宣偉 (SHW) 2015 Q2 法說會逐字稿

Good afternoon. Thank you for joining The Sherwin-Williams Company's review of second-quarter 2015 results and expectations for the third quarter, and full year. This conference call is being webcast simultaneously in listen-only mode by issuer direct via the internet at www.Sherwin.com. An archived replay of this webcast will be available at www.Sherwin.com beginning approximately two hours after this conference call concludes, and will be available until Wednesday, August 5, 2015 at 5:00 PM Eastern time.

Following a review of the Company's second-quarter financial results, we will conduct a question-and-answer session. I will now turn the call over to Bob Wells, Senior Vice President, Corporate Communications.

Thank you, Jessie, and good morning, everyone. Thanks for joining us.

We're going to begin the call today with some prepared remarks by Chris Connor, our Chairman and CEO, and John Morikis, President and Chief Operating Officer. Following their remarks, we will open the call to your questions, and Sean Hennessy, our Chief Financial Officer, and Al Mistysyn, Corporate Controller, are with us to participate in the Q&A session.

But before I pass the microphone to Chris, 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 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. You will find a full declaration regarding forward-looking statements in 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 at www.Sherwin.com, under Investor Relations July 16 press release. With that, let me turn the call over to Chris.

Thanks, Bob, and good morning, everybody.

Back in January, on our year-end 2014 conference call, we issued guidance for 2015 that some would say was out of character for Sherwin-Williams. It was aggressive, on both revenue and earnings per share growth.

The confidence we had in our outlook for high single-digit sales growth came primarily from the continued strength of the North American market, which as you know, accounts for more than 75% of our revenues. This optimism was slightly countered somewhat by declining oil and gas infrastructure investment worldwide, and the weakening currencies in Latin America and Europe.

Because sales volume drives productivity and margin improvement, our bullish sales outlook prompted an equally bullish expectation for 25% earnings per share growth, at the midpoint of our range. Although this guidance might have seemed out of character for us, we believed it was appropriate, given the market environment we saw at the time.

Today, we are revising our expectations for the full year. We now expect consolidated net sales for the year to increase 3% to 5% compared to full-year 2014, and diluted net income per common share to be in the range of $10.60 to $11 per share, a 23% increase at the midpoint of the range, over last year's $8.78. By any measure, 23% earnings improvement and mid single-digit sales growth is a very good year, just not quite as good as we originally expected.

So what's changed? The most obvious answer is also completely out of character for us. As most of you know, it is our long-standing practice to not give weather reports on earnings calls, but the unprecedented rainfall across most of the United States during the past three months is hard to ignore.

16 states recorded above-average rainfall in the month of April. That number increased to 22 states in May, with 12 of those recording much above average, and Texas, Oklahoma, and Colorado setting all-time rainfall records. Then in June, the rain moved to the Midwest and Northeast, with 24 states recording above-average rainfall, and three of those, Illinois, Indiana, and Ohio, setting all-time rainfall records.

The impact of these extraordinary weather patterns can be seen in national home building data, as well. Residential building permits were up 25% year-over-year in May, while actual starts were up only 5%. Year-to-date, residential permits have increased at twice the rate of starts. Non-residential construction projects have suffered similar delays.

We're breaking with tradition in talking about this weather impact today, not so much to explain our soft sales results for the second quarter, but to illustrate why we remain upbeat on the future. Bad weather doesn't destroy demand for paint; it only postpones it. The change in our full-year guidance is not a reflection of lost confidence, but the reality of lost days. We believe market demand remains strong, but we've reached the point where it is unlikely the delays caused by weather will be fully recouped in this calendar year.

I want to turn the call over to John to review our results for the second quarter, then I'll be back to provide a little more color and walk you through our expectations for the third quarter. John?

Thanks, Chris, and good morning, everyone.

I'll begin by highlighting overall Company performance for second-quarter 2015 compared to second-quarter 2014, then comment on each reportable segment. Consolidated net sales increased 2.9% to $3.13 billion, driven primarily by solid performance in our paint stores and consumer groups.

Consolidated group profit dollars increased $120 million year-over-year to $1.5 billion, and gross margin increased to 48.8% of sales from 46.3% in the second quarter last year. Selling, general, and administrative expense for the quarter increased 3.1% to $999.2 million. As a percent of sales, SG&A increased 10 basis points to 31.9% in the second quarter this year, from 31.8% last year, due primarily to the incremental investment to support the HGTV Home rollout at Lowe's.

Interest expense for the quarter was $12.9 million, a decrease of $3.5 million compared to the second quarter last year. Consolidated profit before taxes in the quarter increased $78.5 million to 18.3% -- or 18.3% to $507.7 million. Our effective tax rate in the second quarter this year was 31.1%, compared to 32.1% in the second quarter of 2014.

Consolidated net income increased $58.5 million, or 20.1%, to $349.9 million. Net income as a percent of sales increased to 11.2%, compared to 9.6% in the second quarter last year. Diluted net income per common share for the quarter increased 25.9% to a record $3.70 per share, compared to $2.94 per share in 2014.

Looking at our results by operating segment, paint stores group sales increased 5.4% to $1.98 billion. Comparable store sales, sales by stores open more than 12 calendar months, grew 3.9% in the quarter over last year's comparable period. Regionally in the second quarter, our Midwestern division led all divisions, followed by Southeastern, Eastern, and Southwestern. Sales and volumes were positive in every division.

Paint stores group segment profit for the quarter increased $57.5 million or 15.3%, to $433.4 million. Segment profit as a percentage of sales increased in the quarter to 21.8% from 20% in the second quarter last year.

The consumer group also turned in a solid performance for the quarter. Sales increased to 13.1% to $490 million, due primarily to shipments of the HGTV by Sherwin-Williams Paint to Lowe's stores. Segment profit for the consumer group increased $21.7 million to 23.5% -- or 23.5%, to $114.2 million, from $92.5 million in the second quarter last year.

The profit improvement for the quarter was due primarily to higher sales volumes and improved operating efficiencies that were partially offset by higher SG&A spending related to the HGTV Home launch. Segment profit as a percent of external sales increased to 23.3% from 21.3% last year, an increase in six months to 20.2% from 18.9% last year.

For our Global Finishes Group, sales in US dollars decreased 7.1% to $505.8 million in the quarter, as unfavorable currency translation was partially offset by modest buying increases. Unfavorable currency translation decreased net sales for the segment by 7.7% in the quarter. Segment profit in US dollars increased to $57.3 million from $54.9 million last year. Our results last year include charges in the quarter totalling $4.5 million, related to the exit of our business interests in Venezuela.

In the second quarter of 2015, unfavorable currency translation rate changes reduced segment profit $8.3 million in the quarter. As a percent of net external sales, Global Finishes Group segment profit increased to 11.3% in the quarter, compared to 10.1% last year.

Our Latin American Coatings Group continued to operate in a very challenging economic environment. Second-quarter net sales for the group, stated in US dollars, decreased 17.2% to $150.1 million. Volumes in the quarter were negative, and unfavorable currency translation decreased net sales by 17.4%, both of which were mitigated to some degree by selling price increases. Segment profit in the second quarter, stated in US dollars, decreased to $4 million from $5.7 million in the same period last year.

Currency translation decreased segment profit $2.3 million in the quarter. As a percent of net external sales, segment operating profit was 2.7% in the quarter, compared to 3.1% in the second quarter of 2014.

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

Thanks, John.

My comments for the rest the call focus on our sales in the quarter, because that's clearly where our results deviated from our original expectations. There were some noteworthy bright spots. Residential repaint sales through our paint source group, pro and DIY combined, grew double digits in the quarter. This robust demand was offset by sluggish sales to the new construction segment, and protective and marine.

Our consumer group completed the rollout of the HGTV Home by Sherwin-Williams Paint program in all Lowe's stores by May 1, and that program continues to build momentum as awareness grows. Sales volumes in most of our non-domestic businesses were positive, but gallon growth was insufficient to offset the drag from currency devaluation, which was slightly worse than anticipated in the quarter.

From a profitability standpoint, the picture is certainly brighter. Earnings per share in the quarter increased 26%, and consolidated sales growth of less than 3%. Our incremental margin on consolidated profit before tax was more than 80%. As a percent of sales, both gross profit and operating profit expanded 250 basis points compared to last year, and profit before tax improved 210 basis points.

SG&A actually 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. During the quarter, our paint stores group continued to expand its store footprint, opening 20 new stores, and closing five redundant Comex locations. This brings our year to date net openings to 22.

We remain very confident in the long-term market opportunity for this group, and likewise, remain on pace to open between 100 to 110 new stores this calendar year, as well as close between 20 and 25 redundant store locations. Today, our total store count in the US, Canada and the Caribbean stands at 4,025 compared to 3,941 locations one year ago, an increase of 84 stores in the past year.

In the first six months of 2015, we generated $349 million in net operating cash, an increase of $17.4 million compared to the first half of 2014, driven by higher six-month net income. Working capital was a use of cash in quarter and first half, increasing by slightly more than $80 million. Most of this increase was to support, again, the HGTV Home program at Lowe's. Working capital as a percent of sales increased 11.8% of sales, from 11.7% in the second quarter last year.

During the quarter, we acquired a quarter million shares of the Company's stock for treasury. This brings our year-to-date share repurchase total to 2.25 million, at an average cost of $284.46 per share, for a total investment of $640 million. On June 30, we had remaining authorization to acquire just under 3 million shares. Yesterday, our board of directors approved a quarterly dividend of $0.67 per share, up 22% from the $0.55 per share we paid last year.

Our outlook for raw material supply pricing is virtually unchanged from the view we provided on our first-quarter call. The steady decline in petrochemical feedstock prices over the past year, combined with improving monomer supply has continued to put downward pressure on latex and resin prices over the first 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 still expect average year-over-year raw material costs for the industry to be down in the mid single-digit range in 2015.

As I said in my opening comments, we remain optimistic that US demand for architectural paint will strengthen, as residential and non-residential builders scramble to make up for first-half weather delays. This growth, when it comes, will continue to be offset to some degree by challenging conditions in many non-domestic markets, and currency headwinds.

Our outlook for the third quarter of 2015 is for consolidated net sales to increase 3% to 5%, and for the last year's third quarter. With sales at that level, we expect diluted net income per common share for the third quarter to be in the range of $3.75 to $3.90 per share, compared to $3.35 earned per share in the third quarter of 2014. Again, for the full year of 2015, we expect consolidated net sales to increase 3% to 5% over full-year 2014, and diluted net income per common share to be in the range of $10.60 to $11 per share, compared to $8.78 per share earned in 2014.

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

(Operator Instructions)

Our first question is coming from the line of Ghansham Punjabi with Robert W. Baird. Please proceed with your question.

Just given the drop in raw material prices that you've seen this year, can you, first off, characterize the current environment as it relates to discounting for paint this year versus maybe in previous years? Any material change there?

I think that pricing has held fairly consistent, Ghansham. We have commented over the past cycles that in this environment, we'll see some lower bid pricing on major projects. For the most part though, pricing has been very benign and pretty flat for the year for us.

Okay, and then just -- you called out weather, but was there any meaningful impact in demand from the drop in oil prices, and maybe the related impact in the regions that are exposed to oil, such as Texas?

Yes, we commented I think directionally in the comments, relative to our protective and marine businesses. We've seen a lot of coatings that we would typically supply into the oil field, the rig builders, the supply chain organizations that work in those spaces, and we're absolutely feeling that. Texas is one area that you mentioned, the upper Midwest through the Dakotas and into Western Canada where we have a sizable business now, as a result of the Comex acquisition. We have felt the softness in all three of those geographies.

Maybe a question for Sean in terms of the share buybacks. Just looking back, it seems like the lowest amount of share buybacks in aggregate four quarters since 4Q of 2008. Anything particular we should read into that, or is it just timing? Thanks so much.

Again, this is Sean Hennessy. It was really nothing but timing. There was nothing read into it. I think we were asked at the end of the first quarter, it probably had a little more to do with the acquisition pipeline than anything about the stock, and -- but again, we still feel that throughout the years, we're going to continue to generate cash. We feel at the end of the year, our debt to EBITDA will be just slightly above 1 and we're going to utilize that cash, in either acquisitions or buybacks.

Thanks so much, guys.

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

Chris, you mentioned -- I think I heard you right, that residential repaint was up double digits, while the new construction markets were pressured. Does that imply while it was raining outside, lots of people were painting inside?

We can only hope, Bob. Yes, we absolutely did say that. I think for going on three years now on these calls, we've commented about the residential repaint being the real strength of the rebounding architectural market in the United States. And that remains accurate, as well.

We do see these numbers a little more granular when we break out interior coatings versus exterior coatings, you certainly see the weather impact there. But the strength of that market, despite the weather that we commented in a number of these areas, generated a double-digit performance there. I think what you should take away from that is the highlight of the softness that we're seeing on the new construction side of it, as we have commented on the delays in starts and projects, both commercial and residential, by the way.

And as you guys expand into your relationship at Lowe's, should we expect that would have, given the DIY focus, more of an interior market there, or is that going to be as balanced as you would see typically through your stores?

I think it would have more of a DIY slant within the Lowe's customer base. Some of that will be, they will take -- customers there will give those colors to the painters. But most of those people that are going in there typically are do-it-yourselfers.

I'm sorry. I asked it poorly. Is it more interior?

Yes, so the market is, take Bob to the interior/exterior market break-out, and why we see a little bit more interior for DIY.

Bob, this is Bob Wells. The overall market breaks down, about 60% of gallon volume is interior, 40% is exterior, in that range. The exterior market tends to be more of a pro market. Obviously, fewer homeowners are willing to tackle an exterior project, than paint their living room. So the -- in that the Lowe's channel tends to skew more DIY, it would probably necessarily skew more interior than the market. Certainly more than our stores.

And do you guys have any early read at your HGTV, how that price point has trended? I know you weren't there a year ago, but versus what had been the incumbent a year ago? Are you seeing some pick-up at that price point at Lowe's?

I'm not sure I understand the question.

In other words, you displaced somebody else's product from last year. Are you generating year-on-year gains in that price point for Lowe's?

So we aren't commenting, as we've said specifically, about price points, or the Lowe's entirety of the program. All we had said is that this business is going to add somewhere between 2% to 3% revenue. We are two months into the rollout of this, and it's ramping up and we're on track with our guidance that we gave you, for that business.

Chris, I applaud your consistency.

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

Last winter, obviously, the winter before this bad winter, was obviously a bad winter. So I guess my question is, can you get us up to date on, through the course of 2014, did you feel like you made up the demand that was deferred out of, say, the first quarter of 2014 through the balance of the year? As we come into 2015, with still some of that pent-up demand, then we had the winter, now we have the rainfall. I'm just trying to get a sense of what you think the lag effect is on your underlying sales versus sort of the continued improvement we're seeing in terms of the broader macro housing data, whether it's existing home sales or housing prices, or so forth?

So in 2014's bad winter, as in so many bad winters before, Vincent, we would typically say that a good week in June can make up for an entire horrible month of February. The problem was, we didn't have the good week in June in 2015. We absolutely caught up to our 2014, and we didn't feel that we came into the beginning of this year with any pent-up demand. Projects were completed.

In 2015, we're amending those thoughts a little bit, and that was the intent, that we're just running out of days, with having lost so many paintable days in the second quarter. Not even so much painting days, but just construction days. We haven't been able to pour concrete to get pads set for houses to come out of it. Big commercial projects, cranes and skylines across the country are delayed and behind, because of the impact of weather in these markets.

Anedoctally, we can comment on Dallas, Texas, where there is north of 30 cranes on the skyline. A good two-thirds of those should be in the painting stage right now. We're just on two or three of them, as a result of delays given the significant rain they have had down there. So we are going to have pent-up demand as a result of this particular year, that we don't expect we'll get caught up, and so that should bode well for a little bit of a better start in calendar year 2016.

Okay, and just a quick follow-up. Your other income or expense spiked pretty substantially in the quarter. What was in that line item, and how should it trend the rest of the year?

The environmental. We had a little bit of environmental. We show that broken out on the other, but we had approximately year-to-date, we've got about $10 million. Most of that happening in the second quarter that we took on accrual for.

But that won't recur next year or in the future at all?

No. We think that we've gotten through most of our environmental expense for the year.

Okay. Perfect. Thanks very much.

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

This is actually Chris Bottiglieri on for Aram Rubinson. Had a quick question on drought. I can't imagine it would affect your business directly, but maybe you could walk us through if there is an effect, and did you see customers prioritize more lawn outdoor, or do they switch to indoor painting projects?

Well, Chris, we're rooting for a drought in Texas, Illinois, Ohio, and on and on and on. California and the Southwest, where we have been experiencing drought and part of the country has been in it for such a long, sustained period that year on year comparisons really aren't particularly affected there.

So, hot, baking sun creates opportunities for residential exterior paint projects, to protect and sustain properties, given the rigors of that environment. We haven't seen any significant change that we can point to, to your point, that discretionary spending is being moved to landscaping purchases, et cetera. We have heard recently about a trend where people are starting to paint their lawns green, because they can't afford to water them, so that might be a new market opportunity for us.

Makes sense. Just one quick question on your experience at Lowe's so far. With you entering the market, coming back into home improvement channel, have you seen everyone else playing nicely in the sand box? Have you seen competitors maybe proactively taking price cuts given commodity basket coming down, or has it been pretty stable?

We've not so much seen any of the pricing cutbacks that you talked about. We often talk about, that we're blessed with good competitors. They keep us moving forward, and they are not letting us down, and we're working hard every day.

All right, cool. Thanks a lot for the commentary.

Thank you. The next question is coming from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

Hope you're doing pretty well. I guess I just wanted to delve into the sales growth guidance a little bit. Back in second quarter, or first quarter, you said that you were expecting 6% to 8% for the year. And now, you're saying third quarter may be up 3% to 5%. So is it the case that the wet weather, I guess, has continued into July? I mean, why wouldn't you expect a stronger number for third-quarter sales growth?

Couple things. You're absolutely right. You look at the weather we've had in July, it's not like June 30, the weather changed. I think that July continues to be pretty variable.

I think that a couple things, when we take a look at what we think the foreign exchange hit is going to be in the third and fourth quarter, versus what we thought it was going to be during the third and fourth quarter, it's going to be a larger headwind for us. And then finally, I think there's still some projects that are being delayed from the first half, that they still have not been able to get to. There's a lot of different work that just isn't ready to be painted, that's still in the process of getting to the paint stage.

So there's been a lot of delays and those things, there's only so many days. I think Chris mentioned in his script, there's only going to be so many days. So we think that's going to negatively affect our sales gain throughout the remainder of the year.

All right. That's helpful. And then on the industry, do you expect your sales growth still to be 1.5 to twice the industry, or is the industry slowing at all, just because of the weather, and that's how you get to your 3% to 5% expectation?

We'll have to wait and see how the year unfolds, and our competitors' reports will follow. Don't forget that this is a Company that skews heavily to the professional paint contractor, and a lot of this delay tends to be more contractor-driven because of the construction comments we're making, so time will tell.

I think over the long run, Arun, the point is that the model's intact. We don't think anything structurally has changed here, and we can only delay this, not destroy this demand. So we think we're going to be fine. It's just going to be a little choppy getting there.

Okay, and if I may, a quick follow-up on the raws outlook, as you know, the TiO2 was down in the quarter, and it looks like it's going to continue to decline in third and fourth quarter. Does that give you any more confidence that you could potentially be better than the mid single-digit decline in raw costs year on year? Or is it too early to tell? Thanks.

Arun, this is Bob. If TiO2, if the trajectory of TiO2 comes in where we think it will, that implies the mid single-digit decline in the basket, that we've been guiding to, for the last couple quarters.

Okay. Thanks.

So we don't necessarily see more goodness in the current trajectory of TiO2.

Okay. Thanks.

Thank you. Our next question is coming from the line of Don Carson, Susquehanna International Group. Please proceed with your question.

Just a follow-up, Chris, on your industry views. So you showed some slides back at your May investor meeting -- that industry gallons was up 2.8% last year to 720 million. So where do you see the industry this year versus last year?

And the other related question to that, you talk of a normalized band of 740 million to 760 million gallons, and frankly looks like we'll be almost at the lower end of that band this year. Yet obviously housing remains well below normalized levels. So what do you think of the true normalized level of demand going forward in terms of industry gallons?

So we'll have to wait and see, Don, as we said earlier. But our expectations are that industry growth will be lower than we guided to at the beginning of the year, for the reasons that we talked about. We've commented on that band over the years, and said that we tend to be on the conservative side of that. We believe that as the market rebounds, it will have to actually run above that normalized band for a period of time, because we've been below it for so long.

So even 1 million gallons is not an unrealistic number. We see that from a lot of other folks that opine on what the demand might be in this space. Again, plenty of opportunity for growth here. That's why we continue to remain bullish and open these stores at the pace we're on, one every three days and fully expect that we're going to see that materialize over the coming years.

And just a follow-up on gross margins. You had a pretty phenomenal gross margin of 48.8%. It would appear that most of this year's raw material decline is more second half weighted, so maybe, Sean, you can just talk about what momentum you see in gross margins going forward and kind of the carry-through to next year as well?

You're absolutely right. You're looking at 48% that we have in the second quarter. We've been talking about this band of 43% to 47.5%, we said we were going to be at the high end. We can actually probably see it just slightly above the high end of the band.

When we -- you got to remember, we are on LIFO. And so we take projections of what we think the raws are going to come in, in the second half, and we actually get to adjust our cost of goods sold from FIFO to LIFO. Some of that raw material that we're projecting, and you're projecting, are already reflected in that gross margin. So we see that many times we're pretty close to full year gross margin at the year-to-date in the second quarter.

Okay. Thank you.

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

Sean, just on that last point there, are you saying there was a LIFO/FIFO adjustment catch-up in the second quarter?

No, what I was saying is not a catch-up, but we always project out the LIFO between the first quarter and second quarter, just because the amount of raws we buy, and the amount of paint we sell in the second quarter, the adjustment's usually larger. But it's -- it was pretty flattish, when it comes to percentages.

And then on the comment on, Chris, on the 10% or double-digits on residential repaint, should we compare that against the same-store gross number of 4%?

Well, I mean, we have -- I'm not sure I understand exactly what you're getting at--

Is it relative to the overall growth in paint stores, or the same-store growth, I guess, is the question?

That was total. Double-digit was for total growth for paint stores. So that would include the 84 new stores, as well.

It would, okay. So is that essentially saying that new residential was down in the quarter, or barely growing?

Certainly lower than the double-digit residential repaint numbers. Slightly positive.

Okay. And then as you approach the second half of the year, given that uncertainty, I guess maybe help us a little bit, as you forecast out those pieces, or think about the moving parts, how did you arrive at the second-half outlook, given the uncertainty that you're seeing in weather today?

I think we took it much more into consideration. We saw that at the end of the first quarter, we didn't think that the weather variability would remain as strong as it did, and I think the comments about some of the states in April and May, and June, we probably have a little more volatility because of that weather in our forecast.

So we would say that by segment, we would expect the residential repaint to continue to be the leading part of that. We think new residential and new commercial is going to lag. And a lot of the commercial maintenance projects should continue to be on track. As we've shared with you, Dennis, it's the residential side of the market that's the largest, and it's in those new construction areas that we're really feeling the real headwinds.

Okay. And then if you ignore any shift in the currency rate, did your change in outlook, or did your international outlook change with the guidance provision?

Yes, it did, but the foreign currency also is a factor there.

If you ignore the foreign currency, Sean, was the organic change, if you want to think about it that way, also lowered?

Yes.

Okay. Thank you.

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

First question -- HGTV Paint at Lowe's, is this taking business away from higher price point paint, or are the low-end customers also moving up to buy HGTV? Can you explain that dynamic?

That dynamic happening inside Lowe's box is a conversation that you need to have with Lowe's. We don't comment specifically on their customers moving inside their department to various channels. So again, all we can comment is to tell you that we're fully embedded. The program is ramping up nicely. We're on our original guidance for the program, and expect it to continue to be a contributor to Lowe's for many years to come.

Okay, thank you. And then my second question is on this wet weather. Again, around the discussion there, some of the business gets pushed out into second half. Some goes into 2016. Is there a number in your mind, is it, like, 50/50 or maybe 30% you can recoup in 2015 and the rest goes into 2016, can you just give us some quantification?

I don't think we parse the information that finite, PJ. Again, as Sean commented, we have yet to see the weather improve. July continued to have above-normal rainfall across a significant portion of the United States, and so it's a little early to make that call. We'll see how the year wraps up, and obviously, give you guidance as we head into next year. But for right now, we're struggling to get some gallons in this year.

And then lastly, on your Latin American coatings, which were down, you mentioned that volume was up 1%. Can you talk a little bit about outlook in different countries, Mexico, and Brazil, et cetera? Thank you.

Overall, I would say if you back out Brazil, Brazil is our largest market for us, for the significant challenges. You look at Brazil in its total, and we felt pressure there, as well. Collectively, if you look at the balance of the countries, overall, we were pretty much flat, and we feel as though going forward, we're going to be working hard to continue to improve that, and grow our position from that point.

And PJ, point of clarification, I believe we said volumes in Latin America were negative, not up 1%.

Thank you.

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

I was looking at your consumer group revenues. I would have thought that the benefit from Lowe's, and along the lines of what you publicly said, might have been $80 million or $90 million in the quarter, which would mean that if you pick that out, the consumer group revenues might have fallen 5% or 6%, something like that. Did something happen in the consumer group revenue base? And in rough terms, is that an accurate analysis of what's going on there?

You're close. You're off by a few basis points. But it's clear that we have a soft quarter in the consumer group when you back out Lowe's.

Right.

For all the same reasons we've been talking about. Weather has had an impact across that customer segment. I think we've heard softer reports on various important weekend sales activities. But in terms of the consumers' profile of their customer base, their share of shelf, the energy behind their program, nothing has changed in that regard, Jeff.

Okay. And then -- go ahead. I'm sorry.

I was just going to say, Jeff, you have to also look at the history. If you look at our consumer group last year in the second quarter, it was up 10%. It was up 8% for the first six months. We finished the year at around 5.9. So when you take a look at the comps, this is going to be a very hard comp quarter for the consumer group, with or without Lowe's.

Right, okay. That's helpful. And then lastly, you probably would want to buy chloride-based TiO2 from China, if more chloride-based capacity could come on. Do you find that you're able to do that? There's some new chloride plants in China, that I think has begun to ship commercially. Are those plants you can avail yourself of?

Jeff, this is Bob. Whether we do source chloride from China, or someone else buys that chloride capacity coming out of China, it still has the same effect of tipping the balance of supply and demand in our favor. So I'm not sure that we would benefit from sourcing chloride TiO2 directly from China, but clearly, we're benefiting from growing capacity over there.

Okay. Thank you so much.

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

Thank you. The 3% to 5% growth for the third quarter, I think you said you expect July to be weak already, because of weather. But would you expect high single-digit growth in August-September? The weather's normally pretty good for painting then, and there's a lot of pent-up demand, it seems.

Yes, I think what we were trying to address there or point out, that the weather didn't change at the end of the second quarter. I don't think we're making a comment on month-by-month sales.

Okay, but are you projecting bad weather in August and September?

No, but we weren't projecting it in May-June either, John. I think as we just look across, we have tried to give as solid guidance as we possibly can, here. We're recognizing that a lot of the projects that we had expected to be on, that would have driven some of those sales gains won't be ready to be painted because of the delayed cause in the construction side of it. Just trying to give you the best crystal ball we can. We think that's a pretty good number, going forward for the third quarter.

Okay, and you had a competitor this morning that cited a decline in their independent dealer channel. I know the independent dealers have been lagging their professional paint stores. But is that gap widening, or did something happen where that part of the market lagged substantially more than it normally does?

Again, that would be a good question for you to ask them. I don't know the answer to that.

So you didn't see it -- you have some sales in the independent dealer channel--

A very small part of what we do, as you know. Our focus, again, is customers primarily through our own stores.

Okay. Thank you.

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

I believe last quarter there was some delays in selling through the, to the Home and Garden TV and Lowe's. I'm curious, is the number we saw this quarter in terms of growth, was that slightly inflated, or just how we should think about the growth rate from HGTV going forward for the rest of the year?

I think that we mentioned that because when you look at the load-in May 1 was our target date. To get everything ready for May 1, we were selling some in March. We were just saying that there was a differential between March and April. The load-in continued through May 1 and we're not going to give quarterly sales for this customer. What we've said is on the annualized basis, we're still going to be in the range that we gave you for the year, 2% to 3% of last year's number.

Got it.

That was of total.

Okay. And just obviously the whole industry saw some -- saw declines in volumes this quarter, due to weather. But just looking at your results, you didn't -- it seems like you didn't outperform the industry as much as maybe you haven't done in the past, and a lot of that outperformance seems to be from share gains. Are you seeing any ceiling on your ability to take share, or just how are you thinking about share gains going forward?

No, we don't see a ceiling there. In fact, we're very determined to continue to grow, not only perhaps at the pace that we have, compared to the market, but even at a faster rate. So no, we don't see a ceiling there.

As we've talked about, this opportunity to put 5,000 stores into the United States, Canada and the Caribbean, as we've commented, we're just slightly above 4,000, accelerating into the store openings for the remainder of the decade. This is a solid plan being well executed, and confident that it will continue to drive share gains for us.

Got it. And just one more, if I may. Obviously, there's deferred projects because of the weather and delays, and you probably don't know how it will filter into your results. But is there any risk to some of these projects that have been delayed being canceled?

I don't think there's very high likelihood of that. I mean, data points here on housing permits being pulled, the demand for the projects that we eventually intend to be painting remain strong. They are not destroyed by weather, they are simply delayed. So household formation remains strong. Inventory of housing stock is as well-positioned as it's been in the last four or five years in our country, and the need for these multi-family or single-family living units remains fairly robust. Our expectations are that these projects that are underway and on the books will eventually get to completion, and they will be painted.

And the same holds true for non-residential, Nils. There's a lot of structural steel going up right now that's just, the projects are delayed getting to the painting stage, but they are not, they are not going to cancel a project that's under way.

Understood. Thanks for taking my question.

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

Most of my questions have been answered. But just following up on what Sean has said about the face of share repurchases, and the fact that you were perhaps not as aggressive in the second quarter looking out to your M&A pipeline, obviously nothing was announced in the second quarter. So is there something that we should look over to, in the second half of the year? Or did I misinterpret your comments about M&A playing a role in your share repurchase decisions?

Right. I think what we said is we're always trying to get back to that 1 to 1 by the end of the year, and utilize all the cash. What I said is we were heavier in the first quarter due to -- we weren't as optimistic about the, about the M&A that we're going to incur. I think that second quarter, that has no discussion about M&A, and second-quarter purchases.

Okay. So it was just a question that the first quarter was a little bit faster and the second quarter was more normal, so that's what you should expect going forward?

Yes.

Got it. And then when you look at the mix component of your revenues, both in the store group and in the consumer group, it sounded like with more interior sales, that exterior, and obviously with the load-in at HGTV at Lowe's, is it reasonable to speculate that your mix was down in both channels year-over-year, both in terms of revenue impact, but also in terms of margin?

Well, mix would have been skewed to interior versus exterior in both channels. Is that what you're asking?

Well, in both channels, but then on top of that, in the Lowe's channel, in the consumer group, you also have the HGTV pain, which I'm assuming was slightly dilutive to mix, as well, or not?

Not so much the load of the mix, but it would have skewed to interior versus exterior to the reasons we've articulated.

Okay, and did that have an impact on margins as well as revenue?

No. No, I think that especially we've commented before, operating margins are all very good with incremental gallons, and it's played out the same way this time.

Okay. So exterior and interior paint sales really don't have much of an impact in terms of mix for the Company, either on revenue or on margin, is that what you're saying?

Yes.

Okay. Great. Thank you very much.

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

Couple things. In terms of, Sean, the reduction in the second half sales guidance, I know you tend not to want to talk about segments or weather, but whenever we can cover both, in terms of on a segment basis, was the 3% to 4% reduction in sales guidance consistent across the segments, or more skewed to any of the specific segments?

No, I think that stores group was the least affected. The other thing you have to realize is the Canadian dollar has really weakened, and paint stores group with the acquisition of the assets we received in Canada plus our growth there, they have a little bit of, we have a little bit of FX headwind in the second half there. But, no, stores group was the least affected.

Following up on that, or similar to that, the stores comp for the first quarter I think was around 6.5. Is that -- and not to ask what you think the stores comp will be in the second half, but is the stores comp in the second half more likely to look like the first quarter than the second quarter? Can you give us a little bit of directional sense on that?

I would say the answer -- I wouldn't go all the way to 6.5. But I do think we would expect that the comp stores to be above the second quarter.

Okay. And then the last, is there any reason why weather matters more to the business now than the past? There's been periods of bad weather in the past that you have been able to navigate through a little bit more effectively than this.

No, I don't think any more now, than it has been in the past. I think when it occurs in the year matters, Eric. We've made it through rough winters, where we've had stores close, and really been at a loss for customers. But when it happens in the second quarter, which is really the ramping into the paint season, and our -- it's a really, really strong quarter, that's just the difference that we're feeling this time. And I don't remember in my 30 years, having the kind of rainfall impact that we've had, literally across the United States, that we've dealt with this year.

Eric, I would also to that, that when you're kind of in the midst of growing momentum in demand for new construction, which is where we are in the cycle right now, weather does have an impact on, on completing new construction projects.

And lastly, Chris, you characterized your original guidance, or you suggested that we might have viewed the original guidance as aggressive. How would you characterize the guidance you're giving today?

Perfect.

Very good.

Yes, I think 25% earnings growth, I don't recall a year where we've gone out that far. But as we've said, the markets look terrific to us. We were capturing the raw material advantages and bringing that down, as we've been showing you we've been able to do that by handling the pricing. It was a huge number for us, and we're still hanging in there at a 23% earnings growth forecast, in the midpoint of the range. We're going to get to year end. It just isn't quite as robust as we ha thought it was going to be six months ago.

Thank you.

Thank you. Our next question is coming from the line of Christopher Perrella with Bloomberg Intelligence. Please proceed with your question.

I have a question in regards to your Global Finishes Group. With half the sales there coming from overseas, what's your exposure over in Asia? And what product lines, industrial coatings or wood coatings, would be most affected by a slowdown over in China?

In China, we have our product finishes business, which delves into our OEMs, as well as our automotive team, and our protective and marine team. So each of those have various segments that they are focusing on for growth, in areas that they have strengths in. We'll feel some softness in some of those as a result of the market, and we're continuing to grow and focus on new customers and segments. Our market share there is a relatively small percentage. So we've got plenty of upside ahead of us there.

All right, and then in terms of seasonality in Latin American business, with the broad, I guess, geography of the region, is that business as seasonal as North America, with a large bulk of the volume going out in say 4Q and 1Q, just the opposite in North America, or is it more evenly distributed across the four quarters of the year?

No, your first assessment was more correct. It would be the latter part of our year would be their painting season.

All right. So you could potentially see a pickup in volumes with seasonality there, which will help on the raw material and potentially currency headwinds?

Well, it always picks up in the fourth quarter and first quarter. So I mean, we'll be comparing to those kinds of performances. I don't think it will have any impact on the raw material, or the currency.

Okay. Thank you very much.

Driven by much broader economic issues than whether the paint industry's having a ramping up in demand.

Fair enough. Thank you.

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

Just to follow up on higher administrative expenses, or SG&A expenses in the quarter due to the rollout of HGTV Paint at Lowe's, are any of those costs sort of one-time in nature, and you don't expect them to repeat year-over-year or next quarter?

Yes, I think what we've commented on is that the second quarter was going to be the highest SG&A increase due to advertising for Lowe's. What we have said is, it was really two buckets of SG&A, incremental SG&A at Lowe's. It was the organization that we put in place, and that was going to be flat lined throughout the four quarters. Advertising is going to be a little stronger in the second quarter. And you're going to start seeing it at a more normal run rate in the third and fourth quarter.

And did I hear you correctly that HGTV impact was positive on consumer margin?

Yes. I mean, yes.

Yes, that margin in that group is impacted by gallon movement. That's where we manufacture all the paints for the company, so those gallons have been positive and you can see that, in that segment's reporting numbers.

And the last question on FX, given that you're increasing expectations for the headwinds here, do you expect third-quarter FX headwinds to be the same or larger than what you saw in the second quarter? Thanks.

We have them slightly higher than in the second quarter.

Thank you.

Thank you. Our next question is coming from the line of Rosemarie Morbelli with Gabelli & Company. Please proceed with your question.

Just going back to the weather, you have a lot, and this is probably a lot of projects that are underway, and I am guessing that everyone is going to start to re-aim at finishing at least the outside, before the winter. So -- and then they will start working on the inside. Could your fourth quarter be helped by that particular factor? Can they do enough to start painting in Q4, and therefore you could have a positive surprise?

That could happen.

And so that potential positive surprise is not in your current expectations, is it?

I wouldn't call it so much a surprise. I think your analysis is correct, that we would expect that you're going to get these finished. We're going to move on to these projects. And I think our expectation that will happen is embedded in the sales guidance we're giving.

Okay. Thank you. And then from -- if I understood probably what you said, that $350 million worth of stock buyback in the first half, is that a similar amount that you are anticipating for the second half?

No. I think that the second half of the year will be much smaller, and when you look at the cash generation we're having, again, we're going to be slightly higher than 1 to 1. That would tell you we're going to spend less on stock in the second half of the year.

Okay, and if I may ask one last question, which I probably ask every quarter, but given what you are seeing in the industry and in the housing market, are you still comfortable with housing recovery of another three to five years? And because remodeling is actually more important to you, can that last longer than that three to five years?

Yes, Rosemary. This is Bob. We do believe that in fact the weather patterns we've seen in the first half of the year is probably going to draw the housing recovery, the path back to normal, out even a little more than we anticipated. So certainly three more years to this recovery to reach a peak is certainly foreseeable.

On the repaint side, not just the homes that are being put in place, the existing homes that are trading hands, but also the overall appreciation in home values that we've seen in the markets should drive remodeling and repaint activity in the out years. So we think that this is, that the story is still intact. It's just a little bit postponed as a result of the weather.

Okay. Thank you very much.

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

I've got two follow-up questions. First, on the top line, if we think about the comp store sales growth decelerating about 250 BPs second quarter from first, it sounds like pretty much all of that would have been in the non-residential, or non-residential repaint. Is that a fair assumption, or was there also a deceleration there, just from a high level?

No, that is not completely accurate, Greg. For sure, we saw deceleration in that space, but residential, also particularly in the new area, is below our expectation.

Okay. So it would be fair to say maybe of the 250 BPs of deceleration, 50 or 100 was related to residential, and then the rest would have been commercial and new construction?

We're not parsing those numbers like that, but directionally, you're in the ballpark.

Okay, got it. And then the second question was on SG&A. Sean, it was helpful just what you did describing HGTV, but if you were to leave that out, what was core SG&A running on in the quarter, and how should we expect that to play out in the second half, especially now that you have a new guidance number for the top line?

Correct. I think that the new guidance number, we've said all along, we felt we were going to have efficiencies in our SG&A, but that's when we were at the mid to high single digits. I think that's going to depress a little bit. We're very careful not to break out SG&A, even by a customer. I think that for us, we're probably not going to break out the HGTV SG&A versus the non-SG&A. I think we're just trying to give you, that you can see in the second quarter, that pop, but we're not going to give you a finite number.

Would it be fair to say, though, it's in your new guidance range, that you think you could still leverage core SG&A?

Yes.

Okay, great. And if I could sneak in one on the international news for Latin America, I think, Sean, you mentioned the guidance change was not just FX, so can you tell us -- so what specifically was that? Was it Latin American volume? Was it Asia? What was the other component?

It starts with Brazil, which continues to be a tough story from an economic standpoint. We're seeing the Petrobras scandal with really long legs throughout the entire country. That's actually impacting some of our Asian operations as well, because of our position with Petrobras and their production opportunities over there, for things that they build. Just a little bit of a softness, Greg, in those end markets as well, accelerated by poor economic conditions and bad currency.

Okay. That's great. Good luck.

Thank you. Our final question of the day is coming from the line of David Lang with Morningstar. Please proceed with your question.

I just wanted to ask about the pace of store openings. You mentioned that you wanted to do it perhaps in the back end of the -- I was wondering what's the reason for pushing it back, other than a little bit sooner is?

Well, I would tell you this. It's not by design and it's a discussion that we have with our teams on a regular basis. We, typically, towards the end of the year, as our developers are pushing to get their projects done, have a run at the end of the year, and then we're reloading going in throughout the year.

And we're trying to spread those out a little more evenly throughout the year, but it's not by design. We're pushing these through, and getting them in as quickly as we can, and we've got a lot of confidence in the models. We're continuing to invest in those stores.

And then on -- getting your view of mid single-digit declines in raw material costs, did you see this really high gross margin that's holding on past 2015, or do you see more perhaps pricing pressure, or other things that could bring you back down to your afterwards?

We always look at the way we run the Company as, we think these gross margins over time are going to continue to grow. We think our operating margins are going to continue to grow. So you're going to have years where raw materials are going to hit you or come back, or do what they are doing this year. We feel very good about our model, and the way we're running the Company, that eventually we're going to have our higher gross margin. I would prefer not to comment on the 2016 gross margin yet.

All right. And then -- I think you mentioned that you still see 1.3 million to 1.4 million housing starts long-term. Does this projection take into the, I guess population of millennials that are coming into the home buying age into the next, say, decade or so?

Yes, David. Actually the 1.3 million to 1.4 million is what we consider to be a normalized, sustainable rate of build. We think that, given the rate of household formation today, the fact that inventories of homes for sale, both new and existing, are very low, and that apartment occupancy rates are very high, that this cycle should peak above the 1.3 million to 1.4 million level. And then that 1.3 million to 1.4 million normalized should trend upward as population grows. So --

Any idea how high you see it peaking?

The last cycle peaked at 2.3 million. We hope this cycle doesn't get to that level.

All right, great. Thanks. Those are my questions.

Thank you. It appears we have no additional questions at this time. I would like to turn the floor back over to management for any additional or concluding comments.

Thanks again, Jessie. As always, this is Bob, I will be available for the balance of today, tomorrow and throughout next week to answer your follow-up questions. We would like to thank you for joining us today, and thank you for your continued interest in Sherwin-Williams.

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