宣偉 (SHW) 2014 Q3 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company review of the third-quarter 2014 financial results and expectations for the fourth quarter and full-year. This conference call is being webcast simultaneously in listen-only mode by Vcall via the internet at www.sherwin.com A 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 Monday, November 17, 2014 at 5PM Eastern Time. Following the Company's review of the third quarter financial results and outlook of fourth quarter and full-year, we will conduct a question-and-answer session. I will now turn the call over to Bob Wells, Senior Vice President Corporate Communications. Please go ahead, Sir.

Thanks, Jessie. Good morning, everyone, thanks for joining us. We're going to begin the call this morning with some prepared remarks by John Morikis, President and Chief Operating Officer and Chris Connor, Chairman and CEO. Following their remarks we will open the call to questions and Sean Hennessy, Our Chief Financial Officer and Al Mistysyn, Vice President and Corporate Controller are with us on the call to participate in the Q&A session.

Before I pass the microphone to John, 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 statements 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 have also provided some balance sheet items and other selected financial information on our website at www.sherwin.com under Investor Relations Third-Quarter Press Release. With that, let me turn the call over to John to review our performance for the quarter.

Thanks, Bob. Third-quarter 2014 was another strong quarter for the Company. But before we go through our results in more detail, I'd like to take a few minutes to highlight some key organizational changes we made during the past three months. Let me begin by saying that none of these changes will affect the composition of our reportable segments for the third quarter or in future reporting periods.

For the past four years, Jay Davisson has provided outstanding leadership to our North American Paint Stores organization, overseeing a period of impressive growth and expansion. In August of this year we broadened Jay's responsibilities to include the distribution of our products through Latin America. In this new capacity, Jay and his team will be charged with growing our business across North and South America providing integrated resources to support our sales and marketing efforts.

To support this effort the R&D teams and labs located in Latin America region will become part of the global supply chain R&D organization. This will result in faster technology transfer and new product development across multiple product portfolios. Pablo Garcia-Casas, formerly President and General Manager of Sherwin-Williams Mexico has been promoted to President and General Manager Latin American division reporting to Jay.

Again, none of these organizational changes affect our reportable segments for third-quarter or in future periods. Nor do they affect the leadership on organizational structure of the Paint Stores Group in North America. Our goal is to promote collaboration and the sharing of resources between our North American and Latin American business units to accelerate growth across both regions.

In the third quarter, we continued to see strong momentum in both our domestic businesses and mixed results from our non-domestic operations. I'll begin by highlighting overall Company performance for third-quarter 2014 compared to third-quarter 2013, then comment on each reportable segment.

Consolidated net sales increased 10.6% to $3.15 billion, driven primarily by strong performance in our stores group and acquisitions. The Comex acquisition added 3.3% to net sales in the quarter. While unfavorable currency translation decreased consolidated net sales 0.7%. Consolidated gross profit dollars increased $175 million year over year, to $1.47 billion. And gross margin increased 120 basis points to 46.7% of sales, from 45% in the third quarter last year. This gross margin improvement was primarily the result of better operating leverage, from higher production distribution volume, which more than offset the anticipated gross margin drag from the stores acquired from Comex.

Selling general and administrative expenses for the quarter increased $94.7 million to $984.4 million. As a percent of sales third-quarter as SG&A was flat year over year at 31.2%, reflecting a decline in core SG&A as a percent of sales, plus the incremental SG&A from acquisitions. Interest expense for the quarter was $16 million, an increase of $631,000 over third-quarter last year. Consolidated profit before taxes in the quarter increased $86.6 million or 22.3% to $474 million.

Our effective tax rate in the third quarter this year was 31.2% compared to 32.1% in the third quarter of 2013. For the full-year 2014 we expect our effective tax rate to be in the low 30s compared to last year's rate of 30.7%. Consolidated net income increased $63.3 million, or 24.1%, to $326.2 million. Net income as a percent of sales increased to 10.4% compared to 9.2% in the third quarter last year.

Diluted net income per common share for the quarter increased 31.4% to $3.35 per share compared to $2.55 per share in third-quarter 2013. The combination of acquisitions and currency decreased earnings per share $0.04 in the quarter.

Now looking at our results by operating segment. Paint Stores Group turned in another strong performance in the third quarter. Segment sales increased 15% to $2.03 billion. And comparable-store sales, sales by store open more than 12 calendar months grew 9.6%. This comp store revenue growth includes almost no effective pricing and no contribution from the Comex stores, so core store volume growth was solidly in the high single-digits. Acquisitions added $80.4 million, or 4.6%, to sales in the quarter.

Regionally in the third quarter, our Southwestern division lead all divisions, followed by Southeastern division, Midwestern division, and Eastern division. Paint Stores Group segment profit for the quarter increased $72.5 million, or 20.2%, to $431.8 million. Segment profit, as a percent of sales, increased to 21.3% from 20.4% last year, as higher paint sales volumes were more than enough to overcome a $5.4 million loss on the acquired stores.

During the quarter, we added 18 net new stores bringing our year-to-date total to 51 new locations. At quarter-end, our total store count in the US, Canada, and Caribbean was 3,959 compared to 3,868 locations at the end of the third quarter 2013. Our Paint Stores Group plans to add approximately 80 to 90 net new store locations during calendar year 2014. The integration of the stores we acquired from Comex a year ago is proceeding according to plan, with some consolidation costs coming in below what we originally expected.

For our Consumer Group, organic sales growth slowed somewhat in the third quarter, but segment operating margins held up well. Sales increased 5% to $385.2 million from $366.8 million last year. With acquisitions adding 3.9% to net sales in the quarter. Segment profit for the Consumer Group increased $5.9 million, or 8.1%, to $79 million from $73.1 million last year. Acquisitions decreased segment profit $1.9 million in the quarter as a result of strong seasonality in some of the acquired businesses. Segment profit as a percent of external sales increased to 20.5% from 19.9% in the same period last year.

For the second consecutive quarter, Global Finishes Group generated revenue growth in the mid-single digits and made progress on operating margins. Third-quarter sales in US dollars increased 5.7% to $536.3 million, driven by higher paint sales volumes and selling price increases. Unfavorable currency translation decreased sales 0.4% in the quarter compared to last year.

Global Finishes Group's domestic business continued to show strength in the third quarter, this improvement was partially offset by weakness outside of the US, particularly in Latin America. Segment profit in US dollars increased 36.4% in the quarter to $60.8 million from $44.5 million last year, due primarily to higher paint sales volumes and price increases.

These results also include a $6.3 million gain on the early termination of a customer agreement in the quarter. Unfavorable currency translation rate changes reduced segment profit $900,000. As a percent to net external sales, Global Finishes Group segment profit was 11.3% in the quarter compared to 8.8% last year.

Our Latin America Coatings Group continues to operate in a very challenging economic environment. Third-quarter net sales for the group, stated in US dollars, decreased 4% to $200.4 million. Volumes in the quarter were negative and unfavorable currency translation decreased net sales by 7.8%. Both of which were offset to some degree by selling price increases.

Segment profit in the third quarter, stated in US dollars, increased to $11.8 million from a loss of $1 million in the same period last year. In third-quarter 2013, we incurred a charge of $19.8 million related to a Brazil tax assessment. This year, lower sales volumes, currency related raw material cost inflation, and unfavorable currency translation were only partially offset by selling price increases.

Currency translation decreased segment profit $4 million in the quarter. As a percent of net sales, segment operating profit was 5.9% in the quarter compared to negative 0.5% in the third quarter 2013.

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

Thanks, John. Good morning, everybody, thanks for joining us today. Not much I need to add to John's comments on our third-quarter results, other than we remain convinced this positive momentum is sustainable. Regardless of the financial markets ongoing concerns over the resilience of the domestic housing recovery, if and when the non-res rebound will materialize, or whether the job market can sustain all this; we see an increasingly positive picture developing for our Company.

Home prices are still rising at a healthy yet manageable pace, and mortgage availability has improved. At the same time, rates are dropping. Remodeling activity has picked up in terms of both current projects and contracts or sentiment. New square footage growth is positive year-to-date in both the residential and non-residential markets.

In cities across America, occupancy rates in multifamily housing, office space, hospitality, manufacturing, and warehouses have reached very healthy levels. A really good bellwether of future demand for new commercial space. In many of the industrial coatings markets have turned the corner and are showing increasing strength.

This positive momentum has been evident in our sales and earnings performance going back to the second quarter of last year. The results we released this morning set new all-time records for consolidated sales, operating margins, net income, and earnings per share for any quarter in our Company's history. It was also a record quarter in terms of net operating cash generation.

Working capital management continues to be a source of operating cash for the Company, particularly as we integrate the operations of the Comex business we acquired one year ago. These efforts have driven our working capital ratio down 170 basis points year over year to 10.8% of sales compared to 12.5% at September 30th last year.

Nine months, net operating cash increased more than $100 million compared to the same period last year and stands at just over 10% of sales. In the third quarter alone, we generated $550 million in net operating cash, bringing our nine month total to $881.3 million. Free cash flow, which to us is net operating cash less CapEx and dividends, was $583 million.

We continue to invest a portion of the Company's cash back into the business in the form of capital expenditures. For the first nine months of 2014, we spent $136 million on CapEx. Depreciation expense was $125.7 million and amortization expense was $22.6 million. For the full year 2014, we anticipate CapEx spending will be in the range of $170 million to $180 million. Appreciation will be about $170 million and amortization will be about $30 million.

In the third quarter we bought back 2 million shares of our common stock on the open market, bringing our year-to-date total purchases to 5.33 million shares at an average price of $205.46. On September 30th we have remaining authorization to acquire 6.8 million shares. Last week, our Board of Directors approved a quarterly dividend at $0.55 per share, up from $0.50 last year.

Before I turn to our expectations for the balance of the year, I want to comment briefly on the organization changes John highlighted at the beginning of the call. Needless to say, for the past two years we faced very difficult market conditions in Latin America. Our management teams and all of our people throughout the region responded with intelligence, hard work, and determination. I'm pleased with their response and confident in their future.

The actions we've taken to promote closer collaboration between our North American and Latin American businesses is not a reaction to the current economic environment. Rather, it's an important step towards our long-term goal to be the market leader in architectural and protective coatings throughout the Americas.

For the fourth quarter we anticipate our consolidated net sales will increase 6% to 8% compared to last year's fourth quarter. With revenues at that level we estimate diluted net income per common share in the fourth quarter to be in the range of $1.30 to $1.40 per share, compared to $1.14 per share in the fourth quarter of 2013. This guidance includes our expectations that the Comex acquisition will reduce diluted net income per common share by approximately $0.10 in the fourth quarter.

For the full year 2014, we expect consolidated net sales increased 9% to 11% compared to full-year 2013. With annual sales at that level, we have raised our expectations for full-year diluted net income per common share to a range of $8.70 to $8.80 per share, compared to $7.26 per share earned in 2013. This annual guidance includes $0.28 per share EPS dilution, which is lower than both our original full-year expectation of $0.50 dilution, and our revised second-quarter expectation of $0.35 per share dilution from the Comex acquisition. Again, thanks to all of you for joining us this morning and now we'd be happy to take your questions.

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

(Operator Instructions)

Ghansham Panjabi, Robert W Baird.

Hey. Good morning. Just first off on the customer termination you referenced for Global Finishes, does that impact the top line at all going forward? And is the gain just specific to the third quarter, or is there any sort of residual flow-through into 4Q as well?

Well the fourth quarter --no, there's residual into the fourth quarter. I would say there's going to be a small amount of residual sales decrease in the future, but not enough to be material.

Okay. And then just in terms of the comp store sales for paint stores going forward -- obviously you're starting cycle through some very, very tough comparisons as you did in 3Q. Can you just give us a early glimpse into what a realistic growth rate is for you versus the industry in 2015? I know it's a little bit early, but I thought I'd ask anyway. Thanks so much.

Yes, Ghansham, so we will give you a lot more color, obviously, when we have our year-end call and give you our guidance for an next year. I think we've been commenting for some time now to the investment community that our expectations is that a store's group can perform at 1.5X to 2X the market based on the rebounding contractor segments that we talked about. So if we think that the market will continue to be a little bit ahead of GDP growth next year, let's say in the 3% to 4%, we would expect our volumes in that stores group to outperform.

Okay. Thanks so much Chris.

Vincent Andrews, Morgan Stanley.

Thanks. Could you -- it sounds like Comex continues to come in better than you expected. Do you have an update on when you expect the stores in total to become completely accretive rather than diluted?

We sure do. This is Sean Hennessy, and again we've given you guidance of $0.28 loss this year. And we've been consistent in the last few quarters saying that were going to actually earn $0.08 to $0.13 next year. So we believe that next we're going to have $0.36 to $0.41 accretion and we've given you EPS guidance there. So we think next year we're going to have positive operating profits.

But you're not pulling that forward despite the better performance in the last couple of quarters?

No. And here's why: when you take a look at the difference between the $0.35 and the $0.28, it was really driven by closing costs. Closing costs have come in less than we thought. So operationally, we think we're pretty much in the same situation we were. These $0.06 that we did take this quarter, we did anticipate it in our full-year guidance of $0.35. We did anticipate in the fourth quarter not the third quarter, but for the full year we did anticipate that $0.06. So the difference between the $0.35 and $0.28 is really closing costs.

Okay thanks very much. I'll pass it along.

Aram Rubinson, Wolfe Research.

Hey, good morning. Thank for taking the call. Question on Comex about -- I know they're not in the same store sales, but can you tell us about how those stores are performing on year-over-year basis? I ask because, seasonably it looks like your sales in Comex went down 22% from the second quarter. Whereas your regular Sherwin stores went up the 9%. And I just don't know why they behaved so different on a seasonal basis.

Yes, so if you look at the performance over the past 12 months we've had revenues through those stores of $425 million and that is down slightly year-over-year. As we took that business over, those stores were under pressure, and they had sales that were going backwards. We've since stabilized that business and we're feeling good about where that business is going and we expect that those stores will perform much better going forward. We do expect that they'll lag our comp Sherwin stores in performance, but they'll continue to get better in their performance.

We also believe that because the integration continues to be completed, breaking these sales out going forward really is going to be difficult, if in fact impossible. So this would probably be the last quarter that we're able to give you Comex sales. Because as the integration occurs, the sales go from one store to another.

Suffice it to say if your normal business drops off from Q3 to Q4, I assume we should expect that that Comex sales would also seasonally drop? And then I'll leave that one alone.

Sure. Of course.

And then to add to the Comex story, is that we closed seven Comex stores this year, as well. Whereas the other side of the business, obviously we're continuing to add stores.

And then I'm sure the question will be asked, but oil prices have obviously gone through the floor and that must've had some change in your input price outlook. I'm just hoping you can update us and remind us again, what percent of your inputs are oil-based and how we should think about that for 2015?

Yes. This is Bob. It is certainly true that a portion of our raw material basket is sensitive to crude oil pricing. About 10 years ago we did an analysis that told us that a 10% move in crude oil would result in just under a 1% move in the raw material basket. Since that time, and we haven't updated that analysis since, but since that time, our raw material basket has become less oil sensitive, primarily in the solvent category and resin category. So a 10% move in crude oil today would result in something less than 0.9% move in the raw material basket. There will be some benefit, but it won't really be material.

If I didn't know better I would thought you might've heard that question before. (laughter) Thanks.

PJ Juvekar, Citigroup.

Yes, hi. Good morning.

Good morning, P.J.

(inaudible - multiple speakers) companies that have reported so far have talked about signs of commercial growth. You have a pretty good exposure to that through your stores business, so what opportunity do you see in 2015 from commercial construction?

PJ, this is Bob again. We feel very good about the direction and the momentum in the nonresidential market. And our optimism is fueled by two sources of information. One is the same published data sources that everyone else is looking at and that shows contracts for new, addition, and major alterations up very significantly in a lot of the categories that Chris mentioned in his opening remarks: office and bank buildings, up more than 25%; hotels and motels up almost 50% year-over-year; manufacturing and schools and colleges in the mid-teens.

And those categories all told, represent almost 40% of the nonresidential space. There are some negative categories, retail and healthcare and managed-care standing out amongst the negatives. But overall square footage contracted year-to-date is up 5%. We also get timely robust feedback from our contractor customers, many of them who specialize in this commercial space. And clearly they are busier and more optimistic today than they were a year ago.

Thank you. Thank you for that comprehensive answer. And just quickly, on the M&A pipeline, Chris you talked about in the past making strategic acquisitions in Asia and Europe. And I know at some point you said that valuations were high in Asia. What do you see there now?

I think we've been consistent, PJ. Our interest in Asia and Europe would be the continue to support our industrial coatings businesses, which we would embed in that global group. I don't think these evaluations particularly are out of line for us. Ours is just a much more thoughtful process of looking for the right technologies and the right end customer segments. Coupled with that, will be our continued focus on architectural opportunities throughout the Americas, and obviously in Latin America plenty of opportunity. So we will continue to stay diligent in those two areas and keep the Street posted whenever we have something to share with you.

Thank you.

John McNulty, Credit Suisse.

Yes, thanks for taking my question. With regard to cash flow, you push the working capital levels to some -- pretty aggressively really kind of squeezing a lot, or wringing a lot of rag. I guess I'm wondering how much -- now that we're anniversary-ing a lot of the Comex moves or initial moves -- how should we think about the ability to wring more out of the working capital rag going forward?

One of the things that we always are conscious of as we go through these inventory analysis, as we're looking at our service and what's interesting is that our service is actually higher today than it was when we were at 15% to 18% working capital. What we've said is, we used to talk about 11% of sales would be normal. I think our goal now is 10%. We think that with continued work, especially some of the changes we've made in Latin American and so forth we think that we can run this Company at 10% working capital of the sales and still have higher service to our customers.

Yes, we don't like the word squeeze, John. (laughter) Efficiently running machine is better.

I would say that the commercial teams are thrilled with the service levels and we're operating at a very good place right now.

Great thank you. And then one last question. With regard to the administrative line, or the corporate line, there was a tick-up on the provision for environmental. It jumped up $11 million or so. Can you just remind us of what that is and how we should be thinking about that expense maybe going forward?

You know. Good question. If you look at our footnote that we continue to put in our Q and in the K. These are historical sites, manufacturing sites and the ongoing expenses are both when specific remediation plans are approved. Really trying to predict the timing of the approvals with the government agencies is very difficult, even while we're working with those agencies.

So the quarter we had a little more agreement of what we're going to do in a site and if you look, we talk about the Gibbsboro site in our footnote, and I think that's where we're at. Which is why the work that we've done this quarter -- that's why the expense was higher. And that was higher than we expected that was audibly $8 million to $10 million higher than expected. That was not in our guidance for the quarter. So we were surprised of the timing also, John.

And that goes back down to normal now that we're -- now that it's been announced and it's run through your channels, is that the right way to think about it?

Yes. If you look at it, our admin expense was negatively affected by $11 million in the quarter, $9 million year-to-date. So it's really that timing -- it's definitely with some timing there.

Right. Thanks very much for the color.

Jeff Zekauskas, JPMorgan.

Hi, good morning. There's a new chloride-based large TIO2 plant being built in China or coming on stream in China from Henan Billions. Are you familiar with the technology in that plant? And is it feasible for Sherwin-Williams to import TIO2 from China that's chloride-based for its global operations?

Jeff, this is Bob. We are familiar with that technology. We understand it to be not as productive a technology as some out there, but it's going to produce high-quality chloride TIO2. To the extent that you know that chloride TIO2 comes on to the global market we would certainly be in a position to negotiate.

Okay. Thank you, so much.

Thank you.

Dennis McGill, Zelman and Associates.

Chris, I'm so surprised you letting Bob get away with a 10-year-old analysis. (laughter)

I've got a note right here in front of me.

Maybe just ask that question a little differently. If you put the whole basket together, as you have done in the past and everything holds where it is today, what would be your outlook over the next year, let's say, for raw material cost?

So Bob may be using 10-year-old analysis, but Hennessey uses 148 year-old analysis. (laughter) What we do here is ancient history. It is a little bit early for us, Dennis, to give you comment on the basket of raws for 2015. Again, that will be a first quarter call. We hold ourselves to that discipline to advise you of that. Having said that and with the earlier question from Aram about oil, we don't see a lot of pressure right now, but we will give you a much more definitive answer in the next call.

Okay. Fair enough. And then John, just to clarify the accretion from Comex next year, the $0.08 to $0.13, are there any one-time items or (inaudible) that would be included in that?

No. I think that you know, we acquired this asset, we had eight manufacturing sites. We've announced five have closed. And so we've taken the closing costs on those five. I don't see any major changes or hits in that analysis of $0.08 to $0.13.

And then last question, on the balance sheet, if you were not to find another acquisition over the next year, let's say, that meets your criteria and the cash flow was going to remain strong, would you ever consider borrowing and levering up a little bit to accelerate share repurchases?

I think we've been pretty consistent on this for greater than 10 years, maybe not all 148. We still believe that if we generate this cash, we're going to pay out dividends, invest in the business and CapEx, in void of acquisitions we think our debts are going to be in very good shape and that one-to-one in EBITDA, you'll see us buy back stock. I don't believe -- until we get the idea that we're not in a consolidating industry, and things cannot happen, that's when we will start thinking differently about that one-to-one. But I don't see that happening in the next year's calendar year.

Okay. Thanks.

Ivan Marcuse, KeyBanc Capital Markets.

All right, great. Thanks for taking my questions. Sean, can you give me the changes in gross profit for the segments?

Yes, I can. Paint Stores Group was an increase of $137.8 million. Consumer was an increase of $14.6 million. Global Finishes Group was $14.5 million and Latin America was up $9.8 million. And just remember now, Latin America that's where the hit from the raw material FUNDAP issue in Brazil last year hit. That's why it's up.

Got you. And then if you look at the Latin America division and I know your changing -- your making some leadership changes there. Is your strategy in that region going to change? Or is it going to -- what sort of -- Jay, what's he going to do to improve it? How is he going to go about getting that -- the margins reversing out or gaining market share than what's been gained over the past couple of years?

Yes, I think it's her to say that we've developed a pretty strong franchise here in North America and that we believe that these skills and expertise can and should be leveraged throughout the Americas. And for our long-term products and commitments in the region haven't changed. We do believe that we can drive those margins into that 12% range. And it's going to be up to that team to really get into those markets with the local leadership, understand what is the best route to market, and leverage all the resources that we have to reach that, that type of return.

Okay, great. And then last question, was there any price mix of any consequence that was impacted in top line for the stores group?

No. Mostly volume.

Thank you.

Chris Coelho, Bloomberg.

Good morning. Thanks for taking my call. Just a follow-up on the Latin American strategy there. When a downturn came a North American paint stores you continued to invest. I see the LatAm stores are flattish for awhile now. Is the impetus now to start to build out the stores and await the recovery?

Well, we're committed to that region, but we're also committed to the right strategy in the region. And so as you look by country, we'll be deciding what the best channel would be. And in some cases it will be our stores and in others it will be through other channels of distribution. And the team is working very aggressively right now with the teams on the ground to assess those and will be going full throttle once they've defined the strategy by micro-market.

All right, thank you. And then a question: the price of oil, gas, on your distribution network, is there a benefit? Or how should we think about lower gas prices for the Consumer Group and the distribution network?

Yes, I think that we do buy a lot of gas when we have a lot of shipping and so forth. We'll see what that effect is. I don't really have a metric that I can give you at this time.

Here's one to think about, Chris, we talked about what it cost to get a gallon of paint delivered to shelf, 85% of that cost is raw material, you've got the variable manufacturing costs, fuel and transportation is a small percentage of what's left. So fuel savings on the fleet will be to de minimis in the impact in earnings for us.

All right. Thank you very much.

Thanks, Chris.

Duffy Fischer, Barclays.

Duffy?

Mr. Fischer, your line is live. You may proceed with your question.

Jessie, I think we lost him.

Bob Koort, Goldman Sachs.

Thanks very much. Chris, I'm wondering if you have ever looked at econometric models around oil price and is there expected to be in elasticity to demand for your products as consumers get a little more fat in their wallets?

Yes, I think the other metric that we've been talking about, Bob, that are driving demand for our product are a lot more powerful than that. The occupancy rates that Bob referred in the various end segments, consumer confidence as oil impacts that a little bit, slightly. But we would not put a lot of weight on oil prices changing the curve of demand for paint in the United States.

And given what Sean said, or Bob said, about the relatively limited influence of oil prices on your costs, does it have any influence on your efforts on pricing or do you view those as relatively independent?

Oil would just be one of the many raw material input costs that going into the entire basket. And we've been very clear that we price based on raw material input costs, so we've yet to make the call for next year on what the remainder of those items might be. But for right now it seems that oil will not be a pressure point for us.

Okay. Thanks very much.

Thanks Bob.

Greg Melich, ISI group.

Thanks. I had a couple questions. Maybe a follow-up on the last one. Could you remind us, looking at history how that price mix plays out when oil prices or raw material costs are coming down? And then I have a follow-up.

Well, I think if you take a look at the chart that we show you -- the long-term chart of our gross margin, I believe 2006 oil went up to $140. it came back down into the $75 range. I could be wrong on that. But our gross margin the following year, even though the market was decreasing, we held that price and we hit an all-time high at that point at 46% gross margin.

So gross margin went up, but what happened with the price mix per gallon? Did that come in? Or is there a lag, or? How do we think of that?

Yes, I would tell you that the oil going down did not have an effect on the price mix.

Again, Greg, we've talked about the price mix ratio here for us has been to continue to see a demand for better quality products as labor costs continue to escalate, and that is the biggest part of these particular jobs. So not trying to be obtuse here, there just isn't much impact on these oil prices, dramatically, on the way our customers act or the operating margins you are going to see for the Company.

Got it. And in the second question was on -- I think in the second quarter you called out sprayer sales had sort of stepped up to a new good level. You have any update on that? Has it stayed there?

Yes, I think it would be safe to say that they've continued at a pretty good pace.

Great. And then housekeeping one -- the admin expenses I see popped up to $109 million, up around $20 million. Was that a one times step up, Sean, or do we expect this level going forward? How should we to think about that?

Yes, when you look at the third quarter and you're right it was up $20.8 million. And that's where the $11 million from that environmental hit that was not in our guidance, so -- . Secondly was just the other piece of it was higher compensation including stock-based comp, which was up about $10 million, and again that's just timing. We knew about that. But it was really that environmental that drove half of that increase in the quarter.

So fair to say $100 million would've been like the normal --

More normal.

More normal rate. Great. Thanks a lot.

John Roberts, UBS.

Good morning. I know (inaudible - multiple speakers) no changes to the Latin American reporting, but it sounds like it paves the way for potentially collapsing the Latin American segment and the paints store segments into a sort of a pan-regional segment, much like you have in the global segment. Would that make sense and provide some cost savings? Or why doesn't it make sense?

Yes, well how we report the segments in this particular's case, is historical. I think there's very different to those markets. So we want to continue to give that visibility to that. John, made the comment about a lot of the learning and skill-based programming that we operate in North America, which will be moving into Latin America to assist with those markets. So we're going to continue to run the Company as efficiently as we can with an eye towards driving the most growth and share gains. And we think this is the structure that's best going to serve that. No change intended to the reporting segments for now or the structure in the future.

Thank you.

Thanks, John.

Kevin McCarthy, Bank of America Merrill Lynch.

Yes, good morning. Care to provide an update on how US architectural gallonage is trending for this year? I think back at your investor day in May, you put forth a new normal level of 760 million gallons. Just trying to get a sense of how far below that we're tracking in 2014.

Yes we don't have good data anymore, Kevin, as you know on that. Our expectation or sense of that through the first half of the year we thought the market was moving in about a 3% to 4% range. Just listening to some of our other competitor's results, it may be slowing a little bit to that. Last year's gallons were 700 million. At a 3% pop you're looking at 721 million gallons, so you still have 40 million below that 760. Hopefully we will have a little better data to share with you on the first quarter call on what the year came in on in gallons.

That's helpful. I appreciate it. And then as a follow-up, would you comment on how your auto refinish coatings sales trended relative to the global finishes segments as a whole?

In the Global Finishes Group, the strongest performing markets there were product finishes and protective marine. Automotive would've been in third position there. Domestically, they were stronger than they were internationally.

Okay, thank you very much.

Thanks Kevin.

Arun Viswanathan, RBC Capital Markets.

Thanks. Most my questions have been answered. Good morning. Just a little bit on the paint stores (inaudible), you have been trending up in the high single digits now for several quarters. Maybe you could just help me understand why you think that should continue at that one and half to two times the industry level?

The strategy that we have in our stores with this direct model is to get very close to these customers, build the products and services that they need. We're very aggressive in understanding the customer's needs individually and since we compete on a local basis, we have these local teams that are getting closer and closer to these customers. We're not waiting for the market to come to us, we're going to the market, and we feel as though that the products and services that are helping us to grow share at a faster rate than the market.

And the way put that in context, relative to that 740 million to 760 peak gallonage number, you're only at the 700 maybe in the industry, so that is it fair to assume that your share has grown by significant measures?

Yes.

And is that just because of the -- largely because of the customer base, is what you're saying.

I believe so. I think we're aiming at the right targets with a compelling offer and service to provide them.

One of the charts we've used, Arun, in our deck frequently talks about where these gallons will come from as the industry moves from 700 back up to a normalized run rate. And it's going to come in areas that are depressed and not quite there yet. New home construction, commercial construction: these tend to be very heavily skewed toward the painted contractor as opposed to any DIY participation in the rebound. And to John's point, that's what we've really built the model through the stores group to support the customer segment. So we would expect to outperform on the rebounding portion of the gallons, just given our share position against that contractor today.

Okay. And I'm sorry, just to fully understand this. So I've seen those charts of the new home sales coming back, and we did have a pretty good number earlier this week or last week on new home sales for September. (inaudible) was good. So you think you can still deliver this kind of high single digit range even with new home sales still only at a recovery stage?

We will give you guidance on the first quarter call. (laughter) But I think to your point, we've sustained is now for multiple quarters over a couple of years, and we're still -- to use, since we're in the World Series time of baseball vernacular, this recovery feels like it's about in the third of fourth inning to us right now. So there's a little bit of a runway yet here and we think were in a good position to capitalize on it.

Okay. That makes sense. Great, thanks.

Dmitry Silversteyn, Longbow Research.

Good morning. And thanks for taking my question. Most of my questions have been answered, but I'd like to follow up on a couple of things. First of all, back in your investor day, giving the presentation of a Consumer Group, there were some hints that you are working on some programs perhaps as you get into the various distribution channels. Is there any updates there? Should we be expecting something from a Consumer Group, besides the programs that you are ready have and the products that you already supply to various distribution channels?

Yes, here again, Dmitry we've been very consistent on this messaging point with the investment community. We have been working on expanding our Consumer Group business forever. And we've always been clear that we are willing to sell into these channels with the great platform or brands we have. The real opportunity would be in an architectural paint program at one of the big box players. And we just have been clear about our unwillingness to put the Sherwin-Williams contractor program brands into those platforms, but feeling now we have always believed we have a awful lot to offer. So those efforts continue as they have for some period of time, and if anything ever changes, you'll be among the first to know.

Alright. Fair enough. Just to the follow-up on the Consumer Group. How much of -- either a percentage of sales if you can just sort of ballpark for us, sort of the size of the business. How much of that business goes into the independent retail channel? In other words, the stores that are not owned by companies and are not DIY, but independent paint stores.

Yes, all the sales in that segment are external sales. It doesn't go through any of our stores. There are some industrial coatings businesses in there, aerosols for example, that we would sell to the MRO industry. But I'm going to just guess that were probably talking about a solid 80% of it is going into the traditional home improvement retailing channels.

I understand that, but my question was specifically on the independent paint store channel.

A very small portion of that.

Small portion. Okay. And then finally, can you provide any updates, if there any, on what's going on with California lead decision and where you stand on appeal and what you're doing right now?

Yes, Dmitry. As you know, the judgment was entered against three of the defendant companies in the first quarter of this year. We have filed an appeal and we filed our appeal briefs on September 16th. We are now awaiting the plaintiff's response to those briefs, and once filed we will have an opportunity to prepare responses to their briefs. The short story is that we expect briefing to go on till year-end, or maybe even in the first quarter 2015, following which the court will schedule oral arguments. And we believe the court's likely to take through 2015, or more likely into 2016 to render a decision. At that point, we believe the loser will appeal to the California Supreme Court, which is likely to take another two years plus.

Okay, so nothing to worry about as far as cash outlays in a major way until we get to the end of the decade at least?

We have years to resolve this, yes.

And I just -- I'm sorry to keep revisiting this unpleasantness, but any updates on the cross-suits that you and Comex owners have filed against each other?

Yes, our lawsuit in the state of New York has been stayed indefinitely. But the arbitration process is ongoing. And the timing of the arbitration is uncertain, but it is moving forward.

Okay, fair enough. Thank you.

Thanks Dmitry.

Richard O'Reilly, Revere Associates.

Thank you. Good morning, everyone.

A couple quick questions. When we look at the Consumer Group, the absolute profit went up $6 million or so for quarter. But I'm surprised that the increase in paint sales stores was $250 million and the inter segment sales for the Consumer Group was $110 million -- up $110 million. I just would've thought more of a flow through to the bottom line for the Consumer Group than the $6 million. Am I missing something there?

The only thing you're missing is that we also had a $1.9 million loss in that Consumer Group related to the Comex acquisition. And so -- the number, when you take a look at it -- the flow-through of on the internal sales will change from quarter to quarter due to sales mix, but I think that's the only thing you're missing quite honestly.

Okay. It's nothing out of what should be what would be normal for that size of the -- with the growth in retail sales?

Right.

Okay, fine. Second question is, in Latin America you talked about increasing raw material costs. What is increasing in Latin America that's not going up in North America?

Yes. Actually nothing, but Latin America by the majority of its raw materials in US dollar denomination and sells the finished goods in local currency. So that devaluation is been a pretty good headwind for us in South America. Latin America.

Okay, fine that's what I thought. That's it. Thank you, gentlemen.

Thank you Richard.

John McNulty, Credit Suisse.

Yes, good morning. Thanks for taking the quick follow up. In regards to the Comex stores, I believe you'd indicated on prior calls that you were looking for margins to be in the upper single digits in 2015. Is that still the case, and if not, can you give us an update as to how to think about that?

Yes, in general what we try to do because we were sort of mixing apples and oranges, and what happened there was we'd given EPS guidance for 2014 and that's why we switched the metric to the EPS for 2015, the $0.08-$0.13 positive -- or $0.36 to $0.41 improvement. Operating margins are going to be positive. What happened was, we originally gave a 60% of current stores, when our stores were in the 14% range. And then our stores jumped to 16% and we're not going to be at 60% of that. And again we're going to have margin improvement, so that metric didn't work anymore. So we still felt pretty good about the operating margins, if you back out -- if you go up from $0.08 to $0.13 it's going to show you that we're going to have to be in the mid-single digits operating margins in stores, to hit that number.

Great. Thanks very much for the call.

Think you, John.

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

Thanks again, Jessie. As always, I'll be available for the balance of today, tomorrow, and throughout the coming week to answer any follow-up questions you have. We want to thank you again for joining us this morning, and thanks for your continued interest Sherwin-Williams.

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