Sherwin-Williams Company SHW
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/18/2013

Operator: Good morning. Thank you for joining the Sherwin-Williams Company's Review of the Second Quarter 2013 Financial Results and Expectations for the Third Quarter and Full Year. With us on today's call are Chris Connor, Chairman and CEO; Sean Hennessy, Senior Vice President, Finance and CFO; Al Mistysyn, Vice President, Corporate Controller; and Bob Wells, Senior Vice President, Corporate Communications.

This conference call is being webcast simultaneously in listen-only mode by VCall via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com beginning approximately two hours after this conference call concludes and will be available until Wednesday , August 8, 2013 at 5.00 pm Eastern Time.

This conference call will include certain forward-looking statements as defined under U.S. 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.

I will now turn the call over to Chris Connor for some opening comments.

Christopher M. Connor - Chairman and CEO: Thanks, Jessi. Good morning, everybody. Thanks for joining us today. Last night, the federal competition commission in Mexico voted 3 to 2 with Board approval of our acquisition of Comex announced on November 12, 2012. At this time, we are still reviewing the rational for the commission's decision and will respond if there is specific concern in the days ahead. We have several paths forward in our efforts to secure approval for this transaction including an internal appeal to the competition commission and we are aggressively pursuing these options as we speak.

Our legal representatives in Mexico are attempting to meet with key commissioners yet today. If you may recall that on June 24, we announced an extension of the original purchase agreement out to the end of August. Last evening and again this morning, I spoke with Marcos Achar, CEO of Comex and he confirmed they are equal resolved to pursue all avenues available to secure confirmation of this transaction.

We are clearly disappointed by this decision, but remain resolute in our determination to address their objectives and proceed with the transaction. Obviously we'll be happy to answer your questions on this topic to the best of our ability after the review of our second quarter results.

Let me turn the call over now to Bob to walk you through our results for the second quarter and then I'll be back with some concluding comments. Bob?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: Thanks Chris. Summarizing overall Company performance for second quarter 2013 versus second quarter 2012. Consolidated net sales increased $140.9 million or 5.5% to $2.71 billion due primarily to higher paint sales volumes in our Paint Stores group. Acquisitions added 0.7% to net sales in the quarter and unfavorable currency translation rate changes decreased consolidated net sales by 0.3%.

Consolidated gross profit dollars increased $83 million over second quarter last year to $1.23 billion. Gross margin increased 80 basis points to 45.5% of sales from 44.7% in the second quarter last year.

Selling, general and administrative expenses for the quarter increased 3.3% to $837.1 million. As a percent of sales SG&A decreased to 30.8% in the second quarter this year from 31.5% last year. Interest expense for the quarter was $15.1 million, an increase of $4.8 million compared to second quarter last year. Other general expense net decreased $2.6 million year-over-year due primarily to a reduction in (provisions) for environmental expense.

Consolidated profit before taxes in the quarter increased $53.1 million or 16.2% to $380.9 million. Our effective tax rate in the second quarter this year was 32.5% compared to 30.5% in the second quarter of 2012. For full year 2013 we expect our effective tax rate to be in the low 30% range compared to last year's rate of 30.4%.

Consolidated net income increased $29.5 million or 12.9% to $257.3 million. Net income as a percent of sales was 9.5% compared to 8.9% in the second quarter last year. Diluted net income per common share for the quarter increased 13.4% to $2.46 per share from $2.17 per share in 2012.

Looking at our results by operating segments; Paint Stores Group sales in the second quarter '13 increased 8% to $1.61 billion. Comparable store sales, that is sales by stores opened more than 12 calendar months increased 7%. Regionally in the second quarter, our Southeastern division led all divisions followed by Southwestern division, eastern division and Midwestern division. Paint Stores Group segment profit for the quarter increased $66 million or 24.7% to $333 million from $267 million in the second quarter last year. Segment margin in the quarter increased to 20.7% from 17.9% last year.

Turning to our Consumer Group, sales in the second quarter decreased 1% to $393.7 million from $397.7 million last year. Acquisitions increased consumer segment sales 3.2% in the quarter. Segment profit for the Consumer Group decreased $1.7 million or 2.1% to $79 million in the quarter. Segment profit as a percent of external sales decreased to 20.1% from 20.3% in the same period last year.

For our Global Finishes Group second quarter sales in U.S. dollars increased 3% to $513.5 million. Acquisitions increased net sales in U.S. dollars by approximately 1.1%, while unfavorable currency translation had minimal impact on sales in the quarter compared to last year. Segment profit in U.S. dollars increased 13.4% in the quarter to $54.5 million from $48 million last year.

Acquisition had no significant effect on segment profits in the quarter, while unfavorable currency translation changes reduced segment profit $2.4 million. As a percent of net sales, Global Finishes Group segment profit was 10.6% in the quarter compared to 9.6% last year.

For our Latin American Coatings Group; second quarter net sales in U.S. dollars increased 6.3% to $199 million. Unfavorable currency translation rate changes decreased net sales by 2.8% in the quarter. Stated in U.S. dollars, segment profits in the second quarter decreased to $900,000 million from $9.3 million in the same period last year due to primarily to an $11.8 million charge to cost of goods related to an import duty assessment by the Brazilian government for the years 2006 through 2008. This charge was partially offset by selling price increases and higher paint sales volume.

Currency translation rate changes had minimal impact on segment profit in the quarter. As a percent of net sales, segment operating profit was 0.4% in the quarter compared to 5% in the second quarter 2012.

Turning briefly to the balance sheet, our total debt on June 30, 2013 was $1.68 billion including short-term borrowings of $50.7 million. Total debt on June 30, last year was $1.24 billion. Our cash balance at the end of the quarter was $741.1 million compared to $46.6 million at the end of second quarter 2012. The first six months of 2013 we spent $72.1 million on capital expenditures, depreciation expense was $78.3 million and amortization expense was $14.1 million. For full year 2013, we anticipate capital expenditures for the year will be approximately $130 million to $150 million, depreciation will be about $150 million and amortization will be approximately $30 million.

I'll conclude my remarks on the quarter with brief update on the status of our lead pigment litigation. Trial began on Monday, July 15 in the Santa Clara county case involving public nuisance claims brought by 10 cities and counties in California against five defendant companies. The judge presiding over the case has limited all arguments by each side to 40 hours including live testimony and cross examination which should be concluded before Labor Day. At the conclusion of the trial the verdict will be determined by the presiding judge, there is no jury. At this point, we have no indication or sense of timing on the decision.

That concludes our review of the results for second quarter 2013. I will turn the call back over to Chris who will make some general comments and highlight our expectations for third quarter and full year. Chris?

Christopher M. Connor - Chairman and CEO: Thanks, Bob. We often say that our visibility with respect to end market conditions and input cost trends improved significantly in the second quarter and this year was no exception. This improving visibility over the past few months has revealed the mixed bag of stable to declining raw material costs, continued strength in the domestic residential market, stagnant non-residential and industrial activity all against the backdrop of continued global economic malaise. We felt the effects both positive and negative of these desperate market conditions across different geographies and customer segments. I would say however that I'm generally pleased with our progress in most aspects of the business, although the second quarter had its normal share of ups and downs.

On the positive side, our Paint Stores Group continues to perform well. Comp store sales growth of 7% likely outpaced the U.S. architectural paint market in the second quarter, although we continue to see demand disparity across certain customer segments. Residential market demand in both new build and retain remained very strong and even in the month of June. Most of the non-residential markets while positive continued to lag the strength of residential. Protective and marine for example, a strong category throughout 2012 has softened thus far in 2013.

Paint Store segment margin for the quarter improved 280 basis points over the second quarter last year and eclipsed 20% operating margin percent of sales for the first time on record. This margin improvement was evenly divided between gross margin expansion and SG&A leverage. Global Finishes Group also made solid progress in the quarter despite the challenging conditions in most geographies outside of North America.

Revenue growth in the quarter was aided by an acquisition completed in the fourth quarter last year, but the earnings improvement in the quarter came highly from the core business. Flow through and organic revenue growth in the quarter was nearly 65% with notable improvement in both gross margin and SG&A. Although we're not satisfied with the current pace of revenue growth in this segment as market conditions improved at home and abroad, Global Finishes Group margins should continue to expand.

On a less positive note, Consumer segment continues to feel the effect of loss paint businesses at several retail customers, although they worked hard to mitigate the impact of the loss volumes on segment profit. Perhaps the greatest disappointment in our quarter was the $11.8 million charge to our Latin American coatings group. The charge is related to our handling of import duties on products brought into Brazil during the years 2006 through 2008. Although we believe our handling of import duties was consistent with a large number of multi-nationals doing business in Brazil, we elected to accept a voluntary (indiscernible) program offered by the government to resolve this issue rather than encourage significant legal expenses to contest it in court.

In 2009, we changed our import duty process, however the year subsequent to 2008 remained open to audit. On the raw material front it's pretty apparent that the major TIO2 producers were unsuccessful in implementing the price increases announced in the first quarter of 2013 to be effective early in the second quarter.

Additional price increases were announced late in the second quarter with nominal effect dates generally around July 1. Increased plant utilization rates decreased inventory levels and optimism about third quarter TIO2 demand resided as reasons for the increases. However, in all geographic markets TIO2 pricing held steady in July and we do not believe that market dynamics will change sufficiently over the balance of the year to justify the implementation of these increases in 2013.

Although crude oil moved up during the second quarter, propylene a key feedstock for monomers, latex, solvents and containers remained relatively stable and we expect that to continue as well for the balance of the year. With our assumption of stable TIO2 costs and the current pricing of propylene we expect average year-over-year raw material cost for the paints and coatings industry to be down low single digits in 2013.

In the first six months of 2013, we've generated $302 million of net operating cash an increase of $100 million over the first half of 2012. Approximately half of the improvement in net operating cash was from the increase in net income in the quarter, the other half resulting from lower cash required to fund our working capital.

Working capital, as we measure it, which is receivables plus inventories minus payables decreased as a percent of sales to 12% from 12.6% in the second quarter last year. We continue to use the company's cash to purchase shares of our stock or treasury, increase our cash dividend and expand or control distribution platform. During the quarter we acquired 800,000 shares of the company's stock with treasury bringing our total year-to-date repurchase activity to 1.3 million shares at an average cost of $178.86 per share and equivalent investment of $232 million.

On June 30 we had remaining authorization to acquire 15.2 million shares. Yesterday, our Board of Directors approved a quarterly dividend of $0.50 per share, up from $0.39 per share last year.

So far this year, our Paint Stores Group has added 22 net new stores, 13 of which were opened in the second quarter. This brings our total store count in the U.S., Canada and the Caribbean to 3,542 compared to 3,470 one year ago. As we commented in April, we are ramping up our new store opening activity and our Paint Stores Group plans to add approximately 70 to 80 net new store locations during the year.

Looking ahead, we remain optimistic that U.S. architectural paint market demand, primarily in the Residential segments will remain strong as we go through the prime painting season. Based on this outlook, our expectation for third quarter 2013 is for consolidated net sales increase in the range of 6% to 9% compared to last year's third quarter. With sales at that level, we expect diluted net income per common share for the second quarter to be in the range of $2.55 to $2.65 per share compared to last year's record performance of $2.24 per share.

For the full year of 2013, we expect consolidated net sales to increase over 2012 by mid-single-digit percentage. With annual sales at that level, we are reaffirming our expectations for full year diluted net income per common share to be in the range of $7.45 to $7.55 per share compared to $6.02 per share earned in 2012.

Again thanks to all of you for joining us this morning. Now we'd be happy to take your questions.

Transcript Call Date 07/18/2013

Operator: John McNulty, Credit Suisse.

John McNulty - Credit Suisse: A couple questions just on the overall business fundamentals -- the volume for same-store sales number for your Paint Stores was 7% and I think when you adjust for Easter falling out of this quarter, unlike last year, it looks like it's more like a 5% type number, which seems a little bit lighter than what we've expect given what's going on in the construction market. So, I guess can you walk us through maybe some of the puts and takes that might be driving those volumes maybe coming in a little bit lighter than expected?

Christopher M. Connor - Chairman and CEO: I'll take a crack at that John. First of all I think the 2% impact for Easter might be a little strong for us, it's not that strong of an impact. We have been commenting about the mix change we've been seeing this year, so our gallon numbers actually were terrific, slightly higher than that sales numbers that we indicated. We're pretty confident that that is an improvement over what the market ran for the particular quarter. So, from our perspective ,we see that as a pretty good quarter for the source group.

John McNulty - Credit Suisse: Then just one quick question with regard to the guidance. You're reaffirming the guidance at this point, yet it sounds like the raw material environment is better than what you were originally thinking. So are you starting to give some back maybe on the pricing side or are there other puts and takes that we should be thinking about? Is it something around the timing of Comex potentially closing or what's the change there?

Christopher M. Connor - Chairman and CEO: Yes, I think the guidance reaffirming has a couple of moving parts in it. You are correct, the raw material environment certainly is looking better, but we've also just taken an $0.08 hit relative to this Brazilian tax. Holding that guidance at that level we think indicates our confidence in the strength of the second half.

Operator: Robert Koort, Goldman Sachs.

Robert Koort - Goldman Sachs: Chris, just wondering if you can help out on the consumer side you've referenced losing some business out of a few retail customers, I guess, the new Walmart was a prominent one. Could you maybe give us a little color on the others? And then if we were to take that issue aside wasn't there better growth in the consumer given that as you said the residential markets were reasonably hot?

Christopher M. Connor - Chairman and CEO: We have commented repeatedly about Walmart as well as an (intermediate) calls confirming a Masco comment about the displacement of the Sherwin-Williams' Dutch Boy program out of Home Depot Mexico as Masco Behr moved that program into that country for the first time. So, those are the two impacts that we are seeing for the division. That's had a significant impact. If we back those two things out, we are marginally positive there. We have commented for many, many quarters now that this segment has a little bit of a tough road ahead of us given the strength of the stores organization in the same markets that they are competing with. And to your comment about rebounding home programs we made the comment that we are disappointed in the quarter so we expect this team to do better.

Operator: Ghansham Panjabi, Robert W. Baird.

Ghansham Panjabi - Robert W. Baird: Last quarter you commented on a big deviation in volumes between external, internal paints. I think a lot of that was weather related. Chris, can you just sort of update us on how that evolved during the second quarter?

Sean P. Hennessy - SVP - Finance and CFO: This is Sean Hennessy. When you look at the volumes and that disparage between the exterior and interior that we had really because of the exterior first quarter 2012 that we had very, very strong. We saw little more normal, but exterior still because of rain, different rain in certain segments but usually we don’t talk about weather, but because of that it wasn't all the way back to normal yet, on that interior, exterior mix.

Ghansham Panjabi - Robert W. Baird: And then, just one quick one on Comex as best as you can answer it. Can you point us towards some other transactions in Mexico that were brought in – ultimately went through close down perhaps some concessions. Do you have sense to that?

Christopher M. Connor - Chairman and CEO: No, we don’t have any comment regarding those transactions at this point in time.

Operator: Chris Nocella, RBC Capital Markets.

Chris Nocella - RBC Capital Markets: Can you just give us a sense of how long you think your sales process to take with Comex. I see some headline suggesting the combination that have a market share of maybe 48% to 58%. So, can you remind us your market share in Mexico and maybe what level you think maybe comfortable with?

Christopher M. Connor - Chairman and CEO: I can't answer the appeal process because its somewhat (indiscernible), Chris. After you (indiscernible) like this the parties have 30 days to issue on a formal appeal and then once the Chairman of the commission has accepted the appeal, they have 60 days, and those are working days just to clarify that, to render an opinion on that. It would be inappropriate for us to make any comments relative to what levels of market share the commissions would be (influencing).

Chris Nocella - RBC Capital Markets: Does the Comex deal without Mexico make sense maybe it's supplementary with a large share repurchase?

Christopher M. Connor - Chairman and CEO: I think there are reasons for people to think through that. Our public statements are that we remain committed to completing the whole transaction including both the Canadian, United States and Mexican side of the deal.

Operator: Aram Rubinson, Nomura Securities.

Aram Rubinson - Nomura Securities: Sorry to hear the news on Comex. I understand your desire to do the math to get the deal done, but two things around that and then a follow-up. One, are you able to kind of buyback stock aggressively or are you kind of in a holding pattern as it relates – whether it's kind of quiet period or other things like that? Then second; how can you make sure that you avoid distraction inside the Company, so that if you kind of go at this another couple of quarters or six months then it doesn't kind of affects your business in any unintended way, and then I have a follow-up.

Robert J. Wells - SVP, Corporate Communications and Public Affairs: When you take a little bit of stack we are in a blackout -- we are on blackout for three days, and so three days after we've announced and we think we'll continue with what we've been doing in the past, but as of today we can't (indiscernible) today.

Christopher M. Connor - Chairman and CEO: In terms of avoiding distraction there and we are the masters at avoiding distractions at Sherwin-Williams. We've had blood losses and all kinds of noise to contend with, and here again, we're blessed with really terrific leadership in our field operations, our folks are out selling paint today, taking care of customers, just like the every other day. So, the folks on the phone are spending a little time on this issue, the rest of the 40,000 folks are doing what they're supposed to be doing today.

Aram Rubinson - Nomura Securities: Just around the California legislation, could you just comment as to whether or not you've reserved differently, the 10-Q usually comments on kind of reserves for environment on how you're kind of treating that and whether or not the prior cases that have been dismissed are fair precedence or you think this one might be, I don't know, being more unique.

Christopher M. Connor - Chairman and CEO: No, we think that's precedence, you think about Rhone Island and lot of others, Mississippi, Wisconsin, Ohio, New Jersey, we've never created a reserve for lead losses.

Operator: Kevin McCarthy, Bank of America Merrill Lynch.

Kevin McCarthy - Bank of America Merrill Lynch: Chris, I think you had made a comment in your prepared remarks that your comparable store growth is 7%, same-store has likely outpaced the market. So, give us a sense of where you think the market is running at the industry level for gallonage and how much you might be exceeding that pace?

Christopher M. Connor - Chairman and CEO: We don’t have good visibility into that, Kevin, until several quarters in arrear when some of the various reporting groups get some data out for us. We have commented that we believe our industry grows at a historically in pace with the GDP 1% to 2% as we rebound to a more normalized architectural coatings demand in our market we've talked about that running at a little higher pace, let's say, 3%, 4%. We've seen growth for the industry maybe in the range of 5% here over the last couple of years as we are seeing some of these rebounding quarters. But as I mentioned in the first call that John asked don't forget that our gallon numbers were in excess of 7% revenue numbers. So, we will have a better sense here in a little bit but we are still pretty confident that the teams are doing great in Stores Group in terms of taking gallon share.

Kevin McCarthy - Bank of America Merrill Lynch: And then second question, if I may, on the Latin America Coatings Group. I think you had a translation effect there on the top line but your press release seems to indicate there was no impact on segment profit. I guess it was my understanding you hadn't been hedging and perhaps you could help me kind of understand how the bottom line would have been insulated in the quarter given the volatility in the local currency there?

Christopher M. Connor - Chairman and CEO: We did have debt. I think what we try to do over the years, especially in the last couple of years just to bring cash forward, allow the debt there to be a natural hedge and when you look at really Brazil as where we were really had a major change in that quarter. So, we are fairly hedged.

Kevin McCarthy - Bank of America Merrill Lynch: And then, final question for Chris, if I may, just in terms of potential scenarios for redevelopment of capital if indeed Comex ultimately does not go through. Care to offer any comments on what you are seeing in terms of the M&A pipeline are there other opportunities that you see out here in the private market that might be appealing alternatives?

Christopher M. Connor - Chairman and CEO: I think as deployment of capital go forward here, regardless of the Comex transaction frankly, you are going to see Sherwin continue to operate in its traditional fashion. We are not holders of cash. We will put that to work. We are comfortable buying back stock as we’ve indicated over the years. There are always M&A opportunities for us. We have a disciplined approach and a strategic list of targets would be of interest to the company. Your comment about (indiscernible) privately held family businesses dictate just on certain path in order to try to get those to market and those conversation have been happening in this environment and it will continue to happen, nothing new to report at this time.

Operator: Nils Wallin, CLSA.

Nils Wallin - CLSA: Question on the actual timing of the Comex response, I guess, from the Mexican government. It seems like given the amount of time that they have to respond it would be into late in the fourth quarter. So, is there any reason that you might be able to accelerate that so you get a little bit better clarity sooner?

Christopher M. Connor - Chairman and CEO: Our intent will be absolutely to accelerate and we're approaching this with speed and urgency. It would be premature for me to comment because I simply don't know how quickly we can get them to engage and what that outcome might be.

Nils Wallin - CLSA: In Latin America, it seems like the second quarter has been a bit of a dip in the last two years, is there anything changing in terms of seasonality or product mix that's causing that from the operating profit perspective?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: We continue to do a lot of different things in Latin America, we just did a major IT project down there, Oracle was now turned down in Argentina on the 3rd of July. So, we've been doing lot of different things in the last couple of years, we'll keep moving on that project. We think that project is going to help us with working capital and reducing the working capital percent of sales. I think you're right about the second quarter because if you look at the year-to-date, last year our (indiscernible) segment was 7.4% through the first six months, and first two quarters. This year if you add back the Brazilian import situation we are at 8.2%. We look at our forecast for the year and I'll just tell you we think that we still see that's improving and moving forward on (ROS) improvement for the year.

Nils Wallin - CLSA: Just a final one if I may. When you look at some of what the competitors have put out there in terms of their growth rate in Latin American, it seems like you are doing a little bit better. Is there any share shifts going on or is it just not really comparable?

Christopher M. Connor - Chairman and CEO: I think if there are share shifts they are minimal at this point in time.

Operator: P.J. Juvekar, Citi.

P.J. Juvekar - Citi: Chris, you did mentioned weather and wet spring which would have impacted at least your exterior paint business. Did you make up any of the lost sales in June as the weather improved?

Christopher M. Connor - Chairman and CEO: I think on the call, P.J., we made the comment that we are seeing strength in the residential markets including – during the month of June. There was a lot of noise in the market relative to other impacts to the demand curve there. As Sean said I think in one of his answers we are not ones who are giving weather reports on these calls, we expect to have weather issues in various parts of the geography at all quarters, frankly, and so the health and robustness of the residential markets both new and retained are really the core thing that we are looking at and providing confidence on. We expect that over a cycle weather will not be that big of an impact.

P.J. Juvekar - Citi: Chris, you talked about some pricing pressure in big commercial projects during the last call. Can you tell us if that is continuing. If commercial is weak get to 7% same-store growth was residential up double digit?

Christopher M. Connor - Chairman and CEO: Yes, and both (indiscernible). Commercial bidding activity in an environment like this where folks are going aggressively after gallons has always been tough. In an environment with moderating raw materials we expect to see it even more so and that's been the case. Then your analysis on the residential impact being double-digit is also accurate.

P.J. Juvekar - Citi: Just quickly, have you seen any impact from paint geared towards contractors launched at (indiscernible)?

Christopher M. Connor - Chairman and CEO: No, we have not. I don't think that program has been out there long enough to get any indication of the impact that might have.

Operator: Duffy Fischer, Barclays.

Duffy Fischer - Barclays Capital: I want to talk the incremental margin in the Paint Store business jumped really strong this quarter, up over 50% were kind of in the 38% in the first quarter. Can you walk through the buckets of what improved so well in that business as far as the profitability relative to sales growth?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: I would say that number one, we're starting to see SG&A improvement. I know that in the first quarter we have mentioned that in the first quarter of 2012 that sales are so strong we did not get all the SG&A service dollars into that first quarter that we should have had and we had to go get set that history in the first quarter of this year. And remember at the end of the first quarter we said hang in there because we thought that we would be flat to down slightly year-to-date in SG&A, which we probably didn't. But as those gallons goes through the stores, this is the piece where we really feel good about our flow through, and I think that it was just gallons going through with SG&A leverage and that's really what created it.

Duffy Fischer - Barclays Capital: So, that feels like a good solid margin at above 20% is a good base line, as you would look at it and now there is some seasonality with it, but there is nothing, okay, terrific?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: We think it's in the first and fourth quarter.

P.J. Juvekar - Citi: Then when you look at your business and the Comex business in Mexico not so much around the deal, but we've certainly got a lot of bad macro news flows about the housing market down there and financing for housing, how would you handicap the health of the coatings market going into that today versus if you think about when you would have announced the deal.

Christopher M. Connor - Chairman and CEO: It's clearly softer, Duffy, specifically around the impacts that you've mentioned. The government has redirected some of their support for various housing programs and that's had an impact on some of the large home voters in the region. So, we have felt that in our business moderately and I would suspect Comex has as well.

P.J. Juvekar - Citi: Then just one last question. On Comex in particular, I remember Chris you talking about one of the really strong points of the Comex business was just the density that they had and if one of those fixes and again this is little bit of speculation, but if one of the fixes if the government would ask for is the divestiture of some of the points of sale. Is that a linear line or is there something asymmetric there where the business starts to lose some of its attractiveness pretty quickly if you had to divest and stuff?

Christopher M. Connor - Chairman and CEO: First of all their business model is through an independent constraint scenario. 3,300 of these other Mexican businesses which operate these facilities they're not owned by the Comex company themselves, so that in and of itself may not be the solution. Again, as we commented earlier all those types of potential outcomes are just really speculative at this point in time and we prefer to waiting and work to the normal channel.

Operator: Greg Melich, ISI Group.

Greg Melich - ISI Group: First, on the gross margin expansion. Could you help us with how much of it was due to manufacturing leverage with the gallons coming through versus the price of raw material mix dynamic?

Christopher M. Connor - Chairman and CEO: I would say that the gallons coming through are plants – when you look at the – I will just go to 45 versus (43.8) on a year-to-date basis. Really the majority of it was just the incremental sales. So, I would say the incremental gallons and incremental sales created that gross margin not selling price.

Greg Melich - ISI Group: And then I guess that ties into the next. If gallons are up 8, (indiscernible) resi stronger than commercial how should we think about the 8 versus the 7 in terms of set price it is basically just all mixed and is it mix within those different categories or just mix between the two?

Christopher M. Connor - Chairman and CEO: I would say mix within category, yes.

Greg Melich - ISI Group: And then lastly you guided to a 6% to 9% growth number for the third quarter. I guess, what sort of taking that acceleration is there something easier compares or do you see anything specific in terms of orders or customer dynamic to give you that confidence?

Christopher M. Connor - Chairman and CEO: I think if you look at it we think we are finding. I think third quarter is looking little stronger but I wouldn’t say that our sales in the second quarter versus 6% to 9% is that dramatically different. I think we are going to be fine.

Greg Melich - ISI Group: Chris, I realize you can't say much on Comex but just to make sure I got the timing right. You said you've already extended the merge agreement to the end of August would you expect to extend that again in the near-term to give yourself more time given the 30 day or a formal payroll and 60 day review?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: Yeah, it's just premature to comment on that at this point of time, Greg I'm sorry.

Operator: John Roberts, UBS.

John Roberts - UBS: In the Global Finishes segment where the similarities or differences between auto refinish and the other businesses like product finishes. I would have thought you might be seeing some benefit from the (indiscernible) situation that two businesses might have converged within that segment?

Christopher M. Connor - Chairman and CEO: I think that when you look at the automotive we had (indiscernible) which was an acquisition. So, the automotive piece was the strongest of the three pieces with or without the acquisition.

John Roberts - UBS: What's the material spending in the quarter on a Comex deal in your SG&A?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: $0.01 or $0.02 a share.

Operator: Eric Bosshard, Cleveland Research Company.

Eric Bosshard - Cleveland Research: With some insight into where raw material cost are at this point as you indicated as you speak about the map or the path on gross margin from here, I wondered if you could just give us some of your thoughts and strategy and thinking of where that goes?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: I think when you look at the gross margin, for the first half of the year we're at 45%. I think that without the Brazilian situation that we spoke of was 45.2% and we've continually (savor) in that 43% to 46% range and I would expect that our gross margin will come in between 45% and 46% range for the year.

Eric Bosshard - Cleveland Research: There has been some discussion in the past of the range potentially being better in this cycle, I'm wondering as you think of a structural issues going on with input cost and also where we are in terms of volume and leverage and how do you think about doing better than 43% to 46% range over the next 12 to 18 months?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: I think that over this period I think as we've commented in the past, we've also believed that eventually we would be at 44% to 47%, essentially 45% to 48%. I think that right now the premature, one of the things that we are sort of waiting to see is after the Comex closes to really show the combined gross margin it would be an effect in the short run, and we think it changes our long-term goal. So, I think -- when that occurs I think we would be in a lot better shape to give you some updated numbers.

Eric Bosshard - Cleveland Research: In terms of – related to this – secondly in terms of the benefit from the input costs, looking at better revenue growth and the implied incremental margin in the back half of the year, so the profitability progress for the first half be sustained or improve in the back half, how should that look as we work through this second half?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: When you look at the first six months, I think that we're at 357 versus 313 that's $0.44, the mid-point of our range is $1 now. I'll tell you that we're going to have to have higher flow through -- improvement in the third and fourth quarter than we had in the first two quarters.

Eric Bosshard - Cleveland Research: Then secondly, as it relates to the comments I'm curious what color you can give us on your interactions with the commission prior to last evening's decision from them if you could just shed some light on international the questions I have asked and sort of given your response to the decision last night relative to those interactions?

Christopher M. Connor - Chairman and CEO: Just briefly on that point, we've been represented by outside council in Mexico City who specializes in working with this commission. They have had appropriate meetings with the commissioners. During the process several of our management team have been able to participate in those discussions to help clarify points, provide data et cetera. So, I would characterize that as being open and appropriate conversations.

Eric Bosshard - Cleveland Research: Was that a surprise last night relative to the (indiscernible) of those discussions?

Christopher M. Connor - Chairman and CEO: I'd be careful to not particularly use that word surprise. I think we will just leave it at disappointment.

Operator: Dennis McGill, Zelman & Associates.

Dennis McGill - Zelman & Associates: Chris, just to clarify or maybe explain a little bit on the last question. So, can you talk at all even high level on some of the point of contention that the commission raised things that you have to go back and look at or address? Just to understand what are the dynamics that the commission is focused on?

Christopher M. Connor - Chairman and CEO: Dennis, as we commented we got this report late last night it was 144 pages in Spanish. We are going through that in great detail at this moment. I think it just will be premature to comment at this time unfortunately.

Dennis McGill - Zelman & Associates: On the business side within Paint Stores can you just maybe comment a little bit more on what's driving the mix and whether that's a temporary dynamic within some of the categories or if that's the exterior, interior dynamic and how that plays out as you kind of normalize our weather?

Christopher M. Connor - Chairman and CEO: I think we've mentioned it before I think residential. I think residential has been tremendously stronger than commercial and I think that residential has been fairly strong. So, when you look at those two pieces that's really what’s been driving it.

Dennis McGill - Zelman & Associates: The gallon mix on the residential side is lower than non-res or just new construction?

Christopher M. Connor - Chairman and CEO: New construction, in general, is usually a lower average selling price, so that continue to become a higher percentage of our sales that drive gallon faster than sales?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: This is Bob. There is also still a slight interior or exterior mix difference both into last year, so it (indiscernible) on to the new construction plus an interior to exterior mix difference.

Dennis McGill - Zelman & Associates: And is there a similar negative drag on the margin line?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: No, the operating margins are strong.

Dennis McGill - Zelman & Associates: I know they’re strong, strong. But is there drag on that or is it just the top line drag?

Christopher M. Connor - Chairman and CEO: No, we've talked for a long time, Dennis, about the consistency of the platform products and customers which we’re in. So, we are fine in that regard.

Operator: Charles Dan, Morgan Stanley.

Charles Dan - Morgan Stanley: First, I just want to clarify that the new EPS or the new unchanged EPS guidance that includes the $0.08 Brazilian duty expense?

Christopher M. Connor - Chairman and CEO: Yes.

Charles Dan - Morgan Stanley: Is there another way you would have been raising guidance a bit if we hadn’t running to that issue?

Christopher M. Connor - Chairman and CEO: We got a dime ring and it is only $0.08, so it’s in there.

Charles Dan - Morgan Stanley: And then secondly, just again to clarify the comments you made about the Mexican housing market getting softer versus when the Comex deal was announced. Can you just clarify the original arrangement had -- does it have a price adjustment, if there is a material change in that market and the performance has now we're talking the range that you gave about a year going by before the potential closing?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: As we continue to do the due diligence, the market has changed, there is also things that have not changed and some of things that have gotten stronger. We continue to look at the performance. We look at what we expect to get a return on our assets that we put into this and the internal rate of return. We don't have an automatic adjustment for the market conditions. I think that as we've gone through, I think we're still – if this closes any time soon even with the – in our mind short term market changes in Mexico. We think this is going to create nice shareholder value.

Charles Dan - Morgan Stanley: Lastly just two housekeeping questions. One, administrative expense excluding the change in interest expense is to be down in the first half of the year, do you expect that to continue to be down in the second half or should we think about that going up?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: I would say that we expect even without the G&A or from the interest expense the way you phrased that question. We think that debt expense will be up slightly in the year. We just think there were some timing, and again, we have some couple of IT projects that we're going to be working on in (indiscernible).

Charles Dan - Morgan Stanley: Then lastly, if you could just give the gross profit change by segment?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: Gross profit changed by Store Group $83 million; Consumer Group was down 400,000; Global Finishes 8.6 million improvement and Latin America is down 9.2. I just want to remind you that 9.2 is that's where the $11.8 million was expense (indiscernible) cost of goods sold.

Operator: Ivan Marcuse, KeyBanc Capital Markets.

Ivan Marcuse - KeyBanc Capital Markets: Real quick the residential recovery has been going on for a while now and I understand non-residential tends to lack – historical lag. Is this lag lasting a little bit longer than you would have expected or is this sort of in line with expectations and how would you sort of gauge your outlook for non-residential based off of I guess historic times?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: Ivan, this is Bob. I think what we are seeing is that there are certain categories of non-residential that have been real slow to start and that's not unexpected. Retail was severely overbuilt during the last run-up. We are seeing solid construction activity in multifamily housing. We are seeing a pickup in office. Some of the institutional categories, specifically, schools and government buildings have been slow to start. So, it is choppy across sub-categories in the non-residential market but I think most of the non-residential – potential market is starting to pick up as expected. As a reminder, we do expect positive overall non-residential volume this year in terms of square footage put in place.

Ivan Marcuse - KeyBanc Capital Markets: And then for the Mexican market if you could remind me what is the breakdown between, I guess, the total volumes in housing, new construction and re-paint and how much do the builders dominate – or do they dominate – the large builders dominate the new construction in Mexico, how is that market sort of – I mean, how the gallons breakout, I guess?

Christopher M. Connor - Chairman and CEO: Ivan, it would be very similar to the United States architectural business model that we've commented on for a long period of time. The vast majority of coatings in Mexico are to maintain and decorate existing structures, new construction totally would be in that 25% range plus or minus a little bit. There are large Mexican home builders, but there are hundreds of – thousands of other independent builders as well too. So, you can pretty much apply the same kind of modeling to the U.S. market that we've commented on and shared with you for a long period of time to Mexico.

Ivan Marcuse - KeyBanc Capital Markets: And then my last question, on the Brazilian market there has been a lot of uncertainty. Has that continued to – what do you think in terms of your business (indiscernible) it looks like that your results remains fairly strong?

Christopher M. Connor - Chairman and CEO: Yeah, I think, there has been some noise surrounding Brazil's overall economic environment. We’ve had some segments that have been a little bit harder hit. Don't forget that one of the things that Brazil has in the future is hosting this World Cup and the Olympics and the construction and build out of the required stadiums airport expansion, housing all areas that would impact our business. So, that’s a little bit behind schedule but some of our strength is relatively to the work we’ve seen happening in that space so far.

Operator: Don Carson, Susquehanna Financial.

Don Carson - Susquehanna Financial: Chris, question on your ability to out sustain or outperform industry growth, you are growing 7% industry is three to four. How much of that do you think is due to your stronger position in new home construction because of your relationships with the top home builders and how much would be retained to where you are just seeing a swing back to contractors?

Christopher M. Connor - Chairman and CEO: So clearly, Don, this rebound is occurring, we've commented about the emerging importance of the professional painting contractor. They had trough a little bit during the downturn and we expect that we're on our way back to about 60/40 mix where 50% of all the coatings will be purchased by professional painting contractors. Clearly, the new residential construction market and all new construction, Bob just commented briefly on multi-family also being strong, new segment as well. So, we're getting the lift from that and we would expect that to continue.

Don Carson - Susquehanna Financial: On the last call, part of your confidence in the outlook for the year was just the backlog that your contract customer base had, how is that looking, are they still relatively confident in the business outlook and the other comment you made is that weather doesn't create a destroy demand for paint to defers that are accelerated, so just adverse weather that we saw in the second quarter is that just push out demand into the third quarter or is it loss through the year as a whole?

Christopher M. Connor - Chairman and CEO: I would say you're accurate with all of your questions. We would expect that the contractors’ book-of-business looks robust, Sean just commented on the third quarter sales guidance being a little bit stronger even in our second quarter. As we meet with these folks on a daily basis to our stores, they are continuing to give us indications that they've got a good book-of-business and to your point about weather just moving demand back, none of these folks are commenting about the impact of weather. They are continuing to be on projects and expect that they are going to have a pretty solid second half as well.

Operator: Dmitry Silversteyn, Longbow Research.

Dmitry Silversteyn - Longbow Research: It sounds like from your comments – your commentary on raw material expectations seems to be a little bit better than it was earlier in the year. I think there were some concern about second half of the year seeing some inflation in petrochemical side of raw materials at least and are you looking at it being flat and TiO2 obviously is flat and down year-over-year. Your guidance was basically flat versus your previous expectations so is raw material improvement if it is there just not significant enough or was this basically the $0.08 penalty from Brazil that prevented you from raising guidance on a little bit more robust outlook for cost or is there some other sort of cautionary things that you are seeing in the market in the back end of the year that you would rather keep (indiscernible) as far as your expectations are concerned?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: On the raw material, Dmitry, obviously there is a lot of moving parts. We believe that the TiO2 producers were going to push pricing hard beginning in the second quarter and they have. We weren't sure whether market conditions would be such that they'd actually realize some of the pricing that they were pushing, our outlook – our point of view now is that market conditions will not accommodate a price increase or any effective pricing in TiO2. We weren't sure whether propylene would remain stable, it appears to be holding pretty steady despite the run-up in crude oil. So, I would say that to Chris's opening comments there is a lot more clarity now than there was three months ago. I wouldn't characterize on the total raw material basket outlook to the industry as far better today than it was three months ago. It is maybe marginally better.

Dmitry Silversteyn - Longbow Research: We are in our third year of negative volume comps on the consumer line – or in consumer division, obviously, in 2011 the majority of that Walmart loss and then I guess little bit of that spilled over to 2012 and now we have the Mexican Home Depot issues with Masco advising Dutch Boy. When are we going to or when do you think you're going to anniversary that and we actually get to see sort of the clean performance of the Consumer Group and hopefully positive…

Robert J. Wells - SVP, Corporate Communications and Public Affairs: Yeah, the other thing just make sure that you did a nice job of presenting the history. But you have to remember that when we did do the Walmart deal when that Walmart deal was the major hit and last – at the end of the third quarter last year we had another step down, that's what we're anniversarying. So, in the last call, again Masco put it out there in the fourth quarter last year, we had that Mexican Dutch Boy both convert to compare. So, when you think with the last quarter we said that really we're going to see negative through the third quarter and after the third quarter we would expect that we start to see some improvement there. So, I think we answered it that away after the first quarter and we feel pretty good about that answer, I wouldn't change it.

Dmitry Silversteyn - Longbow Research: So, fourth quarter we should start seeing more apple-to-apple and after comparisons anniversarying all the headwinds as far as business losses?

Robert J. Wells - SVP, Corporate Communications and Public Affairs: Yeah.

Operator: Jeff Zekauskas, JPMorgan Chase.

Jeff Zekauskas - JPMorgan: In terms of the are you – do you continue to be optimistic about the Comex transaction because at worst you could divest your own Mexican business and own their much, much larger Mexican business? Did you offer the commission any remedies so far or remedies that's not been discussed yet.

Christopher M. Connor - Chairman and CEO: Those are all appropriate thoughts and ideas and questions for you to ask. It equally is appropriate, I cannot comment on any of that at this point in time.

Jeff Zekauskas - JPMorgan: Then lastly, sequentially did you prices change either positively or negatively in your Stores and in your Consumer business.

Christopher M. Connor - Chairman and CEO: No, not at all. I think when you look at the second quarter versus the first quarter. It's been over 12 months since we've had the last price increase. The selling prices are not dramatically different.

Jeff Zekauskas - JPMorgan: Are you allowed to say whether you are optimistic or pessimistic about the closing of the Comex transaction?

Christopher M. Connor - Chairman and CEO: Jeff, we're optimistic by nature here. I think the comments we gave early on about the multiple path we have to continue pushing forward here. We're hopeful that we'll get this done.

Operator: Aram Rubinson, Nomura Securities.

Aram Rubinson - Nomura Securities: Can you talk about both the promotional environment and maybe the cadence of comps by range because I think by region you mentioned there was a big range, I was just curious how wider range there was by region?

Christopher M. Connor - Chairman and CEO: The promotional activity Aram has been very consistent in our industry, pretty much for decades in now. This is time of the year when you'll see discounting by all the major retailers including Sherwin-Williams to drive traffic in the stores around the big holiday seasons and certainly July 4 qualify as one of those. Bob did comment briefly about our south eastern division leading the pack, south western division second, then Eastern and Midwestern all of them solidly in the mid-single digits and above range. The range was not very wide.

Operator: Richard O'Reilly, Revere and Associates.

Richard O'Reilly - Revere and Associates: Can you remind me or us are the volumes for the Paint Stores made in the Consumer Group or is it other way around?

Christopher M. Connor - Chairman and CEO: No, the products that are sold through Storage Group is producing – and produced in the Consumer Group. So the Consumer Group is making products for sales of the Consumer Group as well as the Paint Stores Group.

Robert J. Wells - SVP, Corporate Communications and Public Affairs: So, they all handle the logistics and warehousing.

Richard O'Reilly - Revere and Associates: So, the consumer margin is down only couple of basis points even though the sales is down because the Paint Stores Group volumes were up so well. Is that how I should be thinking about that?

Christopher M. Connor - Chairman and CEO: We had a positive impact, yes, from having the Paint Stores Group improving volumes.

Richard O'Reilly - Revere and Associates: And then a second question if I can. Following up on the raw materials, I think you had said (indiscernible) overall basket now down low single digits and we know about pigments and (indiscernible) is down from first quarter levels. What else in that basket is up or down noticeably, I mean, is packaging or is distribution in there what else can you comment on?

Christopher M. Connor - Chairman and CEO: Richard, distribution is not in there but we tend to comment on propylene and TiO2m because TIO2 represents the vast majority of the pigment category, propylene effects about – the cost of about 60% of the raw material basket by cost. So, we find propylene to be a good proxy for most of the rest of the basket outside of pigment. There is some movement in various specific solvents that we don't tend to delve into, but for the most part packaging, latex and resins and most of the base load solvents are holding pretty steady.

Operator: (Jaideep Punjabi), Berenburg.

Jaideep Punjabi - Berenberg: Can you give us a little bit more color on what's going on in the marine and protective market. Why is it we can -- actually when do you expect things to turn around there. Also if you can provide a little bit more color on some of the other industrial coating market that would be great.

Christopher M. Connor - Chairman and CEO: So the protective and marine markets for us predominantly as we've commented through our global group businesses. These are North American business so we have a terrific share position in the United States on a variety of different segments here. I think Bob also commented about some of the softness that we're seeing in the non-residential sector of the economy and frankly that's totally where the protective and marine business resides. Our segments would include bridge and highway, petrochemical, waste water treatment, energy, food and beverage, the military is an important component of that. Better said the government is an important component of that, so sequesters have a little bit of an impact here as well. The good news for this business for us has always been that these is one of these types of painting projects that you can't prefer maintenance for long. So we think there has been just slowing of it, a little bit over this last quarter. In discussing the projects that we see on the books and with our contracts who work in this space. They're confident that the second half of the year will be better for them and we'd expect to report that going forward.

Operator: There are no further questions in queue at this time. I would like to turn the floor back over to Mr. Wells for any concluding closing comments.

Robert J. Wells - SVP, Corporate Communications and Public Affairs: Thanks, Jessie. As always I'll be available for the balance of the day, tomorrow and throughout the coming week to answer your follow-up question. I appreciate your patience if you're in the queue now. Again, thanks for joining us today and thank you for your continued interested in Sherwin-Williams.

Operator: Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.