宣偉 (SHW) 2014 Q2 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of the second quarter 2014 financial results and expectations for the third quarter and full year. With us on today's call are Chris Connor, Chairman and CEO; John Morikis, President and COO; Sean Hennessy, CFO; Allen Mistysyn, 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 default via the Internet at www.sherwin.com.

An archived replay will be available at www.sherwin.com beginning approximately two hours after this conference call concludes and will be available until Thursday, August 7, 2014 at 5 pm eastern time. Following the Company's review of the second quarter financial results and outlook for the third quarter and full year we will conduct a question-and-answer session. I will now turn the call over to Bob Wells.

Thanks, Jesse, and good morning, everyone. Thanks for joining us. As you just heard, we've made an important addition to our earnings conference call lineup. Beginning with this morning's call, John Morikis, our President and Chief Operating Officer, will be participating in our earnings conference call each quarter.

Many of you have had opportunities to speak with John over the years at our annual financial community presentation. He has a comprehensive knowledge of our operating division, customers, suppliers, and our industry in general, and because most of the discussions surrounding our earnings releases involve these topics, it's only natural to include John in the conversation.

We think you will find his perspective on the state of the industry and our Company very valuable. I'm going to turn the call over to John in just a moment, but before I do let me remind you that 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 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 statement whether as a result of new information, future events, or otherwise. A full declaration regarding forward-looking statements is provided in our earnings release transmitted earlier this morning.

In the interest of time we provided some balance sheet items and other selected financial information on our website under www.sherwin.com, Investor Relations second quarter press release. With that, let me turn the call over to John to review our financial results for second quarter.

Thanks, Bob. It's a real pleasure for me to take part in our call this morning, and let me add my thanks to all of you for joining us. The press release we issued this morning summarizes a very solid second quarter for Sherwin-Williams. We continue to see positive momentum in most areas of the business. We credit that momentum in large part to our consistent focus and prudent investments made over the past five years.

There's still some areas where we face challenges, but the progress we have made so far in this recovery and the bullish signals we're getting from our customers give us confidence that our momentum is sustainable. I will begin by highlighting overall Company performance for second quarter 2014, compared to the second quarter 2013, then comment on each reportable segment.

Consolidated net sales increased 12.1% to $3.04 billion, driven primarily by strong performance in our Paint Stores Group and acquisitions. The Comex acquisition added 4.6% to net sales in the quarter while unfavorable currency translation decreased consolidated net sales 0.9%. Consolidated gross profit dollars increased $176 million year-over-year to $1.4 billion.

And gross margins increased 80 basis points to 46.3% of sales from 45.5% in the second quarter last year. This gross margin improvement was primarily the result of better operating leverage from higher production and distribution volume which more than offset the anticipated gross margin drag from paint stores acquired from Comex.

Selling, general, and administrative expense for the quarter increased 15.8% to $969.2 million. As a percent of sales SG&A increased 31.8% in the second quarter this year from 30.8% last year. Higher SG&A spending in the quarter reflects our continued investment in new stores and sales territories plus incremental SG&A from acquisitions. Interest expense for the quarter was $16.4 million, an increase of $1.3 million compared to the second quarter last year.

Consolidated profit before taxes in the quarter increased $48.3 million, or 12.7%, to $429.2 million. Our effective tax rate in the second quarter this year was 32.1% compared to 32.5% in the second quarter of 2013. For the full year 2014 we expect our effective tax rate to be in the low 30%s compared to last year's 30.7%.

Consolidated net income increased $34.2 million or 13.3% to $291.4 million. Net income as a percent of sales increased to 9.6% compared to 9.5% in the second quarter last year. Diluted net income per common share for the quarter increased 19.5% to $2.94 per share, including a $0.06 EPS loss from the US and Canada assets acquired from Comex, compared to $2.46 per share in 2013.

Looking at our second quarter results by operating segment. Paint Stores Group had another strong quarter. Segment sales increased 17.2% to $1.88 billion. And comparable store sales, sales by stores open more than 12 calendar months, grew 9.8%.

Comp store sales growth accelerated 190 basis points sequentially from first quarter 2014 to 280 basis points year-over-year. The rate of sales growth increased sequentially in every customer segment.

Acquisitions added $103.7 million or 6.5% of sales in the quarter. Recently, in the second quarter, our southwestern division led all divisions, followed by our southeastern division, eastern division, and midwestern division.

Paint Stores Group segment profit for the quarter increased $42.9 million, or 12.9%, to $375.9 million as higher paint sales volumes were more than enough to overcome a $10.4 million loss on the acquired stores. Segment profit as a percent of sales decreased to 20% from 20.7% last year, but if you back out the effect of the acquisition, segment profit margin increased to 21.7%.

During the quarter we opened 16 new stores bringing our year-to-date total to 33 new locations. At quarter end, our total store count at US, Canada, and the Caribbean was 3,941, compared to 3,542 locations at the end of the second quarter 2013. 98 of the 399 incremental stores were opened organically since the end of the second quarter 2013. This year our Paint Stores Group plans to add approximately 80 to 90 net new store locations.

Consumer Group also turned in a solid performance for the quarter. Sales increased 10.1% to $433.4 million from $393.7 million last year. Acquisitions accounted for roughly half of the increase while our domestic wood care and building materials business and [Ronciomas Altecs] wood care businesses in Europe accounted for most of the organic sales improvement. Segment profit for the Consumer Group increased $13.4 million, or 17%, to $92.5 million in the quarter, driven by higher sales volumes, improved operating efficiencies, and a profit contribution from acquisitions of $2.7 million.

Segment profit as a percent of external sales increased to 21.3% from 20.1% in the same period last year which was gratifying to see following a softer profit performance in the first quarter. For our Global Finishes group second quarter sales in US dollars increased 6.1%, $544.6 million, due to higher paint sales volumes and selling price increases. Most of Global Finishes group's domestic business strengthened in the second quarter, but this improvement was partially offset by continued weakness outside the US particularly in Latin America.

Unfavorable currency translation had minimal impact on sales in the quarter compared to last year. Segment profit in US dollars increased 0.7% in the quarter to $54.9 million, from $54.5 million last year. These results include charges of $4.5 million related to the exit of our business interest in Venezuela. Unfavorable currency translation rates changed -- reduced segment profit by $600,000. As a percent to net external sales, Global Finishes group segment profit was 10.1% in the quarter compared to 10.6% last year.

Our Latin America Coatings group continues to operate in a very challenging economic environment. Second quarter net sales for the group stated in US dollars decreased 8.9% to $181.2 million. Volumes in the quarter were negative, and unfavorable currency translation decreased net sales by 11.3%, both of which were mitigated to some degree by selling price increases. Segment profit in the second quarter stated in US dollars increased to $5.7 million from $856,000 in the same period last year.

In second quarter 2013, we incurred a charge of $11.8 million related to a Brazil tax assessment. In the second quarter this year, lower volume sales, increased raw material costs and unfavorable currency translations were only partially offset by selling price increases. Currency translation decreased segment profit $2.9 million in the quarter. As a percent of net sales, segment operating profit was 3.1% in the quarter compared to 0.4% in the second quarter of 2013.

Although our Latin-American coatings group results for the quarter and year-to-date are disappointing, we're committed to expanding our presence in this important region, and we're dedicating and working with all our resources and expertise required to succeed in that effort.

Turning briefly to our balance sheet, our total debt on June 30, 2014, was $1.69 billion, including short-term borrowings of $64.7 million. Total debt on June 30, 2013 was $1.69 billion. Our cash balance at the end of the quarter was $267.2 million compared to $741.1 million at the end of the second quarter 2013 and $356.5 million in the last quarter. Through the first six months of 2014 we spent $66.9 million on capital expenditures. Depreciation expense was $83.5 million, and amortization expense was $15.1 million.

For full year 2014, we anticipate capital expenditures for the year will be approximately $190 million to $200 million. Depreciation will be about $170 million, and amortization will be about $30 million.

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

Thanks, John, and good morning, everybody. Let me begin by saying how pleased I am to have John with us on the call this morning. I'm sure will you find him to be a very insightful addition to our conference call team both today and in the years ahead.

At the midway point in the year we are encouraged by how 2014 is shaping up. More than once in John's comments you heard him refer to the positive momentum in our business. Sales and volume growth began the year at a respectable pace and appear to be picking up steam as the year progresses.

Consolidated sales growth in the second quarter increased 280 basis points sequentially, and June was our strongest month so far. Domestic spray equipment sales, perhaps an unscientific but nonetheless reliable leading indicator of paint sales, were robust throughout the quarter. As John indicated, most painting contractors, including many who work on the nonresidential markets, are feeling very bullish about their order books going forward.

Consumer Group had another good sales quarter, and Global Finishes is posting strong year-over-year volume gains in many industrial coatings categories. Consolidated gross margin also showed significant improvement, both sequentially and year-over-year. This is a function of volume driven operating leverage but also of stable raw material costs.

Early in the year, we identified titanium dioxide as an inflation risk in the second half. However, it is pretty apparent that the major chloride TiO2 producers have not yet succeeded in implementing price increases announced in the first two quarters. As I mentioned in our first quarter call, most of the upward pressure on the raw material basket is coming from high density polyethylene which is driving up costs of plastic packaging.

We've also seen higher year-over-year pricing trends in other raw material feed stocks such as crude oil, natural gas, propylene, ethylene, and tinplate, but so far these have not affected raw material costs. We are maintaining our outlook for a relatively stable raw basket for the balance of the year.

In the first six months of 2014, we generated $332 million in net operating cash, an increase of $30 million compared to the first half of 2013, driven by higher six-month net income. Although working capital was a slight use of cash in the first half, this is entirely due to the accelerating pace of sales growth. Our best measure of working capital efficiency, the ratio of working capital to sales, decreased to 11.7% of sales from 12.0% in the second quarter last year.

During the quarter we acquired 2.03 million shares of the Company's stock for treasury, bringing our total year-to-date repurchase activity to 3.33 million shares, at an average cost of $200.15 per share, and a total investment of $665 million. On June 30 we had remaining authorization to acquire 8.83 million shares. Yesterday our Board of Directors approved a quarterly dividend of $0.55 per share up from $0.50 last year.

Our confidence in the domestic building and remodeling markets continues to grow. We expect nonresidential to play an increasingly important role in driving future paint and coatings demand. Many of the industrial segments also appear to be gaining momentum. These positives will be offset to some degree by persistent challenging conditions in Latin America.

Based on this outlook we expect third quarter consolidated net sales to increase in the range of 9% to 14% compared to the third quarter 2015. With sales at that level we expect diluted net income per common share for the third quarter to be in the range of $3.15 to $3.25 per share, compared to last year's $2.55 per share.

Guidance for the third quarter includes our expectations that the Comex acquisition will increase net sales $120 million to $130 million and reduce diluted net income per common share by approximately $0.05 per share in the quarter. For the full year 2014 we expect consolidated net sales to increase 8% to 13% compared to last year. Although our sales expectations have not changed since our first quarter release, we are raising our expectation for full-year diluted net income per common share to be in the range of $8.50 to $8.70 per share compared to $7.26 per share earned in 2013.

Included in this full year guidance is our assumption that the Comex acquisition will increase net sales by a low single-digit percentage in the year and reduce diluted net income per common share $0.35 per share. The change in our full year EPS guidance was driven in part by lower than expected dilution from the US and Canada Comex business from our original midpoint of $0.50 per share to our current expectation of $0.35 per share dilution. Integration of these businesses into our Paint Stores Group and Consumer Group is progressing ahead of our original expectations.

We're on schedule and on budget with respect to supply chain consolidation plans and performing better than planned from an operating profit standpoint. More importantly, we are very pleased with the level of talent, enthusiasm and commitment we see in the men and women who joined Sherwin-Williams through this acquisition. This, above all, will pay dividends for years to come.

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

Thank you.

(Operator Instructions)

Our first question is coming from the line of Don Carson with Susquehanna Financial. Please proceed with your question.

Thanks, Chris. Just wondering what's making you more optimistic about the second half outlook, because it appears even post your changing your Comex guidance that you're looking for a $0.23 improved earnings despite a similar sales outlook.

Your contractors as you indicated seem pretty optimistic, yet the housing data still seems somewhat mixed. Just wondering if you can reconcile those two conflicting items.

Yes, Don, I think that's a good point about the conflicting data we're seeing out of some of the housing numbers. We just were commenting about the most recent information. It seems from quarter-to-quarter we have starts up, permits down, and the exact opposite the next quarter. I think we're still fairly bullish on the need for improved housing starts to get up to a more sustainable number.

But don't forget that a solid 75% to 80% of all these architectural coatings are being used to maintain existing structures. I think therein is the momentum that we're feeling, and John commented about the anecdotal evidence we're getting from our contractors. We just think the second half is going to be strong.

And then just a clarification on your same-store sales growth of 9.8%. What was the price/volume mix. How much of that first quarter price increase that you posted did you start to realize in the second quarter?

That price increase is going well. This is Sean Hennessy. When you -- we don't really break out all those different factors, but the majority of our -- of selling increase was gallons -- volume.

Thank you.

Thanks, Don.

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

Thanks very much. Chris, you mentioned Comex was -- the integration was going faster than you expected and that provided some earnings leverage. Can you talk more specifically, is that because you restructured contracts, took other costs out? What exactly has accelerated the benefit there?

Yes, I don't think it's in any restructuring of contracts, per se. There are variable of contracts in a business like this when you're running your own dedicated store business. I think we're just getting better operating leverage from the Company. Raw material costs, implementation of some of the shutdown activities have gone well, ahead of schedule, lower than expectation cost impact.

I think we have commented the sales of this business is still lagging, what we're seeing in our core business. So it's mainly on the operating cost side that's coming in lower than expectation.

And you mentioned your pretty impressive 10% same-store sales. Can you give us a sense what Comex is doing year-over-year and maybe what you think the overall US architectural paint market might do in 2014?

I would say that the Comex stores are lagging our store sales, which would be typical in an acquisition like this. As far as the entire market goes, we get that information, it lags, but I'd say we feel very comfortable that we're growing at a faster rate than the market right now.

Great. Thanks so much.

Thanks, Bob.

Thank you. The next question is coming from the line of Ghansham Panjabi with Robert W Baird. Pleads proceed with your questions.

Hey, guys, good morning. First off on the paint stores group, clearly well above what your competitors seem to be reporting as has been the case the last couple of quarters. Is this a function of the channel that you are exposed to, maybe commercial construction, or just continued share gains?

I would say that we're experiencing very good growth in all the segments that we play, so I don't think it's any specific area. I think we really enjoy this controlled distribution model. We've been working hard at investing in the service and products that responds to the customer's needs, and we're comfortable with our performance.

And just as a follow-on to that, as commercial construction continues to improve, generally speaking how does that affect the price mix confirmed in the Paint Stores Group?

We've talked about that, Ghansham, in the past. Some of these larger projects will be at lower selling prices per gallon. But we've always said, the SG&A associated with servicing that business really is low as well, so operating margins for the group will benefit from gallons that we gain in any one of these end market segments.

Okay, thanks so much, guys.

Thank you, Ghansham.

Our next question is from the line of Duffy Fischer with Barclays.

Yes, good morning, guys.

Good morning.

Two questions. Maybe first for Sean.

On CapEx, this year's CapEx looks like it's even more back end loaded than normal for you guys. Can you walk through why that split is so skewed? Then if you strip out Comex, what was underlying incremental margin for the Paint Stores Group?

On the CapEx, you're absolutely right, a little backward -- slanted toward the back. Again, as Comex conversion -- Comex stores conversions are going to start taking place here, you are going to start to see that CapEx ramp up. A few other projects that we had originally -- had early in the year, especially with IT down, completing the IT implementation of a system throughout the world, we'll have Latin America here completed by next April, but we have some expenses that are coming in.

So really it's the Comex and the conversion of the stores and some other activities that we see coming in. The flow through on the stores without Comex, I think John mentioned the 21.7 on the percent of sales.

But without Comex, when you look at that, that will tell you we're probably at incremental in the quarter of about $50 million. In the sales without Comex we're up around $280 million. So you're talking almost 35% incremental margin.

Okay, great. Chris, one question -- a follow-on, on Bob's question. If Comex is going Bert early, does that mean that tend point is higher than we thought originally, or do we just get to the same endpoint that we thought but get there quicker?

I think we're just getting to the endpoint on the cost side sooner. As John mentioned, these stores are yet to really be running at the rate we expect them to get to eventually. So we still have some tough sledding ahead of us here.

Great. Thank you, guys.

Thanks, Duffy.

Thank you. The next question is coming from the line of PJ Juvekar with Citigroup.

Yes, thank you. Chris, can you comment on the refinish business in light of the harsh winter we had, and did you see a pickup there in the spring?

And can you also comment on the protective finishes business? Thank you.

Yes, PJ, I'm sorry, if you could repeat it, I wasn't sure which business you were asking me to comment on relative to spring weather.

Refinish business.

Are you talking about automotive refinish?

Yes.

John, you want to take that?

Our business there in the US was up slightly in the quarter. We're expecting that the customers that we're talking with are experiencing more business as a result of the winter, but we're up slightly here in the US.

And then you have the sales force that goes out and bids on projects. What are they seeing in nonresidential activity? Any positives or negatives there?

Very positive. I would say that our contractor base in that space are feeling better -- much better this year versus last year, and quite frankly much better this quarter than last quarter. So they're feeling very excited about the bidding activity, and as Chris mentioned with the spray equipment purchases that we see, that's an indicator of their confidence.

John and I were out recently just meeting with some of these large commercial contractors, some of whom said that they're not even taking any more bids right now, they're so full up for the next 18 months, and that's -- we haven't heard in that years. So expecting really strong performance from that side going forward.

So would you say that there is maybe in the high single-digit number?

It's just baked into all the guidance we've given you, PJ, and we gave awe range that could get to you high single to low double digits for the next quarter.

Thank you.

Thanks, PJ

Thank you. Our next question is coming from the line of John McNulty with Credit Suisse. Proceed with your question.

Good morning. Thanks for taking my question.

Good morning, John.

With regard to SG&A, the 15% jump or $132 million and change however you want to look at it year-over-year how much of that -- how should we think about what the SG&A growth was for, if you will, legacy Sherwin-Williams versus say some of the Comex integration and some of the costs around that?

You know, again, the increase in the SG&A in the quarter and year-to-date are really, really being driven by three factors. In the Paint Stores Group, the new stores 98 and wraps. The acquisition, the Comex assets operated at an SG&A rate materially higher than our consolidated SG&A sales. So as we anniversary that that will improve. And again that investment I mentioned in IT.

So looking forward here, the SG&A was up 1.3%, the sales, as you mentioned, in the first half of the year. We do expect to see that spread start to reduce. In fact, it's also part of the reason why we raised guidance. We expect the second half SG&A to be lower as a percent of sales than it was last year in the last six months of the year.

Okay, great. That's helpful. Then just a quick question on the Venezuelan assets. What was the normal annualized earnings for those assets so we can kind of figure out how much to pull out?

Normalized it was less than $2 million a year. Unfortunately, over the last few years, we've been having sales profits there, but we could not get our cash out.

So it was a small automotive refinish business in Venezuela, so we took some severance costs, and we closed and we wrote our assets off totally. That's why that was over approximately $5 million because cash had accumulated, and we could not get our cash out of Venezuela. We thought that the thing to do was to write that asset off.

Great. Thank you. Then one last question.

With regard to the pace of buybacks, certainly things accelerated in the second quarter. How should we be thinking about that going forward. Is this a good run rate for a while, or was it just opportunistic seeing what was in the pipeline?

We've taken a look at our cash flow for the year like we always do. We know how much cash we're bringing in, and what we've said is by the end of the first quarter 2015, we'll be in a more normalized space. We actually have looked at this quarter and actually we did buy just over 2 million shares, and that was actually in the form of an accelerated stock repurchase program. So we did that in the second quarter, and we're evaluating what kind of program we're going to do in the third quarter.

The way to think about that, John, is that we're sitting in a higher cash balance right now than is customary for us. We're heading into the two strongest cash generating quarters of the year for us, and you know what we like to do with excess cash. So I would expect it would be reasonable to assume we're going to remain active in the stock.

Great. Thanks very much for the color.

Thank you, John.

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

Thank you and good morning. Just wondering on the same-store sales, can you talk a little bit about, is it that you are seeing more contractors coming in, or you're seeing the same amount of contractors buying more product or better mix, or how is that working?

We're seeing more contractors. We feel as though the share of wallet that we have with our existing customers is also growing. We're very excited with the progress that our store's organization is making with both existing and new customers.

Okay. Just one last follow-up on the non-res side of things, are there particular end market that you guys are getting reports from that is leading the enthusiasm?

No, actually, it's a pretty well diversified growth pattern.

Okay. Thanks very much.

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

Yes, good morning. How much did your sales of spray equipment increase in the quarter? And was that rate more than you had previously expected last quarter?

Yes, Kevin, as you know, we don't give you specific sales on all the various product segments inside that stores business. Just to say that the whole business is running at comp stores in the high single digit. Spray equipment was probably leading that a little bit -- double-digit sales growth.

Okay. That's helpful. Chris, I want to maybe come back to an earlier question.

Historically existing home sales growth has been a primary driver of demand for architectural coatings obviously. It looks like economists have that metric in some cases anyway, down a bit, and yet you are seeing very robust growth.

And so I'm wondering why that might be the case. Is it the non-res move that you alluded to? Share gains, lagging, maintenance? All of the above? How would you try to square that circle?

We'll let our resident economist Dr Wells take that one.

Good morning, Kevin. Speaking specifically to the residential market, because we're getting contribution from other market segments as we've already indicated. But on the residential side we think two things are happening. One is we're getting a lift from home value appreciation. So more homeowners who are staying in place are doing remodeling and redecorating projects.

Secondly, if you look at the quality of the existing home transactions that are occurring now versus a year or two years ago, there's a far lower percentage of those transactions that are distressed or foreclosure-type sales. And as you've heard us comment in the past, the owner occupant selling to a new owner occupant is the transaction that generates the most painting activity. We think we're benefiting from that shift.

Okay, that helps. Last one, if I may, Chris, just welcome any thoughts you have on Lat-Am and whether or not we might see volume turn around to positive territory there anytime soon.

When you're doing business in Latin America it's important you look over longer segments. We're in one of these cycles where currency is running against us, and there are a couple of rough spots in bigger countries' economies.

Having said that, and I think John commented on it, we're still very much committed to the region. We think there are opportunities for us to enhance our method of distribution and build out our infrastructure there. I don't think that we're necessarily forecasting in this guidance that we're going to see volume growth in calendar year 2014, but rest assured we will be working hard to get that fixed by 2015.

Thanks very much for the thoughts.

Thank you, Kevin.

Thank you. Our next question is coming from the line of Dennis McGill with Zelman and Associates. Please proceed.

Thank you. The first question just on -- if you look back to the last third quarter, Chris, it was a very strong quarter for you guys, both year-over-year and I think on a seasonally adjusted basis as well. So you're going up against a tougher comp but you're seeing in the pipeline you talked about driving that acceleration, or pretty similar acceleration in growth now versus the second quarter of this year. If you were to look across the major end channels of home improvement or repaint on the residential side, new construction residential and non-res, what's accelerating the most right now as think about that pace?

I think as John has comment, we're seeing a very broad based recovery here, Dennis, across all these segments. New residential has been strong. Residential repaint, which is the largest segment, we've been commenting on that one now for multiple quarters. Both of those would be double-digit increases over previous years to help drive that comp number to that high nine percentage.

That's encouraging for us to see those two numbers doing so well, because they're the lion's share. As John has also mentioned, the nonresidential segments, particularly new construction in that area, which has been lagging for some time, we're really starting to see a lot of lift there, as well, too. So this looks like, heading into the back half where we're going to be hitting on just about every cylinder.

You talked about earlier the disconnect on some of the macro. If you just looked at new construction residential is that a disconnect for you guys, or are you seeing acceleration versus stable trends on the macro side?

We -- our business has been very strong in new residential. One of the anomalies in the June print that just came out this morning is that most of the weakness in starts were in the south. And the south has been very strong for us year-to-date.

So whether that was a one-month blip or something, the beginning of a trend, we will see. But new res in general has been very strong.

Perfect. Helpful. Sean, on the Comex acquisition, the trend in margins, I Chris you said you are now going to get to the targeted margin sooner. Any update on how we could think about the momentum into 2015, versus Chris I think you said high single-digit in 2015?

We were looking at high single digits. We're watching to see how the year ends, but I think that's probably as good a guidance as we can give you right now.

I think probably at the end of the third quarter, fourth quarter, and the fourth quarter for sure, we'll probably be able to update that. But right now we don't see any changes to that guidance.

Okay. Thanks and good luck.

Thank you, Dennis.

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

Thanks. Two questions. One on gross margin in Consumer. On the gross margin how much did Comex hurt in the quarter year-over-year, and what did mix do to help or hurt?

Greg, as you know, I don't think we've ever given the metric, our gross margin with or without. It was dilutive, and it has been dilutive. The only thing I will say is we've given you a range at the beginning of the year, 45% to 46% versus 45.3% last year. And now as the year has gone through, and now we believe we're going to be at the high end of that range.

Got it. And then second on the Consumer Group, nice improvement there? I think acquisitions was half of it, then volume was 5% as well? You said it was driven by retail.

Could you describe that a little bit more? Was it -- did you sign up any new distribution are or was it just strong sell through somewhat do you account for that?

We have a new program that we're rolling into Home Depot that we're excited about in our consumes line. We've also, as I mentioned, seen some nice improvement out of our European operations as well as our materials.

So of the 5% volume would you say that those two were a majority?

The largest one would have been Home Depot.

The Home Depot one? Great. Thanks a lot. Good luck.

Thank you, Greg.

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

Thanks for taking my call. There are a couple of businesses, I guess, that might come available for sale here in North America, and you seem to be going at a measured pace with your repurchase, keep your flexibility. Could you talk about the M&A pipeline?

Yes, John. We've been very clear and open and transparent with the street in terms of the types of properties that would be of interest to us. We would agree that there are some interesting names in North America as well as in our other industrial coatings segments globally but nothing further to comment on at this time.

Okay. Secondly, plan A in Latin America was to get scale to get the margins to improve there. Is there a plan B, given scale doesn't look achievable, at least in the near term that I can see?

Of course, there's a plan B, John, and a C and D to go along with that one. Just as you were referencing, M&A opportunities, there are a number of interesting names and companies that we respect throughout Latin America. So we're certainly not done thinking the about building scale through M&A throughout Latin America.

And also, as has been our practice, we are a company that's focused on our core development. We have good scale already in these countries.

We are not the market share leader in the larger economies, but a close second or third and that's the kind of acquisition to build from. So we have a number of initiatives to really ramp up our own core growth as well as to continue to think about M&A, and I think as we commented earlier, that we're very focused on this region, and we expect to do better in 2015.

Thank you.

Thanks, John.

Thank you. The next question is coming from the line of Nils Wallin with CLSA.

Good morning and thanks for taking my question.

Good morning, Nils.

On the Comex -- is Comex going to be more dilutive in the fourth quarter than it is for any of the other quarters? And if so why would that be the case?

Yes. When you take a look at the year-to-date -- when you take a look at year-to-date loss on Comex, plus the $0.05, and you compare it to the $0.35, then compare to the last year, it won't be any dilutive. It's $0.18 and it's $0.17 in the second half of the year.

But they have a sales curve just like our storage group. If you take a look at that volume, they're closer to the break-even point in that third and fourth quarter -- I'm sorry, first and fourth quarter, and that's why they're more dilutive.

Years ago if you looked at our stores group in the first and fourth quarter, when we were closer to the break even we had the same phenomenon, but we'll get there with the Comex stores and with higher volumes. But until that happens, the first and fourth quarters will be a bigger drag than the rest of the Paint Stores Group.

Okay. That makes sense.

Then in terms of having the point of sale in the Comex stores now for a couple of months, is there anything you're seeing? I know that before in the past you guys have said that there's pricing, lower pricing and lower fill rates. Is there anything new that you have seen that you can make improvements on, and where could those -- how quickly could those get to Sherwin-type levels?

We're very excited with what we're learning through the POS. We're excited about the future.

We're now going to be able to leverage that POS, much like we die in our own stores. Understanding our customers better, to your point about pricing, a basket approach, what are they purchasing from us and what they aren't. So we're excited about that. As we go into next year we're going leverage that.

Great. Then just finally, I know Latin America now seems like you're almost unfortunately a bit of an afterthought in terms of profitability, and you're certainly looking to improve it by 2015. But is there any reason -- is there any reason that it won't get any worse?

Yes, I think that we've had currency headwinds, and if you think about the -- especially the Brazilian real, the third quarter and fourth quarter have been better comparatives for us. Look at Argentina. Right now we've been running at 8 versus 5. Now we'll be 8 versus 6 in the second half of the year. That's a little bit of a difference, but we continue to evaluate in that third and fourth quarter.

Operationally, I don't think that we still feel -- we're making strides and improving our operations. So except for that I think that, I don't see it going backwards from here.

And you've been -- how much have you been able to offset the currency drag with pricing?

I think that when you talk -- as John's points were, sales and if you look at the amount of currency drag, it was over 11%. And again in US dollars we were down around eight, and there was some volume -- volume did go backwards so we did get some price.

Great. Thanks so much.

Thank you, Nils.

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

Good morning.

Good morning, Eric.

Two things. First of all, the earnings guidance change for the core in the back half of the year, it looked like you have affirmed the sales guidance and increased the earnings guidance, so the assumption is the margins are better.

And, Sean, I know you comment about how SG&A looks in two -- the second half versus the first half. Could you provide a little bit more color inside of the core earnings guidance change if the sales mix is different or the margin is different -- just flush that out a little bit.

We don't see the sales mix changing dramatically from our original guidance, Eric. I think it really comes down to gross margin. We did mention 45 to 46. We're at 45.8 halfway through the year. We think for the full year we're going to be at the high end of that guidance.

On the SG&A, we did mention the first half of the year, the comparisons were bad. We probably have more new stores earlier this year than we ever have. Some of the things that we're going to start anniversarying. We think our SG&A in the last six months will actually be below the last six months of last year.

So those are the things. I think that it's the margin in total, and that's because of sales mix, just because of things that are occurring and getting some of those other hits on the way in the first half of the year.

Is the SG&A spend different in the back half than what you originally expected, or is there something different relative to where you started the year thinking?

I think the SG&A spend will probably be right -- slightly below what we originally thought at the beginning of the year, but not dramatically.

I think importantly in that, Eric, the SG&A spend is lower because we're integrating these stores better, we're gaining efficiency there. There haven't been wholesale decisions to whack programs in marketing, advertising, training, R&D, et cetera. So this is really just the Company continuing to add efficiencies around the fringes as we integrate business.

And then second question, Chris, for you, strategically you went through a period of time with acquisitions outside of the US, outside of the US architectural business, and I heard your comment earlier about scale in Latin America. So I'm just curious as think strategically about the portfolio and acquisitions from here, if you could give us a sense of your thoughts or your priority or what's important for you going forward.

I think this Management team has been pretty much locked on a pretty logical strategy here for quite some time, Eric, that hasn't changed at all. We like the architectural coatings business in the Americas, and we recognize that our industrial coatings are competing in a global environment. So wherever we can find controlled distribution to support those American businesses or add technology, infrastructure, important geographies and or customers to the industrial coatings, we'll be at the table discussing those opportunities.

Thank you.

Thanks, Eric.

Thank you. Our next question is coming from the line [Arun Dislonisan] of RBC Capital Markets. Please proceed with your question.

Hi, guys. Thanks for taking my question. Good to be back covering chemicals.

Good to have you.

Thanks. How have the customers, I guess, been responding to the price increase? Maybe if you can just describe their behavior a little bit, given that you do expect a flat raw bucket.

It's not really been an issue with our customers. We've add logical discussion with them. We continue to provide them with a good quality product and great service, and it's really behind us.

Great. I guess -- I just wanted to delve into the earlier comments. You mentioned that you were seeing strength in the south. Maybe you can just highlight what you're seeing both on the res and non-res side, regionally speaking, and if there is any differences.

As Bob mentioned, the strongest performance that we're having in the new residential has been in the south. We've also had good performance in parts of the northern area and midwestern and eastern as well. Commercial has been strong. It's really been quite strong across all segments across our regions.

It's been our practice to give that you ranking of where the strength is coming from, so we've continued on. Sometimes when we're preparing our thoughts to share with you, we think about when all the segments are doing so strong and all the geographies really kind of splitting hairs to tell you which parts of the country are doing better. So this is really a business through the stores group that is just delivering across the country, across all segments, as John commented on.

Okay, great. Thanks a lot.

thanks, Arun.

the next question is coming from the line of Jay McCannless with Sterne Agee.

I wanted to ask about Latin America in a different way. Do you think the volume softness this quarter had more to do with the World Cup than an actual drop-off in demand?

And then the second part of that, when you look at 2015 and 2016 and what the economists are expecting for housing growth and commercial growth down there, what does that outlook -- what does that look like?

I don't know that we want to say that it was the World Cup that influenced our results. There are markets there that we would say are impacted by the economic conditions or the environment, and there are some where we just need to perform better, and that's what we're working on. As far as -- I didn't catch the second part of your question.

The expectation on the market conditions going forward, Jay, I guess we have confidence that when we look behind the results today, the housing needs going forward in Mexico, the infrastructure, that hasn't been maintained as appropriately it is a should have been perhaps in Brazil, the demand for the types of products and services we provide, we'll have to have some kind of a rebound going forward. I think that's why we continue to stay hard at it, improving our operations, investing, trying to build out our network down there.

Thanks. Then the second question I had, just in the US, if you look at single family housing demand versus multifamily housing demand, is multifamily an increasing portion of your business? And what types of numbers do you get there, whether on profit margin or on volume growth relative to what you see in single family?

Jay, this is Bob. With respect to demand, multifamily is a larger component of the new construction market than it was during the last cycle. And we think that's probably going to be true for some time, although, as you know, the multifamily side is really volatile and tends to oscillate quarter-to-quarter and year-to-year.

We think for the time being the US is going to be more of renter's markets than owner's market for some time to come. From a margin standpoint, we've always commented that it really doesn't affect us. From an operating margin standpoint, all of the segments delivered very comparable operating margin.

Okay. Great.

By the way, Jay, the one positive on the multifamily side is that while single-family homes, the maintenance activity in those homes is kind of a mix of DIY and contractor. On the multifamily side it is overwhelmingly maintained by contractors which, you know plays to our strength.

Okay. Great. Thanks, guys.

Thanks, Jay.

Thank you. The next question is coming from the line of Dmitry Silversteyn with Longbow Research.

Good morning, guys, and congratulations.

Good morning, Dmitry.

I would like to touch base on your corporate expense line. It's been off pretty materially year-over-year. Some of it obviously is Comex, but a lot of it is probably not Comex.

So in the context of your SG&A comments in the second half of the year being down as a percentage of sales versus second half of last year, how much of that is going to be sort of corporate expense versus just better margins in the operating businesses?

When you look at the admin expense, we were up $31 million in the first half of the year. If you take a look at the -- if you take that down to $25 million, that's split really between stock compensation and other compensation such as bonus and the IT projects that we've been working on.

The second half of the year we don't think we're going to be up to $31 million. So that's going to help. But even if we're up but we're not up $31 million, that's a nice improvement. But really the SG&A is really being driven by the operating division.

Okay. Got it.

And then can you provide us with updates, if anything is going on, or any changes with respect to the litigation in California, how that's progressing? And also given the news in the market with PBG taking a run at Comex, if that's changing at all, your mutual animosity in the courts with the Comex owner?

Dmitry, with respect to the California litigation, there's really no changes in the status of that suit since our last call. As you know, last quarter we announced that the final judgment was entered against three companies. We immediately filed a notice of appeal in that judgment, and we're currently waiting for the record to be transmitted from the trial court to the Court of Appeals. It tends to be a fairly long process.

We think the record will probably be transferred in the third quarter. At that point the court will initiate a briefing schedule, which is going to take at least five months, and then oral arguments will begin. Once oral argument conclude, it's another 90 days for the court to render a decision. All totalled, we continue to believe that the decision by the Court of Appeals is going to take approximately two to three years.

As far as the Comex issue is concerned, we are still in arbitration, and there is still a lawsuit filed by Sherwin-Williams in a New York court, and at this stage we are in the process of selecting arbitrators.

Got it. Then not to beat the dead horse to death here, but in terms of your Latin-American operations, obviously there's not much you can do about FX other than maybe push through pricing which you have been doing. But for you to turn that business around and the performance of that business and actually get it on a positive trajectory, either this year or next year is there anything that you guys can do internally? Or do you have to rely basically on the currency in the end markets improving?

No, there's a lot we can do internally, Dmitry. It's the same kind of play book we've used to run the Company and deliver the results we have. We need to knock on more doors, call on more contractors, move more gallons of paint, be more efficient.

When the economies come back and the currency runs our direction, it will be really, really good. In the meantime we're working in the things that we can control.

Are you increasing your sales presence in terms of outside sales people? How do you bang on more doors?

We have invested in more people to promote our sales and our gallons in the marketplace, absolutely.

All right, thank you.

Thanks, Dmitry.

Thank you. The next question is coming from the line of Eugene Fedotoff with KeyBanc Capital Markets. Please proceed with your question.

Good morning, guys. Thanks for taking my question. Congratulations on a good quarter.

Thank you.

Couple questions on store group sales throughout the quarter. If you can comment on anything that you've seen, maybe something outside of normal seasonal improvement in sales and also maybe you can comment on sales in the first half of July here.

Well, as we mentioned, the trend is good in all segments across all of our divisions, and that momentum is continuing here as we begin July.

Okay, thanks. Question on DIY customers at your stores. Previously you've talked about gaining market share in that particular segment. Just wondering if that's still the case if you're seeing strong growth in DIY presence and how was 4th of July weekend for that segment, I guess?

Our performance in DIY is also strong. The weekend was good for us as well, and, again, the momentum is continuing.

Great. Thank you.

Thank you our next question is coming from the line of Jeff Zekauskas with JP Morgan.

Thanks very much. I imagine that sequentially your paint prices in North America went up. Is everything now priced in so that paint prices sequentially going forward should be flattish, or is there still more realization to come?

Yes, I think the price increase we've realized what we're going to get from the price increase. We don't see a big improve -- increase in the third or fourth quarter, Jeff.

And you commented before that you thought that the TiO2 market was benign for the remainder of the year. When you look out over the next two or three years, do you still see it as benign, or do you see it as changing?

You know, Jeff, it's always based on the balance of supply and demand in the market. Coatings demand in North America should continue to grow as we move back toward normalized levels.

That said, as you know, there is plans on the drawing board for a new high-capacity TiO2 plant in Mexico. There is continuing supply growth coming out of Asia Pacific. It just all depends on the timing of those two factors.

Okay, thank you very much.

Thanks, Jeff.

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

Thank you and good afternoon now, I guess.

Good afternoon, Richard.

In the Consumer Group, the profit contribution from Comex, that $2.7 million, is that all flowing from the sales gain? My math is at $19.7 million. Or does some of that flow through the paint storks like what happens in the legacy Sherwin-Williams?

That income is actually from a couple different sources that are in Consumer Group. The Duckback products as well as the dealer business we have up in Laurence Hyde Canada. So that profit is really driven by the stores group.

Okay, good. And second question. I guess you kind of answered this, but for the second quarter alone for Comex, your profit -- the loss was smaller than you thought, but the sales were clearly at or below the low end of your projection. What's going on -- why are the stores, Comex stores lagging your expectation?

Well, I don't know if they're lagging our expectation. We expected them to be behind, and they are.

As we commented, Richard, when we made this acquisition that this was a troubled asset in North America, and so we are building these stores out, and improving our inventory position. And we've already talked about the POS equipment, et cetera.

And so it is going to take us awhile to reestablish those relationships and get those gallons and customers coming back. John talked about all the things we're learning in this POS type, for example, the ability to add on associated product sales, spray equipment, et cetera. These are all things that we're going to be working on aggressively going forward.

Okay, fine. So you just came out, I guess the stores, Comex stores business, which is at the low end of your expectation for the quarter.

Actually, expectations we gave were $0.10 dilutive for the Comex assets in the second quarter. Actually we were $0.06 dilutive.

I'm thinking sales, the sales.

Sales are still at the low end of the expectation, that's correct.

Thanks, guys.

Thank you, Richard.

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

I can't believe it. I still have questions left to ask.

Good morning, Aram.

Thanks for extending the call. Couple things was curious. I want to make sure we get the gross profit change by segment if possible before we get off.

Then can you tell us about what your competitors are doing? They seem to be really busy on the acquisition front whether its here in North America, last year in Mexico. Just wondering strategically how you view that and what you would like to do to kind of fortify yourself.

I will take the gross margin dollars real quick here, so we'll get that, ratio we get that. That our Paint Stores Group were up $142,005,000. Consumer was up $21.959,000. Our Global Finishes group were up $8.418,000, and Latin America group was up $4.211,000.

And regarding our competitor, April, we've long comment about this terrific industry that we compete in, that we're blessed with really outstanding companies to compete against. We respect the strategies and performance of all these folks, and we look forward to meeting them on the battle field. I think our results, as John commented earlier, particularly in the area of share gains, are showing that we're pretty confident that we've got a good model here. We're going to continue to work it hard.

Thanks for that. Last thing.

You wanted to get your cash balance down. Is it fair to assume that historically you were kind of sub $100 million in terms of cash you would like on the balance sheet? Should we assume that that's about right for your long term or do you think you need more these days?

No, we don't think -- we need liquidity sources and liquidity sources are strong, but I believe our cash will be below $100 million again in the future.

Thanks, guys. Have a great quarter.

Thank you, Aram.

Thank you. It appears there are no further questions at this time. I would now like to turn the floor back over to Mr. Wells for any additional concluding comments.

Thanks, Jesse. As always, I will be available for the balance of today, tomorrow, and throughout the coming week to answer any follow-up questions you might have. Thanks again for joining us today, and thank you for your continued interest in Sherwin-Williams.

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