宣偉 (SHW) 2013 Q3 法說會逐字稿

Good morning. Thank you for joining The Sherwin-Williams Company's review of the third-quarter 2013 financial results and expectations for the 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 and Corporate Controller; and Bob Wells, Senior Vice President, Corporate Communications and Public Affairs.

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, November 14, 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, and the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

A full declaration regarding forward-looking statements is provided in the Company's earnings release, transmitted earlier this morning. After the review of the third-quarter results, we'll open this session to questions.

I'll now turn the call over to Bob Wells.

Thanks, Rob.

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

Summarizing overall Company performance for the third quarter 2013 versus third quarter 2012, consolidated net sales increased 9.4% to $2.85 billion, due primarily to higher paint sales volumes in our paint stores group. Acquisitions increased consolidated net sales 1.1% in the quarter, and unfavorable currency translations decreased net sales 0.8%. Gross profit dollars increased $145.7 million to $1.3 billion.

Gross margin increased 130 basis points to 45.5% of sales, from 44.2% in the third quarter last year. The increase in gross margin was primarily due to improved fixed cost absorption from increased sales volumes, that were partially offset by import duty assessments related to our Brazilian operations. These import duty assessments reduced gross margin by 60 basis points in the quarter.

Selling, general and administrative expense for the quarter increased 11.2% to $889.7 million. As a percent of sales, SG&A increased to 31.2% in the third quarter this year, from 30.7% last year. Incremental SG&A from new stores, customer service investments, and acquisitions accounted for the majority of the SG&A increase in the quarter.

Interest expense increased approximately $5 million to $15.4 million, due primarily to pre-funding of the Comex acquisition. Consolidated profits for taxes in the quarter increased $44.5 million or 13%, to $387.5 million. Profit before taxes as a percent of sales increased to 13.6% from 13.2% last year.

Our effective tax rate in the third quarter this year was 32.1%, compared to 31.5% in the third quarter of 2012. Year to date, our effective tax rate is 32.1%, which is in line with our expectations for full-year 2013.

Consolidated net income increased $28 million to $253 million, compared to $235 million in the third quarter of 2012. Net income as a percent of sales increased to 9.2% from 9% in the third quarter last year. Diluted net income per common share for the quarter increased 13.8% to $2.55 per share, from $2.24 per share in the same period last year.

Third-quarter 2013 reported EPS includes the Brazilian import duty assessment, which decreased diluted net income per common share $0.13 in the quarter. Currency translation increased earnings per share in the quarter by $0.02, and acquisitions reduced earnings per share $0.02.

Looking at our results by operating segment, sales for our paint stores group in the third quarter increased 13.5% to $1.76 billion. Higher paint sales volumes across all end market segments accounted for most of the increase in sales. Acquisitions increased sales by 1.5% in the quarter.

Comparable store sales, that is sales by stores open more than 12 calendar months, increased 10.9% in the quarter, compared to the third quarter last year. Regionally in the third quarter, our southeastern division led the sales performance, followed by southwestern division, midwestern division and eastern division. Three of the four paint stores divisions reported double-digit sales increases, compared to last year.

Segment profit for the group increased $58.8 million, or 19.6% to $359.4 million in the quarter, as higher sales volumes were partially offset by higher year-over-year selling, general and administrative expenses, and dilution from the Comex acquisition. Acquisitions decreased segment profit by $2.6 million. Operating margin increased to 20.4% from 19.3% in the third quarter last year.

Turning to our consumer group, sales in the third quarter increased 5.4% to $366.8 million, due primarily to timing of seasonal shipments to some customers. Acquisitions increased consumer group net sales 0.2% in the quarter.

Third quarter segment profit for the consumer group increased $16 million or 28% to $73.1, million due primarily to higher sales volumes, and improved operating efficiencies. Segment profit as a percent of external sales increased to 19.9% from 16.4% in the same period last year.

For our global finishes group, sales in US dollars increased 3.1% to $507.3 million in the quarter, due primarily to selling price increases and acquisitions. In the quarter, acquisitions increased net sales in US dollars by approximately 1.3%, and unfavorable currency translation rate changes decreased sales by 0.4%.

Stated in US dollars, third-quarter segment profits increased $8.1 million, or 22.2%, to $44.5 million, due primarily to higher selling prices, improved operating efficiency, and positive currency translation. Currency rate changes increased segment profits in the quarter by $3.4 million. As a percent to external net sales, segment profit increased to 8.8% from 7.4% in the third quarter last year.

For our Latin American coatings group, third quarter net sales in US dollars were flat to last year, at $208.6 million. Selling price increases and higher sales volumes in the quarter were offset by unfavorable currency rate changes. Unfavorable currency decreased net sales by 8.9% in the quarter.

Stated in US dollars, segment profit decreased to a loss of $1 million in the quarter, compared to profit of $21.9 million last year, primarily due to charges related to an import duty tax assessment in Brazil. Charges of $19.8 million were recorded in the quarter to resolve a dispute by the Brazilian government over our handling of import duties through the year 2012. We believe the second and third quarter payments to the Brazilian government, totaling $31.6 million, totally resolve all claims related to import duties.

Currency translation rate changes had no significant impact on third-quarter segment profit. And as a percent of net sales, segment operating profit was a negative 0.5%, from 10.5% in the third quarter 2012.

I'll conclude my remarks on the quarter with a brief update on the status of our lead pigment litigation. Arguments in the Santa Clara County case involving public nuisance claims brought by 10 California cities and counties against five defendant companies concluded on September 23. As a reminder, this is a bench trial. The outcome will be determined by the judge presiding over the case. By statute, the judge has 90 days from the date of closing arguments to deliberate and render a judgment. At this point, we have no further indication or sense of timing on a decision.

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

Thank you, Bob, and good morning, everybody. Thanks for joining us today.

Our third quarter was another solid quarter for Sherwin-Williams in terms of sales momentum, profit improvement, and cash generation. Consolidated sales, net income and earnings per share each set new record highs for any quarter in our Company's history.

Net operating cash increased more than $100 million compared to the third quarter of 2012, and it stands at just over 10% of sales through our first nine months. Excluding the import duty assessments in Brazil, our flow through on pretax income was more than 37% through nine months.

Paint stores group continues to deliver strong year-over-year sales growth at a pace we believe is comfortably ahead of the market. Comp store revenue, and gallon volume both posted strong double-digit gains in the quarter. And for the second consecutive quarter, segment profit as a percent of sales exceeded 20%. Our investments in new store openings and superior store staffing continue to drive profitable market share growth from this team.

Consumer group reported solid sales growth in the quarter as well, muted somewhat by the timing of seasonal shipments to some customers. The strong profit performance in consumer group was the result of gross margin expansion from significantly higher manufacturing volumes, primarily to support paint stores group, as well as good SG&A expense control.

Our global finishes group also turned in a strong profit performance in the quarter, despite weak demand in many regions where they compete in the world. Backing up the effect of acquisitions and currency, sales grew just over 2%, while segment profit increased nearly 13%. Through nine months, global finishes segment profit margin has increased 110 basis points, solid progress towards the double-digit operating market target we've commented on in the past.

Latin American coatings group continues to face significant headwinds from currency devaluation and softening market conditions. Sales in local currencies and volumes were positive in the quarter, but segment profit continues to be pressured by weak currency and a tepid demand environment.

On the raw material front over the past few quarters we've seen a steady stream of price increase announcements across a broad range of commodity categories. Many of the major chloride TiO2 producers announced first and second quarter price increases in the range of $0.10 per pound, followed by a third round of price increase announcements in September, with nominal effective dates around October 1. Crude oil and propylene are also trading above their average pricing levels in the first half.

Given the timing and impact of these announcements, we think that most of these increases are unlikely to gain traction over the balance of 2013. 2014 remains uncertain, and we will give more guidance on this topic during our year-end call in late January. Our full-year outlook for average raw material costs in the industry to be down low-single digits compared to 2012, still feels about right to us.

Although input costs have shifted from a strong headwind to a slight tailwind over the past 24 months, the majority of the 130-basis point increase in our third-quarter gross margin resulted from volume-driven operating efficiencies in our global supply chain.

SG&A spending was up almost $90 million in the quarter, and has increased 50 basis points as a percent of sales. Most of this increase was attributable to higher service expense across our existing store base, the 84 net new stores we opened in the past 12 months, and incremental SG&A from acquisitions. We've commented in the past about the benefits of investing ahead of market growth. I clearly believe the SG&A investments we made in our paint stores group in the back half of 2012 contributed significantly to the strong revenue and volume growth they've reported this past nine months.

In the third quarter, we generated $476 million of net operating cash, bringing our nine-month net operating cash to $778 million. Our nine-month free cash flow net operating cash less CapEx and dividends, was $515 million. We continue to invest the Company's cash to expand our controlled distribution platform, complete suitable acquisitions, increase our dividends, and purchase shares of stock for the treasury.

In the first nine months, our paint stores group added 42 net new stores, 20 of which were opened in the third quarter. In September, we completed the acquisition of the Comex business in the US and Canada, which added 306 stores.

We finished the quarter with 3,868 stores in the US, Canada, and the Caribbean, compared to 3,478 stores a year ago. Today, we're increasing our guidance for paint stores group to accelerate net new store openings up to 80 to 90 during this year.

In the third quarter we bought back 1.5 million shares of our common stock on the open market, bringing our year-to-date total to 2.8 million shares, at an average price of $175.72. On September 30, we had remaining authorizations to acquire 13.65 million shares. Last week, our Board of Directors approved a quarterly dividend of $0.50 per share, up from $0.39 last year.

On the eve of our second-quarter earnings call, we have received word from the federal competition commission in Mexico had voted to block our acquisition of the Comex business in Mexico. Since that time, we've worked closely with our regulatory authorities to secure approval and complete the transaction. Last Tuesday, the newly-seated competition commission held a hearing to consider our case. We expect the ruling within five business days of the hearing, and both parties stand ready to complete this transaction promptly, if and when we receive regulatory clearance.

In the fourth quarter the Comex stores in the US and Canada should generate sales in the range of $95 million to $105 million and earnings dilution of $0.20 to $0.40 per share. The wide range and earnings impact is due to the uncertainty of the timing of various integration activities. A significant amount of the anticipated integration work in the US and Canada will fall in calendar year 2014, as well, resulting in earnings dilution next year for this business. These stores should be accretive to earnings by 2015, and we will keep you posted on our progress throughout next year.

Without the Comex US and Canada business, we expect fourth-quarter 2013 consolidated net sales to increase 5% to 7%, compared to last year's fourth quarter. With sales at that level, we expect core diluted net income per common share for the quarter to be in the range of $1.29 to $1.39 per share, compared to $0.65 per share in 2012, which included a $0.47 per-share charge for our DOL settlement.

For the full year 2013, we expect consolidated net sales to increase by mid-single-digit percentage over last year. With annual sales at that level, we're updating our guidance for diluted net income per common share for the year to be in the range of $7 to $7.30 per share, including the Brazil import duty assessment, and dilution from the domestic Comex business, 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)

Ghansham Panjabi, Robert W Baird.

Obviously, there's been some concern over the impact of higher interest rates on some of the fundamentals here in the US. You obviously reported a very strong quarter regardless, so were there any cautionary indicators that you saw during 3Q, either by geographic region or specific channel?

I'd say, no. The purest read we have on demand is always through our paint stores group. In recent quarters the new residential segment has been our strongest performer, followed by residential repaint. So those are the two categories that would be impacted by any of that. And frankly, we're just not seeing any of that impacting our business.

Okay. That's helpful. And then on Comex you provided some parameters on 4Q, and Chris you mentioned some commentary on 2014 dilution as well, but how should we think about it on 2014 on a quarterly basis?

On a quarterly basis, this is Sean Hennessy, let me just try to give you a little more color on this, and maybe this will help you. We think instead of trying to look at the quarter, for the first 12 months, let's take a look at the first 15 months. That will take us to the end of 2014.

We think during that time frame, we'll lose $0.60 to $0.65 for this Comex US and Canada piece. That would include all of the synergy and the integration costs, as well as right now, this asset is losing operating profit at this current time. But I think that $0.60 to $0.65 is all in, so when we get to Q1 in 2015, will have positive operating profit from this acquisition.

So with the quarters, I think we will try to give you a little more color by first, second, third, fourth quarter, but I think especially when we're trying to give you guidance for $0.20 to $0.40, if you ask the follow-up question, does that mean if we did all $0.40, the next year would be $0.20 to $0.25, I'd say yes. If it becomes around $0.20, because of the integration cost not being able to be booked in the fourth quarter, then I think next year would be $0.40 to $0.45.

By quarter, that's not exactly clear yet, and it's determined by a few things. But by 2015, we see this as a positive operating profit.

Okay. Thanks a lot.

Chris Nocella, RBC Capital Markets.

The incremental flow-through to earnings in the storage business was a little bit lower this quarter than in the past few years, your SG&A take a little bit higher. So is this incremental margin progression more in line with the normalized range, or is there some upside maybe as you acclimate some of these new stores in your network?

Yes. I think after the second-quarter's results, Chris, when stores posted over 50% incremental margin we cautioned you not to get you comfortable with that number, as much as we would have liked to achieve that. So I think what you're seeing in the quarter and year-to-date numbers are more typical. We commented around north of 30% incremental margin and we're comfortable signing up for that for the remainder of the year.

That's great. And on the Comex Mexico deal it seems like you're still pretty confident that it gets done here. Do think that goes forward as originally planned, or maybe would there be some concessions to get that through?

Yes. The last commission, we had gotten to a point with them or we had proposed remedies to address some of their concerns. I think it would be premature to comment on how this next commission will look at that.

We're certainly aware of those remedies, and they will be available to them if necessary. And at this time we're just not sure how it's going to go. We have commented that we remain optimistic, and prepared to move forward, and hopefully next week, we're going to have some good news.

Great. One last one for me, if you might comment. What store did you say you would take the store group to store growth late in the year, here?

I think we're seeing terrific result out of the group. Our confidence in the markets going forward over the next couple years our that were going to continue to see high demand from these products as housing rebounds, and we have yet to begin to see with any sustained volume the rebound in the commercial markets, which will also impact that segment of the Company as well. So I think you should read into that the confidence we have going forward.

Great. Best of luck. Thank you very much.

Duffy Fischer, Barclays.

I was hoping you could just comment, same-store sales last quarter were up about 7%. This quarter about 10.9%, so a pretty big acceleration. Is that real in that sequentially it was improving that much, or might it be that just last year was a lower base in Q3? What was the differential there in your mind?

I think you hit it. I think that last year, the second quarter was very strong in 2012, and third quarter was the opposite, where we probably had our weakest comp store in 2012. So we felt pretty good about going up against that history in the third quarter, and I think when you look at the sales per store and so forth, we feel that the market was pretty much the same in the third as well as the second, but it really more has to do with the history.

Okay. And then just two quick questions on the Comex and the commission down there. First one is, our any of the people the same on this commission versus the first? And then the second is, is this an official process where they have to give a declaration at a set time? Or is this something that they can reach out to you and negotiate quietly, where they don't have to put out press release on this until it's finished?

Duffy, there are no commissioners seated on this body that were on the previous commission. So does the answer to your first question is no.

And secondarily on understanding it, by Mexican law they have five business days to respond to the case that was put in front of them. I don't think there's going to be negotiations at this point. I think we're just going to get an up or down vote.

Okay. Great. Thank you very much.

PJ Juvekar, Citigroup.

Can you talk about commercial or non-residential market, I know it goes up with a lag, but what kind of growth are you seeing, or you could see in 2014?

Yes, PJ. What we're seeing is a staggered start of the commercial market. You're correct, that it's typically moves with a 12 to 18 month lag to residential.

We are seeing a pickup in certain under non-residential categories, like office space and hospitality have been relatively strong. That strength has been offset by weakness in retail, in some of the manufacturing segments, and anything that relies on public funding is pretty soft. So schools, libraries, it's government buildings, et cetera has been very weak year over year, actually down pretty significantly year over year.

So, it's a mixed bag but in total, it's just barely better than flat thus far. We do expect to pick up in many of those other categories and we'll see growth in the market when that happens.

Great. Thank you. And your same-store sales and in paint group were up 10.9%. Given that there was very little pricing this year, is it's all volumes? And also can you make a quick comment on what you're seeing in DIY versus contractors?

I think PJ, we've been commenting all year in that all of the growth is in fact guidance, that guidance running a little bit higher than sales since we've had some mix shift in the business. We are confident that the new residential business is leading the pack, and that's by design is a lower average selling price per gallon. So a little deflationary pricing on the mix.

So it's 10.9% revenue for the comp stores, design was actually stronger than that. So again we can expect that to continue going forward.

DIY has been a good story for us as well. It lags a little bit, the residential new construction and residential repaint segments, but it's been a strong contributing performer for the Company now for several years.

Charles Dan, Morgan Stanley.

I was hoping you could give us a little bit more color about the consumer group. I saw the comment about the timing of certain sales. How much of an impact does that have on the group, and is there any way to adjust for that and figure out what the trend is in that business?

So I think that we've been commenting that as a result of the loss of these two chunks of business that we're anniversarying, both Walmart domestically and Home Depot in Mexico, that this business is going to be off slightly, low-single digits, down in revenue for the year. We've been tracking it back to the first two quarters.

We did see a spike in shipments, as we commented. Most of that happened in the last month of the quarter.

And so that was the timing comment we would expect that the fourth quarter will be back to that soft performance. So nothing really different there in terms of the Company's shelf position or programs, and just riding along with the strength of the customers, and enjoying that business.

Thanks. And just a couple housekeeping items, were there any significant legal or closing costs regarding the Comex North America businesses in the SG&A line or elsewhere, and could you give the gross profit year-over-year change by segment? Thanks.

Sure. When you look at the Comex, we commented that it was $0.02 in the quarter. In that $0.02, and it really impose, they fall in that $0.02. Probably going to break out gross margin and SG&A Comex for one month.

On the incremental dollars, the gross profit dollars that we will have in the Q, stores group was up $129 million. Consumer was up $17 million. Global was up, segment was up $13 million.

LACG was down $12 million, and from Bob's script, and Chris also mentioned, that was depressed by approximately $20 million, due to the Brazilian situation. So without the Brazilian tax situation, LACG would have been up high-single digits.

Thanks.

Robert Koort, Goldman Sachs.

I was wondering if you could talk a little bit about why Comex's business isn't making an operating profit? It seems most of the times when you buy regionalized businesses, they've done well, so is it just their spread is too far, their density is not high enough? What is it about the business that's not as currently profitable as other acquisitions have been?

I would say they are spread and density, Bob, is terrific actually. They've got a really good brand recognition, store locations and penetration in the geographies they are operating in.

This was a business that the time of Comex's acquisition was really focused on new residential construction, almost solely, and lacked the product line, and/or the discipline to really expand into all the other professional contractor segments, and DIY, that has been kind of the hallmark of the Sherwin-Williams paint store. Over the years, their timing was a little bit unfortunate in that they rode the housing market down, and really didn't do a lot to try to mitigate that, with expanding into different segments.

And so as we get these businesses and quickly get them ramped up with the broader product selection, better inventory control, better associated product sales, which Sherwin-Williams has always brought to all of these acquisitions, and a little bit of a better DIY presence, we would expect to start to see them rebound closer to the Sherwin-Williams typical store margin.

I think Sean really articulated that well, how we get from where we are today through these integrations into a positive return in 2013, and then from that platform begin to move them up to our traditional stores operating margins. So thrilled to have the stores, the talent that came with them in terms of store management, sales reps, the folks who say customers are great. And we're excited to get them up and running.

Chris, will they be rebranded as Sherwin stores, or will they remain Comex?

First of all they're not called Comex in the United States, they operate under five different brand names that were the original names of these businesses, when they had been rolled back in late 1990s and Comex did nothing to really change that or integrate that. Our practice has been, Bob, over time, to carefully secure all the customer relationships, and at the appropriate time, rebrand these stores under Sherwin-Williams.

That process can take anywhere from three to five years or longer, depending on the individual markets and strength of the brand. That same kind of thoughtful process that we use for Duron and MAB and some of the other recent acquisitions will be the case here as well.

Great. Thanks so much.

Kevin McCarthy, Bank of America.

Chris, was wondering if you could speak to the expected growth in US architectural gallon, at just the industry level for 2013?

Kevin, this is Bob. It's, as you know, an industry that is not well tracked and measured, there's a lot of estimates out there. The estimates by the American Coatings Association is that the industry through the first half was up mid-single digits, stronger in the second quarter than in the first, actually upper single digits in the second quarter.

We have not seen any indication that market growth in the third quarter thus far, and the ACA typically lags the end of the quarter by a month or so. So and frankly, we're not very well versed on their methodology, so I don't know how they are gathering this data. But it feels to us like mid-single digits is probably not out of the realm of possibility for the market.

And that would be on top of 3.7% increase in 2012, which was pretty well corroborated by the ability to look back and pick and tie a bunch of different sources. So to Bob's point, an accelerating market with better industry gallon numbers this year than last year, hence most importantly for the earlier question, about why we're deciding to open more stores.

That's helpful. Thanks. Speaking of acceleration, I wanted to come back to your store count. You're 42 year to date, so 80 to 90 would apply something like 38 to 48 in 4Q, if my math is right there.

So a couple questions, have you done that many in a quarter before, and as you look at integrating the US portion of Comex, should we think of that number as a gross or net number, given any rationalization that you may need to do as integration progresses?

So just staying on 80 to 90 estimate for the core incremental growth, we absolutely, despite our best efforts, have in fact, opened that many stores in the quarter. This process always ends up being a back-half loaded exercise, despite how hard we push on various real estate developers to get these stores in to us sooner. In fact last year in the fourth quarter, we opened 42 stores, so it's in our wheelhouse to get that done, and to know how to do that, and we expect to go forward on that.

We haven't commented yet on the 306 Comex stores relative to what the likely closings would be there, as a result of overlapping locations. I think if you would look historically at past transactions we've made, somewhere in that 15% to 20% store count would be at the high end of the closings that we would effect. That would put you in this particular scenario in a 40 to 60 store count.

Don't forget, Kevin, that as we have shown you various maps, these stores are actually falling into geographies where our penetration is slightly less than it had been in more of our denser markets. And our expectation is that we probably won't see numbers that high. Maybe 10% to 15% range would be a better wheelhouse to think about.

And those announcements will come out as leases expire, and we get a better chance to get their hands on the business. Again, as we commented, we'll give you a lot more color as we go to 2014 on this business.

Great. Thank you very much.

Matt McGinley, ISI Group.

When you introduced us to Comex, you had said that the business when you purchased it would likely be somewhere worth somewhere around $1 in earnings the first year, and you had indicated that there would be charges related to US operations, would be $0.60 to $0.65. Does that imply that the Mexico assets are worth about $1.60 in year one, or is this more of a fixer upper than you had anticipated in that $1 range that you had talked about a year ago is still on the table?

Just to clarify one thing, what we said is we could close the Comex deal by the end of the first quarter. So which is giving us nine months to do a lot of integration work that we're just talking about now with the US and Canada piece. We would start to look at the $1 a year later

Number one, that's gone a little deeper. We're able to close this on September 16. Your assumption -- it's not apples and oranges.

It's closer than apples but it's not totally apples to apples. But having said what you just said, you're absolutely right. All of the indication would be is that the Mexican asset would be able -- there's a very strong asset, producing nice operating margins.

And then if the US assets were maybe not as busy as anticipated when you first looked at the operations. Are the Mexican assets as good as they were a year ago?

Yes. Both of those things, I think -- we're not that surprised by where we ended up in the US and Canada. Assets are pretty much where we thought they would be, and the Mexican piece is doing fine now. When we get asked every once in while, would you continue -- what's your appetite? Our appetite is still there for that Mexican piece, because that Mexican piece will create shareholder value.

Last quarter you had discussed distortions related to weather that made the interior versus exterior mix shift, and it impacted you negatively rather than positively. Did that reverse in the third quarter, and how much do you think that -- has pent-up demand helped the unit growth in the third quarter?

I think that we actually mentioned that in the first quarter, because of in the first quarter 2012, that was exterior painting going on in Chicago in February, and so there was really no winter as compared to a normal winter. So that first quarter is when we really mentioned it, and I would tell you that pent-up -- year-to-date, I think it's evened itself out.

But when you talk about that, I don't think it changed any of the pent-up in the third quarter. I think had more to do with last year in the third quarter was our lowest comp store increase. But I don't see that as a factor.

Okay. Thank you very much.

John McNulty, Credit Suisse.

Two quick ones. On the consumer segment, the margins were noticeably higher, actually, than they've ever been for a third quarter. How much of this is tied to the strength in paint stores versus the lumpiness that you were talking about in terms of order patterns? And is this a sustainable level now that the paint store group is as big it is as it is?

I would say it's 60-40. I think lumpiness of the sales was 60% of that improvement, stores group was 40%. I think that if you look at the beginning of the quarter, we were managing our SG&A and so forth.

Nothing as strong as sales, but nice strong improvement in sales in consumer for that timeliness really helped the margins in the third quarter. But the paint stores group having that volume go through was nice.

I would tell you, over the years, we have continually talked about this consumer group being more in the flattish long-term, and we said that the margins -- and you correctly pointed out one of the strongest margins we've ever had, will be a little more choppy than stores. But there will be times when these quarters, we will have quarters like this because of the volume going through and certain things hitting. The operating margins will be higher than stores, but over the long-term we think that it will be slightly higher because of where stores -- it won't be this high. In fact, every fourth quarter, that operating margin is depressed a little bit in that consumer group.

Okay. Fair enough. And then just so we understand what may come out next week in terms of the decision from the commission, is that a --that's the end of the game kind of decision, and it's either a yes or no? Or is there a further appeal process or is your appeal already in, and you can get some derivation of an answer whether it's yes, no, or yes, if you do the following? How should we think about what the decision actually could potentially be?

That's a fair question, John. I wish I had more certainty on how to answer this. This is a brand-new commission, and we are one of the first rulings that they're going to distribute.

There's the possibility that their decision is in line with our proposal to them, and we accept it, and we're good to go. There may be things that they don't agree with what we had prepared to do, and they're asking for more, at which point we would have the ability to discuss that further with them. So a little bit of a difficult answer for us to give, until we actually get into the arena.

Okay. Great. Thanks for the color.

Chuck Cerankosky, Northcoast Research.

If we look at that -- Sean, if we look at that $0.60 to $0.65 you suggested for the next four quarters for Comex US Canada, I'd like to think about it in three pieces. One would be non-cash type charges related to asset write-offs or impairments, and then what's the underlying operating losses for the business? And thirdly, what the percentage of that amount would be cash integration expenses?

Chuck, over the next 12 months of doing the purchase accounting, and we're having evaluations and so we probably have a better answer for you maybe in two quarters. And the reason I say that is that it really depends on how much value we put on certain assets that we eventually are going to eliminate. And so that would be back to your point, the non-cash charges, but we'll see what happens there.

I think when you take a look at the cash, it is going to depress our cash. And I would tell you when you think about $0.60 to $0.65, and I use $0.60 and 100 million shares, so you're talking $60 million, I would tell you that cash-wise, probably 80%, 85% of that $60 million will be cash depression that we get, that will occur over the next 15 months.

And of that 85%, Sean, how would you break that down between the ongoing operating loss there or the startup operating loss, and then voluntary expenditures by Sherwin-Williams to integrate the business?

I would probably cut the 80% about 70-30, 30% of the cost of integration and closing costs, 70% from the operations. And I think, by that time, the operations will be cash positive in 2015.

2016.

Very nicely cash positive.

All right. How should we think about capital expenditures for next year? I don't think there would be a lot to go with what we've already purchased from Comex. But if you can give us perhaps a scenario to consider, if you do indeed get your wish and the deal with Mexico -- with Mexican assets goes forward?

Okay. I think that if you look at the core, I think when you think about increasing the number of stores, the CapEx will be up this year just in the core piece. I think that some of -- the majority of the stores that we just, the 306, are long-term stores for us, long term markets, and I think you're going to see us put some CapEx into those.

Put this answer in three -- so I think store CapEx is going to be up, because of increased stores. Number two, these stores we are going to put some POS devices in these long-term stores, shaking equipment, thinning equipment, and color equipment that we have. And then if we complete Comex, there will be another step change there, Chuck, that if we do complete it, we'll give you that number.

All right. And how should we think about share repurchases in light of how this deal shapes up? Originally, you indicated you would abstain from most repo activity because of the size of the deal. Now it's taking place in pieces, and you have bought back some in the most recent quarter.

Right. I think that what really motivated out there to buy back stock, is, when you look at the cash generation, Chuck, if you look at our cash generation, in Chris's comments, he talked about 10%. We have never been at 10% of sales through the third quarter in our history, and I think that's huge.

Because as you know, we're negative in the second quarter. It used to be we could be slightly positive through the second quarter, and we were over 4% year to date. Now we are over 10% for the first time in the third quarter.

And I think we've consistently said that we're were not going to hold cash. We feel that the cash generation from the acquisition will take care of itself, and we're going to buy back stock with that cash. We're not going to hold it.

All right. Thanks. That's great. One last question, just because I don't think anybody mentioned it, same stores pricing in the third quarter, I'm going to take it, that was flattish?

Yes.

Excellent. Thank you very much. Great quarter.

Ivan Marcuse, KeyBanc Capital Markets.

Just a couple quick questions. On Comex within the US, you talked about being more focused on the new residential construction. Will that be -- will that go through next year, will that be a drag a little bit on your mix, as you get new product in there that would be noticeable? And then also with the losses, is this going to help or how would you expect your tax rate to be impacted next year, assuming just the US assets?

Ivan, on the drag of the Comex, I think that it's $500 million. It's not a small piece when you think about the stores group. But in total, the gross margins and the operating margins will be a drag on the stores group.

On the selling price I don't think that, as time goes on it will be slightly. But I think that there's no doubt that the operating margins at the stores group next year, because of that $0.60 to $0.65, will be a drag. On the tax rate, again, we think that if we do complete the Comex acquisition, it could give us an opportunity to have a step change in our tax rate. The US piece, we're going to change our -- going to have that kind of a step change.

Great, thanks.

Dmitry Silversteyn, Longbow Research.

Congratulations on another strong quarter. Just want to understand a little bit, on the Latin American piece, you've done, over the two quarters, as far as paying the Brazilian duty catch up for two years.

So in the fourth quarter, should we expect the margins in this business to get back to whatever normal level is on a year-over-year basis? Something in the mid- to high-single digits? Or is there still going to be a drag on the business, as you go beyond the Brazilian duties?

Yes. You're correct. The Brazilian import tax issue is behind us, so that will not be recurring or anything from that in the fourth quarter, and we'll be back to the business's performance.

I think what you'll see that, Dmitry, is the impact we've been talking about for a while now, on just the softening market conditions, as well as the currency impacting the margin. Don't forget that Latin America, like all the coatings businesses, buy their raw materials on a dollar-denominated basis. And so despite the fact that we can manufacture and sell in country, we do have this impact of a global dollar denominated raw materials.

We shared with you in the past the sizable amount of costs affiliated with our raw material basket. So we're probably in the two Latin American margins look running lower than their normal run rate, even after the tax issue. And that will rebound as pricing activities take place, raw materials moderate, and the dollar versus local currencies get back in line.

Got it, okay. That's helpful and then I know the question was asked about this already but I couldn't follow the answers, so maybe I'll ask it again. The seasonal shipments that you mentioned in that consumer business, I think you said they took place in September, which should improve the growth in that division in the third quarter.

Was that pulled forward from the fourth quarter? How should we think about the different consumer business performance in the fourth quarter? Understanding that it's going up from a tougher comp as well?

Yes. Unlike our stores business, where every single day, sales are reported based on the gallons that go out the door, consumers are selling into supply chain of our customers and so whatever their inventory needs are, stocking issues are, can impact a quarter like this, and we've commented on this in years past. There were just a couple of our customers that placed significantly stronger orders on the business in September than we had forecasted for, and their businesses are doing well and maybe we won't see a falloff in that, but our guidance for the fourth quarter would be that the consumer segment will post the same numbers that we've been seeing throughout the year, and we expect them to be negative for the year in the low single-digit range.

Got it. That's helpful. Finally, and it leads me to my next question, from what you've been seeing in your store growth, at least because you get that a little bit sooner, quicker feedback, how is the October looking as far as [experience paid projects] getting finished off? The weather up until recently has been rather warm, some expect the season to extend a little bit. Are you benefiting from that in the month of October from what you can see?

Dmitry, I would point you to the snow at my house yesterday.

Yesterday, so did I.

So I'm not sure I'm buying the extension of this beautiful Indian summer across America. I think we've been pretty consistent over the years in not commenting or blaming weather, either for goodness or difficult times. We are going to have pockets of good and bad weather in every quarter across the country.

I think this will be a very typical fourth quarter for the industry in terms of demand cycle, and certainly, there are those jobs that you pointed out that we're seeing some exterior work still being wrapped up, but those are coming to an end quickly. And this should be a pretty stable mix environment, as it would have been historically.

Got it. Last question on Comex. You are accelerating your fourth-quarter store openings as you've done in the last year or two. But you've been adding over 300 stores from Comex. It sounds like you've got your hands full in getting those stores product lines and customers aligned with the market. How should we think about your store openings 2014 and 2015, before the Comex integration is completed?

A lot more clarity on that in the January call, Dmitry. What I would comment is that we have consistently said for quite some time now that we see 5,000 stores as a reasonable expectation in North America, and we have an infrastructure in place that knows how to get these stores sourced, discovered, built, opened and running. And I don't think you'll see us fall off that 80 to 90 pace at all going forward next year.

Okay. That's helpful. Thank you very much.

Dennis McGill, Zelman & Associates.

First question, just with the revenue trend, in the third quarter, organically we get to about a 9% growth number, and you're guiding to 5% to 7%, in the fourth. So obviously there's a lot of stuff that goes into the timing in your comps. As you plan for fourth quarter, are you thinking on a seasonally-adjusted basis that demand is stable, up, or down relative to the third quarter?

I think that it's stable. I think that we feel very good about the stableness of three segments. The one piece that I think that Chris did mention in our guidance is we do not have the fourth quarter repeating an over 5% sales gain in the consumer group.

Okay. And then for the Comex stores domestically, can you compare and contrast the physical location or stores or sizes of stores relative to a typical Sherwin store? Is the capacity for the stores from the revenue side similar or different?

Very similar, Dennis. It will be a typical 4,000 to 5,000 square foot box, which is right in line with ours. I think every single one of these 300 stores is leased, Sean, if I'm not mistaken, so they all leasehold locations. It would be fairly similar traffic pattern locations, stand-alone facilities and small strip centers.

I would say there's a good number of these that are in locations that we have coveted to be in, and we're actually pleased to get a number of outstanding paint stores in new neighborhoods that we currently didn't have locations in. Nothing about the physical location our box size of these stores will limit our ability to run them with the same kind of average store sales or productivity that we get out of our current format.

Okay. That's helpful. Thank you.

Eric Bosshard, Cleveland Research.

On the margin in the quarter, excluding the Brazilian import duties, it looks like the overall gross margin was 46%, which is the upper end of that range that you historically have talked about, or recently talked about getting to. Curious on how you think about where gross margins go from here. Also, in regards to pricing and mix, and again obviously without Comex, where do you think the gross margin path might go over during the next 6 or 12 months of the Company?

We felt pretty good about the quarter, Eric. We actually were 46.1% with what we computed, but when you look at it, for the full year, we are in that mid 40%, 45%.

Last quarter, we talked about that we think the full-year was going to be right in between that 45% year to date that we were at the end of second quarter and the high-end of 46%. We still feel about this, that we're in that same answer.

A couple things. Number one, LIFO last year was a big nice improvement. We were 43.9% going into that fourth quarter and we had a 44.8%. We are not going to have a 0.9% improvement between year to date and the fourth quarter this year, and it's because of that LIFO credit that we brought back at the fourth quarter, the way RAV came in.

You're right, that Comex will depress our gross margin a little bit, but I think that we still feel good about where our gross margin is. I think that the volatility in raw materials seems to be a little calmer.

I think with the business market that Chris mentioned, a little more confidence in the market, and then volumes being tremendously more stable than they were in 2009 and 2010. I think that our gross margin stays in the range we're in right now, depressed a little bit by the Comex, but improved because of the volume that we're putting through service group.

Okay. Thank you.

Nils Wallin, CLSA.

Just on Comex, bringing the negative margin in that business to positive, and to actually accretive in the US stores, can you parse what needs to happen from a rationalization, from a new product? And then just from normal market growth, what those three buckets, what needs to happen in order to get to your goal?

Yes. I think a good way to think about it is it's no different than Sherwin opening a new store, and the ramp from dilutive impact up to contributing, and eventually in year three or four, running at a comp store profitability level. So what needs to happen here is mostly productivity. We need more volume, more gallons going through those boxes than they've been enjoying.

And Sean's done a nice job of taking you through the cost impact that will dilute it, as we rationalized. We commented on maybe 10% to 15% store count needs to come out. There will be some SG&A adds as we strengthen the store staffing in these facilities.

But it's pretty much the same kind of blocking and tackling that we do each and every day in these districts, to service these customers, that we know how to do and we expect we get these store volumes up to the level where they'll be performing. And I think Sean made the comment accretive by 2015, and by 2016, really accretive. So therein lies the path forward.

Got it. And just because of the timing differences between the Comex US Canada, and Comex Mexico, assuming that the commission has a favorable decision, is there anything that changes besides obviously just the timing, is there anything that changes the pace of integration? Are they dependent at all upon one another?

No. Two entirely separately businesses, run separately by Comex for that matter, so our integration teams are entirely different. We move forward on this US and Canadian piece, but it entirely resides inside our paint stores group, and that team was already chomping at the bit and willing to go.

And then of course the Mexican piece will be embedded in our Latin American coatings group, and we've had a team down there prepared to get engaged when that one comes. So no issues at all bifurcating these transactions from the integration standpoint.

Great. And then just finally, the same-store sales growth, were you taking any share, because it certainly was a dramatic year-over-year improvement.

Yes. I think we have to assume we were. We've seen the releases that some of our public competitors. Bob commented earlier on COG relative to the kind of market environment where we think gallons are growing in that mid single-digit range, and our gallons were double digit. So we're feeling good about the share for the Company right now.

Thanks very much.

John Roberts, UBS.

Did you say how fast you could close the Comex deal, if you get a favorable ruling next week?

We didn't say it, but I think Chris used the word prompt. And it really depends on if we hit next week, that means would like to do it October 1. Sorry, November 1.

October 1 would be great.

Yes.

Secondly, if you get surprised by the lead paint ruling, is the appeal process any different for bench case versus what we've faced in Rhode Island, that was a jury case?

No, John. To our knowledge, it's the same. And it's likely a multi-year process.

Okay. And then just thirdly The above average growth that you're seeing relative to the market, do you think that's just professionally-applied paint versus DIY? I would think there is more recovery coming in the professional painter market than DIY, just because DIY doesn't cycle as much.

Yes. I think you're right on that. We certainly are benefiting from the rebound in the professional painting contractor. That would be a portion of the share gain. I do think that some of these gallons are coming from our competitors, as well.

Okay. Thank you.

Don Carson, Susquehanna International Group.

This is actually [Chris Nu] stepping in for Don. Most of my questions have been answered, but I guess you have given some color on the US architectural volume growth year to date. And I was wondering if you'd just give us a little more color on why you've been outpacing it in the year, and why you feel confident that you will be able to continue outpacing the market.

Yes, Chris. I think it is a combination of factors that has led to our paint stores group outpacing market growth. Number one, we were among -- we were in very rare company opening stores during this downturn, and as a result we are emerging into the recovery with a much higher store count, and with mature stores in markets where we didn't have them prior to the downturn.

Secondly, as was indicated earlier by John, just in the previous question, the painting contractor market appears to be growing faster than the DIY market, and that is where the majority of our exposure is in paint stores group. We're just a lot of new product lines during this downturn that are getting traction.

So there's a host -- and we've made significant investments in SG&A in store service levels, which certainly helps attract new customers, and more business from current customers in the recovery. It's a broad combination of factors.

Okay. Thank you very much. That's all I had.

(Operator Instructions)

Richard O'Reilly, Revere Associates.

I was also going to ask about weather, because in New Jersey it's been beautiful here, but I think you've already answered that.

Yes. It's going to snow this weekend, Richard.

But on the same-store, it was up 10.9%, a year ago it was up 8.9%, so that's an average of about 10%. Do you think that's a real number or is it that the year to date, the 7.4% a better number that we should be looking at?

I think the 7.4% is the better number. There is nine months of activity there. If the market is growing at a mid single-digit range, and we're running at 7.5% on a revenue and volumes a little bit higher, that's a pretty strong performance.

I think that's more typical. We have had periods of time in rebounding markets, where we posted multiple quarters in a row of double-digit comp store sales gains, but we've never been one to give that kind of robust guidance. So I think the 7.4% feels is about right.

Okay. Great. That's it.

At this time we have come to the end of our question-and-answer session for today. I will now turn the floor back over to Bob Wells for closing comments.

Thanks, Bob. We appreciate all of you joining us on the call this morning. As usual, I will be available for the balance of the day and Monday for any follow-up questions you might have. Thanks again for your participation, and thank you for your interest in Sherwin-Williams.

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