The Sherwin-Williams Company
Q4 2014 Earnings Call Transcript

Published:

  • Operator:
    Good afternoon. Thank you for joining the Sherwin-Williams Company's review of Fourth Quarter and Full Year 2014 Results and Expectations for 2015. 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 2 hours after this conference call concludes and will be available until Wednesday, February 18, 2015 at 5
  • Robert J. Wells:
    Thank you, Roya. Good afternoon, everyone, and thanks for joining us. We appreciate your interest in Sherwin-Williams. We're going to begin the call today with some prepared remarks by Chris Connor, our Chairman and CEO; and John Morikis, President and Chief Operating Officer. Following their remarks, we will open the call to questions, and Sean Hennessy, our Chief Financial Officer; and Al Mistysyn, Vice President and Corporate Controller are with us this afternoon to participate in the Q&A session. Before I pass the microphone to Chris, let me remind you that 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 statement whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in our earnings release transmitted earlier this morning. In the interest of time, as usual, we've provided some balance sheet items and other selected financial information on our website, sherwin.com, under Investor Relations, Quarterly Results Fourth Quarter. With that, let me turn the call over to Chris.
  • Christopher M. Connor:
    Thanks, Bob, and good afternoon, everybody. I want to begin by thanking you for accommodating our very late change in the scheduled time for this call. A long-tenured senior executive of our company and a good friend to all of us on this side of the line lost a 26-year-old son unexpectedly this week. This morning was our only opportunity to pay our respects to this fine family and participate in the memorial service, an opportunity we couldn't pass up. We thank you for your understanding and your willingness to alter your busy schedules to be with us on the call this afternoon. With that, let me turn the call over to John to review our performance for the fourth quarter and full year 2014. I'll be back after his comments to share a few thoughts of my own. John?
  • John G. Morikis:
    Thanks, Chris, and good afternoon, everyone. Looking back on 2014, 2 prominent themes stand out in my mind. The first is the continued strength of our operating results during the year, with record sales, record EBITDA, record net income and earnings per share. The second is that we accomplished these financial milestones while continuing to make prudent investments in our future. As a result, we're entering 2015 very well positioned to grow market share and deliver even stronger sales and earnings. Our consolidated sales in the fourth quarter increased 4.6% to $2.57 billion, due primarily to higher paint sales volume through our Paint Stores Group. For the full year, sales increased 9.3% to $11.13 billion. Acquisitions had no effect on consolidated net sales growth in the quarter but increased sales approximately 3.1% in the full year. Currency translation rate changes decreased consolidated net sales 2.3% in the quarter and 1.4% for the year. Consolidated gross margin in the fourth quarter increased to 47.4% of sales from 45.8% of sales in the fourth quarter of 2013. The increase in gross margin in the quarter was primarily due to improved fixed cost absorption from increased sales volumes, the TiO2 settlement detailed in our third quarter 10-Q and year-over-year progress from the Comex acquisition. For the year, gross margin increased to 46.4% of sales from 45.3% of sales last year. The increase in gross margin for the year was primarily due to increased sales volumes, partially offset by acquisitions. Selling, general and administrative expense in dollars increased $23.1 million in the fourth quarter compared to fourth quarter last year, but decreased as a percent of sales to 38.3% from 39.2% in the same quarter last year. For the full year 2014, SG&A expense increased $355.3 million to $3.82 billion, an increase as a percent of sales to 34.3% from 34% in 2013. Incremental SG&A from acquisitions, new stores and customer service investments accounted for the majority of the SG&A increase in the year. Other general expense increased $28.2 million in the fourth quarter and $35 million for the year, due primarily to higher environmental accruals in both periods. Interest expense for the quarter decreased $1.5 million to $15.4 million. For the year, interest expense was $64.2 million compared to $62.7 million in 2013. Profit before tax in the fourth quarter increased 26.6% to $188.9 million, and for the full year, increased 15.9% to $1.26 billion. Our effective tax rate for the fourth quarter 2014 increased to 29.7% from 22.2% in the fourth quarter of 2013. For the year, our effective tax rate was 31.2% compared to 30.7% in 2013. Our effective tax rate in the fourth quarter and full year 2013 were favorably impacted by the integration of Comex stores and would have been 32.3% and 32.1%, respectively, without Comex. Consolidated net income for the quarter increased $16.6 million to $132.7 million. For the year, net income increased $113.3 million to $865.9 million. Net income as a percent of sales in the quarter increased to 5.2% from 4.7% last year. For the year, net income as a percent of sales increased to 7.8% from 7.4% in 2013. Diluted net income per common share for the fourth quarter 2014 increased to $1.37 from $1.14 per share in the fourth quarter 2013. For the year, diluted net income per common share increased 20.9% to $8.78 per share from $7.26 per share in 2013. Now let me take a few minutes to break down our performance by segment. Sales by our Paint Stores Group in the fourth quarter 2014 increased 8% to $1.58 billion, thanks to higher paint sales volumes across all customer segments. For the year, net sales increased 14.2% to $6.85 billion. This full year sales increase was also driven by higher paint sales volumes across all customer segments, plus the Comex acquisition. The acquisition increased Paint Stores Group net sales 4.5% for the full year. Comparable store sales increased 7.5% in the quarter and 8.8% in the year. Regionally, in the fourth quarter, our Southeastern division led all divisions, followed by Southwestern division, our Midwestern division and our Eastern division. Fourth quarter segment profit for the Paint Stores Group increased 46.9% to $247.5 million from $168.5 million in the fourth quarter last year, due primarily to higher year-over-year paint sales volumes and improved operating results from the acquired Comex stores. For the full year, Paint Stores Group profit increased 21.3% to $1.2 billion from $990.5 million in 2013. The increase in segment profit for the year resulted from higher paint sales volumes that were partially offset by higher SG&A expenses and a loss from acquisitions. Acquisitions reduced full year segment profit by $32.3 million. Segment profit margin for the fourth quarter increased to 15.6% from 11.5% last year. Profit margin for the full year 2014 increased to 17.5% from 16.5% in 2013. Turning now to the Consumer Group. Fourth quarter external net sales increased 1.6% to $276.9 million, due primarily to higher volume sales for most of the group's retail customers. For the year, Consumer Group sales increased 5.9% to $1.42 billion, as a result of acquisitions and increased order volume for most of the group's retail customers. Acquisitions increased net sales by 3.4% in the year. Segment profit for the fourth quarter decreased to $30.3 million from $36 million in fourth quarter 2013, primarily as a result of higher operating costs in advance of the HGTV HOME by Sherwin-Williams program rollout at Lowe's. For the year, segment profit increased 4.5% to $259.2 million from $242.1 million in 2013. This increase was primarily due to higher sales volume and improved operating efficiencies, partially offset by the higher operating costs related to the Lowe's rollout. Acquisitions had no significant impact on segment profit in the full year. Consumer Group segment profit as a percent of sales in the fourth quarter decreased 11% from 13 -- to 11% from 13.2% last year due to higher operating costs from the Lowe's program. For the year, segment profit margin decreased to 17.8% from 18% last year for much the same reason. For the Global Finishes Group. Fourth quarter net sales in U.S. dollars increased 1.1% to $502.4 million, and for full year, sales decreased 3.8% to $2.08 billion, due primarily to selling price increases and higher paint sales volumes, partially offset by unfavorable currency translation. Currency translation decreased sales in U.S. dollars by 4.1% in the quarter and 1.6% in the year. Stated in U.S. dollars, Global Finishes Group segment profit in the fourth quarter increased to $39 million from $37.7 million last year. The increase in segment profit in the quarter resulted from increased operating efficiencies and higher year-over-year selling prices, partially offset by unfavorable currency translation of $10.2 million. For the year, segment profit increased 17.9% to $201.1 million from $170.6 million last year. This full year profit improvement resulted from increased operating efficiencies, selling price increases and a $6.3 million gain on the early termination of a customer agreement reported in the third quarter, partially offset by unfavorable currency translation of $13.5 million. As a percent of net sales, Global Finishes Group's operating profit was 7.8% in the fourth quarter compared to 7.6% last year, and 9.7% for the year compared to 8.5% in 2013. For our Latin America's Coatings Group. Net sales decreased 6.7% to $207.4 million in the fourth quarter and decreased 7.3% to $771.4 million for the full year, due primarily to unfavorable currency translation and lower volume sales, partially offset by higher year-over-year selling prices. Currency translation decreased in U.S. dollars by 13.5% in the quarter and 12.3% in the year. Stated in U.S. dollars, Latin America Coatings Group segment profit in the quarter decreased to $13 million from $17.9 million last year, due primarily to unfavorable currency translation and lower volume sales, partially offset by selling price increases. Unfavorable currency translation decreased segment profit $4.9 million in the quarter. For the year, segment profit increased to $40.5 million from $38.6 million in 2013. As a reminder, in 2013 we incurred charges of $31.6 million to satisfy tax assessments in Brazil. Unfavorable currency translations decreased profit $15.7 million in the year. As a percent of net sales, segment operating profit was 6.3% in the fourth quarter compared to 8.1% last year, and 5.2% for the year compared to 4.6% in 2013. That concludes my review of our operating results in the fourth quarter and full year 2014, so let me turn the call back over to Chris Connor, who will make some general comments and highlight our expectations for 2015.
  • Christopher M. Connor:
    Thanks, John. It's a pleasure to add a few comments to the strong numbers John just walked you through. More than $11 billion in sales, an increase of almost $1 billion, consolidated gross margin above 46% for the first time ever, profit before tax that eclipsed $1.25 billion and EBITDA north of $1.5 billion. All that led to earnings per share up 21% in the year. As John mentioned in his opening remarks, we also measure our success in 2014 by how well the company is positioned going into this year. We made great progress during the year on integration of the U.S. and Canadian Comex stores, the largest Paint Stores acquisition in our history. We stabilized sales volumes in these stores and significantly improved product assortment and product availability, all of which will result in a positive contribution to the Paint Stores Group operating profit in 2015. During the year, we also realigned our Paint Stores Group and Latin American Coatings Group under a unified management team led by Jay Davisson. This move will enable us to share expertise between the 2 business units and better leverage our operating, technical and supply chain resources, which will benefit both organizations in the long run. In December, we announced our first-ever architectural paint program in Lowe's stores nationwide under the HGTV HOME by Sherwin-Williams brand. We're excited about this program, which will begin shipping in early spring, just in time for the start of the painting season. In 2014, we generated more than $1 billion in net operating cash for the second consecutive year, thanks in part to the terrific working capital management by all of our operating segments. In spite of a fourth quarter inventory build to support the HGTV HOME rollout at Lowe's, our working capital ratio dropped to 10.1% of sales from 10.5% last year. This improvement is further evidence of the progress our Paint Stores Group and global supply chain teams have made in integrating the Comex acquisition. We used this cash from operations, along with the excess cash on our balance sheet at the start of the year, to fund capital expenditures, expand our controlled distribution, raise our dividend and buy back shares for treasury. Our capital expenditures in 2014 totaled $207.9 million. Depreciation for the year was $169.1 million, and amortization was $29.9 million. In 2015, we anticipate capital expenditures of approximately $240 million, depreciation of $170 million to $175 million and amortization of about $30 million. Capital spending was higher than normal in 2014, and will be again in 2015 as we complete the conversion of Comex store locations to Sherwin-Williams. We expect CapEx to return to more normal levels beginning in 2016. In December, our Paint Stores Group celebrated the opening of our 4,000th paint store. For the year, we exceeded our initial expectation of opening 80 to 90 new stores and finished the year with 95 net new locations and 4,003 total stores in the U.S., Canada and the Caribbean. We remain confident that our goal of 5,000 locations in North America is realistic, and we intend to get closer to that goal by 100 to 110 stores this coming year. During the past year, we hired more than 1,400 new college graduates into our management training program to bolster our store staffing, improve our territory coverage and fill our store management pipeline. Although these investments tend to drive SG&A higher in the back half of the year, new stores and service employees pay for themselves over a very short period of time. At year-end, our total debt was $1.8 billion and cash on hand was $41 million compared to a cash balance of $745 million at the end of 2013. In 2014, we've returned more than $1.7 billion in cash to shareholders through share repurchases and dividends. In the fourth quarter, we acquired 1.6 million shares of the company stock for treasury, bringing our full year total to 6.93 million shares at an average cost of $214.97 per share, for a total investment of $1.49 billion. At year-end, we have remaining authorization to acquire another 5.23 million shares. We paid $215 million in cash to shareholders through quarterly dividends. 2014 marked our 36th consecutive year of increased dividends per share, a string we intend to continue. This year, at our February board meeting, we will recommend approval of an annual dividend of $2.68 per share, an increase of 22% over 2014. Looking ahead to 2015, the paint and coatings demand in most domestic markets looks encouraging. Residential starts and turnover gained momentum in the fourth quarter, even in the oil patch areas of the South, which bodes well for the coming year. Contracts for new nonresidential square footage were up 7% year-over-year in 2014. And the pace of demand growth in segments such as office, hospitality, warehousing and apartment buildings remained strong. Although the rate of growth in manufacturing activity slowed at year-end, December marked the 19th consecutive month of expansion, which should drive continued growth in demand for our industrial coatings. Outside the United States, it appears likely that sluggish market conditions and currency devaluation in Europe as well as many Latin American countries will remain a challenge. Our raw material basket has many moving parts. But in total, we believe we're likely to see stable to declining input costs for this year. The drop in the price of crude oil, if sustained, will no doubt have a positive impact on the petrochemical side of our raw material basket. But these commodities will not necessarily move in a linear relationship with crude. High-grade chloride TiO2 pricing held steady over the back half of 2014, but soft order volumes and excess inventory suggest pricing should remain stable for the foreseeable future. Based on these factors, we would expect average year-over-year raw material cost inflation for the paint and coating industry to be down in the low single-digit range in 2015. Our outlook for the first quarter 2015 is for consolidated net sales to increase in the mid-single-digits 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 $1.30 to $1.45 per share, compared to $1.14 per share earned in the first quarter of 2014. Embedded in this guidance is our expectation that we will incur some onetime expenses related to the rollout of the HGTV HOME program at Lowe's stores. For the full year 2015, we expect net sales will increase in the high single-digit percentage range compared to full year 2014. With annual sales at that level, we estimate diluted net income per common share for 2015 will be in the range of $10.90 to $11.10 per share, compared to $8.78 in 2014. Again, we'd like to thank you for joining us this morning. And now we'd be happy to take your questions.
  • Operator:
    [Operator Instructions] Our first question comes from the line of Ghansham Panjabi with Robert W. Baird.
  • Ghansham Panjabi:
    First off on your sales guidance for '15 calling for a high single-digit increase. Comparisons in the Paint Stores Group get quite a bit more difficult as the year progresses, and then I think you have some headwinds from FX also. So first off, can you maybe parse out the various end-market drivers that will get you towards that sales growth level, starting with maybe your expectation for what gallonage growth will be in the U.S. for '15?
  • Robert J. Wells:
    Yes, Ghansham, it's Bob. As we've often said, to hit our guidance range for the full year at high single digits, Paint Stores Group would have to be at or above that level, and that is certainly our expectation. We believe that, that will outpace gallon growth in the domestic market by, again, probably close to a factor of 2x. We would expect low- to mid-single-digit growth in the market, probably slightly above the rate of growth in 2014, which we estimate to be more in like the 3.5% range. So it should pick up. Also embedded in the consolidated sales guidance is the impact from Lowe's, which we've said would be low single-digit lift on consolidated sales.
  • Ghansham Panjabi:
    And then in terms of the guidance increase versus your mid-December update, I guess, is that primarily due to the lower raw material costs that you are now forecasting?
  • Sean P. Hennessy:
    Good afternoon. This is Sean Hennessy. No, I would say that the raw materials, when you look at the $10.75 mid-point to $11 mid-point, it was mostly driven by raw materials. There was -- we also had a little more foreign currency. The sales went from 7 to 11 to high single digits, so they have a little more effect on foreign currency. But there were raws -- and there were other factors, but raws were a major part.
  • Operator:
    Our next question comes from the line of Arun Viswanathan with RBC.
  • Arun S. Viswanathan:
    So I guess just maybe you can just give us an update on what you're hearing from your customers so far. I know it's still early in the year. But on the backlog side, contractors as well as maybe non-paint items within the stores.
  • John G. Morikis:
    I'd say that our customers are feeling pretty good about their future. Many of them are looking at bookings that they've said they've not seen in quite some time. And let's say, quarter-after-quarter here recently, it seems as though they're becoming more and more bullish. So I think it's looking very well through the lens of our customers. As far as the nonpaying sales, those are performing very well. We're seeing strong performance in our sundries and our spray equipment sales. And as you know, we use that -- sorry, we use that gauge of the spray equipment sales as a bit of an indicator for us as to the confidence of the contractors, so those bode well for us.
  • Arun S. Viswanathan:
    Okay. So you have seen some, I guess, building backlogs there. And then is there any kind of difference between trends that you're seeing in res versus nonres, especially in the U.S.?
  • Robert J. Wells:
    In terms of the macro data that we're looking at, we're seeing nonres actually outpace res in starts for 2014. Going forward, we think that the housing activity should pick up, we'll see solid growth out of both of those segments. It's a little early to tell which one is going to grow better in 2015, but we would expect solid growth from both of them.
  • Operator:
    Our next question comes from the line of Vincent Andrews, Morgan Stanley.
  • Vincent Andrews:
    Can you talk a little bit about your store concentration in some of the areas or states that, from a real estate perspective, might face some difficulties with the reduction in oil prices?
  • Christopher M. Connor:
    Yes. So Vincent, our store concentration, we've shared that density map with the investment community. I think it's up on the website. You can pull it down and take a look at it. Obviously, you'll see Texas is a strong state for us, as is Oklahoma. Those are 2 markets where oil matters. I think in our comments we made the notion that even in the oil-rich states, we're seeing good demand for our products. The residential repaint activities, which are still not running at kind of a normalized level, we think will continue to carry through, even though there might be a little softness in some of these oil numbers. But as Bob has commented, it's a little bit early to see the full impact of that. But we're not expecting or anticipating any fall off on the kind of guidance we're giving for those reasons.
  • Vincent Andrews:
    Okay. And just as a follow-up. Year-over-year, with the winter we had last year versus what we had this year, is there anything we should be thinking about in terms of sort of comparisons, not knowing what the weather is going to be for the next several months, but is there anything we need to be thinking about there?
  • Christopher M. Connor:
    Well, if you're living in New York or Boston today, you need to be thinking about a snow shovel, I would imagine, and it's pretty ugly in Cleveland right now. So our comment on winter has been pretty consistent for the last several decades, is there are going to be pockets in our country that are going to have really ugly stretches here. We'll have stores that will be closed. We'll have customers that are unable to get out and do the amount of work that they had planned to do. But that's just kind of embedded in the fourth quarter and our expectations. We're blessed with an industry which really catches up well in the second and third quarter. So we're not giving any kind of indication that winter weather will ever have an impact here.
  • Operator:
    Our next question comes from the line of Jeff Zekauskas with JPMorgan Chase.
  • Jeffrey J. Zekauskas:
    When you look across your customer base, which parts of your customer base are more aggressive about trying to capture some of falling raw materials? And which parts of your customer base are less aggressive about trying to capture those lower values?
  • Christopher M. Connor:
    Yes, so I think it's fair to say, Jeff, that all of our customers are smart businesspeople. They pay close attention. In the case of the professional painting contractors, their focus has primarily been on ensuring that they have enough labor to complete the strong demand that they have for their products right now. So we're holding pricing this year. We've made that announcement earlier that we were not raising prices. That activity has been well received by them. And we don't expect, as we have in the past, that these raw material fallbacks occasionally, like we're seeing right now, will impact our selling prices at all.
  • Jeffrey J. Zekauskas:
    What about in the Consumer segment. Is -- are the attitude -- or are the attitudes of the retailers much different than the attitudes of the paint contractors?
  • Christopher M. Connor:
    We don't comment on any one specific customer in that segment, as you know, Jeff. And again, we would just -- would say the same thing. They're paying close attention. They want outstanding products and outstanding service at a fair value, and we're working hard to provide that every day.
  • Operator:
    Our next question comes from the line of P.J. Juvekar with Citigroup.
  • Daniel Jester:
    It's Dan Jester on for P.J. So if I remember correctly, typically, your store openings have been back-end loaded throughout the year. But I think in early 2014, you had stated that you were going to try to maybe make it a little bit more even throughout the year, but in the end, it was still a little bit back-end loaded. So as we think about this 100 to 110 new stores this year, is it still going to be back-end loaded in 2015? Or any chance that it's going to be a little bit more even throughout the year?
  • John G. Morikis:
    Dan, I wish you could see the smile on my face. We try to level-load those every year, and we push hard to do that, and we'll be pushing again this year to do that. We've got a terrific real estate team and a good market out there. We're working hard to spread those out a little more evenly, but we'll get them in as best as we can in the right locations at a great price.
  • Daniel Jester:
    Okay. Great. And then on foreign exchange and Latin America specifically, it still looks like foreign exchange is going to be a big headwind going into the first half of 2015. So is there anything you can do to kind of accelerate improvement in that business? Or is that something we just have to wait out until currency moves in a better direction?
  • Sean P. Hennessy:
    I think that when it comes to improving our cash flows and doing hedges, we can do that on the balance sheet side and the cash flow side. But on the sales side, there's nowhere to run. I mean, when you start to see Mexico right now at 14x, 14.5x, and then last year, we're in about the 12.60, there's really nothing -- nowhere you can hide when it comes to sales. But we're doing everything we can to mitigate the cash flow. But in -- operationally, we continue to work on that and that's -- and I think when you see more of a flattening of the foreign currency, then you're going to be able to see the improvements there.
  • Operator:
    Our next question comes from the line of Duffy Fischer with Barclays.
  • Duffy Fischer:
    A question around kind of each of your architectural competitors here in the U.S., so Masco, Valspar, PPG have all had a fairly sizable announcement around contractor business through one of the big boxes in, call it, the last 18 months or so, which seems to be a bigger push than we've seen historically. Do you see any difference in the way they're approaching that market where they may have more success than efforts like that have had in the past? Or is there a splintering of that contract or subsegment that may make them more likely to use the big boxes going forward?
  • John G. Morikis:
    Duffy, we've seen a number of initiatives over the years. And quite frankly, our focus is on really executing our strategy. We love our model. We love the relationships that we have. And we're continuing to build on what we believe are the right things. And most importantly is just understanding that customer and building a relationship and the products and services that they need, having the right people, the best people in the industry that are partners with those people. So I'm respectful of all of our competitors. I think they keep us honest. We're blessed to have good competitors. But we've got a lot of confidence in what we're doing, and we're going to continue to do it and try to get better every day.
  • Duffy Fischer:
    Great. And then just 2 questions about the international market. One, with what happened in Mexico with Comex, has your existing business down there suffered at all from any of the maturations that happened around that, number one. And then two, just with where currencies have gone, would purchasing foreign assets be more attractive today than maybe it was a year ago for you guys?
  • Christopher M. Connor:
    So Duffy, on the Latin American business, we made the comment that in local currency, we actually generated sales gains, both in the quarter and for the year. And I think that the relative softness in that, while they were positive, they weren't robust, really speaks more to the broader economic environment in the big economies of Brazil, Mexico, Argentina and Chile than perhaps any things that were happening in the industry. Those are the issues that we need to get on top of and address and fix going forward.
  • Sean P. Hennessy:
    And when you asked about the acquisitions, the way we do it is we look at after-tax discounted cash flows. If we can get our cash back operationally and it's a good business, we really don't worry about the instantaneous or the current exchange rate. And I'll tell you why. A lot of times when we go into these countries, we don't put our cash in there, we actually will borrow in local currency to create a natural hedge. We try to do that as much as possible, and let the operation pay that note off. So we're more interested in what we can do with that business and with the long-term business, not the instantaneous foreign exchange conversion rate.
  • Operator:
    Our next question comes from the line of Aram Rubinson with Wolfe Research.
  • Aram Rubinson:
    So I wanted to ask you just on the math around inputs. So we know that your gross margins are 46%, which means that your cost of sales are 54%. If 85% of that is raw materials, that's about 45% of the house of revenues that's raws. I think you've said in the past that a 10-point move in oil is about a 1% change in the underlying inputs. So if we've got a 40% change in oil, I'm kind of getting about 150 basis point accretion to the total which would be over $1 in earnings. So I'm just wondering what I'm missing in the math or where we're reinvesting along the way.
  • Robert J. Wells:
    Aram, we mentioned when we cited that 10% versus the slightly less than 1% relationship between crude and our raw material basket, that, that was an older analysis. And what we've done is gone back and not just looked at the input -- or the impact of crude, but the impact of crude oil derivatives like propylene and ethylene. And propylene and ethylene are really the key inputs for the resin basket, which is about 40% of the raw material basket. And what we've found is that in broad terms, a 10% reduction in propylene would result in about -- I'm sorry, a $0.10 reduction in propylene would result in about a $0.015 decline in the price of a pound of latex, $0.015 to $0.02 decline. And the same relationship with a $0.10 decline in ethylene, you'd have about a $0.01 decline in the price of a pound of latex. So we've updated the guidance. It's not quite as sensitive to crude oil as it was when we did the last analysis. We also get some benefit in the alkyd resin basket and in solvents, so -- which would, too, would be roughly a 10% move in crude, would be a 0.2% move in the raw material basket from those 2 inputs. The point being, there's a lot of moving parts. It's just not quite as sensitive as it was when we did the old analysis, largely because we don't use as many petrochemical inputs as we used to.
  • Sean P. Hennessy:
    And Aram, when you talk about the dollar and you look at -- we move the guidance mid-point from $10.75 to $11, we had raw material goodness in the $10.75. We didn't have 0, and now what we're doing is putting 100% of it to get to $11. The $10.75, so when you look at $8.78 to the mid-point of $11, that's $2.22, over 25%, one of the largest increases we've ever put out here as a company. So the -- we weren't saying that 100% of the raw material goodness was taken up from $10.75 to $11. What we said is $10.75 to $11 was driven by the difference of what our view is of raw materials from December 12 until today.
  • Aram Rubinson:
    And was that kind of flat to now down low singles? Was that the change?
  • Sean P. Hennessy:
    Well, I don't think we're going to get to that detail of going from our guidance on December 12 until today to show you all the puts and takes in each one of the gross margin or SG&A or even conversion rates, foreign currency.
  • Aram Rubinson:
    And my follow-up, if it's all right, is just in the Paint Stores Group. We tried to back out Comex just to see what the legacy stores were doing, and it looks like you guys are kind of pushing about 19% segment margins in the core Sherwin-Williams Paint Stores Group. And I just wasn't sure if that trajectory still had some legs to it or if you had designs on kind of capping that at some point. Any thoughts on that?
  • Sean P. Hennessy:
    No, we really don't have any ideas on capping it. And one of the things about it, what we've said, Aram, is with the larger the gallon gains, that more flow-through we're going to have. So we had a very good gallon year.
  • Operator:
    Our next question comes from the line of John McNulty with CrΓ©dit Suisse.
  • John P. McNulty:
    Looking at the numbers, it looks like Comex was less dilutive. It looks like it was actually breakeven in the fourth quarter. And I think your previous guide, it kind of implied it was about a 10% -- or excuse me, $0.10 headwind. So I guess what came out better than expected? Was it just the costs weren't there? Or are the assets actually performing better that you thought? And I guess how should we be thinking about the Comex add as we look to '15 then?
  • Sean P. Hennessy:
    All right, John, we lost $0.10 in Comex in the fourth quarter. I think that the reason you might be looking at it that way is if you think about the comments that John made about the full year, Consumer was relatively flat. I think that you have to take a look at some of that losses, it was in the Consumer Group for some of the -- from some of the product lines that they've -- they acquired there. But in total, the company lost $0.10 a share, right on the forecast.
  • John P. McNulty:
    Okay. Fair enough. And then just one last question. On the Lowe's ramp-up and the costs around that, do you recoup those or do you catch up on them at any point this year? Or is it more of a 2016 time frame, when you kind of get the margins in Consumer back to normal?
  • Sean P. Hennessy:
    Yes. I would tell you this that, again, we're going to have expenses in all 4 quarters for Lowe's. We're going to have sales mostly in the last 3. We do catch up for the calendar year 2015. It's very, very slightly accretive. But it's -- really, 2016 is when we feel we'll see the lion's share of that accretion.
  • Operator:
    Our next question comes from the line of Kevin McCarthy with Bank of America Merrill Lynch.
  • Kevin W. McCarthy:
    I think you spoke to this partially, but I was wondering if you could perhaps walk us through some of the macro assumptions that you're embedding in your 2015 EPS range of $10.90 to $11.10 in terms of perhaps existing home sales, starts, nonres and maybe most notably FX, where you're marking that?
  • Robert J. Wells:
    Yes, Kevin, we -- this is Bob again. We didn't really tie our guidance to any particular metric in existing home sales or starts. We start from the standpoint that 75% to 80% of the residential market -- paint sold into the residential market is used to repaint existing structures. Only part of that is sold by existing -- is driven by existing home turnover. We do think turnover will be higher in '15 than it was in '14. We certainly saw an upward inflection in existing home sales in the fourth quarter. And we think that bodes well for the coming year. We also saw that in starts, a little stronger new home sales and starts numbers later in the year. So we feel we have a lot of momentum going into 2015. Importantly, if you look at inventories of both new and existing homes, they are at 5.5 and 4.5 months' supply, respectively, which are well below where both of those metrics should be. So we have some catch-up on the inventory side in new homes. We think that as inventory comes into the market in existing homes, it's going to drive that -- drive sales stronger. And then in addition to that, there is the whole nonresidential piece which we see as picking up as well.
  • Kevin W. McCarthy:
    And presumably on the currency, you're just marking it recent days. Is that fair?
  • Sean P. Hennessy:
    Yes, I think when you take a look at it, especially the way currency really drove down in the fourth quarter, I think that we do -- our forecast is we're going to have a headwind, a significant headwind, especially in the first 3 quarters.
  • Kevin W. McCarthy:
    And then a second one. I apologize if I missed this, but did you size the expenses in the quarter in Consumer related to the operating cost on HGTV HOME?
  • Sean P. Hennessy:
    No, we did not. Again, we're not going to do a P&L by customer or rank anything out to that finite when it comes to any one single customer.
  • Operator:
    Our next question comes from the line of Nils Wallin with CLSA.
  • Nils-Bertil Wallin:
    On SG&A, it grew a little bit more year-on-year than it has in the past. And just curious if this is sort of a new level to expect? Or do you expect the SG&A growth to sort of moderate in '15 and '16?
  • Sean P. Hennessy:
    Right. I think that this year, our SG&A was up 0.003%, really driven by Comex stores and the Comex acquisition. We were pretty upfront saying that, that was going to happen. As the integration continues to happen, we aren't -- we also did -- we've done some work -- we've been pretty public about some IT investments that we're making. But going forward, we see a reduction in our SG&A expense as a percent of sales.
  • Nils-Bertil Wallin:
    Got it. And then just on LatAm, I'm noticing some, this year, some closures. And historically, Sherwin has, even in downturns, has sort of grown its store base. So curious as to -- is this a function of a different view on LatAm macro? Or is it rightsizing your asset base? Just why there's been a retrenchment in stores versus the normal Sherwin strategy to grow?
  • John G. Morikis:
    That's not our strategy. I'm not quite sure where you're getting the data closing...
  • Sean P. Hennessy:
    Yes, we did have a couple of closings of some -- down in a few countries such as Brazil, but it was -- it had more to do with just what we're going to do in that local, very local market, not a strategy for other countries.
  • Operator:
    Our next question comes from the line of Bob Koort with Goldman Sachs.
  • Robert A. Koort:
    Chris, I think a quick and easy one, because most of the good questions have been taken. But have you guys noticed yet, detected any sense of enhanced or improved consumer-buying behavior in light of the sort of tax relief on fuel costs?
  • Christopher M. Connor:
    No, and we wouldn't see that in the fourth or first quarter, Bob. As you know, those are the slow quarters for the industry. We've seen pretty strong consumer purchasing throughout the year, driven by pent-up demand, better home values, all the other metrics that we've been talking about. When we get into the start of the spring painting season, if oil prices are still here and it costs a little less to fill up your car, maybe that will have a little bit of a lift impact as well, too. But regardless of that, we're giving guidance that we expect this to be a good year.
  • Robert A. Koort:
    And Sean, I think you'd said you're getting the expense burden for the HGTV and then most of the revenue benefit rolls in, starting in the second quarter. Do you actually get a sellthrough when you place that inventory? Or is it only as the retailer books the consumer sale?
  • Sean P. Hennessy:
    Right. I mean, when they'd have a sale and they reorder, then we definitely have a sale to them.
  • John G. Morikis:
    We book the sale when we ship to Lowe's.
  • Operator:
    Our next question comes from the line of Dennis McGill with Zelman & Associates.
  • Dennis McGill:
    So I really don't want to get too specific on that -- the load-in costs in the first quarter, but how should we think about the segment margin there, either relative to the fourth quarter or relative to year-over-year?
  • Sean P. Hennessy:
    I think that you're going to see our -- in the first quarter, our Consumer Group margin will be lower. And it'll be lower because of the load-in -- the costs that we have. For the full year, we think it's going to be -- as I've said, you're going to see very little effect of the Lowe's business being depressive on the margin for the Consumer Group.
  • Dennis McGill:
    And when you say lower, Sean, you're saying sequentially lower or year-over-year lower?
  • Sean P. Hennessy:
    Year-over-year, I'm sorry.
  • Dennis McGill:
    Okay. And Chris, it seems like other than maybe some -- some of the international uncertainty in currency, the domestic market, you feel pretty good about. Is there anything domestically that on the margin you see as a higher risk to the business or something that you're keeping a particularly close eye on?
  • Christopher M. Connor:
    I think Bob's taken you through a couple of the important end-market data points we look at. We've talked in this call, Dennis, for a number of years, about the lagging commercial or institutional construction market, which looks better to us heading into this year than it has for the last 7 years. We've commented on residential, and no one knows that better than you what that's potential will look like, and the existing home maintenance schedules look strong as well. And finally, just to piggyback on John's earlier comments about the anecdotal conversations we're having with our painters, who have got as book of business as strong as they've had in a while. So from a domestic architectural platform, 2015 should be a good year.
  • Operator:
    Our next question comes from the line of Dmitry Silversteyn with Longbow Research.
  • Dmitry Silversteyn:
    Just one quick bookkeeping question, what's the tax rate guidance for 2015 as far us on the P&L, not -- the effective tax rate, not the cash tax?
  • Sean P. Hennessy:
    Right. The effective tax rate should be in that low 30s. We had a pretty good -- the last 2 years. And that's why in John's comments, he told you what the tax rate was. It was in the 32s without the Comex acquisition. We're going to be in that ballpark.
  • Dmitry Silversteyn:
    Okay. So about 32%, 33%, something like that. And you talked a little bit about Latin America and kind of how you're viewing things there. Can you talk -- I mean, I know Europe is not a big market for you yet, but I'm sure it's something that you look at carefully, both from an M&A perspective as well as the growth of the businesses that you do acquire over time. We've heard some companies talk about the second half of the year maybe being a little bit stronger on lower gas pricing and more money in the pocket of consumers, so to speak, and maybe a little bit more competitive industrial economy, given the deflation in both the currency and the crude oil. Sort of what's your view of the businesses, particularly in the industrial side of the Coatings business, where you're at in Europe, on that region for 2015?
  • Christopher M. Connor:
    Yes, Dmitry. So as you know, our exposure to Europe is almost entirely industrial coatings and weighted towards industrial wood finish coatings. A lot of those customers are manufacturing products that then get exported out of that region as well, too. So we've commented historically about our low share position. Despite some rougher economic environments, we expect to make progress, given that position. We've got good technology and a good team on the ground. We've worked hard to solidify and improve our operations. You've seen that in the global group margins. Coming up, a lot of that's been worked on Europe, and our expectations are that we'll have a positive growing year in Europe as well.
  • Dmitry Silversteyn:
    Okay. One of the segments that has been sort of depressed for a long period of time, really, since the 2008, 2009 recession, and showed some signs of coming out in 2014, and I was just wondering what your outlook on that would be for 2015, was the marine and protective business. There is a couple of companies with exposure to it in the group of companies that I cover that's looked to be sounding a little bit more bullish about marine and protective, especially. You've grown through this downturn with your business. How do you view it going into 2015?
  • John G. Morikis:
    Well, I'd say it's going to be choppy, which is appropriate for a marine response, I suppose. But as we look forward, we play a niche market -- play in the niche market there. We kind of carve out our space. And again, just as we've described in other markets where our market share overall is lower, we've got plenty of opportunity to grow regardless of the market. So I think overall, there's going to be some ups and downs there, but we feel as though there is still opportunity for us to grow.
  • Operator:
    Our next question comes from the line of Greg Melich with Evercore.
  • Gregory S. Melich:
    I had a couple of follow-up questions, really getting to the Paint Stores Group. You mentioned, I think, volume for the industry you thought was up 3.5x and you were 2x that for the year. How did the fourth quarter play out in terms of volume versus mix and price?
  • Sean P. Hennessy:
    It was pretty -- I would say, it was very comparable to that. I mean, we saw -- the numbers were -- we're starting to see the Comex stores come into the comp stores in the fourth quarter. And you're seeing that. That was a little depressive. But in total, we still -- we sit there and feel that we were probably still growing twice the market in the fourth quarter.
  • Gregory S. Melich:
    And is it fair then to say that there was a point or 2 of mix and price as well in that, that 7.5?
  • Sean P. Hennessy:
    Yes, yes. Yes.
  • Gregory S. Melich:
    Perfect. And then the second and I -- just a little bit of a housekeeping one. When you have the $0.16 share charge, does that include -- is that the net effect, including the titanium dioxide settlements? Or is that different from the $0.16?
  • Sean P. Hennessy:
    The $0.16...
  • Robert J. Wells:
    Well, it was $22 million for the titanium dioxide -- or I'm sorry. Pardon me.
  • Sean P. Hennessy:
    Right. Yes. When you -- I'm trying to remember where that $20 million -- when we had the titanium dioxide which was $21 million, we had to net that for taxes. So that's where the $0.16 comes from.
  • Gregory S. Melich:
    Got it. And then lastly, and at the risk of going back to this one more time, so I make sure I heard it clearly, the start-up costs for the HGTV Lowe's program was basically the only reason for the Consumer margin decline in the fourth quarter.
  • Sean P. Hennessy:
    Yes.
  • Gregory S. Melich:
    And it sounds like you expect a similar pressure in the first quarter?
  • Sean P. Hennessy:
    Yes.
  • Operator:
    Our next question comes from the line of Chuck Cerankosky with Northcoast Research.
  • Charles Edward Cerankosky:
    Could you, Sean, just repeat, to start off with, the 2015 CapEx number? I missed it before when you were giving us those numbers.
  • Sean P. Hennessy:
    Yes, in the $240 million. And again, that's really being driven by the refurbishment of the Comex stores.
  • Charles Edward Cerankosky:
    Okay. Great. And then yes, my next question is about Comex. Sean, how do you expect their contribution in 2015 to phase into the quarterly earnings space? They lost some money in the fourth quarter. Are they suddenly profitable in the first? Or how do you see that shaping up?
  • Sean P. Hennessy:
    When we look at it, we talked about the $0.10 a share, I would say that we're looking that in the first and fourth quarter, we'll be slightly negative. And in the second and third quarter, we're going to make probably 10-plus in those 2 quarters. And I would say it's about even between the second and third quarter.
  • Operator:
    Our next question comes from the line of John Roberts with UBS.
  • John Roberts:
    When I look at the Brazilian real last year, it actually rallied in the late spring and into the summer. Is the most difficult currency comp going to be in the second quarter? The fourth quarter was $0.09. Are we looking at materially above $0.09 when we get on to the second quarter this year?
  • Sean P. Hennessy:
    Right. When you were talking about the Brazilian real, if you look at it, it was in the 2.22, 2.23 to 1. That's really going to be the biggest hurdle for us in the year 2015. In the first quarter, it was closer to the 2.40. So the 2.65 versus 2.40. If it stays at 2.65, it's 2.65 versus that 2.22, 2.23 in the second quarter last year.
  • John Roberts:
    Okay. And then the earlier question about low gasoline prices potentially stimulating consumer demand, I mean, the outdoor market is what seasonally picks up later in the year, which would be much less consumer that's there. The consumer market would be mostly indoor, and I would think you would see some signs of that here during the winter as well, if that was going to happen.
  • Christopher M. Connor:
    Yes, that's accurate that the indoor market is -- or the interior paint market is more of a 12-month than the exterior one for sure. But if you look at our traditional sales bell curve, we're going to see, even in pickup and interior gallons in the second and third quarter. I think the reality is, is that we're having terrific gallon performance this year through those stores. So is the reaction because oil prices are lower or because people have more confidence and home values are up, it's just time to repaint? We're not smart enough to put our finger on exactly what it is. We're just out there working hard to get every one of those incremental gallons as we can.
  • Operator:
    Our next question comes from the line of Eric Bosshard with Cleveland Research Company.
  • Eric Bosshard:
    One question on Comex. Could you remind us of the earnings impact of that business in '14, and then '15 and '16? And you can frame it on an earnings or on a margin basis, but curious on where that is pacing. You also seemed to indicate that it's still comping below the core, and I'm curious on your expectation of how that would work its way through the system and what your outlook is for that.
  • Sean P. Hennessy:
    Yes, Eric. We lost $0.02 in the third quarter 2013. We lost $0.11 in the fourth quarter 2013. So we lost $0.13 in the calendar year 2013. This year, we lost $0.28, $0.10 of which was in the fourth quarter. So we lost $0.18 in the first 3 quarters. So really, when you look at that $0.11 in the fourth quarter of 2013, $0.10 this year, it was relatively flat. We've said that we're going to make $0.10. Now we have annualized this acquisition, and that's pretty much the amount of color that we're really going to give. I think as it becomes a higher degree of integration, it's harder to actually pinpoint the exact numbers. But to give you any more color around sales going forward in '16 or '17, we're just not going to be able to do it.
  • John G. Morikis:
    I think, Eric, as you know, our strategy moving forward, as they become a Sherwin-Williams store, those products are going to be available. Those customers are using those accounts already in different stores. So our strategy is to make that more of a customer-efficient store. And that means more Sherwin products available in any of the stores, including those that are acquired through Comex.
  • Eric Bosshard:
    I think that -- and that's helpful. I think the vision -- or in the past, the thinking was that it would get to a comparable margin as the stores grew up, an upper teens margin. It felt like that was kind of a '16 event. Is that still the way we should think about it? Or -- and I understand it's now consolidated within the business, but how we should we think about where the margin is going?
  • Christopher M. Connor:
    Yes, I think that's a very good way to think about it. By '16, these stores will have been in our family now for 2.5, 3 years, and that's when they're running at a core level.
  • Operator:
    Our next question comes from the line of Christopher Perrella with Bloomberg Intelligence.
  • Christopher Perrella:
    How many of the Comex stores are left to refurbish at this point? And how should I think about run rate CapEx next year...
  • Christopher M. Connor:
    Yes, we have about -- of the 306 we acquired, we have 294 still. That looks like a good number going forward. We had about 1/3 of them converted this year. So just shy of 200 yet to go.
  • Christopher Perrella:
    All right. And what should CapEx be when it returns to normal, I guess, as a percent of sales in 2016?
  • Sean P. Hennessy:
    Well, I think we've always run this company around 1.5%. I think that 1.5% to 2% is probably a pretty good long-term number.
  • Operator:
    Our next question comes from the line of Richard O'Reilly with Revere Associates.
  • Richard O'Reilly:
    Talking about the consumer savings from lower fuel costs, would any of that show up in the Finishes Group? I'm thinking wood treatment cabinets, home appliances, would you see any of that?
  • Christopher M. Connor:
    Sure, if we were able to have the laser vision to see through the consumer's incentive for purchasing, if they felt a little more confident to make furniture purchases, to your point, floor covering purchases, expansions of their properties, all those things would have an impact in the coatings demand.
  • Richard O'Reilly:
    Okay. And second thing, I guess I'm confused about the Comex, because my press release says it lost $0.18 a share in 2014. And I guess I'm confused.
  • Sean P. Hennessy:
    Yes, that was the first 3 quarters. And I think in the press release, I remember the $0.18 also. I think that, that was an incremental $0.18. So when you were looking at that $0.28 versus last year, I guess it's because the share count changes. When I gave Eric the number of 2 plus 11, that was a 1 share count number. And this year, it was the $0.28 at a different share count. So the difference was $0.18 one year over the other.
  • Richard O'Reilly:
    Okay. Fine. So you had $0.28, okay, versus '13. Okay. Fine. But the press release uses an $0.18 number for the full year. Okay.
  • Sean P. Hennessy:
    Right.
  • Operator:
    Thank you. We have no further questions at this time. I'd like to hand the call back over to Bob Wells for closing remarks.
  • Robert J. Wells:
    Thank you again, Roya. I'd like to wrap up today by asking you to save the date of Thursday, May 28, on your calendars. That's the day we'll host our Annual Financial Community Presentation this year at the Langham Hotel in Boston. The program will consist of our customary morning presentations with questions and answers, followed by a reception and lunch. Again, that date is Thursday, May 28, and we'll be sending invitations and related information and a link to our registration site in late March. So please watch your e-mail. As usual, I'll be available for the remainder of today and tomorrow to answer any follow-up questions. Thanks again for joining us today, and thank you for your continued interest in Sherwin-Williams.
  • Operator:
    Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.