast majority of coatings in Mexico are to maintain and decorate existing structures. New construction totally would be in that 25% range plus or minus a little bit. There are large Mexican homebuilders but there are hundreds, if not thousands, of other independent builders as well too. So you can pretty much apply the same kind of modeling to the US market that we've commented on and shared with you for a long period of time to Mexico.

Great. And then my last question -- on the Brazilian market there's been a lot of uncertainty, does that continue to -- what are you seeing in terms of your business on there? It looks like your results remain fairly strong?

Yes, I think there has been some noise surrounding Brazil. So overall economic environment -- we've had some segments that have been a little bit harder hit. Don't forget that one of the things that Brazil has in its future is hosting this World Cup and the Olympics and the construction and build-out of the required stadiums, airport expansions, housing -- all areas that would impact our business. So that's a little bit behind schedule but some of our strength is relative to the work we've seen happening in that space so far.

Great, thank you for taking my question.

Thanks, Ivan.

Don Carson with Susquehanna Financial Group.

Yes, thank you. Chris, a question on your ability to out-sustain or out-perform industry growth. You're going 7% industry 3 to 4. How much of that you think is due to your stronger position in new home construction because of your relationships with the top homebuilders and how much would be repaint to where you are just seeing a swing back to contractors?

Clearly, Don, as this rebound is occurring, we've commented about the emerging importance of the professional painting contractor. They had talked a little bit during the downturn and we expect that we are on our way back to about 60/40 mix where 60% of all the coatings will be purchased by professional painting contractors. Clearly the new residential construction market, in terms of all new construction -- Bob just commented briefly on multi-family also being a strong new segment as well. So we're getting a lift from that and we'd expect that to continue.

And on the last call, part of your confidence in the outlook for the year was just the backlog that your contractor customer base had. How is that looking? Are they still relatively confident in the business outlook? And the other comment you made is that weather doesn't create or destroy demand for paint, it just differs it or accelerates it. So this adverse weather that we saw in a second quarter, does that just push out demand into the third quarter or is it lost for the year as a whole?

I would say you're accurate with all of your question there. We would expect that the contractors book of business looks robust. Sean just commented on the third quarter sales guidance being a little bit stronger even in our second quarter. As we meet with these folks on a daily basis through our stores, they are continuing to give us indications that they've got a good book of business. And to your point about weather just moving demand back, none of these folks are commenting about the impact of weather. They're continuing to be on projects and expect that they're going to have a pretty solid second half as well.

Okay, thank you.

Thanks, Don.

Dmitry Silversteyn with Longbow Research.

Good morning, everybody. I guess we still have a couple minutes left. It sounds like from your comments that your commentary on raw material expectation seems to be a little bit better than it was earlier in the year. I think there was some concern about second half of the year seeing some inflation on the petrochemical side -- in the raw materials at least. Now you're looking at it being flat and obviously flat and down year-over-year. Your guidance was basically flat versus your previous expectation. So is raw material improvement, if it is there, just not significant enough or was this basically the $0.08 penalty from Brazil that prevented you from raising guidance on a little bit more robust outlook for cost? Or is there some other sort of cautionary things that you are seeing in the market in the backend of the year that you would rather keep the power drive as far as your expectations are concerned?

On the raw material path, Dmitry, there's obviously a lot of moving parts. We believe that the TiO2 producers were going to push pricing hard beginning in a second quarter and they have. We weren't sure whether market conditions would be such that they'd actually realize some of the pricing that they were pushing. Our outlook -- our point of view now is that market conditions will not accommodate a price increase or any effective pricing TiO2. We weren't sure whether propylene would remain stable. It appears to be holding pretty steady despite the run-up in crude oil. So I would say that to Chris's opening comments, there's a lot more clarity now than there was 3 months ago. I wouldn't characterize on the total raw material basket outlook for the industry as far better today than it was 3 months ago. It is maybe marginally better.

Okay, that's helpful. And then we are in our third year of negative volume comps on the consumer line -- or the consumer division. Obviously in 2011, it was the majority of that was Walmart loss and then I guess a little bit of that spilled over into 2012. And now we have the Mexican Home Depot issues with Masco replacing Dutch Boy. When are we going to -- or when do you think you are going to anniversary that and we actually get to see sort of the clean performance of the Consumer Group and hopefully positive (inaudible -- background noise)

Yes, the other thing just to make sure that you did a nice job of presenting the history. But you have to remember that when we did do the Walmart deal -- when that Walmart deal was the major hits and last -- at the end of the third quarter last year we had another step down and that's what we are anniversarying. So on the last call, again, Masco put it out there in the fourth quarter last year they -- we had that Mexican Dutch boy convert to Behr. So when you take -- the last quarter we said that really we were going to see negative through the third quarter, then after the third quarter we would expect that we start to see some improvement there. So and I think we answered it that way after the first order and we feel pretty good about the answer. I wouldn't change it.

Okay, so fourth quarter we should start seeing more apples-to-apples type of comparison anniversarying all of the headwinds as far as business losses?

Yes.

Very good, thank you.

Thanks, Dmitry.

(Operator Instructions)

[Jeff Setakis] with JPMorgan Chase.

Thanks for squeezing me in. In terms of the -- are you -- do you continue to be optimistic about the Comex transaction? Because at worst, you could divest your own Mexican business and own their much, much larger Mexican business. And did you offer them -- did you offer the commission any remedies so far or remedies have not been discussed yet?

Jeff, we will always squeeze you in, first of all. So thanks for being on the call. Secondarily, those are all appropriate thoughts and ideas and questions for you to ask. And equally as appropriate, I cannot comment on any of that at this point in time.

Okay. And then lastly, sequentially, did your prices change either positively or negatively in your stores and in your consumer business?

Not at all. I think when you look at the second quarter versus the first quarter, it has been over 12 months since we've had the last price increase and the selling prices aren't not dramatically different.

Are you allowed to say whether your optimistic or pessimistic about the closing of the Comex transaction?

Jeff, we are optimistic by nature here and I think the comments we gave early on about the multiple paths we have to continue pushing forward here -- we are hopeful that we will get this done.

Okay, good. Thank you very much.

Aram Rubinson with Nomura Securities.

Hello? Did I hit the button again by accident? I'm sorry about that but while I'm at it, can you talk about both the promotional environment and maybe the cadence of comps by range? Because I think by region you mentioned there was a big range and I was just curious how wide a range there was?

So the promotional activity, Aram, has been very consistent in our industry, pretty much for decades on end now. This is the time of year when you will see discounting by all the major retailers including Sherwin-Williams to drive traffic into stores around the big painting holiday seasons and certainly July 4 qualifies as one of those. Bob did comment briefly about our Southeastern division leading the pack. Southwestern division second, then Eastern and Midwestern -- all of them solidly in the mid-single digits above range. The range was not very wide.

Okay. Sorry for dragging on the second question. I was as surprised as you.

(laughter) Thanks, Aram.

Always nice to have you back on.

[Reginald Riley] with [Revery] Associates.

Good afternoon now. Can you remind me or us where the volumes in the -- are the volumes for the paint stores made in the Consumer Group or is it the other way around?

No. The product that it's sold through, Stores Group, is produced and produced in the Consumer Groups. The Consumer Group is making products for sales of the Consumer Group as well as the Paint Stores Group. They all handle the logistics and warehousing.

Okay. So the consumer margin is down only a couple percentage -- basis points even though the sales are down because the Paint Stores Group volumes were up so well. Is that how I should be thinking about that?

They definitely got a positive impact, yes, from having the Paint Stores Group improving volume.

Okay. And then a second question if I can -- following up on the raw materials. I think you had said you (inaudible) the overall basket now down low single digits. And we know about pigments and propylene at least is down from first quarter levels. What else in that basket is up or down noticeably? Is packaging or distribution in there? What else can you comment on?

Richard, distribution is not in there. But we tend to comment on propylene and TiO2 because TiO2 represents the vast majority of the pigment category and propylene affects about the cost of about 60% of the raw material basket by cost. So we find propylene to be a good proxy for most of the rest of the basket outside of pigment. There's some movement in various specific solvents that we don't tend to delve into but, for the most part, packaging, latex and resins and most of the base-load solvents are holding pretty steady.

Okay, fine. Okay thanks a lot. You gave me a better answer than I expected. Thank you.

Thank you.

[Gidi Panjabi] with [Arenberg].

Thank you taking my question. Can you give a little bit more color on what's going on in the Marine and Protective market? Why is it we can actually -- when do you expect things to turnaround there? And also, if you can provide a little bit more color on some of the other industrial coating markets, that would be great. Thanks.

Yes, so the Marine markets -- Protective and Marine markets for us -- predominately, as we've commented through our global group businesses, is a North America business. So we have a terrific share position in the United States on a variety of different end segments here. I think Bob also commented about just some of the softness that we are seeing in the nonresidential sector of the economy and, frankly, that's almost totally where the Protective and Marine business resides. Our segments would include bridge and highway, petrochemical, wastewater treatment, energy, food & beverage, the military is important component of that -- or better said, the government is an important component of that. So sequester's had little bit of an impact here as well. The good news for this business for us has always been that this is one of these types of painting projects that you can't defer maintenance for long. And so we think there's been just a slowing of it a little bit over this last quarter in discussing that projects that we see on the books and with our contractors that work in this pace. We're confident that the second half of the year will be better for them and we expect to report that going forward.

Thank you.

It appears we have no further questions in queue at this time. I would like to turn the floor back over to Mr. Wells for any concluding comments.

Thank you, Jesse. As always, I will be available for the balance of the day, tomorrow and throughout the coming weeks to answer your follow-up questions. I appreciate your patience if your in the queue now. And again, thanks for joining us today and thank you for your continued interest in Sherwin-Williams.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. May disconnect your lines at this time. Thank you for your participation and have a wonderful day.