宣偉 (SHW) 2013 Q4 法說會逐字稿

Good morning. Thank you for joining the Sherwin Williams company's review of the fourth quarter and full year 2013 results and expectations for 2014. With us on today's call are Chris Connor, Chairman and CEO; Shawn Hennessy, CFO ; Thomas [Isshin], Vice President and Corporate Controller; and Bob Wells, Senior Vice President Corporate Communications.

This conference call is being webcast simultaneously in listen only mode by VCall via the Internet at, www.sherwin.com. An archived replay of this webcast will be available at sherwin.com, beginning approximately two hours of this conference call ends, and will be available until Wednesday, February 19, 2014 at 5 PM Eastern time.

This conference call will include certain forward-looking statements, as defined under the US Federal Securities laws with respect to sales, earnings, and other matters. Any forward-looking statements speak only as of the date on which such statement is made, and the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

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

I will now turn the call over to Bob Wells.

Thanks Jesse. In order to allow more time for questions, we have provided balance sheet items and other statistical data on our website at sherwin.com under Investor Relations 2013 Year End Press Release.

Summarizing overall Company performance for the fourth quarter and full-year 2013, consolidated sales for the fourth quarter increased 10.6% to $2.46 billion, due, primarily, to higher paint sales volume to our Paint Storage group and Acquisitions. For the full year, sales increased 6.8% to $10.19 billion.

Sales from Acquisitions increased consolidated net sales of approximately 4.6% in the quarter, and 1.8% in the full year. Currency translation decreased consolidated net sales 1.1% in the quarter, and 8/10% for the full year.

Consolidated gross margin in the fourth quarter increased to 45.8% of sales from 44.8% of sales in the fourth quarter of 2012. The increase in gross margin in the quarter was primarily due to improved fixed-cost absorption from increased sales volumes, partially offset by lower gross margin sales by the US and Canadian stores acquired from Comex.

For the year, gross margins increased to 45.3% of sales from 44.1% last year. The increase in gross margin for the year was primarily due to increased production volumes, partially offset by import duty assessments related to our Brazilian operations, and dilution from Acquisitions.

Selling, general and administrative expense, in dollars, increased $70.2 million in the fourth quarter, compared to fourth quarter last year. But decreased as a percent of sales, to 39.2% from 40.1% in the same quarter last year.

For the full year 2013, SG&A expense increased $208 million to $3.47 billion, but decreased as a percent of sales, to 34% from 34.2% in 2012. The incremental SG&A from Acquisitions , new stores and customer service investments, accounted for the majority of SG&A increase in the year.

Interest expense for the quarter increased $5.1 million to $16.9 million . For the year, interest expense was $62.7 million compared to $42.8 million in 2012 .

Our effective income tax rate for the fourth quarter 2013, decreased to 22.2% from 27.8% in the fourth quarter of 2012 . For the year, our effective tax rate was 30.7% compared to 30.4% in 2012 -- our effective tax rate in the fourth quarter and full year was favorably impacted by the integration of Comex stores. The effective tax rate for the quarter and year without Comex, would have been 32.3% and 32.1%, respectively.

Consolidated net income for the quarter increased $48.1 million to $116.1 million. For the year, net income increased $121.5 million to $752.6 million.

Net income, as a percent of sales, in the quarter, increased to 4.7% from 3.1% last year; and for the year, net incomes percent of sales increased to 7.4% from 6.6% in 2012. Diluted net income for common share for the fourth quarter 2013, increased to $1.14 per share, from $0.65 per share in the fourth quarter last year. For the year, diluted net income for common share increased 20.6% to $7.26 per share, from $6.02 per share in 2012.

Now I would like to review our performance by segment. Sales for our Paint Storage Group in the fourth quarter, increased 17.6% to $1.46 billion. For the year, net sales increased 10.9% to $6 billion.

Sales increases in the quarter and year, resulted from higher paint sales volume across all customer segments and Acquisitions. Acquisitions increased net sales for the segment 7.5% in the quarter and 2.2% for the full year.

Comparable store sales increased 9.2% in the quarter and 7.8% in the year. Regionally, in the fourth quarter, our Southeast division led all divisions, followed by Midwest divisions, Southwest division, and Eastern divisions.

Fourth quarter, segment profit for Paint Storage Group decreased to $168.5 million, from $181.5 million in the fourth quarter last year, due primarily to a loss from Acquisitions, partially offset by higher year-over-year paint sales volumes. Acquisitions reduced segment profit $40.4 million in the quarter .

For full year, Paint Storage Group profit increased 14.9% to $990.5 million from $861.8 million in 2012. The increase in segment profit for the quarter and year, resulted from higher paint sales volumes, that were partially offset by higher SG&A expense, and a loss from Acquisitions. Acquisitions reduced full-year segment profit $43.1 million.

Segment profit margin for the fourth quarter decreased to 11.5%, from 14.6% last year. Profit margin for the full year 2013, increased to 16.5%, from 15.9% in 2012 .

Turning now to our Consumer Group, fourth quarter external net sales increased 6.6% to $272.6 million, due primarily to higher volume sales to most of the groups retail customers and to Acquisitions. For the year Consumer Group sales increased 1.5% to $1.34 billion, as a result of Acquisitions, which more than offset the previously disclosed reduction in business for the large retail customer. Acquisitions increased net sales by 1.3% in the quarter by 2.4% in the year.

Segment profit for the fourth quarter, increased to $36 million from $23.3 million in the fourth quarter of 2012. For the year, segment profit increased 11.9% to $242.1 million, from $216.4 million in 2012.

In both the quarter and full year, segment profits increased, due primarily to higher sales volume and improved operating efficiencies, partially offset by dilution from Acquisitions. Acquisitions reduced segment profit $2.3 million in the fourth quarter, and a $0.5 million in the full year.

Consumer Group segment profit, as a percent of net sales in the fourth quarter, increased to 13.2% from 9.1% last year. For the year, segment profit margin increased to 18%, from 16.4% in 2012 .

For our Global Finishes Group, fourth quarter net sales increased 2% to $496.9 million, and full-year sales increased 2.2% to $2 billion, due primarily to selling price increases and acquisitions, partially offset by unfavorable currency translation. Acquisitions increased the group sales, in US dollars, by 1.1% in the quarter and 1.2% in the year . Currency translation decreased sales, in US dollars, by 0.2% in the quarter, and decreased sales by 0.4% in the year .

Global Finishes Group segment profit in the fourth quarter increased to $37.7 million, from $34.1 million last year. For the year, segment profit increased to $170.6 million from $147.2 million last year. In the third quarter and the year, segment profit improvement resulted from increasing operating efficiencies and higher year-over-year selling prices.

Unfavorable currency translation and acquisitions reduced segment profit $400,000 in the quarter and $500,000 in the year. As a percent of net sales, Global Finishes Group operating profit was 7.6% in the fourth quarter, compared to 7% last year, and 8.5% for the year compared to 7.5% last year.

For our Latin America Coatings Group, net sales decreased 4% to $222.2 million in the fourth quarter, and decreased of 4/10% to $832.5 million for the full year, due primarily to unfavorable currency translation, partially offset by higher year-over-year selling prices. Currency translation rate changes decreased sales in US dollars, by 9.4% in the quarter and 7.1% in the year.

Stated in US dollars, Latin America Coatings Group segment profit in the quarter, decreased to $17.9 million, from $30.1 million last year, due primarily to lower volume sales and unfavorable currency translation. For the year, segment profit decreased to $38.6 million, from $81.2 million in 2012.

Brazil tax assessments in the second and third quarters, totaling $31.6 million, accounted for most of the reduction in segment profits in the year . Unfavorable currency also contributed to full-year profit shortfall.

Currently translation decreased segment profit $3.7 million in the quarter and decreased profit $5.5 million in the year. As a percent of net sales, segment profit was 8.1% in the fourth quarter, compared to 13% last year, and 4.6% for the year, compared to 9.7% in 2012 .

I'll conclude this review with a brief update on the status of our lead pigment litigation. In the Santa Clara County case involving public nuisance claims, brought by 10 California cities and counties against five defendant companies, Judge Kleinberg filed his final statement of decision on January 7, 2014. His decision orders three of the defendants: Sherwin Williams, NL Industries, and ConAgra, to pay $1.15 billion into a fund, to be administered by the Childhood Lead Prevention Program Branch, a state agency that already receives funding from fees paid by major oil producers and paint companies.

The 10 plaintiff jurisdictions must apply for grants from this fund to use on lead education, testing or abatement programs. Each jurisdiction has a maximum amount of money that they can use from this fund based on a number of pre-1980 homes in the jurisdiction.

The ruling only applies to interior paint, but does include encapsulation of some outside soil around homes . The plan is a voluntary for homeowners, and will be administered on a worst-go-first aces. Any money left in the fund after four years reverts to the defendants.

Final judgment was entered on January 27. From this final judgment we will file push trial motions, and our notice of appeal. We expect to file our appeal to the six District Court of Appeals within the next 60 days, and believe the process is likely to take two to three years.

There was also a recent development in the bank's case, which is a lead pigment case, pending in Mississippi, involving claims by five individuals for lead poisoning, allegedly to have occurred while they were children, at a Head Start facility. The plaintiffs in this case alleged that Sherwin Williams supplied paint containing lead to the facility for use on playground equipment .

The trial court originally granted Sherwin Williams summary judgment, based on the lack of product identification . On January 16 of this year, the Mississippi Supreme Court reversed the lower court's dismissal, sending the case back to trial court for further proceedings. Additional discovery and subsequent motions for summary judgment are expected, and no timetable has been established for further proceedings.

That concludes my review of our results for the fourth quarter and full year 2013. So, I'll turn the call over to Chris Connor who will make some general comments, and highlight our expectations for 2014. Chris?

Thank you Bob. Good morning everybody, thank you for joining us today.

The financial results in the press release we issued this morning, as well as the numbers that Bob just walked you through, adhere to generally accepted accounting principles for financial reporting. That is the standard we prefer to follow, because it is the most consistent and appropriate way to present our results.

Although we did not use non-GAAP, or Performer, or adjusted financial metrics in our earnings releases, in some cases you can get a clearer picture of how the core business performed by backing out the extraordinary items. The past two years are good examples.

If you strip away the impact from Acquisitions, tax assessments, Department of Labor settlements, and various other one-time items we incurred over the past two years-- we are comparing apples to apples-- our core consolidated sales increased 5% from 2013. And our core earnings per share increased more than 17%, from $6.49 per share to $7.60.

This approach also helps to highlight the earnings leverage in our operating segments. For example, backing out the acquisitions from our Paint Storage Group, organic revenue growth for the year was just under 9% and flow through on operating profit was more than 36%.

On a GAAP basis, both Paint Stores Group, and Consumer Group established new high water marks for full-year operating margins. Paint Stores operating margin expanded 60 basis points to 16.5% and Consumer segment operating margin increased to 18% from 16.4% last year.

Global Finishes Group operating margin also improved 100 basis points year-over-year, while the economic challenges and currency headwinds Bob discussed, were too much for our Latin American Coatings segments to overcome. Although we anticipate further dilution from acquisition and integration this year, we also expect continued strong earning leverage from organic revenue growth .

We achieved two significant revenue milestones in 2013. Consolidated net sales for the Company eclipsed $10 billion, and our Paint Stores Group surpassed $6 billion in sales .

Based on the midpoint of our sales guidance range for 2014, we will add more than $1 billion in consolidated revenue this year. The majority of which will come from organic growth .

For the first time in our history, net operating cash exceeded $1 billion, finishing the year at $1.1 billion. This is a 10.6% of sales.

A portion of this increase came from our continued progress by reducing working capital requirements. Our working capital ratio was 10.5% of sales at year end, compared to 10.8% of sales at the end of 2012 . Once again, if you back out these back-to-back acquisitions, year-end working capital ratio would have been 10.0%, and that would have been an all time low for the Company.

In 2013, our Paint Stores Group opened 82 net new stores, and acquired an additional 306 locations under the Frazee, Parker, General, Kwal, and Color Wheel brands. A total of 388 new locations.

The integration of the stores and facilities into our existing operations is proceeding on schedule. We are delighted to welcome these outstanding men and women to our Company and at these well respected brands and products to our portfolio.

At year end, our store count in the US, Canada, and the Caribbean was 3,908 locations. In 2014, we intend to ramp up our new store openings to a range of 80 to 90 additional locations.

During the past year we hired 1,400 new college graduates into our respected management training program, bolstered our store staffing, improved our charge rate coverage, and fill our store management pipeline. Although these investments tend to drive SG&A higher in the back half of the year, these stores and service employees pay for themselves over a very short period of time.

At year end, our total debt was $1.72 billion and cash on hand was $745 million. We continue to manage our balance sheet in anticipation of closing our Mexican portion of the Comex transaction.

During the year we return more than 90% of the net operating cash we generated, and [$974] million, to be exact, to shareholders, to share repurchases, and dividend payments. In the fourth quarter we acquired 1.5 million shares for the Company stock for treasury, bringing our full year total to 4.3 million shares, at an average cost of $178.90 per share, and a total investment of $769 million.

At year end, we had remaining authorizations to acquire another 12.15 million shares. We paid $205 million in cash to shareholders through quarterly dividends .

2013 marked our 36 consecutive year of increased dividends per share, a string we intend to continue. This year, at our upcoming February meeting of the Board of Directors, we will recommend approval of the pay out rate for 2014, consistent with our policy of 30% of the prior-year earnings per share, resulting in an annual dividend of approximately $2.20 per share, an increase of $0.10 -- 10% over 2013.

We begin each year with some level of uncertainty, and 2014 is no exception. Data on the US housing market is in mix in recent months, but we remain bullish based on current buying trends, and feedback from many of our customers.

Likewise, we are covering the domestic nonresidential construction market has been slow, but we have since an improvement on the sales for this segment nonetheless. We expect this positive momentum in this market segment to continue as well, in 2014.

Outside the US, it appears likely the sluggish market conditions and currency devaluations in many Latin American countries will remain a challenge. [Lastly,] improving economic growth in Europe may provide some offset.

Our raw material basket has many moving parts as well, but in total, we believe, there is some risk of modest inflation. Hopefully, the key raw material feedstock has increased in successive months, $0.73 per pound today from the low $0.60 per pound range a year ago. This will keep upward pressure on the price of monomers and latex in the first half 2014.

Increases in the price for high density polyethylene will effect the cost of plastic pails. High grade chloride, titanium dioxide pricing help steady the back half of 2013, but higher order volumes and lower inventories are driving factory utilization rates up, which could result in some pricing traction by mid-year. Based on all of these factors, we would expect average year-over-year raw material cost inflation for the paint and coatings industry to be in the low, single-digit range, in 2014.

With these factors in mind, our outlook for the first quarter of 2014 is for consolidated net sales to increase 7% to 12% compared to last year's first quarter. With sales at that level, we estimate diluted net income per common share in the first quarter will be the range of $0.95 to $1.15 per share, compared to $1.11 per share earned the first quarter of 2013.

Embedded in this guidance, [their] expectation that Comex stores in the US and Canada will at approximately $97 million to $107 million in net sales, and reduce diluted net income per common share $0.15 to $0.25 per share in the quarter. For the full year 2014, we expect net payable increase by 8% to 13% when compared to full year 2013. For annual sales at that level, we estimate diluted net income per common share for 2014 will be in the range of $8.12 to $8.32 per share, compared to $7.26 in 2013.

This guidance anticipates that Comex stores in USA and Canada will increase net sales by a low, single-digit percentage in the year, and reduce earnings per share in the range of $0.45 to $0.55 per share for the full year of 2014. Again, we would like to thank all of you for joining us this morning and we would be happy to take your questions.

( Operator Instructions )

Bob Koort, Goldman Sachs.

Chris, you mentioned upper single-digit, low double-digit revenue base, and also some raw material inflation. Can you give us a sense of what pricing might do in 2014?

Yes we can. In fact, we have announced some pricing for our stores, as to what we typically comment on; but, we want to give a little bit different scale for that this year. Sean, maybe can take the guys through that.

This is Sean Hennessy.

As you mentioned, in the past we have been able to tell you when and how much selling price increases we have taken to market. Due to the integration of the five brands acquired through the Comex, there are inconsistencies as to when those things will occur that, really, do not allow us to answer the question on pricing the same way we have in the past.

Our margins will be affected by the selling price increase that Chris just talked about, and stores did go out in early January with some pricing; but the annualization of Comex, the foreign currency fluctuation, raw material changes that are going on -- what we thought of in the past, we have only given guidance on the annual basis looking at the sales and to the EPS.

To give you some clarity on what is going to happen when pricing and how all of this affects us, is to give you a gross margin range. Gross margins will increase this year, but we still believe we are in that 43% to 46% range; and this should tell you that we believe our total gross margin will be in the 45.5% to 46% range, versus the 45.3% that we realized in the full year 2013.

Duffy Fischer, Barclays.

I just wanted to clarify the comment that Chris made first. 36% incremental margins in Paint Stores excluding the acquisitions -- did I hear that right?

That is correct.

If you look at the $40.4 million of loss from the acquisition in that segment, can you break that down a little bit? How much was underlying business, how much was inventory one-time step up or costs from the integration? I guess I'm trying to get a sense -- what was the run rate of the business? I think we talked about close to breakeven as it was coming into the portfolio; but trying to understand the health of the businesses underlying that number.

There are a couple of things there -- once again, this is Sean Hennessy.

When you take a look at the sales curve that they have, they have a sales curve much like the Paint Stores Group for the second and third quarter, or the highest sales quarter. When you talk about -- annual might be flat, but, really, when the fourth quarter is our toughest quarter, because of the sales curve. When you look at that $40 million, approximately half of that was operating income -- normal operating income. The other half was, really, one-time causes of inventory step up, other causes of expense that you mentioned.

That was about half and half, almost; half and half, it is, exactly. And just to remind you, when you look at that $40 million hit, we also mentioned that Comex was $0.13 dilutive for the year; and [if you stick with that] $40 million segment was in the operating profit, so net effect from Comex was positively affected by tax savings.

Those tax savings were due to the integration of contingent liabilities. That integration was a positive $0.15 per share, so when you -- it really dealt a lot with the defined benefit plan. Our tax rate was 30.7% for the year that we reported. It would have been 32.1%, really, without that Comex and without that balance sheet integration. Our fourth quarter tax rate was 22.2%; it would have been 32.3% without the Comex. That $40 million that converts down to the $0.13.

When you look at Chris's comments, that $45 million to $50 million, midpoint there at $50 million, there it is, $0.63. I know, last quarter we talked about the $0.60 to $0.65 dilution. We did give you $0.40 in the fourth quarter, and we just experienced $0.11, but that $0.15 tax savings -- actually, we were not expecting to get that in the fourth quarter. We actually were expecting to get that in the calendar year 2014, but we were able to accelerate that with the combination of defined benefit plan. So it worked out pretty well.

Ghansham Panjabi, Robert W Baird.

Sean, maybe you could just expand on the contingent liability tax savings. Is there any flow-through whatsoever into 2014, or was that all netted out in 4Q?

Yes, we were able to get 100% of it in the fourth quarter; so, that was nice.

Just on Latin America, can you give us a more granular picture as to the major countries there? The weakness broad base, any impact on inflation from the currency valuations in certain countries there?

Sure, Ghansham. As we have commented in the past, Brazil is the second largest country of revenue for the Corporation; Mexico would be third; and those happen to be easy to economies that were probably hit the most. When we look at local currency performance for the Business, our sales were up modestly. We held serve, I guess, is a good way to take a look at that, as we went through the year. We are not expecting to see a lot of turnaround in Brazil, going forward, and I think we still have these currency devaluations.

Latin America has been the cycle for us. We have had a solid 10-year run down there where we have relatively flat currency and were able to make some good inroads, and going through the other side of that right now. Our expectations as we gave guidance was that it would not be a real help to the Company next year.

Just to clarify that -- on Brazil specifically, does this paradigm right now just reflect your organic growth initiatives down there?

Not so much. Those are long-term plans that we have in place, so as you know, we are continuing to open our own dedicated Company facilities, primarily in the northeastern part of the country. We continue to support our dealer network, and convert to more dedicated viewer formats. We haven't pulled back; we rarely do in a downturn -- we keep pushing forward.

Jeff Zekauskas, JPMorgan.

You talked about or you can deduce from the press release, that the revenues in Comex in the quarter were about $100 million. What order of magnitude -- what are they in a seasonally strong quarter?

I think when we talked about this acquisition, we had told you that at one point in time, the entirety of the acquisition was being discussed as about a $1.5 million transaction for the Company. We said a third of that was approximately in the United States, so $500,000 for ease of math. $100 million fourth quarter, and back to Sean's comment about the second and third quarters' [drive it]; just gave guidance at the first quarter for Comex revenue would be, again, about $100 million, at the midpoint of that. So that all seems to fit and [tick and] tie together, Jeff.

You're looking at about 20% in the fourth and the first, 30% in the second and third.

For my follow up -- pretty much every year, propylene goes up in the first quarter of the year and then comes back down, because refineries turn around and so do ethylene crackers. Do you normally have some rise in your raw materials, in your propylene-based raw materials, in the first quarter, and then they come off in the course of the year? Or now that the acrylics industry structure is a little bit tighter, do they tend to stay a little bit higher? Can you discuss the progression of the normal propylene-based raw material?

Yes, Jeff, this is Bob.

We have said in the past that typically, it takes between 90 and 120 days for an increase in propylene to flow through the acrylic chain, and that is still the case. I guess that would be saying, if propylene does follow its normal course and comes down after first quarter, it is likely we are not going to see a lot of upward pressure in the acrylics and the solvents. But if it were to stay in the low- to mid- $0.70 per pound range, we would likely see some modest upward pressure, primarily in acrylics, in the middle part of the year.

Aram Rubinson, Nomura Securities.

A couple of things, I'm hoping that you can clarify on the US, in terms of the bid process to get a proxy for your backlog, how things are looking there? And then, I had a quick follow up.

I think, when you look at the activity, the bidding activity, we feel pretty good about it. I think, occasionally you will see some weather affecting daily sales, but when you look at the demand, we still feel pretty good about what is happening in America, the United States.

In terms of size of job, as well, any sense of whether that is coming from non-res or res? Can you tell?

I think it is been pretty consistent, Aram, about the segments we have commented on. Residential repaint has been terrific; new residential construction, we have commented on that as well. Property management is doing well, given the rebound in the multifamily housing. So, all of those segments are doing well.

We are not the kind of company that has a backlog, or we see forward orders. Any contractors walk in that morning, we put paint in their truck and they walk out and get the job done. To Sean's point, the flow, the rhythm, and the feel of the business is very consistent with the guidance we have given.

A few quick housekeeping things. Can you give us a sense as to what share count you have got assumed in the EPS guidance for 2014? And also, Bob or Sean, if you know, oftentimes at the end of the year you do a physical inventory adjustment and call that out on the K. I did not know if that figure was available for us.

Thanks.

Yes, in the past, when you take a look at guidance and you -- we do have share buyback in our guidance. We're not really going to share that number, but as we said earlier, we don't usually go down the P&L. But we do have some back [stash for our use as] cash.

On the other number, for that adjustment, we do not have it right now in the physical inventory. I know it's going to be in the K; I just do not have it here in the room with me.

One more note on share count. We ended the year with actual shares outstanding of 100,129,380. That is the starting point.

PJ Juvekar, Citigroup.

Quick question on the commercial market. Can you talk about what kind of contractor project backlog are you seeing for this spring? And how does that compare to last year?

I would not describe -- this is Bob again.

I would not describe the commercial rent market right now at this point as being significantly backlogged. We are seeing a modest pickup in starts in the back half of 2013, which should translate to more paint projects like the back half of 2014. That would be in the mid to high single-digit range; so, the rebound in commercial construction has been slow to start. We are seeing a little bit of momentum building. I think the forecast for starts in 2014 are healthier than 2013 -- high single-digits; some people are even going out on a limb with low teen numbers.

I think the good news in this is, we are seeing more activity in the repaint market, which implies higher occupancy rates in office, retail, and lodging; and that should ultimately translate to higher square footage.

As a reminder, commercial construction volume is still in the trough, so we have got a long ways to come back.

On TiO2, I think, Chris, you mentioned that [Polish] inventory have come down. As you get ready for the spring season, how do your inventories of TiO2 look like?

And also you have been cautious on buying Chinese TiO2 in the past. Where do you stand on that?

In terms of our TiO2 inventories, they remain extremely steady, and in line with our kind of production processes throughout the course of the year. We take the vast majority of this product in the United States in a slurry form. It is not the kind of thing that we can load up on excess inventory and sit on it.

It is pretty much a steady-state consistent inventory level, based on the demand in production we put on our factories. We have been increasing our purchases of some offshore titanium, hopefully in the sulfite [grade]. We see more of that emerging in our Latin American operations. I think we have commented in the past, at some point in time, that, perhaps, 5% of our needs could be moved to that type, we are seeing some progress towards that.

Charles Dan, Morgan Stanley.

I am trying to understand if you guys are including higher gross margins in your guidance, it seems like to get to the guidance, you have to assume some pretty sharp increases in SG&A or other costs in excess of what you have outlined for Comex. Is there some reason why that is happening? Or any color that could help us understand the SG&A ramp would be helpful.

I think we are continually, we have continued to invest in the business, invest in new stores. I think we are going to open more stores in 2014 than in 2013.

The people and the reps and the infratructure there -- I think we are adding to that, and it will increase the SG&A. And I think we continue to, on the admin side, continue to invest in IT projects that have allowed us to get our working capital down to an all-time low of net 10%, and allowed the cash to go back over 10% of sales.

And those things are good investments that we are spending in SG&A that are creating cash. We are investing in this business; but I think the number one reason we are going to have SG&A growth next year is going to be the Comex acquisition. And then secondly is the continuing of building out of the store chain in our Stores group.

Is there a significant amount of expenses related to Comex Mexico and your efforts there? And maybe you could highlight that as well.

I think we have been pretty prudent there. We do have ongoing expenses. I would not call them material on our SG&A base.

As a follow up, or a housekeeping -- if you guys could give the change in gross profit by segment?

For the quarter?

That would be great.

Consolidated was $128.7 million, as you know. Paint Stores Group, was $80.9 million; Consumer Group, $27.4 million, Global Finishes, $8.6 million; and Latin America, $6.4 million. I'll just give you the year to date, so you don't have to do the addition.

The full year 2013: consolidated, $410.3 million; Stores Group, $330.9 million; Consumer Group $47.4 million; Global Finishes, $43.6 million; and Latin America was actually negative $28.8 million.

Dennis McGill, Zelman Associates.

Sean, I am asking a question again.

In the past, you have always invested in the business, and even been proactive about investing ahead of revenue. And I think that was the case in 2013 as well. But, you have also been able to leverage SG&A versus revenue. From a relative standpoint, is your expectation that SG&A is going up? Even, maybe, talking about it with and without Comex?

Yes, I think when we look at the 2013 -- back to your point, looking at 2012, our SG&A was $34.2 million. Without Comex this year, we would have shown improvement on that; and next year, we are still going to show improvement on the core SG&A. I am trying to look at a metric that I could give you, but I think the core SG&A will improve.

With Comex it would be up? [In the] revenue?

When you take a look at it -- yes, it will be close to up, be in that ballpark for the full year.

Chris, I guess there is probably nothing specific you can share on Comex Mexico, but any update on timing, at least as news flow?

I would be happy to comment on Comex Mexico. We continue to work on that.

Sean, maybe you can take the team through that?

Like I said, we still believe this is going to be very good acquisition for the Company. We will continue to work on a process that will allow us to close this acquisition.

This process required us signing nondisclosure agreements with outside parties, which limits what we can say. But what we will say is, we have an exclusive contract with the Achar family through March 31, 2014. We have crafted our final remedy and are prepared to present it to the proper authorities. We have not received the firm date of that presentation, but fully expect it to occur in February, with a response from the commission sometime after that, but close to the March 31 date.

Is it your expectation that the decision would then be final, one way or the other?

That is why we use the word final remedy. I think this is our final bite at the apple.

Kevin McCarthy, Bank of America Merrill Lynch.

Sean, just a clarification on the tax rate, given Comex US and Canadian distortions. What is the tax rate that you have embedded in your earnings guidance for 2014? Or range of tax rates?

Again, we try not to go down the whole thing because -- we have one range. We have multiple scenarios to get into our range. If you take a look at year to date without the Comex, it would have been in the 32%, 33% million range. We are all constantly talking about that low 33%s, and I think if you go back the last 5 years, I think, it has been in that low 33% type of range.

The second question, for Chris, if I may. I heard your comments regarding the California litigation, or as Bob's comments there on the appeals associated with that. How should we be thinking about funding of the $1.15 billion, in terms of how it could possibly be split among the defendants, and timing.

And a separate question -- do you have any other avenues of recourse beyond the appeals process? Factoring property owners, for example?

Kevin, this is Bob.

On the first part of the question, the decision by the judge, the remedy is joint and several. It is a joint and several liability. It means that all three defendants are essentially equally responsible for the entire remedy. He has given no indication as how he intends to apportion the remedy across the three defendants.

It is also our position that it is a moot issue at this stage in the game because we do not believe we will have to pay any money prior to the appeal process. This is a mandatory injunction, which we do not believe should require any appeal bond or anything of that nature.

As far as future actions, with respect to factoring homeowners or anything like that, we are not prepared to go into that at this point.

Nils Wallin, CLSA.

It looks like incremental margins in your Paint Stores Group declined pretty sharply on a sequential basis, and year over year, when you remove Comex. Is there any seasonality in this, or is there something unique? I'm just trying to get a bit more color on what drove the decline in incremental margins.

I don't know what number you used for the Comex margin, but we are even with that. The fourth quarter is always interesting because of LIFO, the physical inventory adjustment that we spoke about before. A couple of years ago, we were talking about this. In 2009, the gross margin was actually 48.5% in the quarter, because of so many things that occurred. There are different things that go on between one fourth quarter to another. Fourth quarter is the toughest to look at, I think, to try to read -- to try to project anything in the future.

Just as a follow up, I think at one time the estimate, Sherwin's estimate, at least, for total gallons in the US, was somewhere in line of 630 million to 640 million in 2012. Do you have an estimate, or do you have an update we think it may have been in 2013?

Nils, this is Bob.

We think the market in 2013 probably grew in the 4%, 5%, maybe 5 1/2% range. And we base that just by looking at various public statements and public releases across the population of publicly traded companies that do significant architectural business in the US. That feels about right to us.

John Roberts, UBS.

Could you give us a time frame for getting the US and Canada Comex stores to the average Sherwin Williams margins? And given the potential here that you might have to divest the wholly-owned Mexican Sherwin Williams operations -- I don't know whether the nondisclosure will allow you to at least range that, or size that for us, either above, or at, below the average Paint Store margin.

Just so you know, for the Mexico stores that you refer to, the operations are in the LACG segment, they are not a Store segment. Just want to make sure that is clear.

On the first question, what we have said is, again, that $0.60 to $0.65 -- what we have said, is in 2015, in the annual 2015, we think the stores, the Comex stores, will run at 70%, 80% of where Paint Stores Group is at. After that it will start to continue to improve from there.

On the Comex -- on the Mexican assets -- again, we are under secrecy with the nondisclosure. We really do not want to express what the remedy may or may not be; and then also, we are not going to give metrics to any possible remedy. I think what a better course for us is, that if we get approval, we will disclose all of those type of things to you, and if we don't get approval, we probably won't -- that is for sure -- the remedy will never be public.

John McNulty, Credit Suisse.

Two quick points or questions -- on the $0.45 to $0.55, that shift you expect in 2014 from Comex -- in that, could you give us some color as to how much of that is going to be one-time or structurally working the 50/50 [plan] versus the normal run rate for that business?

I think 60% will be one-time hits, and it will be in that range.

So that business has been running at a loss, or in your mind, for 2014 it 's going to run at a loss the whole year?

Right. Because what happens is -- let's say you are living in the short-term with the additional cost of possibly some plants and distribution centers. Those we're considering part, until we close them, in taking the hits, we consider that part of the ongoing [op]. And that is when you start saying, which bucket do you put it in.

If you close the plant in September, at the end of September, the first nine months go into your first bucket of the operating margin, and then the hit to closing plants goes into the extraordinary. That answer would tell you that, if we run that plant for nine months, that is in the normal, not in the extraordinary.

One follow up question.

If we back out Comex in terms of what it did in the fourth quarter, and also how it is going to impact in 2014, it looks like you're guiding to 5% to 10% top line growth; which, normally, based on what Chris had talked about earlier, in terms of leverage, tax, what have you, to get you $1.25 to almost $2.25 of incremental EPS.

But your guidance really doesn't imply that when you look at your core non-Comex-related business. It looks like it is at the very low end or even sub that. What is driving that level of conservatism in your core platforms?

I will tell you this. I would just say, if you take a look at the core, I don't think that a 5% gain has ever given us $2.25 EPS growth in a year. When you look at the number that Chris gave you, the $7.60 versus the $6.49, that is $1.11. When you sit there and look at that $7.60 -- and I am just going to add back the midpoint-- I always use the midpoints -- $0.08, $0.22, and $0.50 of Comex, that takes you up to $8.72 from $7.60. That's $1.12 when you take a look at that. I think that is pretty comparable.

I do think that in general, I think things are going pretty well. I think $1.11 on top of $1.12 last year -- $1.12 versus $1.11, that's pretty comparable. When you look at that sales gain, just like this year, we think currency is still going to be a headwind, and some of these countries are still going to have some problems.

Ivan Marcuse, KeyBanc Capital Markets.

Most of my questions are answered; here's a quick one.

In the Global Group, you continue to be fairly -- consolidation continues to move on to [very opportunity] for you to consolidate that market further. Then if you look at your European businesses I know that they are small, relative, maybe (inaudible) stabilization to improvement going forward?

Yes, Ivan.

We have talked for a while with the Street about our strategy here; we like these businesses; we would look for opportunities to invest appropriately when the opportunities do present themselves, we don't comment on any of that, prospectively.

Europe had a good year. For our Global Finishes business, we are seeing some nice progress over there from the teams that we have put on the ground. We expect Europe to continue to add profitable sales going forward.

On your first question, our operating profit in 2012 with 7.5%, this year was 8.5%. So a nice 1% gain on the ROS. As we have talked in the past, we still think we can drive that to 12%. We think that there will be an improvement in the future.

Dmitry Silversteyn, Longbow Research.

A couple of questions.

First of all, could you follow up on the last question? Can you talk a little bit about what you're seeing in your Global Group businesses in terms of auto collision and industrial markets. You mentioned that Europe was strong for your [Woods] Coatings business but you talk about the other portions of Global?

I think all three of these businesses ran pretty much at the same level. You can see the sales results here were below the Company's consolidated numbers. A relatively soft sales year, we have commented about the soft economic environment, some of the end markets that we sell products into, a little soft as well. I think that when we take the market performance itself into consideration, we are not concerned that we're losing share here, but not exactly lighting it up either.

Going forward, we are pretty excited about the winter we are having across the United States. Automotive runs on collision repair business, so should be a little bit of a tailwind for that team going into this year. I think we have had some nice wins on various accounts around the world, in our Product Finishes businesses, we would expect them to have a better year going forward as well.

Beyond that, Dmitry, not allowed to comment on.

If you look at the Consumer Group, you really had a nice turnaround as the year progressed. It started the year weakly, and then you have losses of business, and then it seemed to have all turned around by the end of the year. Can you talk a bit about what you guys have done to get the ship moving in the right direction? And also what your outlook for the Consumer is for 2014, both in terms of not [using] the topline, directionally and for (inaudible) margin expectations?

I will take the business and the sales, and let Sean comment on margin expectation for the Consumer Group.

You are right, the fourth quarter was terrific, one of the best quarters we have seen in some time. It was pretty broad-based across the entire customer segments, the product lines. As you know, in our consumer business, we have architectural paint, but we also have aerosols, brushes and rollers, caulks and sealants, stains, water protection products, and -- pretty much across the board. All of the businesses were going in a good direction.

I don't think that the fourth quarter is the precursor of things to come. We have been consistent with our guidance that this is a low single-digit growing business for the Company. I don't think we are expecting that we have reached a new kind of plateau, and we're going to run at this level going forward. It was encouraging to see, and I think one of our executives made the comment that, when we get good quarters in Consumer, we take them; we are glad for them.

Our expectations are that most of the headwinds that we have had here, that have been event-driven -- lost a big account, et cetera -- they are all anniversaried, they are all behind us. 2014, knock on wood, might be one of those years that is a pretty normalized year, and gives us a sense of how the business can actually run.

Sean, do you want to comment on our market expectation?

Over the years, we continue to talk about the Consumer -- the operating margin could be higher than the Stores, but it is going to be more volatile. When we get volume through, and with tight volume for the last couple of years, which we have had volume only going through from the Stores Group -- Chris talked about the [criticals] from the external sales. But when you get external sales like we have, as well as the internal sales going through there, Consumer can really produce nicely for us.

That is why we have always thought that the margins can be higher there, but because of the choppiness of demand pushing on the external side, you are going to see it much more volatile. Last year, we hit 18%. It is a well managed division that was given some access from the Comex grouping to them. I think they will do a great job with those assets, and I think in the end, you will see margins higher than this.

I can remember when Stores Group's highest margin was 14.4% and someone said, are you ever going to beat that? We have beat that a few times now, the last 2 years, actually. And I think our Consumer Group, we expect it to go higher with some more [of the advancement] and a little more volume.

Couple of book keeping questions.

What is your CapEx and G&A expectations for 2014?

I think our CapEx will be somewhere in the $180 million to $200 million range, as we do some of this work and move some production around. Our G&A should be in the $35 million range, up from around $29 million to $30 million they had this year.

Don Carson, Susquehanna Financial.

Bob, I wanted to follow up on your growth outlook for US architecture. You talked about 5%, 5 1/2% growth in calendar 2013. With the pickup in commercial, or non-residential construction this year, would you expect that to accelerate?

And then to follow on to that, Paint Stores grew at almost 8% versus 5% market growth. And obviously, non-res is even higher proportion of contractor business. Would you expect your Paint Stores Group sales on same-store sales basis to outpace the market growth even further in 2014?

Don, on the first part of the question, if the rate of housing starts holds up, and that would be a 10% to 15% increase, year over year in the rate of housing starts. And we see this high single-digit acceleration in non-residential starts, with a commensurate amount of non-residential maintenance and property maintenance activity, it would be very easy to duplicate mid-single-digit industry growth rates in 2014. We have long said that our expectation for our Paint Stores Group is for growth in the range of 1 1/2 to 2 times market rate, and we think in that environment, that is probably doable as well.

Greg Melich, ISI group.

The half of the $40 million of loss you had in the quarter from acquisition -- the half that was impairment, does that show up in the gross margin or SG&A?

I would tell you probably 65%, 70% went into gross margin and the remainder went into SG&A.

The second question was on the pricing. And I recognize it is difficult, given Comex having a different mix, but if you could look at the old Paint Stores Group, what do you think the pricing is?

I think again, because as time goes on, there is customers that are going to go from the old to the new, the Comex stores. I think that any metric we give you, might give you a wrong indication, Greg; and that is why we are trying to walk away from this, this quarter. A year from now, we might come back to the old rate, but right now with people going from one store to another, any metric might give you the wrong indication.

Maybe to get to another angle about gross margin -- it looks like gross margins, if you back out the G&A settlement, or really only have 20 or 30 bps, why did the GM gains decelerate so much in the fourth quarter? Is there something else going on?

No, I think it was the Comex. Take a look at that piece that went through, that one-time hit that went through gross margins that we just gave you, I think should give you a pretty good idea that really gross margin didn't decelerate.

At that is the 65%?

Chuck Cerankosky, Northcoast Research.

Will start off with Sean.

I think around the time you announced the Comex acquisition, I had asked about using the financing that you had instituted for recall if the deal didn't get done. Is that still how you're feeling?

Yes. You can probably tell that we are close to having a final answer in this. So, we still have that cash on our balance sheet. If not, we will end up buying back stock.

And then, at 36% incremental margin -- I don't understand quite how you got to that, but I do see if I back out the Comex impact on the Paint Stores in the quarter, the segment has got about a 16.6% margin. Can you connect the dots there, Sean, between those two figures?

Chuck, you have one other question? I will pull up that sheet of paper.

The other question would be, if you look at the approximately $20 million hit from Comex in the fourth quarter due to one-time items, and what you are forecasting for Comex's hit in the first quarter, it looks like you are going to be spending more on one-time items, perhaps, and that the operations should already be showing improvement in the first quarter of 2014. Is that a correct conclusion to draw?

You know, again, that is why we put a little bit wider range on here. It really depends on when we take some of these closing costs, Chuck. The first quarter should be fairly consistent. But, you are right, when you back that out, it is going to be slightly better than the fourth quarter with the 50/50.

I think you closed a couple plants in the distribution center on Comex. Have you announced any other facility shutdowns or integrations with existing Sherwin operations?

We have announced four closings, Chuck, to date, of the eight that we talked about that we acquired. Not all of those are down, or cost into the numbers yet, but four have been announced.

Chuck, back to your other question.

If you take a look at the operating profit in the Stores Group segment, $990 million, you add back the $43 million that we talked about the (inaudible) acquisition impact -- without that, it would have been, call it, $1.033 billion, you compare that -- that means that the PBG changed $171,000,855. The sales without Comex was up $476 million, $171 million divided by $476 million, 36.1%.

Eric Bosshard, Cleveland research.

Two things. First of all, Sean, you referenced -- just curious -- was there a LIFO charge that was material that impacted the 4Q Paint Stores profit?

No, but I think what happens is, that when you start to look at the fourth quarter, it might not be material. But if you look at the change, year over year -- because one year might be a hit, one year might be a credit, and we true that up in the fourth quarter. Even though LIFO might be a credit for the year, you might have a debit there because of the way you accrued it in the first three quarters.

So was there a material year-over-year change in how that influenced 2014?

I do not have that exact number, but I would try to answer it in a question about why specifically the fourth quarter isn't as pure as the other three quarters. I do not think LIFO was that material between one or the other.

Secondly, on Comex, you have owned these stores for a while; seems like they were losing market share and money before you acquired them. Obviously, closing facilities helps on the money side, but in terms of the market share in those stores, how is [the old stores] performing in those versus the core, and how do you feel about the trajectory of market share in that business?

Eric, we have done a lot to stabilize this Business since acquiring it. As an example, a number of these stores did not have a full complement of management inside, sales representative territories were open, stores were struggling to get inventory when we had acquired them. All of those fixes have been made, and made quickly. We are seeing stabilization of the existing customer base through these stores. We are every bit optimistic that these things are going to run in line with the other stores inside the districts that they are joining. So the business is doing fine from that regard, and we expect it to get better as time goes on.

Richard O'Reilly, Revere Associates.

On the Paint Store margins, if you exclude the loss -- the acquisition loss -- it looks like the margins, if I did my math right, was about 14.3%, or slightly down from a year ago, which is surprising because of the higher volumes. Can you explain that? Or is the benefit of the volumes all showing up in the Consumer group?

You are talking about the quarter, correct?

For the quarter, yes.

Again, I think when you look at it without the acquisitions, just from the quarter, like we did with Chuck, you add the $40 million back in at $208 million. That would tell you that we were at 12.3% and last year were at 14.6%. I would just say it had to do with how some SG&A rolled in. When you look at the Stores Group, especially the way new stores rolled in, a little more heavy in the fourth quarter than it was in 2012.

The volume gain -- the Consumer Group has benefit from the volume gains, in the paint business, that is part of it, right?

Yes.

Second question -- on your inflation outlook, a year ago you said it was all going to be up low single-digits. What did it work out to be for calendar 2013, got an idea?

We see it as pretty stable year over year. The TiO2 was down a little, and the rest of the back was up slightly.

A year ago you were too pessimistic, and now, you are looking at things about the same way.

Charles Dan, Morgan Stanley.

I wanted to follow up on the gross profit -- on the Latin segment, did you say that the profit was $6.4 million increase or decrease?

I'm going to double check, because the way you asked that question --

I didn't mean it to sound like an accusation.

It was a decrease.

There are no further questions at this time. I would now like to turn the floor back over to Management for any concluding comments.

Thanks you, Jessie.

Let me conclude this morning by asking you all to save the date of Thursday, May 22, on your calendars. This is the date we will host our annual financial community presentation at the Intercontinental Barclays Hotel in New York City. The program, as usual, will consist of our customary morning presentations with questions and answers, followed by a reception and lunch. Again, the date is of Thursday, May 22, and we will be sending out invitations and related information in the weeks ahead.

I'd like to thank you all for joining us again today, and thanks for your continued interest in Sherwin-Williams.

Thank you presented on this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.