宣偉 (SHW) 2015 Q1 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of the first-quarter 2015 results and expectations for the second-quarter and full year. This conference call is being webcast simultaneously in listen-only mode by Vcall via the Internet at www.sherwin.com. An archived replay of this webcast will be available at the www.sherwin.com beginning approximately two hours after this conference call concludes and will be available until Wednesday, May 6 at 5 PM Eastern time. After the review of the first-quarter results, we will open the session to questions.

I will now turn the call over to Bob Wells.

Thank you, Melissa. Good morning, everyone, thanks for joining us. We're going to begin the call this morning as usual with a brief recap of first-quarter 2015 results by John Morikis, our President and Chief Operating Officer. Then Chris Connor, our Chairman and CEO will provide some perspective on the quarter and our expectations for second-quarter and full-year. Following their remarks we will open the call to questions and Sean Hennessy, our Chief Financial Officer, and Al Mistysyn, Vice President Corporate Controller, are with us this morning 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 law with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made and the Company undertakes no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided on our earnings release transmitted earlier this morning.

In the interest of time, we've also provided some balance sheet items and other selected financial information on our website, www.sherwin.com, under the investor relations tab first-quarter press release.

With that, let me turn the call over to John to review our performance for the first quarter.

Thanks, Bob. If you have listened to our earnings calls over the past few quarters, you may detect a familiar pattern in today's release. Once again in the first quarter, we saw good momentum in most of our domestic businesses and less favorable results from our nondomestic operations.

I will begin by highlighting overall Company performance for first-quarter 2015 compared to first quarter of 2014 then comment on each reportable segment.

Consolidated net sales increased 3.5% to a record of $2.45 billion driven primarily by higher paint sales volumes in our paint stores and consumer groups. Unfavorable currency translation decreased consolidated net sales 3.1% in the quarter.

Consolidated gross profit dollars increased $66.5 million in the quarter to $1.13 billion. Our consolidated gross margin increased 120 basis points in the quarter to 46.2% of sales from 45% in the first quarter last year. Most of the gross margin improvement in the quarter resulted from higher sales by Paint Stores Group, our highest gross margin segment and increased operating leverage from higher production and distribution volume.

Selling, general and administrative expenses increased $45.1 million over first quarter last year to $929.2 million. As a percent of sales, SG&A increased to 37.9% in the first quarter this year from 37.4% last year due primary to the incremental investment in the Lowe's rollout.

Interest expense decreased $4 million compared to the first quarter last year to $12.4 million. This decrease was due to the rate difference between the $500 million in five-year notes we retired in the fourth quarter of 2014 and comparable increases in our short-term borrowings.

Consolidated profit before taxes in the quarter increased $27.2 million to $193.2 million due primarily to improved operating results from our Paint Stores Group.

Unfavorable currency translation reduced profit before tax in the quarter by $6.4 million or 3.8%. Our effective tax rate in the first quarter this year was 32% compared to 30.5% in the first quarter of 2014. For the full year 2015, we expect our effective tax rate to be in the low 30s compared to last year's rate of 31.2%.

Consolidated net income increased $15.9 million to $131.4 million. Net income as a percent of sales, was 5.4% compared to 4.9% in the first quarter last year. Diluted net income per common share for the quarter increased 21% to $1.38 per share from $1.14 per share in 2014.

Now looking at our results by operating segment, sales for our Paint Stores Group in the first quarter of 2015 increased 7.5% to $1.46 billion from $1.36 billion last year. Comparable store sales, sales by stores open more than 12 calendar months, increased 6.4%. All the Paint Stores Group sales increase was due to higher organic paint and equipment sales volumes across all end markets. Price mix had a negligible impact on sales in the quarter.

Regionally in the quarter, our Midwestern division led all divisions followed by Southeastern division, Eastern division and our Southwestern division. Sales and volumes were positive in every division. Segment profit for the group increased $30.3 million or 20.7% to $176.6 million in the quarter as higher paint and equipment sales volumes were partially offset by higher SG&A spending.

Segment operating margin increased to 12.1% of sales from 10.8% in the first quarter of last year.

For our Latin America Coatings Group, first-quarter net sales decreased 8.9% to $166.2 million due to unfavorable currency translation that was partially offset by selling price increases. Volumes in the quarter were slightly positive but currency translation rate changes decreased sales in US dollars by 13.9% in the quarter. Segment profit in US dollars increased to $9.5 million in the quarter from $10 million last year. Segment profit was negatively impacted by higher raw material costs and unfavorable currency translation partially offset by selling price increases.

Currency translation decreased Latin America segment profit by $3.4 million in the quarter. As a percent of net sales, segment operating profit was 5.7% in the quarter compared to 5.5% in the first quarter 2014.

Now turning to Consumer Group, first-quarter sales increased 8.1% to $351.7 million due primarily to the initial shipments of the HGTV HOME by Sherwin-Williams paint program to Lowe's stores. Segment profit for the Consumer Group increased $4.3 million to $55.4 million in the quarter from $51.1 million in the first quarter last year.

The profit improvement in the quarter was due primarily to increased operating efficiencies that were partially offset by higher SG&A spending related to the HGTV HOME rollout. Segment profit as a percent of external sales increased to 15.8% from 15.7% in the same period last year.

For our Global Finishes Group, sales in US dollars decreased 5.6% to $469.6 million in the quarter as unfavorable currency translation was partially offset by higher selling prices. Unfavorable currency translation decreased net sales for the segment 6.9% in the quarter. First-quarter segment profit stated in US dollars decreased $7.6 million or 16.3% to $38.9 million due primary to unfavorable currency translation rate changes, which decreased segment profit $4.4 million in the quarter.

As a percent of sales, segment profit decreased to 8.3% from 9.3% in the same period last year.

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

Thank you, John. Good morning, everybody. Thanks for joining us. First quarter was a good quarter from a profit perspective but revenue clearly came in a little below our expectations. This was largely a result of two factors, the impact of unfavorable currency translation on sales was a little worse than we anticipated in our guidance and HGTV HOME by Sherwin-Williams shipments to Lowe's in the quarter were slightly lower than we expected due entirely to timing. This combination reduced revenue growth in the quarter by a little more than 150 basis points versus our guidance.

But neither of these factors affect our expectations for the full year in any way. We remain bullish in our outlook for both sales and earnings as we were in January.

From a profitability standpoint, earnings per share in the quarter grew 21% and consolidated sales growth of 3.5%. Our incremental margin on consolidated profit before tax was more than 32%. As a percent of sales, gross profit expanded 120 basis points, operating profit margin improved 60 basis points and profit before tax improved 90 basis points.

SG&A was the only line on the P&L that went the wrong way in the quarter and that was by design to support the rollout of HGTV HOME at Lowe's.

Both of our domestic operating segments reported solid sales and profit results in the quarter. Paint Store Group got off to a strong start in January, hit a soft patch in February but regained their momentum in late March. Comparable store sales growth of 6.4% in the quarter overcame the drag from the 283 Comex Stores now embedded in the comp. We are encouraged by the fact that the locations we have converted to the Sherwin-Williams format have shown immediate improvement in DIY and residential repaint business, the two highest gross margin customer segments.

During the quarter, Paint Stores Group opened 21 new stores and closed 14 redundant Comex locations. Our plan still calls for full-year store openings in the range of 100 net new locations. Today our total store count in the US, Canada and the Caribbean stands at 4010 locations compared to 3925 one year ago.

Consumers Groups 8.1% sales increase and 10 basis point improvement in segment profit margin in the quarter both reflect the impact of the HGTV HOME load in at Lowe's. If you back out the Lowe's shipments, the group's core sales in the quarter were roughly flat year-over-year. The profit margin of incremental sales was only 16.4% due to higher SG&A spending to support the HGTV HOME rollout.

Our Global Finishes Group and Latin American Coatings Group got off to slow starts for the year due in part to unfavorable currency translation and in part to soft end market demand. Both segments, however, reported positive sales volumes in the quarter but volume did fall a little short of offsetting negative currency impact.

In spite of the inventory build to support the Lowe's program, our working capital ratio decreased to 10.9% from 11% in the first quarter of last year. If you back out the effect of the Lowe's rollout, working capital sales would have been about 10% at the end of the quarter. The reduction in working capital combined with the increase in net income more than offset the incremental cash used for Comex Store integration and the HGTV HOME rollout in the quarter. As a result, net operating cash in the quarter improved by approximately $28 million compared to our first-quarter cash performance last year.

During the quarter, we acquired 2.0 million shares of the Company stock for treasury at an average cost of $287.75 per share for a total investment of $575.5 million. On March 31, we had remaining authorization to acquire 3.23 million shares. Yesterday our Board of Directors approved a quarterly dividend of $0.67 per share, up 22% from the $0.55 we paid last year.

Our outlook for raw materials continues to evolve as we get further into the year. The drop in petrochemical feed stock prices combined with steadily improving monomer supply will likely result in declining latex and resin prices in the back half of the year. At the same time, high grade chloride titanium dioxide pricing has softened a bit in recent quarters due to continued weakness in global demand and excess supply.

Based on these developments, we expect average year-over-year raw material costs for the industry to be down in the mid-single-digit range in 2015 compared to the low single-digit outlook we gave in our year-end 2014 call.

As I commented in my opening remarks, we remain optimistic that US residential demand for architectural paint will continue to strengthen as we move into the prime painting season and we are encouraged by growing signs of a robust commercial recovery. This growth will continue to be offset to some degree by challenging conditions in Latin America and currency headwinds, particularly in the first half of the year.

Our outlook for the second quarter of 2015 is for consolidated net sales to increase 6% to 8% compared to last year's second quarter. With sales of that level, we expect diluted net income per common share for the second quarter to be in the range of $3.70 to $3.90 per share, nearly a 30% increase at the midpoint compared to last year's record $2.94 per share.

For the full year 2015, we expect consolidated net sales to increase over 2014 by a high single-digit percentage. With annual sales at that level we are reaffirming our expectation for full year diluted net income per common share to be in the range of $10.90 to $11.10 per share compared to $8.78 per share earned in 2014.

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

Thank you. (Operator Instructions). Gansham Punjabi, Robert W. Baird.

First off, can you just touch on the competitive environment in the paint industry in the US. Just anecdotally there seems to be a lot more of a promotional focus this year across many channels. Just wondering what you are seeing?

Yes, Gansham, I don't think that we are seeing any more aggressive promotional activity than we typically would at this time of year. We are entering into the start of the paint season and that is pretty typical for our industry to incent traffic and volume movement with promotions. Pricings are holding as you can tell by our margin improvement, so I think it is pretty much business as usual.

Okay. And then just in terms of the timing that you called out in the HGTV load in, can you just give us some more color on that, what drove the shift particularly?

Yes, so we are very pleased and confident in the rollout and our revisional projections. And what has happened here is that we gave some initial thoughts on how this thing would roll out. The quarter happened to land in the midst of a pretty major rollout so there are some stores that are shipping week, maybe two weeks later than the original plan but it's nothing we are concerned with and we are very confident in the direction and the rollout and the way it is going.

Okay. And just one final one, if I could, on what you are seeing, if anything different on wage inflation for your US stores. And I'll leave it there. Thanks so much.

Our wage inflation has been pretty standard for a long time, Gansham. Based on the formula we look at given the current market indices, we adjust our annual compensation. Those wages have increased on average 2% to 3% per year for our employee base for many years as they will again this year.

Okay. Thanks, guys.

John McNulty, Credit Suisse.

So with regard to your 2Q guidance, it is implying a pretty significant lift in the margin on a year-over-year basis on the operating side. So I guess I am wondering if you can walk us through some of the puts and takes on that? Is it just you will finally have the Lowe's platform kind of out and ramped up? Or I guess how much of it is being -- is it just the end of some of the Comex headwinds from last year? If you could walk us through some of the major puts and takes that really give you confidence to hit that kind of a margin level, that would be helpful.

When you look at the second quarter and when you look at that guidance going from $2.94 to the midpoint of $3.80, our margin -- I don't think you can get into that kind of a range with that kind of sales gain without having margin expansion. And operating margin expansion I think is going -- you are going to see margin expansion in the gross profit line and I think you're going to see some efficiencies in the SG&A line. That's the only way you can get there.

But I think we are coming over -- coming against the Comex integration. We feel really good about the Comex integration and this is where the business is at. We feel very good if we can get gallons. It also has to do with the sales curve in the second quarter. In the third quarter, the Stores Group and Consumer will be a larger percentage of our total sales, so a couple of things happen there.

Number one, we've always said an incremental gallon in those two groups are the best incremental gallon flow throughs we have in the Company. And number two, even though foreign currency is going to be a headwind in the second and third quarter, with the sales curve again outside the country being a smaller percentage of the total, that headwind will actually be smaller in the second and third quarter. That comes back in the fourth quarter.

So all those things are working in our direction and I think operationally the Stores Group is in great shape and the Consumer Group is in great shape and they are going to lead the profit improvement in the second and third quarter.

Great. That is helpful. And then maybe just one follow-up question. With regard to the HDTV rollout, when we think about the actual costs and how they sequence in throughout the year, I guess how should we be thinking about the lumpiness of that as you are ramping this up? Could we see a lot in the first quarter and then it winds down or do we do see a lot and then it starts to get offset more by revenues coming in? How should we think about that?

I think a couple of things. The last quarter I mentioned that we have 12 months of SG&A because you can't just turn on an organization in mid-March and we had 9.5 months worth of sales. So the first quarter because it is the smallest quarter, the SG&A impact was the greatest and that's why you saw in the first quarter our SG&A was $0.05 higher than last year.

In the second quarter, there's a lot of advertising and a lot of SG&A promotion going on in that second quarter and then you are going to start seeing the SG&A flatten out. And so I think from the expense, the second quarter may be the largest actually but the first quarter is probably the most -- the toughest comparison for us and then you will see the SG&A get to a more normal running rate in the third and fourth quarter.

Great. Thanks very much for the color.

Vincent Andrews, Morgan Stanley.

Just a question if we could sort of try to bridge the full year from your guidance has stayed the same. It sounds like in the quarter you felt like volume could've been a little bit better. You had the issue with the buy-in at Lowe's. Now you are seeing that FX is obviously worse, raw materials are going to be better across the balance of the year. So can you just help us understand what -- in keeping the guidance the same, what are things like on an underlying basis. What has gotten better, what has gotten worse and if we stripped out some of the things that are outside of your control, is the year progressing the same or better, or worse than you expected three months ago?

I think you did a great job of answering that question for us, Vince.

I'm looking for some dimension on those issues, not just the high level.

Yes, we began the year with pretty robust guidance; EPS in the 25% plus range and strong domestic volumes and none of those things have changed for us at all. I think some of these issues are a little bit around the fringe on us. FX is definitely more of a headwind than we had anticipated at the beginning of the year. But as you know, this is a Company that remains primarily a US focused revenue story. So to that end it will be an impact for us but it won't be that much.

Offsetting that is a little better raw materials forecast than we had given you to begin with. We had planned for good raw material favorable impact. It is getting a little bit better than that. So you put a couple of those little marginal puts and takes together, the real driver as Sean just commented, will be the strong results that we are expecting from ours Stores Group and Consumer Group in North America in 2015.

Okay. And if I could just ask a follow-up. You mentioned as it related to your store business that the Southwest was the weakest of all of them. Was there any particular reason for that? Is there anything notable about that or is that just how it stacked up?

Well, it is interesting that you point that out. If you notice also that Midwestern was the leading division and the time of year it is odd to see our Midwestern division leading. Clearly some of the weather that impacted Southwest had a direct impact on their sales. We don't like to talk about weather. We keep our head down and drive our sales but it clearly in that division had an impact.

Okay. Thanks very much.

P.J. Juvekar, Citigroup.

Thank you. A couple of questions on HGTV. Can we begin to talk about the initial reception of the paint in the stores or is it too early and what would be the margins on this product compared to your Customer Group average?

Yes, so I'll give you some thoughts, P.J., on kind of early run and let Sean comment on the margins, at least what we are prepared to say.

As John mentioned, we are really right in middle of this rollout. May 1 is the official national rollout date. We will absolutely be set in every store and ready to go. I would say we probably have two-thirds of the stores set at this time, John, and so we are starting to see some really strong reorders and excitement inside the aisles at Lowe's stores. The color merchandising unit that has gone in has been terrific. It's really creating quite a stir and so I would say that from every angle that we can look at it, this program is really on track with our expectations and off to a good start.

And what we have said, P.J., about the operating margins, the only thing we have commented on is a couple of things. Number one, we're not going to put out a P&L by customer. We never have quoted a customer P&L and we really are not going to start doing that. But what we have done is said that this program during the calendar year 2015 will give us low single digits increase for the Company. Last year our sales were around -- just slightly over $11 billion and that gives you an idea of what kind of sales we have in our guidance. But when it comes to operating margins, we have said at the beginning it was slightly dilutive in the fourth quarter for some of the expenses and it will be slightly accretive in the calendar year 2015. And then we are going to see a nice profit on operating margins in 2016 and that is really all we are willing and prepared to say.

Okay, thank you. And Chris, the fact you had talked about your global ambition in making acquisitions outside the US. With a strong dollar, this seems like a good time. Can you just talk about your pipeline and what are your thoughts about that?

I think we've been very open, P.J., with our investment community regarding our appetite here. We have a strong interest in continuing to strengthen our architectural coatings platform throughout Latin America. And we talk about our industrial coatings businesses on a more of a global business and so there are a number of interesting ideas that we are discussing and at the right time we will be happy to let you know about them.

Thank you.

Don Carson, Susquehanna International Group.

Two questions. First on consumer, Sean, I think on the last call you said that operating margins would actually decline year-over-year because of the cost of the HGTV rollout and yet you were slightly higher. So I'm just wondering what went on in consumer to offset that from a margin standpoint?

And then secondly, just wondering on your Q2, Q3 paint season outlook, what are your contractor customers telling you in terms of their bookings outlook both on residential and nonresidential?

You know, Don, I would tell you probably one of the very nice surprises was the ability for our consumer group to have an operating margin improvement and I think there's two pieces. There was a piece on the selling side but on the manufacturing and the logistic side, they had a very good quarter. And because of that ability they actually were able to have an operating margin $0.01 higher this year than last year. But they were helped by the incremental gallons that they were producing and so forth and they put some of those gallons on our balance sheet which took a little debit and put it on there that you're going to see come off in the second quarter. But that's what really drove the operating margins in the first quarter to be one time higher.

I will take the question regarding the contractors and how they are feeling and I would describe it as very bullish. I have been around the country and in talking with our people as well as our customers, there's a very strong level of confidence. There's a very high level of bid activity and they are very excited about this year. Our non-paint sales of spray equipment and related sales are very, very strong and that is all tied to the confidence that they have in the market.

Thank you.

Kevin McCarthy, Bank of America Merrill Lynch.

In Paint Stores, with you comment on how your spray equipment volumes would have compared to the segment average same-store sales figure of 6.4%?

Our spray equipment sales are extremely strong, very strong.

Double digits perhaps?

Yes.

Okay, good to know. Thank you. Then a second question for Sean, if I may. Typically your net debt balance expands seasonally it seems in the first quarter relative to the fourth quarter. This year the jump was roughly double what you had been running historically. Would you comment on that and what might be driving it?

Yes, I can tell you very quick that we decided to do an accelerated stock repurchase, and AFR, in the first quarter. So in the month of February, as Bob commented, or am sorry John commented, we did purchase 2 million shares in the first quarter. We did that using and ASR and so that's why you saw a use of cash of approximately $585 million. And so in the last few years we have been a little more cautious in buying stock in the first quarter but this year when we were looking at the cash generation of the Company and what we are going to do with the cash, we feel very good and we went out and we bought the 2 million shares. At the end of the year we still believe that our debt, our total debt will be in that 1 to 1 range with our EBITDA.

Okay. And last one if I may. It sounded like the HGTV load in was running slightly later then you had previously anticipated. But other than that, were there any March to April timing shifts that you would consider noteworthy?

No, I don't know that there is anything noteworthy in that. And I would like to be just really clear on that HGTV. We had some protections on how this would roll out. This was just a simple matter of having some areas that we had planned on moving a week or a couple of days in some cases just falling on the other side of the line of the quarter. So I want to be clear not sending the wrong signal here. It's just a matter of a very simple timing and where the quarter landed in the midst of this rollout. So it's important you understand that as well.

Yes, that's helpful. Thank you.

Arun Viswanathan, RBC Capital Markets.

I'm wondering if you can give us an update on what you are seeing, or if it's too early on the spring paint season is shaping out as you expected? Thanks.

We expected a strong start to the season and our contractors would tell you that the average excited about that. There's a strong pipeline of bids, as I mentioned earlier, and there's a good feeling about that. I think many of the contractors experienced a little bit of a delay in some of those projects starting with some of the weather that they face, so we are excited about the paint season.

And Arun, To put a little context around that, the American Coatings Association came out with their forecast of volumes for 2014 and 2015 a couple of days ago and their outlook for this year is for annual growth of 5.6% but first-quarter growth more in the 3% range, so they kind of anticipated a slow start but a really strong season to follow.

Okay. And just some clarification on the industry numbers than. Would that bring us closer to kind of a normal level of gallonange in the 750 million range or where do you think we are tracking on the year?

No, they actually took their 2014 number down a little bit. We've been talking about 2014 being a 3.5% growth year. They actually knocked that down to about 2.5% or 2.8%, so they finished the year in the range of about 720 million gallons. If you put 5% on top of that, we are still not back to where we think this cycle is going to peak or even normalize.

That's very helpful. And then just as a last follow-up, can you differentiate any activity in new construction versus repair and remodeling and how the two segments are going? Thanks.

Yes, historically repair and remodel has been about 80% of the industry, so a smaller percentage increase in that segment will move the needle on gallons a lot further. Repair and remodel recovered earlier than new construction. It has remained strong. We have commented for a while now that residential repaint is the strongest growth category that we have seen. But if you look at the numbers, particularly in the housing market year to date this year, we have seen really strong activity in new home sales. So in fact, permits have actually lagged sales, so it has drawn inventories down. We would expect a very robust building season in the spring given that inventories are as low as they are now. So repaint has led the pack but new home construction will be a strong contributor this year.

Okay, great. Thank you.

Bob Koort, Goldman Sachs.

I was wondering if you guys could help describe for me when a consumer comes into a Lowe's, what is the selling proposition of the HGTV brand, what is the differentiator there and maybe where it sits on that price point scale?

When you walk into a Lowe's store, Bob, you are going to see immediately the impressive color presentation that the HGTV HOME by Sherwin-Williams makes. That really starts the shopping experience. Those color centers are at the end of their drive files, they are close to the very entry points of their stores. A good number of the Lowe's stores that we have been in since the rollout has begun, you're able to pick out that color center literally within steps inside the store.

So I think that is going to create excitement and an impression into the department. Once the consumer has made that choice if it is an HGTV color, then they are inclined to look for the HGTV product and then Lowe's associates will be trained to help them make that.

I think as we have commented in the past, both Valspar and PPG remain in the department. They will have product offerings as well too. So this will be a typical experience for all the boxes in managing multi-supplier lines in the department and there will be the merchandising and quality and name association that will help drive that preference for the HGTV HOME.

The confidence factor I think with the color selector and the coordinating of the colors is another compelling feature of the HGTV, so the consumer with confidence can choose a color as well as coordinating colors to go along with that.

And do you guys, will you have completed by May 1 on the ground training at every Lowe's location?

Yes, we will have.

Okay. And then last thing real quick, if I might. You mentioned Latin America raw material inflation. Could you describe what was going on there in the context of expectations for deflation on the horizon?

Again, the majority of the raw materials are priced in US dollars so when the currency devalues, de facto is a raw material increase for the different countries (technical difficulty).

Understood. Thank you.

Nils Wallin, CLSA.

Good morning and thanks for taking my question. First off, I was wondering if you could size the accretion you might have seen from Comex this quarter?

This integration has gone great and I think that what we said is last year we lost $0.28 and for the year we are going to be at $0.10. We feel it's going to be there but as it is so integrated now, we don't feel confident on a quarter by quarter basis to give you that kind of detail. So that's why I think we have said that in the future we not going to be commenting on this acquisition. It is baked into the --

Understood. I am curious, there wasn't -- Paint Stores is usually pretty much a US dollar type business but obviously with Comex coming in, there's a heavier Canadian footprint and the Canadian dollar did depreciate year-over-year. So was there any sort of FX headwinds in the Paint Stores Group?

Yes, you are exactly right. With the Canadian sales in the Paint Store Group, there was some headwind but we break out the headwind 3.1% for the Company. We don't break it out to that finite by the segment.

Got it. Okay. And then you just mentioned in the previous question about the raw materials in Lat-Am being priced in dollars, so that sounds like it is a transactional type FX effect. Is there any opportunity for you to switch that or buy more locally to offset those FX headwinds going forward?

Not on the major titanium dioxide and some of the other major resins and so forth, so that's a situation we are in. There are some small percentage of the raws that we do buy locally but not enough to offset that.

Thank you very much.

Dmitry Silversteyn, Longbow Research.

Would just like to tie up a couple of outstanding questions that I have. In the Global Group, can you provide a little bit of granularity between volume and pricing, what the components of revenue was outside of FX?

What we have said is, if you think about it, we said that our sales were down 5.5% and we said that our gallons were up slightly. So that we did put pricing in there in the local currencies but not enough to offset the currency [hedge], but the volume was up slightly.

Okay and the price increases, was that mainly -- this is both for Latin American and the global group. The price increases that you mentioned, that was mainly to offset the deflation in the currencies, I would imagine?

Yes.

Okay. In terms of your guidance for the year, it sounds like with increased foreign exchange headwinds you are nevertheless looking for high single digit growth for the year sort of reported sales, so it sounds like the organic sales growth expectations have improved.

Is that a correct read through and sort of what is behind that? Is it just the optimism in the [stores] business with the contractors benefiting from commercial construction, or are there other drivers to your more upbeat expectations for organic performance in 2015?

I think everything you said there was accurate. We still believe that for the full year we are going to make it and we also believe that the foreign currency is going to be a slightly stronger headwind than we did three months ago.

I will tell you we still remain pretty confident in that range because as I tried to point out, the 3.1% is very strong in the first quarter even if the currency remains exactly the headwind in the second and third quarter, that number should reduce.

So -- and the other thing you have to remember is we did have some foreign currency devaluation in the guidance already so that 3.1% was not 100% incremental. We did have some. So it is just that incremental piece and when you look at the range of let's say 7% to 9% at 2% on $11 billion, $220 million, we still feel that we are in pretty good shape to get inside that range.

Got it, got it. And then the final question, you talk about raw material sales in the mid-single digits for 2015. You also mentioned that you expect that to really take place in the second half of 2015. So are we to interpret from that that second half 2015 may see more like a double-digit decline in raw material costs on a year-over-year basis?

I don't think so, Dmitry. I don't think it will be that strong. We will have to see -- I think the linchpin is going to be TiO2. We will have to see what happens with TiO2 in the back half but I would say that the back half will likely be in the mid- maybe upper mid-single digits.

Okay. So the back half will be mid to high single digits. Okay. Got it.

Dennis McGill, Zelman & Associates.

First one, Chris, you had mentioned I think -- the term used in February was a lull in February and I think you said that it took until the second half of March to pick up, just want to confirm that the first half of March looked more like February?

And then maybe if you could just frame a little bit what was the difference between (inaudible) exiting the quarter and what you were seeing during that lull Period? (multiple speakers)

Sure, Dennis. That is exactly what we said. February was a soft month for us. March started a little soft but really started to pick up and John made a brief comment about weather in the quarter. As we started to see some warmer days, we really were seeing the acceleration of all this confidence that is pent up out there with this professional painting contractor.

I think what is notable is that it is winter in the fourth quarter. It is supposed to be cold and Boston is supposed to have the kind of snow it had and we had stores closed, etc. That really wasn't the impact. It was the cold south of the Mason-Dixon line that really had the impact and just as we commented about our Southwestern division kind of lagging, a division that typically leads at that time of year, when we got some warm weather in those parts of the geography, we really started to see it rebound.

Now that we are into the second quarter weather really diminishes as an impact at all and again back to the strong guidance we are giving.

And I guess just indirectly the guidance you are giving on sales on organic base in the second quarter suggests paint store sales are getting back to that high single digit rate?

Correct.

Okay. Then separately on the global side, I think when you back out FX, this quarter was modest growth and it had been something more in the 4% or 5% range recently. Can you just talk to whether you think that continues? And if so, just sort of give some color on what you're seeing in different geographies and different end uses?

Well the performance by business unit varied and not surprisingly our business in North America across every category was stronger than a relatively weaker performance in Latin American and Europe and obviously part of that was due to the currency. We expect in local currency for these businesses to improve and over the balance of the year we feel they will get on top of it, so we are confident about the year and the projections we have given you.

Okay.

In Latin America, Dennis, in the first quarter, we had volume gains in every country with the exception of Brazil and it has been a while since we have seen that. So starting to feel better about our prospects there as well.

Okay, perfect. Thank you, guys.

Greg Melich, Evercore ISI Group,

I wanted to follow-up (inaudible) just to make sure I got this right. So if you hadn't had the HGTV program, would SG&A have levered in the first quarter? And if you were to think about it going forward, we do expect it to lever at the corporate basis in the second quarter but probably not in consumer. Did I summarize that right, Sean?

Yes, the only thing that we did not say is that we would have shown some efficiencies in the first quarter with SG&A. Without that, I think that we don't want to break that out. The reason we don't want to do that is to tell you how much we spend exactly on the Lowe's program but we would not have had the $0.05 of increase on SG&A, right.

It would have gone the right way, it would have been down. We don't know how much?

Yes.

And then the follow-up, I want to talk a little bit more about the outlook or ask beyond there. I know we have talked a little bit about resi and it looks great deer and the contractors. What about commercial and industrial? What sort of read can you see there? Is there any sort of project work going on, or is that not dialed up or is that just sort of as planned?

There's quite a bit of project work going on and due to the long start to paint cycle in the nonresidential space, you kind of got to look back a year or more at the data and if you look at 2014 data in terms of signed contracts, nonresidential rebounded pretty strongly, up about 7% in total with as we pointed out before, some really strong categories in office and bank, hotel and motel, manufacturing, etc. And so there is certainly growth across the country. There are specific categories that we can target to grow faster than the market in total.

And by the way, those were contracts I just talked about but we also saw a big jump in starts in the fourth quarter of 2014. There is a lot of projects coming out of the ground that will be painted this year, so it is looking a lot better than last year and that is mostly driven by occupancy rate, which also implies that the repaint market will be strong in nonresidential this year.

Great. And then lastly, I know it's early days but what do you expect the HGTV program at Lowe's to do to the program in your own Paint Stores Group? Do you expect it to help, to hurt -- anything there in terms of your plan would be helpful.

Yes, the HGTV Home program inside the Sherwin-Williams Paint Stores Group format is not a significant contributor to our overall revenue. Having said that, we think the additional exposure for the brand, the additional advertising, some of the upgraded color features and labeling which will impact both the Sherwin store offering as well as the Lowe's store will have a positive impact. So it should be marginally better to flat would be our expectation.

And Chris, is there a lag to that do you think, or do you think that it sort of happens as the advertising, etc., kicks in, or is it --?

I think we will see it in the second and third quarter when we really start to ramp up the marketing activities.

That's great. Thanks.

Ivan Marcuse, KeyBanc Capital Markets.

Just a couple of quick questions. I believe your gross margin range typically I think you have said the past couple of quarters 43% to 47% with lower gross margin -- with lower raw materials. Do you expect to exceed that range this year, or would you expect to move that range over time with the impact of the additional volume that you've gotten over the past couple of quarters?

Ivan, you are absolutely right. We believe that this range where we have been talking about the 43% to 46%, 44% to 47%, we think we are really in a 44.5% to 47.5%. I would tell you that would be the range that I would give today.

Okay, great. And then you mentioned that there's weather every year, which there is. I am curious, have you seen any impact of the lower oil costs hitting the economies of Texas or any other energy impacts in terms of construction or housing or anything to that effect?

Not really. I've spent some time with our team down there and they are feeling pretty good about the marketplace, so there's not been any impact in our business down there.

Great. Thanks for taking my questions.

Jay McCanless, Sterne, Agee.

First question I had, trying to catch up with Comex and how many of those stores are now part of the actual comp group to make up your comp store sales for the Paint Stores Group?

283.

On a percentage basis of the stores you acquired, where does that stand?

Well we acquired 306, so 283 divided by 306 is about 93.5%. I did that in my head real quick.

It's a meaningful part of the comp group at this point? You are not going to get any more catch-up from those stores rolling in?

Well, we have approximately close to 4000 comp stores, so there are 293 of the 4000 stores, so that's half of one percent. I'm sorry you are asking a question of how many we -- remain. (multiple speakers)

So September 2013, right. So they are fully in the comp number. That's the point we are making.

Jay, do you mean what percentage have we converted to Sherwin stores?

No, I just wanted to see if they were part of the comp group already -- (multiple speakers). My other question is, on SG&A in 2Q 2014, are there any one-time items in there that aren't going to reappear this year? Just trying to frame our model for how SG&A is going to look.

No. When you look at that SG&A was 31.8% and $970 million. There really was no one-time onlys.

(technical difficulty)

Good morning, everyone. You covered a lot of ground but the one thing I want to ask Sean is it looks like CapEx bumped up quite a bit year-over-year in the first quarter. Is there anything going on there?

Chuck, we said that our CapEx would be high this year around $220 million to $240 million and what we're doing is converting those Comex stores, that is what is driving it this year. So as those conversions occur, we continue to spend approximately $100,000 per store and that's an ongoing cost.

Will you get them all done this year?

We will get most of them done. The largest part of it. There will be some perhaps in Canada that will roll over and maybe a little bit out on the West Coast but the largest part we will get them mostly done.

And finally, any other significant projects in the CapEx budget for 2015?

No. That's the major right there.

All right. Thank you.

Jeff Zekauskas, JPMorgan.

Can you remind us what percentage of Sherwin-Williams' consolidated sales are nonpaints or non-coatings?

I don't think we've ever given that dynamic. I think we've talked about the stores and so forth but I don't think we've ever given that and the reason why is because we are diversified and we have brushes and rollers, we have caulk and so forth I don't think we have ever given that metric.

We have given you some directional help there, Jeff. I think we say our stores are 70%, 75% coating sales. The rest would be spray equipment, etc. Our Consumer Group would be probably the same range, 60%, 70% range in coatings, brushes and rollers. Whether you consider aerosol paint as paints or specialty, that might be a different way to look at it. But and all of Global Finishes Group would be coatings.

Okay. And then secondly, do you think that there will be any sequential change in your overall prices, or for the industry in 2Q or 3Q? How does the general price outlook appear on a sequential basis?

No, we think that if you look at the selling prices, there's a lot of activity going on and pricing has been fairly stable. Just to remind you the last time we put a price increase in was early January 2014.

And then lastly, what is the size of the DIY business in the stores and will the consumer say I can get Sherwin-Williams paint at Lowe's, I really don't need to get it at the stores. Do you think that there might be a trade-off for the consumer, or no?

We have been consistently at about 15% of that Paint Stores Group revenue (technical difficulty) DIY consumer. We don't expect that to change substantially one way or the other.

Okay, great. Thank you so much.

[Geoffrey McKinney], BofA Merrill Lynch.

Just a follow-up on the share repurchase side. The utilization of short-term debt to fund that acceleration, should we think about the balance sheet kind of sustain a normal debt balance, that coming down or being refi-ed and termed out? I'm just curious about how we should think about that going forward.

I think you should think about that it is going to come down. Our largest debt at the end of the quarter will be the first quarter. I also think you should think about terming this out. We are looking at issuing some bonds this year. The timing is not exactly public yet because we haven't decided exactly when.

One of the things about it, you have seen our interest rate -- our interest expense was $4 million less in the first quarter than last year, which was positive because when we did -- when the bonds matured our five-year bonds matured in 2014, we did not reissue. But we are so heavy into short-term debt I think as I said earlier, I think our debt by the end of the year will be in that 1 to 1 range of EBITDA and you will see our fixed notes being a much higher percentage of our total debt.

Okay, great. Thank you, guys.

John Roberts, UBS.

Just in under the wire here. Good morning, guys. You're off to a slow start in the new store openings. It is normally a little bit of a hockey stick anyway and back end loaded but it looks even more so this year. Should we expect you to get fully caught up there?

Yes, you should expect us to continue to run around that 100 new store rate. We try to press these deals earlier in the year. For some reason a lot of them end up at the tail end of the previous year but there is a really very good pipeline that -- the team is working on it. We are excited about our pipeline of new stores this year.

And then if the raw materials are down mid single for the year and down mid to high single in the back half of the year, one of the things that are down the most in that outlook. Is TiO2 something that is at the higher end, or are some things about the high end of that that might be down even double-digit?

I think, John, from a timing standpoint we are seeing more relief on the petrochemical side of the basket early in the year and to get to mid to upper single digits by the end of the year, we would need to see a slide in TiO2. So I think that that would probably on a percentage basis perhaps put TiO2 down more than the petrochemical than most of the petrochemical side of the basket but right now that is not the case.

Thank you.

Rosemarie Morbelli, Gabelli & Company.

I was wondering, we talked a lot about from selling price increases offsetting FX devaluation and so on but as your raw material costs are coming down, do you anticipate some selling price pressure having to cut some of your pricing obviously outside of contracts?

Not significantly, or have an impact at all, I don't think, really. Large jobs are always competitive. We quote those accordingly. Raw materials are one element of it -- one component of what goes into the selling price. Our services that we provide and the quality of the product, the people that we have with our customers, all are a component of debt. So I think we are going to continue to see the pressure where we always have seen it but nothing any more than we have in the past.

All right, thanks. And then you also talked about the high level of expectations or satisfaction rather from contractors. Do you see any change in the do-it-yourself? Do you see that particular part of the equation growing still this year? Or do you think that people have more or less repainted what they were going to repaint for the last couple of years?

Well we never think that, Rosemarie. But we continue to see across the entire country a shift towards the painting contractor away from the DIY just as the demographics of our country support an aging population and less free time, etc.

Having said that, the remaining portion of the market, which is around 40% of all the gallons are purchased by DIY and we would expect this to be a good year. Bob has mentioned about residential repaint being one of the strongest segments. Residential repaint is both DIY and pro and we have seen nice growth there as well too. We have given color on our DIY sales gains inside the store's organization and the consumer group is mostly DIY, so we would expect to see nice results there this year.

And the HGTV is also DIY, correct?

That is correct and that will be an impact as well.

Okay. And if I may, how long do you expect this housing recovery to continue based on your experience, based on historical data? Do you think it is another two years to go, another three years? Any thoughts?

You know, Rosemarie, we have said -- we have been saying for the last couple of years that we really like the pace of this recovery. That we are not seeing huge year-over-year increases in activity on either the residential or nonresidential side of the market and at this measured pace depending on where the market peaks exactly, it could certainly go another three to five years. We think that 1.3 million to 1.4 million residential starts is normal but we have been running below that normal rate for quite a while now for a number of years now and so there should be some catch up required that would require us to go above the normalized rate during -- at the peak of the recovery. So we could be three to five years from the peak.

That is great. And if may ask for one last question for Sean, as you fix a lot of your short-term debt, you are obviously going to do it at a higher rate. Could we look at next year having interest expense increase by about 3%, is that more or less what we should be looking at?

4%, 4.5% when you think about next year. And I would say that 4%, 4.5% between 2016 and 2014 depending on the timing, we save $4 million in the first quarter. If we do a bond deal this quarter, you are not going to see that same savings. If it goes to the third quarter, you will see two quarters of it. So that's why I think probably compared to 2014 is the right one -- the right way to look at it full year.

And when you say -- so what you are saying so I am making sure I understand is that the rate will be about 4% to 4.5% above whatever you had in 2014, or is it that your interest expense will go up by that amount? (multiple speakers)

Interest expense. The interest expense.

Okay, great. Thank you very much.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I would like to turn the floor back to Mr. Wells for any final remarks.

Thank you again, Melissa. As a reminder, our financial community presentation is scheduled for Thursday, May 28 at the Langham Hotel in Boston. The program will consist of our customary morning presentations with a question-and-answer session followed by a reception and lunch with Company management. If you have not yet signed up and would like to attend, registration is to still open. Send me an email at rjwells@sherwin.com and I will reply with a link to our registration site.

As always I will be available over the next few days to handle any follow-up questions that arise as you digest this morning's call. I would like to thank you again for joining us today and (technical difficulty).