宣偉 (SHW) 2016 Q4 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of fourth-quarter and full-year 2016 results and expectations for 2017.

With us on today's call, are John Morikis, President and CEO; Al Mistysyn, CFO; Jane Cronin, Senior Vice President Corporate Controller; and Bob Wells, Senior Vice President Corporate Communications.

(Operator Instructions)

An archived replay of this webcast will be available at www.Sherwin-Williams.com, beginning approximately two hours after this conference call concludes, and will be available until Wednesday, February 15, 2017, at 5 pm Eastern time.

This conference call will include certain forward-looking statements as defined under US Federal Securities laws, with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the Company's earnings release transmitted earlier this morning. After the Company's prepared remarks, we'll open the session to questions.

I will now turn the call over to Bob Wells.

Thanks, Jesse. Good morning, everyone. In the interest of time, we provided some balance sheet items and other selected financial information on our website, www.sherwin.com, under Investor Relations January 26 press release.

Beginning with our fourth quarter, consolidated sales increased $178 million, or 6.8%, to $2.78 billion, due primarily to higher paint sales volumes through our paint stores, and the impact of a change in revenue classification related to third-party service revenue and related costs. For the full year, consolidated sales increased $516.3 million, or 4.6%, to $11.86 billion. The change in revenue classification increased sales 2.2% in the fourth quarter, and 1.1% for full-year 2016.

Unfavorable currency translation decreased consolidated net sales 9/10% in the quarter, and 1.4% for the full year. Consolidated gross profit in the fourth quarter increased $66.2 million, or 5%, to $1.38 billion. Gross profit for the year increased $363 million or 6.5% to $5.92 billion.

Consolidated gross margin in the fourth quarter was 49.9%, compared to 50.8% in the same period last year. Adjusting for the change in revenue classification, comparable gross margin in the fourth quarter would be approximately 51%. For the year, consolidated gross margin increased to 50% from 49% last year. Again, adjusting for the revenue reclassification full-year gross margin would be 50.4%.

Selling, general and administrative expense increased $53.5 million, or 5.4%, to $1.04 billion in the fourth quarter. But decreased as a percent of sales 37.6% from 38.1% in the same period last year.

For the full year, SG&A expense increased $246 million, or 6.3%, to $4.16 billion and increased as a percent of sales to 35.1% from 34.5% in 2015. Without the change in revenue classification, SG&A as a percent of sales was 38.2% in the quarter, and 35.4% for the year. SG&A in both the quarter and full year included acquisition-related expenses totaling $9.2 million and $58.4 million, respectively.

Interest expense for the quarter increased $23.8 million to $43.3 million. For the year, interest expense increased $92.3 million to $154.1 million. The majority of this increase was acquisition-related interest expense.

Consolidated profit before tax in the quarter increased $6.8 million or 2.3% to $304 million, which included approximately $34.5 million in acquisition-related expenses. For the full year, consolidated profit before tax increased $46.3 million, or 3%, to $1.6 billion, including approximately $133.6 million in acquisition-related expenses. Unfavorable currency translation reduced profit before tax $4.1 million in the quarter and $21.3 million for full year, compared to 2015.

Our effective income tax rate for the fourth quarter decreased to 33.2% from 33.4% last year, and decreased to 29% for the full year, compared to 32% in 2015. Comparable effective tax rates, excluding the effect of the reduction in the income tax provision, would be 34.8% in the quarter, and 32.3% for full year. Diluted net income per common share for the fourth quarter increased 1.9% to $2.15 per share from [$0.2011] per share last year.

The $2.15 included $0.03 accretion from the change in accounting standard and $0.22 dilution from acquisition-related expenses. Diluted net income per common share for 2016 increased 7.5% to $11.99 per share, from $11.15 per share in 2015. The $11.99 includes $0.40 accretion from the change in accounting standard, and $0.86 dilution from acquisition-related expenses.

Unfavorable currency translation decreased earnings per share by $0.03 per share in the quarter and $0.14 for the full year. Our results in the quarter and full year includes individually significant non-operating items, consisting of environmental expense, a gain on the sale of assets, and goodwill and trademark impairment charges. The net after-tax impact of these items increased diluted earnings per share approximately $0.03 in the quarter and had no effect on earnings per share for the full year.

Let me take a few minutes now to break down our performance by segment. Sales for our paint stores group in the fourth quarter increased $163.5 million, or 9.8%, to $1.84 billion. For the year, net sales increased 8.1% to $7.79 billion.

Comparable store sales, sales by stores open more than 12 calendar months, increased 5.5% in the quarter and 5.3% in the year. Paint stores group's sales increase was due primarily to higher architectural paint sales volume across all customer segments, plus the impact of the change in revenue classification. The change in revenue classification is not reflected in comparable store sales.

Regionally in the fourth quarter, our southeastern division led all divisions, followed by Canada, Southwest division, Midwestern division and Eastern division. Sales and volumes were positive in every division. Fourth-quarter segment profit increased $25.7 million, or 8.1%, to $341.9 million, due primarily to higher year-over-year paint sales volumes.

For the full year, profit increased $189.1 million, or 13.2%, to $1.62 billion. The increase in segment profit for the year resulted from higher paint sales volumes that were partially offset by higher SG&A expenses.

Excluding the change in revenue classification, segment operating margin for the fourth quarter increased 30 basis points to 19.2% from 18.9% last year. Paint stores group operating margin for full-year 2016, excluding the revenue reclassification, increased 130 basis points to 21.2% from 19.9% last year.

Turning now to the consumer group, fourth-quarter external net sales increased $1.3 million, or 4/10%, to $315.9 million. For the year, consumer group sales increased $6.4 million, also 4/10% to $1.58 billion.

In both the quarter and full year, higher volume sales to most of our consumer group's retail accounts was partially offset by unfavorable foreign currency translation that decreased net sales 1.3% in the quarter and 1.1% in the year. Segment profit for our consumer group in the fourth quarter increased $4 million or 8% to $54.9 million. For the year, segment profit increased $10.4 million or 3.3% to $319.2 million.

Segment profit as a percent of net sales for the quarter increased to 17.4% from 16.2% last year. For the year, segment operating margin increased to 20.1% from 19.6% last year. Most of the improvement in both fourth-quarter and full-year segment profit margin was from volume-driven operating efficiencies and good SG&A expense control.

For our global finishes group, fourth-quarter net sales in US dollars were flat to last year, at $455 million. Full-year sales decreased 1.4% to $1.89 billion. Unfavorable currency translation decreased sales in US dollars by 1.7% in the quarter, and 2.6% in the year.

Stated in US dollars, global finishes group's segment profit in the fourth quarter increased $11.4 million, or 22.6%, to $62 million from $50.6 million last year. For the full year, segment profit increased $37.1 million, or 18.4% to $239 million. Due primarily to good expense control, lower raw material costs that were partially offset by unfavorable currency translation.

Unfavorable currency reduced segment profit $800,000 in the quarter and $5.8 million in the year. As a percent of net sales, segment profit improved to 13.6% in the fourth quarter, compared to 11.1% in the fourth quarter last year. Operating margin for the year increased to 12.7%, compared to 10.5% in 2015.

For our Latin America coatings group, net sales in the quarter increased $13.1 million, or 8.3%, to $171.8 million. Full-year net sales decreased $44.1 million, or 7%, to $586.9 million, due primarily to unfavorable currency translation and lower volume sales, partially offset by higher year-over-year selling prices. Currency translation decreased sales in US dollars by 6.7% in the quarter and 13.5% in the year.

Stated in US dollars, Latin America coatings group recorded a loss of $7.8 million in the quarter, compared to a profit of $2.8 million last year. For the year, Latin America coatings group reported a loss of $17.4 million, compared to a profit of $18.5 million in 2015. Segment profit in both the quarter and year was adversely affected by goodwill and trademark impairment charge of $10.7 million, increasing raw material costs and unfavorable currency translation, that were all partially offset by selling price increases.

Unfavorable currency, decreased segment profit $3.2 million in the quarter and $14.2 million in the full year. As a percent of net sales, segment operating profit was negative 4.5% in the quarter, compared to a profit of 1.8% last year. And, negative 3% for full year, compared to a profit of 2.9% in 2015.

That concludes our review of our operating results for the fourth-quarter and full-year 2016. Let me turn the call over to John Morikis, who will make some general comments and highlight our expectations for 2017. John?

Thanks, Bob. Good morning, everyone. Thanks for joining us.

2015 was a momentous year for Sherwin-Williams. Against the backdrop of our 150th year in business, we transitioned the role of Chief Executive Officer at the beginning of the year and put plans in place to transition our Chief Financial Officer role at year end. In March, we announced our intent to acquire Valspar, the largest most transformational acquisition in our Company's history.

Throughout the year we worked to secure regulatory approval for the deal. And to define what this new combined organization would look like post-integration. With change comes uncertainty, and in financial markets, uncertainty often leads to volatility.

2016 was a volatile year for Sherwin-Williams stock. We opened the year at $257 a share, saw a mid-year high of $312, and an intra-year low of $239. Some of the share price volatility was understandably caused by quarter-to-quarter volatility in our results, while some appeared to be driven by market speculation.

Through all of the change, uncertainty, volatility and speculation, our confidence in our business model, our strategy and the ability of our people to execute at a high level and generate high returns never wavered. Our full-year results for 2016 include expenses related to the Valspar acquisition, and two accounting changes adopted during the year that affected our revenues and tax break.

If you back out the impact of these items, our core results for the year met or exceeded every expectation we set back in January. The consolidated sales increased 3.5% to $11.72 billion. Consolidated gross margin was 50.5%, an increase of 150 basis points over full-year 2015.

Operating profit improved 10.8% to $1.82 billion. Profit before tax grew 11.6%, to $1.73 billion, an increase of more than 100 basis points as a percent of sales. EBITDA eclipsed $2 billion for the first time in our history.

Net income increased 11% to $1.17 billion. Earnings per share increased 11.7% to $12.45 per share. Noteworthy, considering our full-year EPS last year included $0.53 in favorable LIFO inventory adjustments, while LIFO was slightly unfavorable in 2016. Each of these results represent a new record high for the Company.

Architectural paint sales to our paint stores picked up momentum in the fourth quarter, with every customer segment generating positive volumes. Not surprisingly, the tightness in the labor market appears to be less acute in the seasonally smaller quarters. As a result, architectural paint sales to contractors accelerated to a high single-digit growth rate in the quarter, aided by a backlog of projects from earlier in the year.

Sales to residential repaint contractors rebounded to a double-digit growth rate, marking the 11th quarter of double-digit growth in the past 13 quarters. Sales of protective and marine coatings were negative in the quarter, but the impact on paint stores group's sales were muted, due to seasonality.

In the fourth quarter, paint stores group's operating margin on incremental sales was greater than 24%, a strong performance in light of the roughly $30 million LIFO benefit they received in fourth quarter last year, compared to a LIFO expense of $2 million in fourth quarter this year. During the quarter, we opened 39 net new stores, bringing our full-year store opening total to 94 net new locations. And our total store count at year end to 4,180 stores in the US, Canada and the Caribbean. We remain confident that our next milestone of 5,000 locations in North America is realistic, and we intend to add another 90 to 100 stores this year.

We anticipated a stronger sales performance from consumer group coming into the fourth quarter. The weakness we experienced in the third quarter in our European business, due in part to currency devaluation carried over into the fourth quarter, despite the weaker-than-expected sales results, consumer group continued to manage operating expenses well and showed good progress on margins in the quarter.

For the second consecutive quarter, Latin America coatings group reported positive revenue growth as stronger volumes and positive pricing overcame a currency headwind of nearly 7% in the quarter. Segment profit also showed improvement, overcoming rising raw material costs and the effect of currency devaluation. Without the $10.7 million goodwill impairment in the quarter, the segment earned $2.9 million in profit for the quarter.

Our global finishes group once again did a commendable job of managing both gross margin and SG&A in the quarter, resulting in a cycle high 13.6% operating margin, a 250 basis-point improvement, compared to fourth quarter last year. We continued to see positive demand momentum in some of our industrial coatings businesses in Europe and Asia.

2016 was another strong year in terms of cash generation. Net operating cash for the year was $1.31 billion, well ahead of our target of 10% of net sales, with fourth quarter accounting for about $344 million of the total.

Net working capital was a use of cash, finishing the year at 10.7% of sales, compared to 8.6% at year-end 2015. Free cash flow, which is net operating cash less CapEx than dividends, was $757.5 million, compared to $953.5 million last year. Our capital expenditures for the year totaled $239 million, depreciation was $172.1 million and amortization was $25.6 million.

In 2017 we anticipate capital expenditures of approximately $231 million, depreciation of $175 million to $185 million, and amortization of about $30 million. Capital spending will continue to run higher than normal in 2017 as we continue to invest in capacity, systems and new stores. Our cash balance at the close of 2016 was $889.8 million, compared to $205.7 million at year-end 2015.

As we indicated when we announced the Valspar acquisition, we intend to continue to build cash on our balance sheet over the course of the coming year to reduce total borrowings required to finance the deal. Therefore, we made no open market purchases of our common stock for treasury during the quarter and year, and we will suspend share repurchase activity again in 2017.

On December 31, we had remaining authorization to acquire 11.65 million shares. We are also temporarily modifying our practice of paying 30% of prior-year EPS in cash dividends. This year, at our February meeting of the Board of Directors, we will recommend approval of an annual dividend of $3.40 per share, an increase of $0.04 over 2016.

Before I close with our outlook for 2017, let me briefly comment on our Valspar acquisition progress. Based on our ongoing discussions with the FTC, we now expect a divestiture will be required to gain approval to complete the acquisition, and we are actively working toward that objective. The expected divestiture falls well below the $650 million revenue threshold, and we expect to negotiate the divestiture and complete the Valspar transaction within 90 days at a price of $113 per share.

Looking ahead to 2017, the demand for paint and coatings and most domestic markets continues to look positive. Growth in residential starts and existing home turnover was sufficient to drive 2% to 3% growth in US architectural industry volume throughout 2016. The outlook for 2017 is comparable.

Although contracts for new non-residential projects slowed somewhat in 2016, it was still a solid year in absolute square footage, which bodes well for the paint demand in the segment. Outside the US, we are increasingly optimistic on demand conditions across many regions. But we remain cautious in our outlook on many currencies.

Our raw material basket has many moving parts, but in total, we believe we are likely to see higher year-over-year input costs in 2017. The recent uptick in the price of crude oil could result in upward pressure on the petrochemical side of the raw material basket, but these commodities will not necessarily move in a linear relationship with crude. Most of the raw material basket inflation will come from TiO2.

Stronger global demand for high-grade chloride TiO2, and relatively tight inventory levels, has prompted producers to announce additional price increases, effective in the first and second quarters of 2017. It remains to be seen how much, if any, of these increases will actually take effect. Based on all of these factors, we expect average year-over-year raw material costs of the paint and coatings industry to be up in the low-single digits range in 2017.

Our outlook for the first-quarter 2017 is for consolidated net sales to increase in the mid to high single-digit percentage range, compared to last year's first quarter. With sales at that level, we estimate diluted net income per common share in the first quarter will be in the range of $1.45 to $1.55 per share, compared to a restated $1.75 per share earned in the first quarter of 2016. First-quarter 2017 earnings guidance includes approximately $0.69 per share in Valspar acquisition cost, and an $0.11 increase in EPS, related to the decrease in the income tax provision.

As a reminder, first-quarter 2016 earnings per share included $0.24 expense related to the Valspar acquisition. For the full year 2017, we expect net sales will increase in the mid-single digit percentage range compared to full-year 2016. With annual sales at that level, we estimate diluted net income per common share for 2017 will be in the range of $13 to $13.20 per share, compared to $11.99 in 2016.

Full-year 2017 earning guidance includes approximately $0.80 per share in Valspar acquisition costs, and an increase in EPS of approximately $0.20 per share related to the decrease in the income tax provision. Full-year 2016 earnings per share include an $0.86 per share in acquisition-related expense, partially offset by a $0.40 EPS increase from the reduction in income tax provision.

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

(Operator Instructions)

Arun Viswanathan with RBC Capital Markets.

I just wanted to understand some of the guidance commentary for 2017. Maybe you can help me understand the mid-single-digit sales commentary, how that breaks out between your volume expectations and your price, given that you do have a price initiative that you announced on the last call, and potentially new stores and the revenue recognition, as well. Thank you.

This is Al Mistysyn. When you look at our full-year sales guidance, the price we have in there, as you know, paint store's group announced the 3% to 5% price increase effective December 1. We expect that to be effective similar to previous price increases, maybe even a little bit better, considering the last price increase we had was first quarter 2014, so you can expect around a 75% effectiveness there.

When you look at volume, paint stores group continues to take share, we believe. We expect -- you can expect our sales to roll out similar to how our 2016 sales rolled out. What I mean by that is, when we say mid-single digits, typically our paint stores group that is in the high end of that, or maybe even a little bit above that.

New stores, as John mentioned in his comments, being 90 to 100, you can consider that similar impact as 2016, which is roughly 1% on paint stores. One other thing I would say, on revenue re-class, because we had a half year of revenue request in 2016, and the impact was around 1%, full-year 2017 we would have a similar impact. The final thing I would mention on our sales guidance is we do still believe FX will be a headwind, but just not to the effect it was in 2016.

Thanks, Al. Just as a followup, you've also given a range for Q1. I think there is some concerns out there, just given that you are facing a pretty large comp year over year, given that you did 94 in same-store sales in Q1 of 2016.

Can you just describe the market environment and what's embedded in your sales guidance? Do you expect a positive comp in Q1, and if so, what gives you the confidence that you could achieve that? Thank you.

I would say what gives us the confidence is the continued discussions that we have with our customers. We have talked about over the last couple of quarters, the impact of the labor constraints on our contractors, and I've referenced a few times the comments that we have continuously heard about their ability to do more work if they had more labor.

I think it's clear now to see that that's most prevalent in the second and third quarter, which are their busiest quarters. They were running at capacity. Coming into the fourth quarter with less labor constraint and a heavy backlog of work, they clearly had a better performance, and we expect that to continue as we go into the first quarter, and we are working very hard, as always, to continue to position ourselves to be the supplier of choice when they are making their decision on which supplier.

Also, as reminder, the revenue reclassification hit stores the greatest, and they will have that in the first and second quarter.

All right. Thank you.

Ghansham Panjabi with Robert W. Baird.

Matt Krueger sitting for Ghansham. Can you provide the same-store sales breakdown for 4Q 2016 in terms of volumes for architectural paint, volumes for non-paint end markets, and then any contribution from the price increase?

Yes, Matt. When you look at the sales increase in the fourth quarter, it's really minimally impacted by the price increase. December is our smallest month of that quarter.

I would say if you look at the effective date, the first of December roll-in, the smallest month, and as Al mentioned, we are rolling this in. We expect to have good effectiveness in the rollout of the price increase. But it would certainly have been very negligible in the fourth quarter.

Great. Any breakdown between volumes for the non-paint end markets versus volumes for the architectural paint? Any turn in oil and gas-related markets, things like that?

John, I'll take the non-paint sales. We feel they perform fairly well throughout the year. We did see an uptick in the fourth quarter similar to what we saw in our volumes. I think, overall, we're pretty happy with the performance of the non-paint sales, which includes, by the way, spray equipment.

On the P&M, or protective and marine side, it continues to be a drag. Obviously, it's much less of a drag as we go into more seasonal period. That's largely driven by our strong position in our petrochem.

We are continuing to focus on that business. There's still a lot of opportunity for us to grow. We are also working, I think, quite well, given the efforts on the team to pivot into other segments.

We are not waiting for that segment, the petrochem, to recover as a means of driving our performance. We are working very hard in these adjacent markets, other segments, and we are really starting to see some good penetration there. It takes some time before we can overcome that petrochem number, though.

Got it. Switching over to the acquisition front, how should we think about that divested Valspar assets as it relates to impacting the synergy numbers that you previously outlined when the transaction was announced?

We are obviously very limited in what we can comment on regarding this. We're very pleased with the progress we are making. The business to be divested has been identified and we're working through the FTC with that, through that process.

But we are really not going to expand too much greater than that, right now. We've mentioned that it's well below the $650 million. But, right now, we are working closely, and I think quite well with FTC, and we want to make sure that we respect the boundaries there.

Great. That's helpful. Thank you very much.

Christopher Parkinson with Credit Suisse.

As we head further into 2017 and in the context of recent housing and mortgage apps, data. Can you just give us a sense on the general composition and parse out the various buckets of R&R activity, and how you think that should flow into the architectural volumes of both PSG and consumer? And I guess consequently, guidance?

Also, do you have any updated assumptions on labor availability as we had throughout the year? Thank you.

Chris, this is Bob. I will take the first half of that, and that is, our outlook for the repaint market, on both the residential and commercial side, is very positive for 2017. On the residential side, obviously, existing home turnover drives repaint activity, but only about 15% to 20% of the market is driven by actual turnover.

A significant share of the market is driven by home values, which obviously have been very positive. I just read this morning, 58 consecutive months of rising home prices. So, that is certainly driving the repaint and remodeling side of the market.

We expect mid-to high-single digit growth in the repaint remodel side of the market in the coming year, and as reminder, that is 80% of residential industry gallon volumes. It's a significant piece of the market, and we expect very good momentum in that piece.

On the non-residential side, we are seeing some pickup in property management, property maintenance activity. It's very likely, as we see more churn in office space and apartments, that we'll see that pick up. But you've got to see more churn. Churn has been slow in 2015 and 2016.

Regarding labor, I would say that this has not been the second consecutive year where our contractors have faced a challenging, if you will, Q2 and Q3, as it relates to labor. We've been talking to them. I do actually believe their confidence in the market is pushing them to be more aggressive in hiring additional labor.

I think there had been some questions as the businesses unfolded about the stability or the firmness of the market. I think there is obviously a very growing level of confidence, and I think we will see our customers be far more active in trying to bring more labor on as we go into the painting season this year.

Great. A quick followup on PSG as it pertains to the price increases.

Most people's understanding that obviously we will start off in the DIY crowd and some shorter-term contractors. Can you just give a little more guidance on the cadence of how you think that will flow through PSG results, based on the breakdown of the sales? Thank you.

If you think about past price increases, what you typically see, and we will see that again, is a slight downtick in our gross margin, and then as the effectiveness becomes -- as we become more effective through our customers in 90 days, 180 days, you will start seeing that turnaround, and that's what I would expect in this price increase as well.

I would also add that the effectiveness is going to be a little bit stronger. Given the rate of growth in our residential repaint business, there are some opportunities with mix to offset some of that as well. We actually have very good confidence in the fact of, again, over-repeating it here, but we've not had that price increase since the first quarter of 2014.

The phase-in will be mixed based on customer, type of customer, types of projects. We are out there working hard. You don't do a price increase on December 1.

It's actually -- we work with our customers around the year, providing those solutions to them that help them be more productive in their business. So, if we are more successful in helping them, then it's a better discussion, and that's what we've been working on for many years here.

Thank you.

Steve Byrne with BofA Merrill Lynch.

John, you mentioned this backlog of projects came forward in the fourth quarter. Would you say that that drove a mix shift towards the pro-market versus DIY, and did you gain share from the other channels, would you say, in the PSG group?

It's early to comment on gaining shares from other channels. I would say given information that's out available in the market right now, we are feeling good about the momentum we have, certainly not complacent. We are driven to get better every day.

I would say that there is clearly been some shift from DIY to the contractor base of business, if that was your question. But, I'd also say that, as I mentioned, there has clearly been more demand than there was labor to be able to satisfy that, and that clearly shifted into the fourth quarter.

Just on that last point, are your pro-contractor customers telling you that they just needed to be more aggressive in hiring? Or is it actually difficulty in finding that labor pool?

I think it's a little bit of both. A little bit of both.

There was a level of confidence that it seems we've gotten over the hill on. But there clearly is a demand or desire to hire more than what they have been successful in hiring, thus far.

Thank you.

Robert Koort with Goldman Sachs.

Chris Evans on for Bob. Regarding the DIY consumer, just kind of curious if the weaker results across the industry in the third quarter continued in the fourth quarter, and whether that was reflected in paint stores group and consumer?

We actually had a nice rebound in the fourth-quarter DIY. Our sales were up in the fourth quarter. Not quite as high as some of our contractor segments.

We had really, really strong double-digit gains in res repaint. The other segments in the wholesale were strong, and DIY would have been amongst them.

Got you. In regards to your guidance for 2017, you talked about some of the pros, some of the positives that you are going to be impacted by the pricing in the market share gains. What are the offsets that might be impacting you in 2017 that you guys would be concerned about?

I wouldn't say we are concerned. I think when you look at the last two years and how our comp store sales have trended, our biggest quarters are still in second and third quarter.

Although, we think we're working hard on programs and plans with our customers to get on top of that in the second and third quarters, it still remains to be seen how effective that is, and if there's other changes that occur -- whether it's immigration policy, or whatever, that might impact it. That would be the only thing that would give us any pause.

Thank you.

Duffy Fischer with Barclays.

Question around -- with the deal feeling imminent, have you guys been able to narrow what you think the range will be between a GAAP accretion and a cash accretion with the deal? What is the step up will be in that increased amortization?

Along those same lines, are you planning to talk about a cash EPS, or will you talk about a GAAP EPS once the deal closes and goes forward?

We have not gotten to a narrowed down range on the impact of devaluation, and I think, Duffy, we would make sure that it's clear, we give you enough information and the investors enough information to get to a cash EPS. What the incremental impact on amortization depreciation of a step-up accounting is and we want to be as transparent as we can with that.

Okay. One of the arguments for architectural being so good is the argument around the footprint, and it's very hard to come in without an existing base. But we did see an Asian competitor, a non-incumbent in North America by a North American competitor here recently. Wondering if you could comment on why that might be that they were able to do that, and with deeper pockets, would that North American base now provide the ability for them to grow more into the architectural space?

Well, I'd say that Dunn-Edwards is a terrific company. And one that we have long admired, and the reason we've admired them for such a long time, is they've got quality products, quality people and a terrific, as you mentioned, footprint. They have been very good competitors.

I don't expect that any of our people on the ground there ever took Dunn-Edwards as a light competitor or someone that you didn't have to be very careful of and work hard to try to grow our business and maintain the business that we had. So, we respect that there's another competitor in the market. But we've got great confidence in our model.

We've got great confidence in our strategy, and we have found that the greatest success we have is when we focus on our execution. They've always been a good competitor out there, and we expect they will continue to be a good competitor. While we will watch what they do, we are going to be really focused on outstanding execution of our strategy.

Let me add to that, Duffy. Your point about the store base, the store concentration is well-taken. As you know from our Business, doesn't require a lot of capital to expand the store base.

So, we don't view a competitor like Dunn-Edwards as ever having been capital constrained in their ability to grow their store count. We don't necessarily see this new owner as being a tougher competitor from that regard.

Terrific. Thanks, fellas.

Don Carson with Susquehanna Financial.

John, as you've had time to meet with your Valspar counterparts, to the extent you can and you've gone over synergy targets. How are you feeling about that $280 million in synergies? It struck me that, particularly on logistics and manufacturing, that you are somewhat conservative on your outlook for synergies.

We feel great about them. We're not going to raise them here. We are still working through a number of blueprinting and our approach to the combined business.

We feel very good about them. We are excited about it. Wonderful people, wonderful products, great customers, it is a great complement to our Business, we're very excited.

Right now that's our target, and as we get in, to Al's point, transparency is important. We understand that. Right now, that's our goal, that's what we're focused on.

I want to follow up on PSG, you've got one price increase on the table. If you do see some of the second round of TiO2 price increases if oil continues to go up, what are the conditions that would cause you to put through a second price increase later on in the year?

I think you should take great confidence in our previous actions. We don't think that we are in a similar environment, but in the not-too-distant past here, when [Rosworth], I'll call it out of control, they were growing very aggressively, and we demonstrated the discipline we have to go out and put price increases in the market. Not by choice, but given the ability that we have to continue to bring value to our customers and help them, we were successful in doing that.

We don't think it's anywhere near that situation here in the current environment. If we find ourselves in that environment, I think we've demonstrated the determination to do that. At the same time, our ability to demonstrate the value to our customers to maintain those customers through that difficult time.

Thank you.

Vincent Andrews with Morgan Stanley.

Matt (inaudible) for Vincent. I'm just curious how you think about the quarterly cadence of the expected low single-digit increase in 2017 raw material costs. Specifically, will the headwind be a any more pronounced in the first quarter than the balance of the year, given the comp against the trough TiO2 environment?

Good question, Matt. I think it depends on what happens to the price increases in TiO2 nominated for the first and second quarter.

If you look back at 2016, first quarter was the trough. We started seeing TiO2 inflate, beginning in the second quarter, which means that the history is going to start to rise as we go through 2017. It remains to be seen whether TiO2 inflation rises at the same pace as the comp, or stronger or less.

At this point, we think that most of the low single-digit inflation for 2017 year over year is going to be driven by TiO2. We suspect, given inventory levels right now, and the fact that fourth quarter was actually a pretty busy quarter for them, that they are going to get likely a little traction on the price increases that they've nominated. Again, that remains to be seen, and I think you could model raw material costs at a low single-digit rate, pretty much across all four quarters.

On SG&A, what are your expectations there, in terms of the promotional environment perhaps moderating on a year-over-year basis, 2017 versus 2016?

I think if you look at our guidance and think about with the raw material price increases and that, let me frame it this way -- our improvement in operating margin is not going to come from as big a gross margin improvement as we've seen over the last few years. When we look at SG&A, we're going to get SG&A leverage to hit that EPS guidance.

We set ourselves up, I think, fairly well. We did some things in the fourth quarter to get us in a position to do that. You saw that in our leverage we got in our SG&A in the fourth quarter. I don't think the environment, promotional activity or that will be any different.

That won't be affected. We are going to continue to do the right things to reach out to our customers. To Al's point, we clearly try to remain disciplined in our approach to SG&A, and so we will be managing the SG&A and continuing to reach out to our customers.

Great. Thanks, guys.

Kevin McCarthy with Vertical Research Partners.

Matt DeYoe on for Kevin. Just wanted to ask, paint store contribution margins look to have moved higher sequentially, but we're still below the mid-30% range that I think is more normal. I know part of that is probably due to revenue reclassifications, but can you discuss what's needed to turn that back around, and when do you anticipate getting back to those prior mid-30% levels?

What I would point you to is we have felt very good about paint stores group here, and they had a strong year. When you look at their incremental margin ex the rev reclass, it was 42% for the year. That came through primarily gross margin expansion.

In the quarter, it was a little bit over 24%, and as John commented in his opening remarks, that did include a LIFO benefit in our fourth quarter last year. As a comparison, we didn't have that same benefit this year.

I think the 42% is probably higher than we would expect going forward. It's certainly in line with where we would expect.

Okay. You touched briefly on this, but just one more on the protective and marine business. When do you expect that business should flatten out first, then return to growth, just given the rebound we are seeing in the activity?

We're starting to see some rebound, you are right. That combined with the pivoting into other areas that I mentioned, we have high expectations of that team.

When do we expect to see it? It can't come soon enough. We are pushing hard, and we are counting on that team to deliver. We are working on that very hard right now.

Okay. Thank you.

Nils Wallin with CLSA.

First of all, on TiO2, a little differently. Have you thought over the next 2 years, about your sourcing requirements and how you might change those if there was a border tax adjustment, and it raised the cost of imported TiO2?

Yes. I think -- I'm not sure how much high-grade chloride TiO2 that is sold in the United States is produced in the United States. I do believe the vast majority of our sources are domestic.

I think that may not be the same in the case of sulfate TiO2. I think a lot of that is imported.

Chloride, we see sufficient capacity in the US market to supply US demand at the current growth rate, and growth rates in 2016 in the domestic market were probably mid-single digits, and we think that supply can grow in line with that rate of demand growth.

Understood. Just on the consumer group, I think the commentary was that you saw volume growth in all of the different distribution channels. But that seems, particularly in the big box, seems to be a little bit dissonant with what you've seen reported out of the big boxes. Was the volume growth relatively the same across those distribution channels, or how would you characterize the different channels in terms of that growth rate in consumer?

I'd say that they were very similar. As mentioned, we had a good fourth quarter in paint. The pressure that we felt was outside of the US, mainly the UK, stain and sealer business. Across most our channels here in the US, I'd say we had a pretty good performance in paint on the consumer side.

Thanks. I will pass it along.

Scott Rednor with Zelman and Associates.

A question on the global finishes. I think 12% to 13%, maybe 11% to 12% was kind of the prior goal that, John, you guys had communicated at Analyst Day, fairly recently. You guys are there and it hasn't come with a lot of volume growth.

How should we think about that business going forward? Now that it's not really that small piece of the portfolio anymore.

Well, you are right. For the past two years, the group has benefited from the successful integration of those two acquisitions that we made in Europe, the Decker and [Serelac], as well as the acquisition that we made in Asia, Inchem. Both of those acquisitions brought along scale, technology and talent outside of the US.

There's a team that has really been working hard at driving the synergies in those acquisitions, and by the way, it will be the same teams that are actively involved in the Valspar integration. So, they have been doing a very good job from an integration standpoint, and to your point, the focus is on driving sales and growing market share. I actually have felt very good about the momentum that we have in some markets.

In Europe, we are doing quite well and in some of the segments in Asia. The scale effect that we've experienced will continue. This will also benefit greatly from Valspar, as those businesses come together. We'll have additional technology and a customer base to pursue.

While we are pleased, obviously, with the improvement on the bottom line, we also know that it's absolutely critical that we drive the top line. So, the scale has helped. There's a lot of focus on growing market share going forward, and we've got confidence in that Team and the ability to do that.

Switching transitions to the domestic contractor business, is there anything you guys can do to help alleviate the shortage of contractors, whether that's fund a trade school, or I know you are probably developing products that we don't hear about. Is there anything bigger picture, John, that you guys can help with, and probably with all the other manufacturers to solve what's viewed to be a broad-based shortage?

Yes. (laughter) There are, and we are working on them. I don't want to talk about that.

Okay. Lastly, I will defer. Al, can you give us a sense of what the tax rate will look like in 2017, maybe in 1Q in 2017, with the income tax benefit?

Yes, I think when you look at our fourth quarter, we had some things in it, just timing of discrete items and you're at full year at 32.3% is consistent with prior. I think, our first quarter on the stock comp adjustment is our largest quarter. So, our core tax rate will be around the 32%, and you have to think about how that flows this year and there will be a few percentage points on that.

Thank you.

Chuck Cerankosky with Northcoast Research.

Congratulations on a nice finish to the year. Looking at this acquisition, you mentioned with the cash you had at the end of the year that you are going to apply to funding it, what can you tell us at this point, perhaps, what the initial debt load-in might be, and might that be offset by some short-term investments that aren't included in your cash balance at the end of the year?

On the debt, certainly, our cash is a little bit better than we thought it would. We had a strong cash quarter.

The debt that we'll issue is similar to what we've been talking about, Chuck. Any proceeds we would get from the divestiture would go towards the reduction of that debt, and I think, as you know, we've had the treasury lock rates in place. We will issue the debt as we get closer to closing of the acquisition, and I think, like I said, I think we will be around that same number we've been talking about.

Okay. How should we think about the tax rate going forward? You are backing out the benefit of the accounting change. What would you offer as the underlying run rate for Sherwin's taxes?

On the core, tax rate will be around the 32% that we've been running the last few years.

32%?

Yes, sir. 32%, with looking forward, Valspar has a much bigger presence outside the US than you would expect -- as you would expect, that should be lower on the weighted of the two.

All right. Thank you very much.

Stephen East with Wells Fargo.

John, you all sound pretty skeptical on the TiO2 additional pricing going through. Just wondered what your thoughts were on why you at least sound that way, that it probably won't. And then if we could talk on the consumer DIY, what's the promotional environment you are seeing there that the fourth quarter picked up, and would your pricing through the paint stores have any halo effect at all through the retail channel?

Stephen, this is Bob. On the TiO2 issue, they kind of had a perfect storm at the end of the year. They were running mid-single digit growth kind of throughout the year, and then at year end, you saw our volumes in the fourth quarter. They had kind of a spike in demand that did not allow them to build inventory at the rate they normally would coming into 2017.

So, there are strained inventory levels, and that will keep utilization rates high and inventory levels fairly low going through the first two quarters, because those are the strong demand quarters. Those are actually favorable market conditions for them. However, we think there's ample capacity in the market.

The offset to that, and to that kind of good environment for them, is that they are going to raise their operating rates, and if demand coming out of the gate is not robust in 2017, it's very likely that the pricing that they've announced for the first two quarters is going to at least break to some degree, if not entirely.

Could you clarify for me -- I want to make sure I understood your question on consumer fourth quarter and the halo effect. Can you help me understand?

Sorry, John. Just combining those a little bit, you had a better consumer segment DIY channel in the fourth quarter.

I was wanting to know, one, what was the promotional environment like? And as you all push through your price hikes in your paint stores, would you see any halo effect to allow any pricing on the retail side, on the DIY home centers, et cetera?

I don't see the halo effect on the store to the retail side, and on the consumer side, I'm sorry, on the promotional side, I don't think there was any significant shift at all on the consumer side. That team has been working very hard, and we've been open about the traction we've been gaining starting a little slower than what was expected, and over the last two years working to be a little more effective, and I think we're starting to see some of that attraction pay off.

Okay. Latin America, just quickly, what was the trademark related to? And as you look at 2017, some of those economies have started to recover. Are you expecting volume (inaudible) growth in your forecast there?

For the impairment, if you think about our Latin America coatings group, the high watermark and operating margin was about 10% in 2012, and over the past few years they have been dealing with the economies that you talked about, the currency headwinds. Quite honestly, the sales (inaudible) haven't been up to our expectations with that, including 2016, and building off of that base, your sales and profit projections and the cash that generates, just didn't support the good will had on the balance sheet, so that's why we took the impairment.

To your question about going forward, we clearly see the investments are starting to pay off that we've been making with improved volume, and even the pricing actions that we've been able to experience. While we expect economic conditions to improve there, we also expect that they will be choppy from quarter to quarter.

Our teams are really working hard down there to position themselves favorably in the market. We've been really doing, I think, some heavy lifting down there.

All this comes back together to the point that I take away, not only in Latin America, but across the entire Company. Where we are continuing to grow sales and market share across many of our businesses, Latin America, included. I think we're demonstrating the ability to improve the mix by providing that superior solution to those customers, and the disciplined offset to input the cost inflation with pricing that's needed.

When you are converting sales to profit, like we are, we are improving our return on sales and focusing on cash, not only in Latin America, but around the Company. It gives us confidence, in Latin America, here in the US, and around the world.

Okay. Thank you.

Ivan Marcuse with KeyBanc.

I have a couple of quick ones. First, what was the change in gross profit for your consumer -- or for your paint stores group and for consumer group?

The change in gross profit for paint stores group was $62 million, and the gross profit change for consumer was $2 million. (multiple speakers) I was going to say, Ivan, Latin America was $2.5 million and global finishes group was $1.1 million.

Great. Thanks for that. If you had to gauge the percentage of your volume that goes in infrastructure, that would be all in the protective and marine? Or would there be other channels to think about in terms of if we see an increase of infrastructure going forward, how that would impact you?

It would largely be in our protective and marine. You would see some in our product finishes, as well. We would have may be fabricators that might be tucked in under that business.

Great. Protective and marine, that's roughly 15% of sales in terms of your paint stores group?

Of paint stores group, yes. There's also a component in Latin America and a component in global finishes. The domestic piece here, no question, is paint stores group.

Great. Thanks. My last question, in terms of the tax, if we start to see the tax rates being reduced, at least in the US, I know the vast majority of your earnings come out of the US.

Would you appreciate 10% reduction in the tax rate? Would we see a similar type of reduction in your overall tax rate? How should we think about the moving parts, and are your book taxes similar to your cash taxes?

I think with the stock comp change, our booking cash taxes are more similar. I would say on our current book of business, that might be the case, to your point about a 10% reduction in tax rate is that it correlates to a 10% reduction in ours. That may be the case today.

But if you look forward with Valspar, we will get a bigger chunk of our profits from outside the US, and that's going to change things a little bit. So, we will model that as we go forward. But that is kind of where we are at.

Great. Thanks for taking my questions. I appreciate it.

John Roberts with UBS.

I wanted to come back to the foreign acquisition on the West Coast. I think it's true that there are no other foreign-owned significant architectural competitors in North America, and maybe the only significant last two were Glidden and the Colmax businesses that you ended up acquiring.

I think the history here is that we probably shouldn't worry about that all that much. But I wanted to check if I have the tax right here.

I believe you are right on the past two owners, I would say that we live a healthy life of concern. We don't want to take anything for granted.

So, while there is a lot of competitors in the market right now, Dunn-Edwards has been a very good one in the past. We are not taking anything for granted. They've done a terrific job in the past, we expect they will continue to do a terrific job, and our job is to get better every day.

Thank you.

Thanks, John.

Mike Harrison with Seaport Global Securities.

Hello, this is Jacob on for Mike. I was just wondering, can we get an update on the paint shield product? Where are you guys in the launch process, and maybe how it's been tracking relative to expectation?

I would say that we continue to see this product in more and more test applications, which is exciting for us. We've had a number of hospitals that are using the product, and others that are testing it. What we are finding is, they, meaning our customers, want to put these through a validation process, which we expected, and that's what we're working through right now.

We always want to sell more. So, while there is clearly momentum in gallons that are going out, we want to continue to drive that at a faster rate, and that's what our teams are working on.

Perfect. Thank you for answering my question.

Scott Mushkin with Wolfe Research.

Ben [Shin] on for Scott. Recently, you've been talking about previously talked about what may be a new seasonality in the third quarter. Given the pent-up demand going to the fourth quarter and the strong volumes you guys had, is there anything new that you've learned or seen from customers, so far, that could continue or alter that trend for 2017?

Well, there is a few things. As I mentioned, I believe that our customers have gotten a little more comfortable in growing what might be perceived initially as their fixed cost by adding incremental labor, number one.

Number two, I believe the idea of product selection has become more important. That actually benefits us. So, when we are introducing products of higher quality to our customers, they are able to be more productive on the job, and we are benefiting from that. We're seeing a positive mix shift in the choice of gallons used by many of these customers, because they recognize a higher-quality product might cost them a bit more in a gallon of paint, but helps them tremendously. Not only in their cost of labor, but speed of labor.

The last thing I would add, we are working closely with many customer groups and continuing to innovate new products that will help them. In fact, this year, 2017, we are launching 17 new architectural products into our stores group on top of, I think, it was 23 last year, and I believe it was 25 the year before. It's been a tremendous driver in our pipeline of innovation, as well, to try to help our customers.

Great. Any thoughts on recent change in FTC leadership, and how that might affect the timing of the Valspar acquisition? I'm assuming it doesn't change, but I wanted to see if you have any thoughts.

I think you are right. I don't think it changes. I think we are proceeding quite well, we believe, and we're very respectful of whoever we are speaking to on the FTC side.

Thanks so much.

Christopher Perrella with Bloomberg.

In Latin America, is there additional restructuring to be had? Have you right-sized that business in light of the impairment charges?

And then overseas, in preparation for the Valspar acquisition, are there any steps you are taking before the deal closes to right-size locations?

For Latin America, what I talked about, where we were at at the high watermark and where we are at today, I think the Team has taken all the steps, as far as right-sizing the organization. We are continuously looking for opportunities to improve our SG&A, and to expand our margins, whether that's through our factories, distribution or whatnot. But just from the organizational standpoint, I think we are where we want to be.

We talk an awful lot about, Chris, the mindset of continuous improvement in our organization. So, there is not a finish line in that space. We are going to constantly be looking for those opportunities, and to your point about right-sizing in other parts of the world, as you heard when we were talking about our global finishes group, attacking the synergies between the two acquisitions that we've made, those have been many years in the progress, and we are still working very hard at that and it's going to continue.

I think you should expect us to continue to look for those, but be very smart. At the same time, we are investing in other levers that can help us grow our business.

Thank you. I appreciate that. Then, on the petrochem and the raw material basket, is there any lift that you have built into your guidance, maybe in the back half of the year, cost pressure there, or is it evenly flat across the board?

No, we are expecting mild inflation in the petrochemical size of the basket. You may have noticed that polypropylene pricing for January settled up quite a bit. We anticipated some upward pressure in propylene -- I said polypropylene, it's actually propylene settled up quite a bit.

That move came a little earlier than expected. But, we believe it was primarily a function of higher propane demand for heating and propylene restocking primarily amongst polypropylene customers. In our view, both of these factors are short term, and we are not convinced that the move in January is going to result in more petrochemical inflation than we anticipated in our initial forecast, which is relatively mild.

For housekeeping purposes, it takes about 90 days to work its way down the chain to you?

Give or take, 90, yes.

Thank you very much. I appreciate it.

Dmitry Silversteyn with Longbow Research.

Great finish to the year. A couple of questions left over from all the ones that have been asked.

First of all, following up on the last question around Latin America. You put up about 15% growth excluding FX.

I understand that mostly pricing. Is that correct? Your volume was still weaker year over year?

That's incorrect. We had a volume increase in a number of our countries down there, the strongest being Mexico, and we had some good performance.

Okay. My next question on the pricing, was that actual price increases to offset foreign exchange translations? Or was it also a price increase above and beyond taking out either the raw materials or just mispricing in the market? Can you talk about some of the behind pricing components of those revenues?

It was primarily related to the continued devaluation. If you think about some of the devaluations that have taken place, use the real, that really has turned around in this year, but it's still well devalued from where it was just a few years ago. The pricing actions we are taking are catching us up to that devaluation, as an example.

Got you. Final question on the paint store groups, the bounce back that you saw in same-store growth to about 5.5% from what I think was about 2% last quarter. How much of that was oil and gas either being less onerous or just seasonally less impactful? How much of that was, if you could, parcel it in those two buckets, and how much of that was the loosening up of labor restrictions on the contractor segment?

I'd first point out that it really points to the strength of what we've seen in the market and our continued drive to get better positioned in the market. As we have talked about, the residential repaint is the 11th of 13 quarters with a double-digit gain. So, the other segments, the contractor segments that we've focused on were also very, very strong.

You are right, to some degree, in that the protective and marine drag has been weighing on our results. It was muted because of the seasonality of it. It still speaks to the strength of that, those segments, our confidence in our position there and our determination to get even better.

I understand that. If 90 days doesn't change your orientation or your strategy that much, you have talked about labor constraints as being one of the drivers, along with the oil and gas? I'm just trying to see how those two played out in the fourth, that's all.

Well, I think it's a smaller quarter. So, the absolute numbers improve, and our focus on the protective and marine during this fourth quarter is much less, because of the seasonality. I'm not quite sure if I'm answering your question.

Protective and marine was still a drag in the quarter, just less than it has been over the last couple of quarters. The majority of the rebound in the comp was from the fact that contractors do not face the same labor constraints in the fourth quarter that they do in the third. We saw a significant pickup and activity amongst new residential, residential repaint, and most of the architectural segments picked up pretty solidly.

Perfect, Bob. That's what I was looking for. Thank you very much.

Eric Bosshard with Cleveland Research Company.

Two questions. First of all, the revenue guidance for the fourth quarter, I think, was low-single digit and the reported revenues were up 7[%]. Just curious the difference between those two numbers, what grew notably faster in 4Q relative to what you guided? The second question relates to what you would tell us to expect for gross margin growth in 2017.

I would say that in the quarter, our paint stores group had a much stronger finish to the year than we had in that guidance, and also, Latin America coatings group and the investments that John talked about that the Team has been making started paying off. That also was a benefit relative to our guidance.

As far as gross margin, I think we don't give out the specifics of each of them. As I mentioned before, margin improvement, we do expect to have a margin expansion in 2017. It will not be, as you can imagine, similar to previous few years.

But with continuous improvement in mindset and that, we expect to have some in the volume gains that paint stores group is getting and putting through our North American supply chain. We do expect to get some margin expansion. The key will be on the SG&A leverage that we get.

Just a follow up. On the paint stores better than expected, what component of paint stores proved better than expected?

Again, the residential portion of our business was very, very strong. I say that, but many of the commercial segments were stronger than we expected, as well. We had very good momentum there.

In the prepared remarks, Eric, we mentioned that contractor business grew high-single digits. That's across all end markets. Architectural paint sales to contractors grew high-single digits.

That's an acceleration from third quarter, then?

Yes.

Thank you.

David Lang with Morningstar.

I have one on your growth versus industry. It looks like existing home sales grew a little bit slower than what you're paint stores group posted.

I am wondering if you could talk about what attributed the differences? Is it partly the shift from DIY to pro or is it something else?

First, I mentioned early on in the call that only about 15% to 20% of residential repaint activity is driven by existing home turnover. What's driving the other part, the 80% to 85%, we believe, is rapid appreciation in home values. People are more comfortable investing in remodeling and repainting activity when they are investing in an appreciating asset.

We think we've gotten a tailwind from appreciating home values that would make actual residential repaint activity in the market outpace what existing home turnover would imply the pace should be. We also think that we are gaining share and residential repaint, and that is in part due to your point, the shift from DIY to do it for me.

We think that also tends to pick up pace when home values are appreciating. So, the market conditions we are seeing here, particularly driven by rapidly appreciating home values, is a net benefit for repaint and remodeling activity.

All right. Great. A follow-up question.

I know we have a particularly good year for housing starts and existing home sales. I think we grew mid-single digits. If we continue to see rebounding in the housing market, how much operating leverage would you guys be able to see, especially flowing through to the paint stores group profit margins?

We would expect to absolutely leverage the incremental volume through our stores organization. You started to see some of that in the fourth quarter. It's an area of focus for us. This is an important part of our Business, and one where from an expense standpoint, would not require incremental expense for us to be able to pursue the incremental volume.

You mentioned that housing starts are only up mid-single digits. Mid-single digits volume growth through our North American supply chain would generate a pretty substantial amount of leverage.

Thank you.

Richard O'Reilly with Revere Associates.

I have a short-term question. Weather-wise, I'm in New Jersey, and we've had a mild winter. Yet, when I listen to the national news, there's tornadoes and blizzards somewhere else in the country. Is weather so far in January, quote, normal or is it worse than usual, less than usual, is it affecting your store days to any than normal, quote, normal?

Richard, we have a sworn oath not to ever talk about weather again. (laughter) There is always good weather in areas and bad weather in areas, and we don't like to point to that. We know that our shareholders are counting on us to make things better every day.

There is areas that have had some tough weather, if it be ice or tornadoes, whatever, and there are other areas that are nice. We, quite frankly, insist that our people focus on how they improve their results, not report the weather. It's not anything I want to really comment on.

Okay. Fine. Thank you for your attempt.

It appears we have no additional questions at this time. I would like to pass the floor back over to Mr. Wells for any additional concluding comments.

Thanks again, Jessie. Thanks to all of you for hanging with us this long.

I will wrap up quickly by asking you all to save the date of Thursday, May 25, on your calendars. That's the day we will host our annual Financial Community Present this year, in New York, at the Marriott Marquis. The program will consist of brief business reviews by our segment leadership teams, followed by a more detailed update on our Valspar integration plan and progress. We will host our customary Q&A session, followed by a reception and lunch.

Again, that date is Thursday, May 25, we will be sending out invitations and related information and a link to our registration site in late March. Please watch your email.

As usual, I will be available for any follow-up questions you have today and tomorrow. Thanks for joining us today, and thank you again for your continued interest in Sherwin-Williams.

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