宣偉 (SHW) 2014 Q1 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of the first-quarter 2014 financial results and expectations for the second quarter and full year. With us on today's call are Chris Connor, Chairman and CEO; Sean Hennessey, Senior Vice President, Finance and CFO; Allen Mistysyn, Vice President, 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 archive 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 Wednesday, May 7 at 5.00 PM Eastern time.

This conference call will include certain forward-looking statements as defined under US Federal securities laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made 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 first-quarter results, we will open the session to questions. I will now turn the call over to Bob Wells.

Thanks, Jessie. In order to allow more time for questions, we've provided balance sheet items and other selected information on our website, sherwin.com, under Investor Relations, first quarter press release.

Summarizing overall Company performance for the first quarter 2014 versus first quarter 2013, consolidated net sales increased 9.2% to a record $2.37 billion due primarily to higher paint sales volume in our paint stores group and acquisitions. Acquisitions increased net sales 4.5% in the quarter, and unfavorable currency exchange decreased consolidated net sales 1.9%. Consolidated gross profit dollars increased $103.1 million for the quarter to $1.659 billion.

Gross margin increased 60 basis points to 45% of sales from 44.4% in the first quarter last year. Selling, general and administrative expenses for the quarter increased $105.4 million over first quarter last year to $884.1 million. As a percent of sales, SG&A increased to 37.4% in the first quarter this year, from 35.9% last year.

Interest expense increased $1.1 million compared to the first quarter last year to $16.4 million. Consolidated profit before taxes in the quarter decreased $2.3 million to $166.1 million, due primarily to the loss from acquisitions and unfavorable currency translation. Acquisitions and unfavorable currency reduced net income in the quarter by $19.2 million and $5.3 million respectively.

Our effective tax rate in the first quarter this year was 30.5%, compared to 31% in the first quarter of 2013. For full year 2014, we expect our effective tax rate will be in the low 30% range, compared to last year's rate of 30.7%. Consolidated net income decreased $728,000 to $115.5 million. Net income as a percent of sales was 4.9%, compared to 5.4% in the first quarter last year. Diluted net income per common shares for the quarter increased to $1.14 per share from $1.11 per share in 2013 .

Looking at our results by operating segments, sales for our paint stores group for the first quarter 2014 increased 16.4% to $1.36 billion from $1.17 billion last year. Comparable store sales, or sales by stores open more than 12 calendar months, increased 7.9%. More than half of the paint store group sales increase was due to higher organic paint and equipment sales volume across all end markets. Acquisitions increased net sales 7.2% for the segment.

Price mix had a negligible impact on sales in the quarter. Regionally in the first quarter, our Southwestern division led all divisions, followed by Southeastern division, Midwestern division, and Eastern division. Sales and volumes were positive in all four divisions.

Segment profit for the group increased $16.6 million, or 12 .8% to $146.3 million in the quarter, as higher paint and equipment sales volumes were partially offset by the loss from acquisitions and higher SG&A spending. Acquisitions reduced segment profits $16.7 million in the quarter. Segment operating margin, including acquisitions, decreased to 10.8% of sales from 11.1% in the first quarter last year.

Heading to the consumer group, first-quarter sales increased 5.4% to $325.3 million, due primarily to acquisitions and the timing of seasonal shipments to some customers. Acquisitions increased net sales 3.9% in the quarter. Segment profits for the consumer group decreased $2.9 million to $51.1 million in the quarter from $54 million in the first quarter last year.

Profit was negatively impacted by higher distribution costs to maintain service levels, and by a loss from acquisitions. Acquisitions reduced segment profits $600,000 in the quarter. Segment profit as a percent of external sales decreased to 15.7% from 17.5% in the same period last year.

For our global finishes group, sales in US dollars increased 2.2% to $497.6 million in the quarter, due primarily to selling price increases, partially offset by lower paint sales volumes and unfavorable currency translation. Unfavorable currency decreased net sales for the segment 1.6% in the quarter.

First quarter segment profits stated in US dollars increased $12.6 million, or 37%, to $46.5 million, due primarily to improved operating efficiencies and selling price increases. Unfavorable currency translation reduced segment profit $1.8 million in the quarter. As a percent of sales, segment profit increased to 9.3 % from 7% in the same period last year .

For our Latin America coatings group, first quarter net sales decreased 10% to $182.4 million, due to unfavorable currency translation and lower paint sales volumes that were partially offset by selling price increases. Currency translation rate changes decreased sales in US dollars by 16.5% in the quarter. Stated in US dollars, segment profit in the quarter decreased to $10 million from $20.8 million last year.

Segment profit was negatively impacted by higher raw material costs and unfavorable currency translation and lower year-over-year sales volumes. Currency translation decreased Latin America segment profits $3.8 million in the quarter. As a percent of net sales, segment operating profit was 5.5% in the first quarter, compared to 10.3% in the same quarter last year.

Turning to our balance sheet, our total debt on March 31, 2014 was $1.71 billion, including short-term borrowings of $87.4 million. Total debt on March 31 last year was $1.7 billion. Our cash balance at the end of the quarter was $366.5 million, compared to $613.9 million at the end of the first quarter 2013.

In the first quarter 2014, we spent $29.4 million on capital expenditure. Depreciation expense was $41.4 million, and amortization expense was $7.6 million. For the full year, 2014 we anticipate capital expenditures will be approximately $190 million to $200 million. Depreciation will be about $170 million and amortization approximately $30 million.

I will conclude this review with a brief update on the status of our lead mitigation. In Santa Clara County case, involving public nuisance claims brought by 10 California cities and counties against 5 defendant companies, Judge Kleinberg entered his final judgment on January 27. From this final judgment, Sherman Williams, NL Industries and ConAgra filed motions with the trial court for a new trial and to vacate the judgment.

Following briefing and argument on those motions, they were denied on March 25. Our notice of appeal was filed on March 28. The record has not yet been transmitted to the Court of Appeals, nor has a briefing schedule been set. We continue to believe a decision by the Court of Appeals will take approximately two to three years.

That concludes our review of the first quarter results for 2014. I will turn the call over to Chris Connor, who will make some general comments and highlight our expectations for second quarter and full year. Chris?

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

Before I comment on the quarter, let me take a few minutes to summarize where we stand with respect to the Comex Mexico acquisition. As you know, March 31 was the date after which either party could terminate the purchase agreement without cause. Throughout the month of March, Sherwin-Williams worked closely with Comex and the Mexican Competition Commission in an effort to secure approval to complete the transaction. We presented a detailed remedy proposal to the commission, but as of the end of the month they had not ruled on our remedy.

On April 1, the seller notified us that they believe we've breached our obligation to use all commercially reasonable efforts to secure regulatory approval in Mexico. In response to this notification, on April 3 we filed a complaint with the New York State Court seeking a judgment that we are not in breach and we notified Comex that we terminated the purchase agreement. This action was entirely defensive on our part.

We cannot allow an allegation of breach to stand without an appropriate response. At this point, we do not know how long this single process will take, but both parties agree the termination is final, and we are moving on.

After 18 months of effort behind this acquisition, it is an understatement to say that we are disappointed with the conclusion. On a positive note, the portion of the transaction we did complete, 306 Company-operated paint stores and 8 manufacturing sites in the United States and Canada, are on track to deliver outstanding returns to our shareholders over a relatively short timeframe.

During the quarter we made good progress in our effort to integrate this business into our existing paint stores platform and supply chain operations. We announced the consolidation of four manufacturing and distribution facilities and a headquarters building.

On March 1, all US store locations converted to the Sherwin-Williams point-of-sale system, which will significantly improve store operations, including color matching and inventory management. The Canadian stores will convert to this POS platform in May.

As a result, product availability has improved dramatically in these stores and our field management teams are working closely together on product cross training and improving territory coverage. Our first quarter guidance included acquisitions dilution in the range of $0.15 to $0.25 per share for the Comex acquisition. Actual dilution of $0.12 per share reflect the budgeted amount of one-time integration costs and better-than-expected operating results for these stores in the quarter.

Our core business is also off to a good start. If you back out the impact of the acquisition, consolidated sales grew 4.7% in the quarter and profits before tax increased 10%. As a percent of sales, operating profit and profit before tax increased 30 basis points and 40 basis points respectively.

Even with dilution from the acquisition, our consolidated gross margin increased year over year for the eighth consecutive quarter. The lion's share of this improvement came from our paint store groups. Organic sales grew 9.2%. Operating profit, without acquisitions, increased 25%, and core operating margins increased 160 basis points. Incremental margin on the core business was 30%.

During the quarter, paint stores group added 17 net new stores, and our plan calls for full year store openings in the range from 80 to 90 net new locations. Today, our total store counts in the US, Canada and the Caribbean stands at 3,925 stores, compared to 3,529 one year ago. This year-over-year increase in store locations, both organic and acquired, along with the investments we made in store and territory staffing the back half of last year, resulted in an 80 basis-point increase in segment SG&A as a percent of sales. Without the acquisition, SG&A as a percent of sales decreased 10 basis points in the quarter.

Consumer group got off to a respectable start from a revenue perspective, with organic sales up 1.6% in the quarter. With the harsh winter weather over the first two months of the year, disrupted raw material deliveries, it made it difficult to move finished goods across the Northern half of the country and occasionally the Southern half, for that matter. This drove supply chain costs up, resulting in negative flow-through for the group in the quarter.

Sales momentum remained strong in the domestic paint and coatings market, particularly in the contractor segment, and Europe is showing early signs of recovery, but economic conditions in Latin America have continued to deteriorate. Both our global finishes group and Latin American coatings group felt the impact of currency devaluation and weakening market conditions throughout this region. While global finishes group was able to offset the drag from Latin America with growth in other regions, our results in Latin America coatings group reflect the impact of soft demand and currency in the quarter and we expect these conditions to persist over the balance of the year.

Our ongoing efforts to improve working capital efficiency continue to bear fruit. Working capital decreased as a percent of sales to 11% from 11.7% in the first quarter last year. If you back out the effect of the acquisition, working capital sales would have been 10.4% at quarter end. The reduction of working capital more than offset the incremental cash used for integration activities in the quarter. As a result, that operating cash in the quarter improved approximately $8 million, compared to our first quarter cash performance last year.

During the quarter, we acquired 1.3 million shares of the Company's stock for treasury at an average cost of $197.22 or a total investment of $256.4 million. On March 31, we had remaining authorization to acquire 10.85 million shares. Yesterday our Board of Directors approved a quarterly dividend of $0.55 per share up from $0.50 last year.

We remain optimistic that US residential demand for architectural paint will strengthen. As we get into the prime painting season, we are encouraged by early signs of a more robust commercial recovery. This growth will be offset to some degree by challenging conditions in Latin America. Our outlook for second quarter 2014, look for consolidated net sales to increase 8% to 14% compared to last year's second quarter.

With sales at that level, we expect diluted net income for common share for the second quarter to be in the range of $2.80 to $3 per share compared to last year's record $2.46 per share. This guidance includes our expectation the US and Canadian stores acquired from Comex will increase net sales by $125 million -- $135 million and reduce diluted net income per common share by approximately $0.10 per share in the second quarter.

For the full year 2014, we expect consolidated net sales to increase over 2013 by 8% to 13%. With annual sales at that level, we are reaffirming our expectation for full-year for diluted net income per common share to be in the range of $8.12 to $8.32 per share, compared to $7.26 per share earned in 2013. This annual guidance includes our expectation that the Comex stores will increase net sales by a low single-digit percentage in the year, and reduce diluted net income per common share by approximately &0.45 to $0.55 cents per share in the full year of 2014.

Again, thanks to all of you for being with us this morning on the call, and now we would be happy to take your questions.

Thank you. At this time we will be conducting a question-and-answer session.

(Operator Instructions)

Our first question is coming from the line of Bob Koort with Goldman Sachs. Please proceed with your question.

Thank you. Good morning.

Good morning, Bob.

Chris, I don't want to steal your thunder from your meeting here in a month or so, but I'm just wondering, as you guys look at your ability to continue to get some price and lever the store base, can you give us some sense of where the goals are on the gross margin line? And then, do you think it is possible to leverage your SG&A-to-sales a little bit more aggressive and maybe get it closer to the 32% level for -- on an annual basis you had during the housing boom?

Thanks, Bob. We will be talking about all of those topics when we come to see the entire investment community in New York next month. Specifically to your question on price in SG&A, as you know, we did comment in the last quarter call that we did take price in the market in the first quarter. Those price increases are going in as they typically work for us, so nothing to report there out of the ordinary.

As you know, we've given guidance, which is somewhat unusual for us, that our gross margin this year will come in probably in the 45.5% to 46% range, up from 45.3%, so you can read into that the price effected taking place in holding in delivering the expected results.

I think the SG&A numbers are going to be a little bit cloudy this year. As we pointed out, the jump in that is almost 100% attributable to the acquisition rolling in. When we back that out, for example, in stores we are seeing SG& A leverage and we would expect as the year goes on we to continue to see that SG&A leverage as sales ramp up.

And then if I might, you mention the price in the store base. Can you talk about price through the consumer channel? Obviously, that takes a little more concerted effort with your channel partners. Is that likely to be as robust, not as robust, not at all? How do you see that developing through the year?

Bob, as also has been our practice, we haven't commented on pricing activity so much outside of the stores organization. We basically just kind of give you a sense of where we are managing that inside that platform. We tend to keep those discussions confidential, so I'm not going to comment on pricing outside of the stores organization today.

All right. A guy can try. Thanks, Chris.

Good effort. Thanks, Bob.

Thank you. The next question is coming from the line of John McNulty with Credit Suisse. Please proceed with your question.

Thanks for taking my questions. A question with regard to Comex US -- it sounds like the revenues are coming in maybe better than you expected and certainly the dilution in the first quarter was a lot lower than what you were looking for. And yet you've maintained the full-year expected dilution at that $0.45 to $0.55 range.

I guess I'm wondering what maybe got pushed out or if there's some chunkiness to it that maybe we need to think about or is it just a conservative outlook in terms of what the dilution may be for the year?

This is Sean Hennessy. Greg, that question -- when we take a look at the first quarter, yes, sales were slightly above what we had thought, but the loss was dramatically lower. We were talking in the first three months ago when we reported the full year that we thought that 60% of the loss in 2014 would be coming from one-time only and 40% would be operational.

This quarter it was 80% operational and 20% one-time. So you can see that the one-time hit did not occur in the first quarter. I like your word, the quarters will be choppy because as Chris mentioned, we have announced for -- not all of the hits have been heard, have been realized due to those closings. So as those come in, it is a little choppy trying to determine exactly which quarter those will come in, but we still feel at this time we're going to stay with the guidance for the year on both the $0.45 to $0.55 and the $0.60/$0.40.

Okay. No, fair enough. And then one last question. On the nonresidential construction side, can you walk us through maybe what you're seeing in the markets there. I know there's some expectations that things are starting to warm up, but have you started to see it and what are you seeing there?

Yes, John, this is Bob. We look at published data sources just like everyone else and it's been somewhat mixed in recent months. The one benefit of control distribution is that we get timely robust feedback from our contractor customers, and a lot of this feedback lately has been about bidding activity and order volume. Suffice it to say, commercial contractors are clearly busier and more optimistic than they were this time last year.

Great. Thanks very much for the color.

Thank you, John.

Thank you. Our next question is coming form the line of Ghansham Panjabi with Robert W Baird. Please proceed with your question.

You called out the weather impact on the consumer side from a manufacturing perspective. What about the paint store business as a whole in terms of feed back from your customers? Did that have any impact on your same store sales? It was still very solid, but just curious as to what your customers feedback was.

Yes, Ghansham, as the quarter unfolded, and we certainly had days and weeks of rough weather in certain geographies. I think the interesting impact was we could certainly see that in our daily sales reports. Typically, that vibe would rebound relatively quickly, so when we did have good weather we'd have strong days in the backside of that.

The kinds of projects that we're involved in with these products, typically don't get deferred. If you miss a painting window in February because stores closed or traffic is impaired and contractors can't get to job sites, it doesn't tend to get delayed for quarters or years, it gets right back on it. Certainly we had some days where we were low on revenue, but overall I think the quarter was pretty steady in terms of the demand that we saw.

Chris, just to take that one step further and comment on North American housing as a whole from your perspective, do you see any material changes given the increase that people talk about in interest rates and home prices and the potential impact on housing. Are you seeing any impact from that whatsoever?

Ghansham, this is Bob again. The March housing starts and permits were released yesterday. And it was interesting, although the top line was considered a bit of a miss versus consensus, single-family starts were really solid. They were up 6%.

We think that is a sign of latent strength in the market. We also believe that inventory levels of both new and existing homes are well below where they should be at this point in time. If there is any pickup in rate of sales in the spring, they're going to be building. We do not believe that interest rates are significantly affecting affordability, so we would expect some pickup in the rate of sales in the spring.

That's helpful. Thanks so much.

The next question is coming from the line of PJ Juvekar with Citigroup. Please proceed with your question.

Good morning. It's Dan Jester on for PJ. In Latin America, is the weakness that you are seeing uniform across all the end market, or are there differences in architectural, protective, marine and your product finishes businesses.

Geographically, Dan, the weakness unfortunately are in our two biggest economies -- Brazil and Mexico. Architectural in both of those categories is probably leading the weakness, but we are also not seeing much pickup in the protective and marine segments either, so pretty soft market conditions in both of those economies. And of course, as we commented throughout, currency in both places is not helping either.

Okay. And then on your US store count, typically I think you are backend loaded in terms of the openings, but 17 stores has been a lot more than you've had in the first quarter last couple of years. So are you doing anything different in terms of your store openings?

That is an insightful comment. You're absolutely correct. In fact, when we look at the rolling 12-month new store count, we are up 95 net new stores this quarter.

Part and parcel of that SG&A kind of moving a little bit in the wrong direction as we get excited about the coming demand and getting on top of it. This is actually the preferred path for us. We would rather not be so backend loaded on new store openings.

We don't control that as much as the municipalities and building permits cycle that developers face trying to get these retail stores open. I think this is nothing more than the stars just aligning a little better, performance getting these stores open. And as we commented, we're pretty much on target to get this 80 to 90 store count in this year.

Great. Thank you.

Thanks, Dan.

Thank you. Next question is coming from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.

Thank you. Good morning, everyone. You called out raw materials in Latin America and didn't mention anywhere else, so was it just that you couldn't price it down there or did you actually see inflation everywhere else? What is your outlook.

Raw material comment in Latin America is so much that raw material based on there US dollar-denominated. So our raws are relatively flat and benign everywhere, including Latin America. It's the local currency conversion rates that's the headwind for those guys.

Okay. And just as a follow-up, can I just ask you about share repurchases and with Comex Mexico not going to happen now, should we anticipate you making a lot of progress towards the remaining authorization of the balance of the year?

I think that if you take a look at the long-term history of the Company, we believe that we like to run the Company at a one-time turn debt to EBITDA. I think that we have been higher than that, as well as we don't believe in holding cash. We've had cash balances all the way up to $800 million, $900 million.

Now that -- we held that for the Comex Mexico so that we would have the proper liquidity at closing. I think over the next period of time, you are going to see us get back to those metrics, so that would tell you, void of an acquisition you're going to see us buy back stock.

Okay. That sounds great. I will pass it along.

Thanks, Vince.

Thank you. The next question is coming from the line of Aram Rubinson with Wolfe Research. Please proceed with your question.

Thanks. Good morning. I appreciate the call. Can you spend a little time talking to us about the DIY part of the market. I know you guys are going at it with the perks program. Wondering if you plan a strong emphasis for you?

Also on the DIY side, curious what your customers on the consumer side of the business are doing with inventory, whether they're kind of pulling it in or sending it back?

The DIY business, Aram, has always been an important part of our marketing platform here and to our stores organization, it continues to be something we are trying to build. To put it into perspective, our business ratio through those neighborhood network of paint stores is about 85% professional, 15% DIY.

So while an important segment, certainly deminimus compared to the contractor focus, I wouldn't characterize our DIY program so much as a perk program. We do have a preferred customer arrangement that we have built up by just capturing customers' email contact information and really doing a much better job of connecting with them on the various digital formats that are available to us.

As we've said repeatedly now probably for the last 2.5 years, our DIY sales have been terrific. They've been outpacing the market and slowly gaining a little share, and as a result of that, we're pretty pleased with that performance. We give some credit to our relationship with HGTV, which is been a terrific relationship for the company in attracting a younger consumer to us.

In terms of our consumer group customers and their exposure to the DIY market and whether or not they're adjusting inventory, I would expect the answer to that to be no. Most of these folks are very sophisticated retailers, have great systems in place. Much as we talk about working capital management and consistently put in to help us manage that, I think they are doing the same.

So long gone are the days where inventory spiked up and down based on some kind of the term being offered, et cetera. So I think they are in pretty good inventory shape and we would expect as the season ramp ups so will their purchases.

Chris, can you also just clarify on price realization for the increase you took earlier in the quarter? Can you just remind us how that price realization is going? You mentioned price and mix didn't have much of an impact on Q1, but how we should think about that in the next few quarters would be great.

Again, this is Sean. We feel pretty good about our price realization. That's why when you see the gross margin up six-tenths for the first quarter and I think earlier this call Chris, again, reaffirmed that the gross margin forecast we have, 45.5% to 46% versus last year's 45.3%, we are not changing that. We feel the realization's been good.

Thanks, guys. Appreciate it.

Thank you, Aram.

Thank you. The next question is coming from the line of Trey Grooms with Stephens. Please proceed with your question.

Good morning. Back on the pricing, just to follow up on that. So you are seeing good pricing realization but the addition of Comex's 300-plus stores, is that going to impact the rollout or implementation of pricing at all as we look through this year? As far as the timing?

The answer to that is yes, and I think that's why we really changed what we did for pricing this year versus in the past. We used to give you a percentage and a date, and because this was an integration between just not only the core but really five different businesses that needed to be integrated, there was going to be some timing difference. That's why we've switched from giving you a date and a percentage that we were going out and an effective rate that we felt that we were going to eventually achieve. We went to a gross margin forecast where we went from 45.5% to 46%. And those are the reasons why -- those are partly the reason why, is because of what you just refer to.

Okay. That makes sense. And then on the cost front, you mentioned not seeing any real raw material inflation, but can you speak specifically -- I know one point, maybe late last year, you guys thought that there was -- that we could see or there was possibly the potential for some modest TIO-2 inflation this year. Has that outlook changed since we are not really seeing much yet? If not, could you kind of give us some ideas of your thoughts around that?

Yes. Trey, this is Bob. We think for the first quarter specifically, for the industry, raw material inflation across the entire basket was likely flat to very low single-digits. Any year-over-year change in the quarter was most likely from plastic packaging, due to, as we referred to in the last call, the run up in high density polyethylene, and also monomer and polymer pricing might have been a little inflationary due to higher energy costs in the quarter.

TIO-2 still remains a moderate risk for the back half. It has not moved in the first half of the year. But even if it does move, it's unlikely to push the raw material basket for the full year above, say, 2% inflation. So our outlook of flat to low single-digits is still solid.

Okay. And then just one more still on the cost front. You guys we're kind of moving -- I guess outside of North America you have been moving some of your facilities over to sulfate in some markets. Can you give us an update kind of where you are on that effort? Thank you.

Yes, Trey, I think we have commented that certainly as new products and technologies are being worked on that we're exploring all the different types of titanium packages that might help us get to the market. We have seen some switching outside the US. Those activities are continuing to move. I don't think those are going to be dramatic shifts for us, but it's helping a little bit around the margins.

Thanks a lot. Good luck, guys.

Thank you. The next question is from the line of Ivan Marcuse with KeyBanc Capital Markets.

First on the Comex North America, it sounds like things are proceeding fairly quickly, so if you look out at 2015 and with getting the point of sales in all your product and training involved, would you expect those stores to be up closer to the Company average? Or would it be a slower ramp up than that once all the restructuring is done?

Right. What we've said is that next year, when we take a look at 2015, we believe that the operating margin will be in the high single-digits. So when you look at the sales next year, it's going very well right side in the SG&A and so forth. The gross margins are moving in the right directions. We still feel pretty good about that forecast.

Could you just give -- you usually do, the gross profit and the SG&A dollar change for the segments?

I have the gross profit here. Paint stores group, $104.7 million on the gross profit increase. Consumer was $1.4 million increase. Global finishes were $5.6 million increase. Latin America was actually a reduction of $6.9 million. On the SG&A, I don't have those right now.

I can back it in once I have that. I appreciate it thank you.

Thanks, Ivan.

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

Now that you've had Comex in the business for about two quarters or so, are you noticing anything different with the pricing strategies between the five different brands that you can optimize? And how do you feel about getting them fully integrated into the legacy Sherwin strategy?

Nils, not so much differences between the five brands, but clearly a difference between a way that their organization approach this and the way that the Sherwin's core business. We reference the ramp up to our POS system, effective March 1 for these stores.

That is really the start of the process. It starts with good data collections so we can actually look at trends and look at specific customer segmentation, volume sets, et cetera. All that tooling will be helpful for our field teams in coaching our new members of the team here on how to appropriately price these products. So I think one of the previous callers asked about price increases as well here too. These are all be things that will be improving.

Sean just gave guidance that we expect next year and these stores will be in the high single-digits in terms of operating margin as a percent of sales, and then ramping them up fully to the mid-teens that stores runs at, this will be part of that mix, getting pricing levered properly and implemented. So, work to be done here still.

Understood. I know that you probably don't want to think about Mexico too much anymore, but I'm curious through you're -- through this whole process if maybe you've learned something about how you might change your approach to the customer in that country now?

We are happy to continue to think about Mexico. We have a good business down there. We were excited for a long time to have a better stance there. Obviously, it didn't work out that way. I think that remains to be seen, and that's probably fodder for future conversations to talk a little bit about what our strategy is. Right now are just trying to extricate ourselves from this particular situation we're in.

Got it. Thanks very much.

Thank you. Our next question is coming from the line of Kevin McCarthy with Bank of America. Please proceed with your question.

Yes. Good morning. What was the magnitude of the elevated distribution costs that you had in consumer, please?

Just again, while Shawn is digging a few numbers up here, Kevin, think about the fact that fundamentally, paint is made from water. And when half of the United States is under the polar vortex, we were shipping a lot of paint around this country in zero-degree temperatures, below zero temperatures and so renting heated trailers, having to put some frozen loads into heated warehouses to get them ready, checking the R&D in some of these things to make sure they're still viable. So those are some of the factors that led to these costs.

And if you look at these costs, if we back those costs out, consumer margin the first quarter would've been flat, up slightly year over year. So we did report 15 .7%, so when you look at it you can do the math, but that is where we are at. That's what the costs are.

That helps. And then the second. In the Latin American segment, what was the magnitude of the volume decline and the foreign exchange pressure? Any additional insights there would be helpful.

Again, as we mentioned, the currency actually was -- effected sales by 16%. We reported a negative 10%; it would have been a positive 6%. Really driven, as Chris said, by the Brazilian reais. Last year was around BRL2 to $1. This quarter remains in that BRL2.38 to BRL2.40 to $1. But when you look at the volume, we were negative in the volume for the Latin America group. We really don't share volumes by segment, especially in Latin America.

Okay. And then maybe for Chris. Apologies if I missed it, but I wanted to ask you about M&A broadly and what you are seeing on the landscapes, specifically whether or not you're seeing anything that might fill, at least partially, the void from the termination of Comex Mexico, if you look at a year or so, let's say.

Yes, Kevin. We've been clear with the street about our interest and intentions to continue to build out our architectural coatings platform throughout the Western hemisphere. There are a number of terrific companies in all of those geographies, including Canada, the United States and throughout all of the Latin American region.

Time will tell whether any of those come to fruition or not. So this is just, this was one opportunity. We have other ideas that we will be working in as time goes on.

Likewise, we continue to be focused on building out our industrial coatings platform globally. There's some interesting technologies there as well too. Nothing more to report on it than that.

Okay. Thanks very much.

Thanks, Kevin.

Thank you. The next question is (inaudible) line of Don Carson with Susquehanna Financial. Please proceed with your question.

Thank you. Chris, a question on where you think we are in the coding cycle. If I look at your numbers with, say, 4% growth in the overall market last year for US architectural. You've got another 4% this year. You're knocking on the door of 700 million gallons.

I know in the past, you've talked of the 700, 750 million gallon market as being normalized. I just wondered if you've rethought that.

No, those numbers are pretty accurate, Don. I think we've been showing that chart now as part of our investor deck for a couple of years. You'll recall that the peak of that market was at 800 million gallon, and there are some folks commenting that they think that, that's a more realistic number that the market can get to in the coming years.

As you know, we tend to be a little more conservative on that. I think you're pretty much on target. We are moving up comfortably now into the mid-600 million gallons for the industry. This'll be another year of progress, so pushing in on 700 with another, call it 50 to 100 million gallons of incremental growth for the industry yet to go.

Okay. And then, Sean, a housekeeping question. What share repurchase is baked into your guidance? And what was the carry out number of shares at the end of the first quarter?

At the end of the actual share count on May 31, 2014, was 99,651,879. I prefer not to give you -- you can imagine, each and every quarter we purchase stock, so it is very likely we're going to be buying stock over the next three quarters. I will tell you that, but I would prefer not to give you the guidance on what our share count is for the year end.

Thank you.

Thanks, Don.

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

First question -- Chris, I think you noted as you expect when the weather got better, you saw your daily sales improve in the regions that were affected. Any chance you could give us a sense of how the 8% same-store sales kind of trended through the quarter?

Dennis, March was the best quarter, or best month we had in the quarter. January, February were about even.

Okay. And then kind of along the same lines, I think you mentioned Southwest being the best region, East being the worst. How much variation is there between those two?

Dennis, this is Bob. The two strongest divisions were in the double digits. The other two were in the singles.

And then last one, Chris, I think on the global and Latin American business, when we look at X acquisitions, X currency, the growth rate was the best that we've seen, I think, in about four, five quarters. The commentary -- and I think some of the commentary, maybe this was a difference between volume and price, was more negative. Just wondering if that is a trend that's decelerating, which is giving you concern, or it there's something maybe were missing in that high-level deal.

Are you speaking about our global segment, Dennis?

I was actually looking at both, both together. Kind of that concept of global and Latin America.

I think we would agree with the global business. We're feeling that we are on a good trend line here. We solidified a lot of the operations in Europe, particularly on the back of our acquisitions there are couple of years ago.

Asia is showing some nice improvement from really, really low market shares, so we have got a lot of room to go there. But we are pleased with the profit improvement we've seen there. You recall this was a segment that was running at around 3% ROS and now we're pushing up close to the kind of targets we told you we can get it to, which would be into the low double digits. That is tracking well, and we think that, that can continue to add some tailwind to the Company's numbers going forward.

Latin America, not so much. I think we commented that we expect that we're going to be in for tough sledding here for the rest of the year, given the currency and the market environment.

Okay. That's helpful. Thanks again.

Thanks, Dennis.

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

I wanted to -- a lot of my questions have been answered, but wanted to follow up on a couple of things. First of all, in terms of integrating the Comex operations, you talked about closing the four plants and the one headquarters building. Are you pretty much done with the (inaudible) rationalization, or is there still more to go?

There's a few more to go.

Are you going to be retaining any of the plants that you bought, or is there enough room in your plants to relocate the production there and just streamline the operations to that extent?

We haven't specifically commented on that. I think at as time unfolds will we will be in a better position to share that with you.

In terms of Latin America and the significant margin degeneration you've seen there in profit dollar declines, obviously a lot of it has to do with foreign exchange. What are your expectations for sort of the margin recovery trajectory of that business? Is that going to be in 2014, or is it all related to (technical difficulty) coming back?

I think that before we give you any type of guidance for the full year we would like to see another quarter. We just have gone through one quarter. At the beginning of the year, our expectations were, if you remember, we had a one-time hit in our mind, which was the Brazilian fund-back situation. Without that, our margins were still -- our operating margins were still strong.

At the beginning of the year, we thought that we were going to have improvements, or at least be flat. I would say we'd like to have seen another quarter, but we are not as optimistic about having improved margins as we were three months ago, that's for sure.

Okay. To follow-up on that question, in the past and in other businesses and other regions, we've seen companies respond very aggressively with price increases in situations where devaluations of the currency was to the extent that we've seen in Latin America. Are you sort of moving along that thought path, or are you just content to sort of wait around and see if the real and the other Latin American currencies will come back?

Dmitry, if I just go back to the total, our sales were down 10% after currency and currency was 16%, so we were up 6% in real world currencies, and if you think about -- we freely have told you that our volume was down. So prices up at least 6% plus what our volume is down.

We've been moving price as aggressively as we can. Some of the governments in South America have started to put pricing limits on and we have to get approval from the governments. We are being as aggressive as we can to get pricing on South America.

Got it, Sean. Thank you. And then last question, in terms of your share buyback. I know you don't want to give a number for share count at the end of the year, but just in terms of releasing the cash that you've been holding for the Comex deal now and looking to redeploy towards share buybacks, are there any thought being given to sort of accelerated share buybacks or are you still going to be opportunistic and even keel throughout quarter, or throughout the year?

We really did a lot of accelerated factory purchases ten years ago, eight years ago. About four years ago, the volatility of our stock, as well as a lot of other companies stock, really it proved that ASRs really did not -- were not in your best interests. I would tell you that the volatility in our stock is tremendously lower.

I think that we were interested in getting the stock -- the greatest effect on our share count. So yes, we are evaluating ASRs at this time, and I think that we want to be in a situation where you can do -- if we do an ASR, we want to be opportunistic if our stock does become more volatile again.

Got it. Thank you.

Thanks, Dmitry.

Thank you. Our next question is coming from the line of Jay McCanless with Sterne, Agee. Please proceed with your question.

Good morning, everyone. I wanted to ask first -- and I apologize if you already answered this. Did you give any timing for the Comex breach-of-contract suit and if there's going to be any cost impact?

We did comment that we have no idea what the timing on that will likely be, and we've made no comment about the cost impact.

Okay. Second question. If you look at the promotions for the paint stores group, public promotions, have those increased versus what you were doing last year? And does that have any impact on margins on a year-over-year basis?

No. Our promotional schedule for our paint stores team has been pretty consistent now for a number of years. They do have these big super sale events around important weekends in the paint season as it starts to ramp up, but from a day-to-day comparison, year-to-year, as well as the discount comparison from year to year, Jay, those have been very consistent.

Last question on Latin America. I know a lot of people have talked it. If we think over the next year to two years, given what -- especially in Brazil, where it seems like things are not getting better any time soon. Does this give you the opportunity to be a buyer down there if conditions do worsen, or is the better opportunity maybe to pull back? If you could give us the one- to two-year outlook for that market for Sherwin.

Our thoughts on M&A obviously are always long term, and we think the long-term demand for potential products that we would like to be purchasing and adding to our platform are strong. So were appropriate targets to emerge in Brazil or anywhere throughout Latin American region that we thought we could acquire and improve and enhance their contribution to our earnings growth, we would be interested in doing that. It's just too speculative to comment any further than that at this point.

Okay. Thank you.

Thanks, Jay.

Thank you. The next question is coming from the line of Matt McGinley with ISI Group. Please proceed with your question.

Good morning. My first question is a follow on with some of the comments you made about the global segment and the margins. You've had tremendous operating efficiency in that segment in the first quarter here. You had very strong margin growth but pretty weak unit growth. My question is, was there something unique about the first quarter that enabled you to get such strong operating margin expansion that wouldn't be relatable to the rest of 2014?

First of all, the global finishes group really recorded solid sales growth in North America, Europe and Asia. When you look at the scale we have in North America, gallons going through our footprints and our imprints in North America gives us the greatest flow-through. That was nice.

They also, when you look at their Latin America was a significant drag in the quarter, and they also were affected by that currency. Gallons going through our North America footprint are more efficient.

Thanks for that. And then, my second question is on the -- a follow up on how much you made in the paint stores group. In prepared remarks, you said that you realized price but the mix impact was so negative. Can you help me understand what happened with that mix the caused the price increases you have to have a muted impact on your total top line for that paint stores group?

I just don't remember us making that comment. I would not say that comment is accurate.

So pricing was positive in the quarter?

Yes.

Okay. And there was not a negative mix impact?

No.

No, there was not.

All right. I guess I need to get my ears checked before Easter.

I think we said the effect of pricing was modest on sales.

Okay. That makes sense, then. Okay. Appreciate it. Thank you.

Thanks, Matt.

Thank you. Our next question is coming from the line of Eric Bosshard with Cleveland Research. Please proceed with your question.

Two things. First of all, in the Comex business I'm wondering if you could characterize the market share performance you're seeing of their business, kind of before and after, and how that is progressing and where do you expect that to go?

So, Eric, I think it's typical with these types of controlled store acquisitions. We commented that this was a struggling asset for the parent company. Their sales have been declining when we acquired them. They've improved slightly from acquisition, but they're still a little bit negative. So with the market that's rebounding in gallon growth, we have to assume that there is some concern that they're moving share.

Interestingly, now with these POSs in place, we can kind of track who those specific customers are, and so a lot of that share's transfers been going from their store locations to ours. That will be an important part of process going forward. I can say with great confidence that in all the markets that we have acquired these stores that the Company is not losing share, just may be seeing a little bit of a rose in the acquired store format.

As you look forward, do you think this is sustained throughout the year, or can you see a path or investments that you are making that should allow their growth, if you just be similar to the market at some point in 2014?

We've seen in a relatively short period of time that trend line moving positively and in a very quick fashion. It comes from better inventory in stores and enhanced and improved associated product lineups that we've been rolling into their store locations as well, including some of our own brands -- Purdy applicators, case in point. Our expectations are that these stores are going to go positive as the year unfolds.

And then secondly, I appreciate the component of the incremental SG& A investment is then the timing of the new store investment. But away from that, I am interested in how you're thinking about the incremental SG&A that you're investing in the business this year to allow you to participate in improved market growth or gain market share. Can you just talk a little bit about where you're spending money away from new stores and where we are in the continuum of net incremental -- incremental SG&A spend?

A couple of years ago I remember mentioning to you, Eric, you actually asked a question one year. One of the other big issues that we are spending is some IT projects. As we continue to low roll out our global Oracle platform, between early next year we will have all of South America, Asia as well as the United States and so once we get there, we think we are in pretty good shape with IT.

But those investments are actually helping us with our working capital, and you can see the results in our working capital. Usually the first quarter is at one of the highest working capital as a percent of sales quarters we have and we are at 10.4% without the Comex, 11% -- and last year we're at 11 .7%.

Some of these investments are not just for market share, but the majority of them are when it comes to new stores and so forth -- wraps and so forth. I would say IT is probably the other one that is really driving some of this cost. A lot of those costs are pretty flat across the year, and so first quarter being the lowest sales quarter, those cost divided by the lowest sales quarter has the greatest impact on the SG&A as a percent of sales.

Great. Thank you.

Thanks, Eric.

Thank you. Our next question is coming from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question.

Thanks for squeezing me in. Because of the timing of price increases in the stores division, should prices rise sequentially in the second quarter as you more fully implement whatever you raised in the first quarter?

Yes. Yes they will, Jeff.

Thanks. Secondly, we're your volumes flat to up in the consumer division?

No. Volume wise, they were up slightly.

They were up slightly? And then lastly, your sales forecast for the second quarter is 8% to14%? Why so wide?

I think it really comes down to Latin America group and the currency and trying to figure out exactly what that currency is going to happen. That's probably the biggest determination of the wide range.

Okay, great. Thanks very much.

Thanks, Jeff.

Thank you. Our next question is coming from the line of [Jideed Pendeff] please proceed with your question.

Thank you, and congrats on the great results today. I have two questions. First one is on your gross margins. Maybe focus on the paint stores, really. I know you don't disclose this, but if you look at the previous peak and compare it to in the next couple of years as you head towards the 800 million gallon mark, can you tell us what has really changed? I.e., have you actually structurally improved in gross margin, considering also the fact that maybe some of the input cost should be relatively in your favor with all the capacity that is coming in the US, and if you have gained share, if you have improved your price per gallon. I would be really curious to know that.

And then the second question I have is on your industrial coating franchise. What are you really structurally doing to improve this in terms of market share? Are you targeting organic growth levers, or are you also looking at some acquisitions to spend on your franchise in marine, protective, et cetera? Thank you.

Again, this is Sean Hennessey and I'll take the first question about the gross margin and structurally where are we. I think that over time, we used to talk about a range of 41% to 44%. We talk about 43% to 46%. We are near the peak again. In fact, we're saying that for the year were going to be at 45.5% to 46%.

Over time, we believe that range will grow for a lot of the things you just mentioned. We think that we will continue to come out with new products that are higher in gross margin, and then efficiencies. I think that our consumer group, over time, has done a great job of lowering our conversion costs, lowering our warehouse costs, lowering that logistics cost.

So those two things, when you look over a five-year period, and you look at the amount that new products have continued to help our gross margin, we think that is going to continue, and that's why we continue to try to develop new products.

And structurally, we took advantage of when the market did crash from the 800 approximate million gallons a year down to that 575 million, we did close some plants and some warehouses that were our least efficient. So as that market comes back, and we're seeing it, that we are actually producing those products in the lower cost plants.

Then to the second part of your question, Jideed, the investment coatings franchise really is benefiting now from organic growth. There was substantial M&A activity probably up to three years ago, creating the platform we needed in various geographies around the world. But as we've seen the significant profit leverage in the sales revenue, the market share growth is coming now from the businesses we have. We have commented a couple of times during the call about continuing to be on the hunt for appropriate acquisitions in the state, but for the last couple of years it's been mostly organic performance.

Thank you.

Thanks, Jideed.

Thank you. Our next question is coming from the line of Richard O'Reilly with Revere Associates. Please proceed with your question.

Thank you, gentlemen. Good afternoon. At least, good afternoon here. Is the acquisition contribution, is that fully -- or is that 100% from Comex or is there something else in there?

It's 100% Comex. We've annualized all their acquisitions.

So the reason I ask, so some of it is showing up in the consumer group business event.

Yes. Consumer did pick up a piece of that business. Most notably Duckback and some dealers in Canada and in the United States. They also picked up a piece of that Comex acquisition.

The reason I ask is, the 4.5% is about $97 million of sales, if I did my math, which I think would fit at the low end of your forecast. So I guess I am confused. You said it was doing better than you had thought top line, and I guess I'm a little confused with the numbers.

Yes, we gave a sales range in the first quarter. And if you look at the midpoint I think -- I answered it because I assumed that he was speaking of the midpoint, not the high end of the range.

Oh, okay. Okay, fine. Thanks a lot, then.

Thanks, Richard.

Thank you. The next question is coming from the line of John Roberts with UBS. Please proceed with your question.

Could you comment on the sales trends in some of the leading indicator things like spray guns, ladders, less consumable-oriented items?

We got a good quarter, John, in those categories as well. Spray equipment, obviously, for us is always one of the leading indicators of painting contractor confidence, and just as we've been talking about strong sales performance in the stores, these categories have been up double digits as well. Just adding to the comment that Bob added about the face-to-face, anecdotal information we get from seeing these folks in our stores every day.

Wouldn't that tend to be a drag on your margins? So back to the mixed questions you had earlier, I would've thought consumables like paint would've been more weather impacted and maybe some of the more leading indicator things people would buy anyway in anticipation of when the weather would break, so that, that would actually be a negative mix effect to have the ladders and spay equipment and so forth outperform paint.

No, most of those sales start to come in around this time of year. March and April, this is when we typically see what we call pro-day, or pro-show events happening from pros Sherwin as well as all the other people in this place. We commented that March was a strong month for us in terms of rebounding in the quarter, so there wasn't a substantial mix shift away from paint as far as the impacts of products.

Okay. Thank you.

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Mr. Wells for any additional concluding comments.

Thanks, Jessie. As a reminder to everyone that is still in the call, our annual financial community presentation is scheduled for Thursday, May 22. It will be held at the Intercontinental Barclays Hotel in New York City. The program will consist of our customary morning presentation with questions and answers, followed by reception and lunch with Company management.

If you have not signed up and would like to attend, registration is still open. Send me an e-mail at RJWells@Sherwin.com and I will reply with a link to our registration site.

On a final note, our offices will be closed tomorrow in observances of Good Friday, so I will be returning calls over the balance of today and on Monday. Thanks for joining us today, and thank you again for your continued interest in Sherwin-Williams.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation and you may disconnect your lines at this time.