The Sherwin-Williams Company
Q1 2015 Earnings Call Transcript

Published: 16 Apr 2015

[Operator:]

Good morning. Thank you for joining the Sherwin-Williams Company to review of the First Quarter 2015 Results and Expectations for the Second Quarter and Full Year. This conference call is being webcast simultaneously in listen-only mode by Vcall via the Internet at www.sherwin.com. An archived replay of this webcast will be available at the www.sherwin.com, beginning approximately two-hours after this conference call concludes, and will be available until Wednesday, May 06, at 5

[Bob Wells:]

Thank you, Melissa. Good morning, everyone. Thanks for joining us. We're going to begin the call this morning as usual with a brief recap of first quarter 2015 results, by John Morikis, our President and Chief Operating Officer. Then Chris Connor, our Chairman and CEO, will provide some perspective on the quarter and our expectations for second quarter and full year. Following their remarks, we will open the call to questions, and Sean Hennessy, our Chief Financial Officer and Al Mistysyn, Vice President, Corporate Controller, are with us this morning, to participate in the Q&A session. Before I pass the microphone to John, let me remind you that this conference call will include certain forward-looking statements, as defined under 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 on our earnings release transmitted earlier this morning. In the interest of time, we've also provided some balance sheet items and other selected financial information on our Web site, www.sherwin.com, under the Investor Relations tab, first quarter press release. With that, let me turn the call over to John to review our performance for the first quarter.

[John Morikis:]

Thanks Bob. If you’ve listened to our earning calls over the past few quarters, you may detect the familiar pattern in today’s release. Once again, in the first quarter, we saw good momentum in most of our domestic businesses and less favorable results from our non-domestic operations. I’ll begin by highlighting overall Company performance for first quarter 2015, compared to first quarter 2014, then comment on each reportable segment. Consolidated net sales increased 3.5% to a record of $2.45 billion, driven primarily by higher paint sales volumes in our Paint Stores and Consumer Groups. Unfavorable currency translation decreased consolidated net sales 3.1% in the quarter. Consolidated gross profit dollars increased $56.5 million in the quarter to $1.13 billion. Our consolidated gross margin increased 120 basis points in the quarter to 46.2% of sales, from 45% in the first quarter last year. Most of the gross margin improvement in this quarter resulted from higher sales by Paint Stores Group, our highest gross margin segment, and increased operating leverage from higher production and distribution volume. Selling, general and administrative expenses increased $45.1 million over first quarter last year to $929.2 million. As a percent of sales, SG&A increased to 37.9% in the first quarter this year from 37.4% last year, due primarily to the incremental investments in the Lowe’s rollout. Interest expense decreased $4 million compared to the first quarter last year to $12.4 million. This decrease was due to the rate difference between the $500 million and five-year notes we retired in fourth quarter of 2014, and the comparable increases in our short-term borrowings. Consolidated profit, before taxes in the quarter, increased $27.2 million to $193.2 million due primarily to improved operating results from our Paint Stores Group. Our effective tax rate in the first quarter this year was 32% compared to 30.5% in the first quarter of 2014. For the full year of 2015, we expect our effective tax rate to be in the low 30s compared to the last year’s rate of 31.2%. Consolidated net income increased $15.9 million to $131.4 million. Net income, as a percent of sales, was 5.4% compared to 4.9% in the first quarter last year. Diluted net income per common share for the quarter increased 21% to $1.38 per share from $1.14 per share in 2014. Now, looking at our results by operating segments. Sales for our Paint Stores Group in the first quarter of 2015 increased 7.5% to $1.46 billion from $1.36 billion last year. Comparable store sales, sales by stores opened more than 12-calendar months, increased 6.4%. All of the Paint Stores Group sales increase was due to higher organic paint and equipment sales volumes across all end-markets. Price mix had a negligible impact on sales in the quarter. Regionally in the quarter, our Midwestern Division led all divisions, followed by Southeastern Division, Eastern Division and our Southwestern Division. Sales and volumes were positive in every division. Segment profit for the Group increased $30.3 million or 20.7% to $176.6 million in the quarter, as higher paint and equivalent sales volumes were partially offset by higher SG&A spending. Segment operating margin increased to 12.1% of sales from 10.8% in the first quarter of last year. For our Latin America Coatings Group, first quarter net sales decreased 8.9% to $156.2 million due to unfavorable currency translation that was partially offset by selling price increases. Volumes in the quarter were slightly positive but currency translation rate changes decreased sales in the U.S. dollars by 13.9% in the quarter. Segment profit in U.S. dollars decreased to $9.5 million in the quarter from $10 million last year. Segment profit was negatively impacted by higher raw material costs and unfavorable currency translation, partially offset by selling price increases. Currency translation decreased Latin America segment profit by $3.4 million in the quarter. As a percent of net sales, segment operating profit was 5.7% in the quarter compared to 5.5% in the first quarter of 2014. Now, turning to Consumer Group. First quarter sales increased 8.1% to $351.7 million due primarily to the initial shipment for the HGTV HOME by Sherwin Williams paint program to Lowe’s stores. Segment profits for the Consumer Group increased $4.3 million to $55.4 million in the quarter from $51.1 million in the first quarter of last year. The profit improvement in the quarter was due primarily to increased operating efficiencies that were partially offset by higher SG&A spending related to the HGTV HOME rollout. Segment profit, as a percent of external sales, increased to 15.8% from 15.7% in the same period last year. For our Global Finishes Group, sales in U.S. dollars decreased 5.6% to $459.6 million in the quarter, as unfavorable currency translation was partially offset by higher selling prices. Unfavorable currency translation decreased net sales for the segment 6.9% in the quarter. First quarter segment profit stated in U.S. dollars, decreased $7.6 million or 16.3% to $38.9 million due primarily to unfavorable currency translation rate changes which decreased segment profit $4.4 million in the quarter. As a percent of sales, segment profit decreased to 8.3% from 9.3% in the same period last year. That concludes my recap of our results for the quarter. So I'll turn the call over the Chris Connor, who will make some general comments and highlight our expectations for the second quarter and full year. Chris?

[Chris Connor:]

Thank you, John. Good morning, everybody. Thanks for joining us. First quarter was a good quarter from a profit perspective, but revenue clearly came in a little below our expectations. This is largely a result of two factors; the impact of unfavorable currency translations on sales was a little worse than we anticipated in our guidance; and HGTV HOME by Sherwin-Williams shipments to Lowe's in the quarter, were slightly lower than we expected, due entirely the timing. This combination reduced revenue growth in the quarter by a little more than 150 basis points versus our guidance. But neither of these factors affect our expectations for the full year in anyway. We remain bullish in our outlook, for both sales and earnings, as we were in January. From a profitability standpoint, earnings per share in the quarter grew 21% and consolidated sales growth to 3.5%. Our incremental margin and consolidated profit before tax was more than 32%. And as a percent of sales, gross profit expanded to 120 basis points, operating profit margin improved 60 basis points and profit before tax improved 90 basis points. SG&A was the only line in the P&L that went to wrong in the quarter, and that was by design to support the rollout of HGTV HOME at Lowe's. Both of our domestic operating segments reported solid sales and profit results in the quarter. Paint Stores Group got-off to a strong start in January and a soft patch in February, but regained their momentum in late March. Comparable store sales growth of 6.4% in the quarter, overcame the drag from the 283 Comex stores, now embedded in the comp. We’re encouraged by the fact that the locations we’ve converted to the Sherwin-Williams format have shown immediate improvement in DIY and residential repaint business, the two highest gross margin customer segments. During the quarter, Paint Stores Group opened 21 new stores and closed 14 redundant Comex locations. Our plan still calls for full year store openings in the range of 100 net new locations. Today, our total store count in the U.S., Canada and Caribbean, stands at 4,010 locations compared to 3,925 one year-ago. Consumers Group’s 8.1% sales increase and 10 basis point improvements in segment profit margin in the quarter, both reflect the impact of the HGTV HOME load-ins at Lowe's. If you back out the Lowe's shipments, the Group’s core sales in the quarter were roughly flat year-over-year. The profit margin and incremental sales was only 16.4% due to higher SG&A spending to support the HGTV HOME rollout. Our Global Finishes Group and Latin America Coatings Group got-off to a slow start for the year due in part to unfavorable currency translations and in part the soft-end market demand. Both segments, however, reported positive sales volumes in the quarter, but by indeed fall a little short of offsetting negative currency impact. In spite of the inventory build to support the Lowe's program, our working capital ratio decreased to 10.9% from 11% in the first quarter of last year. If you back out the effect of the Lowe's rollout, working capital of sales would have been about 10% at the end of the quarter. The reduction in working capital, combined with the increase in net income, more than offset the incremental cash used for Comex store integration and the HGTV HOME rollout in the quarter. As a result, net operating cash in the quarter improved by approximately $28 million compared to our first quarter cash performance last year. During the quarter, we acquired 2.0 million shares of the Company stock, or treasury, at an average cost of $287.75 per share for a total investment of $575.5 million. On March 31st, we had remaining authorization to acquire 3.23 million shares. Yesterday, our Board of Directors, approved a quarterly dividend of $0.67 per share, up 22% from the $0.55 we paid last year. Our outlook for raw materials continues to evolve as we get further into the year. The drop in petrochemical feedstock prices, combined with steadily improving monomer supply will likely result in declining latex and resin prices in the back-half of the year. At the same time, high grade chloride titanium dioxide pricing has softened a bit from recent quarters due to continued weakness in global demand and excess supply. From these developments, we expect average year-over-year raw material cost for the industry to be down in the mid single-digit range in 2015 compared with low single-digit outlook we gave in our year-end 2014 call. As I commented in my opening remarks, we remain optimistic that U.S. residential demand for architectural paint will continue to strengthen as we move into the prime painting season. And we’re encouraged by growing signs of the robust commercial recovery. This growth will continue to be offset to some degree by challenging conditions in Latin America and currency headwinds, particularly in the first half of the year. Our outlook for the second quarter of 2015 is for consolidated net sales to increase 6% to 8% compared to last year’s second quarter. With sales at that level, we expect diluted net income per common share for the second quarter to be in the range of $3.70 to $3.90 per share, nearly a 30% increase at the midpoint compared to last year’s record $2.94 per share. For the full year 2015, we expect consolidated net sales to increase over 2014 by a high single-digit percentage. With annual sales at that level, we are reaffirming our expectations for full year diluted net income per common share to be in the range of $10.90 to $11.10 per share, compared to $8.78 per share apparent in 2014. Again, we’d like to thank you for joining us this morning. And now, we’ll be happy to take your questions.

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Ghansham Panjabi with Robert W. Baird. Please proceed with your question.

[Ghansham Panjabi:]

First up, can you just touch on the competitive environment in the paint industry in the U.S.? Just anecdotally listening to your lot more of promotional focus this year across many channels. Just wondering what you're seeing.

[Chris Connor:]

Ghansham, I don’t think that we’re seeing any more aggressive promotional activity than we would typically would at this time of year, and we’re kind of entering into the start of the paint season. And that’s pretty typical for our industry to -- and send traffic and value them with promotions, pricings are holding as you can tell by our margin improvement. So, I think it's pretty much business as usual.

[Ghansham Panjabi:]

And then just in terms of the timing that you called on the HGTV load-in. Can you just kind of give us some more color on that, what drove the shifts specifically?

[Chris Connor:]

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

[Ghansham Panjabi:]

And just one final one if I could on what you're seeing if anything different on wage inflation for your U.S. stores? I’ll leave at that. Thanks so much.

[Chris Connor:]

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

[Operator:]

Thank you. Our next question comes from the line of John McNulty with Credit Suisse. Please proceed with your question.

[John McNulty:]

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

[Sean Hennessy:]

This is Sean Hennessy. Good morning. When you look at the second quarter and when you look at that guidance going from 294 to the midpoint of 380, our margins, I don’t think you can get into that kind of the range with that kind of sales gain, without having margin expansion. And the operating margin expansion I think it's going to be -- you're going to see margin expansion in the gross profit line and I think that you're going to see some efficiencies in the SG&A line. The only way you can get there so -- but I think, we’re coming over, coming against the Comex integration. We feel really good about the Comex integration and this is where the business is at. I mean, we feel very good, if we can get gallon. It’s also has to do with the sales curve in the second quarter and in the third quarter, the Stores Group in Consumer will be a larger percentage of our total sales. So a couple of things happened there; number one, we’ve always said an incremental gallon in those two groups, are the best incremental gallon flow through as we have in the Company; and number two, even though foreign currency is going to be a headwind in the second and third quarter with the sales curve again outside the country be in a smaller percentage of the total, that headwind will actually be smaller in the second and third quarter. It comes back in the fourth quarter. So, all those things are working in that direction. And I think operationally, the Store Group is in great shape and the Consumer Group is in great shape. And they are going to lead the profit improvement in the second and third quarter.

[John McNulty:]

And then maybe just one follow-up question. With regard to the HGTV rollout, when we think about the actual cost and how they sequence in throughout the year. I guess how should we’d be thinking about kind of the lumpiness of that as you’re ramping this up, do we see a lot in the first quarter and then it went down or do we just see a lot and then it starts to get offset more by revenues coming in, like how should we think about that?

[Sean Hennessy:]

I think couple of things there, the last quarter I mentioned that we have 12-months of SG&A because it can’t just turn on our organization in mid-March. And we had nine and half months with the sale. So, the first quarter because it is the smallest quarter, the SG&A impact was the greatest and that's why you saw in the first quarter our SG&A was 5 times higher than last year. In the second quarter, there is a lot of advertising, and lot of SG&A promotions going on in that second quarter. And then you’re going to start seeing the SG&A flat now. And so -- and I think from the expense, second quarter maybe is a largest actually. But the first quarter is probably the most, the toughest comparison for us. And then you will see the SG&A get to a more normal running rate in the third quarter and fourth quarter.

[Operator:]

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

[Vincent Andrews:]

Thanks very much and good morning everyone. Just had a question, if you we could sort of try to bridge this full year from here and your guidance stay the same. It sounds like in the quarter, you felt like your volumes could have been a little bit better. You had the issue with the buy-in at Lowe’s and now you’re saying that FX is obviously worse, raw materials are going to be better across the balance of the year. So, could you just kind of help us understand what's in treating the guidance the same, what are the things like on an underline basis, what's gotten better, what's gotten worse? And if you shift-out some of the things that are outside of your controls, is the year progressing, the same or better or worse than you expected three-months ago?

[Chris Connor:]

I think you did a great job for answering that question.

[Vincent Andrews:]

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

[Chris Connor:]

We began the year with pretty robust guidance EPS in the 25% plus ranges and strong domestic volume and none of those things have changed for us at all. I think some of these issues are a little bit around the fringe on us. FX is definitely more of a headwind than we had anticipated at the beginning of the year. But as you know this is a Company that remains primarily a U.S. focused revenues story. So for that end, it will be an impact for us but a lumpy that much, offsetting that is a little better raw material forecast than we had given you to begin with, we’ve plans for good raw material favorable impact, it's getting a little bit better than that. So, you put a couple of those little marginal puts and takes together, the real driver, as Sean just commented, will be the strong results that we're expecting from our Stores Group, the Consumer Group, in North America in 2015.

[Vincent Andrews:]

Okay, and if I could just ask a follow up. You mentioned that it's related to your Store business that south west was the richest evolved and was that -- is there any particular reason for that or is there anything notable about that or is that just kind of stacked up?

[John Morikis:]

It's interesting that you pointed that out. If you noticed also, that Midwestern was the leading division and this time a year, it's obviously our Midwestern Division leading. Clearly, some of the weather that impacted south west had a direct impact on their sales. We don't like to talk about weather. We keep our heads down and drive our sales. But it clearly in that Division had an impact.

[Operator:]

Thank you. Our next question comes from the line of P.J. Juvekar with Citigroup. Please proceed with your question.

[P.J. Juvekar:]

Couple of questions on HGTV, can you talk about the initial reception of the paints in the stores or is it too early? And what would be the margins on this product compared to your Consumer Group average?

[Chris Connor:]

So, I’ll give you some thoughts P.J. and kind of the early run rate and let Sean comment on the margins that at least what we’re prepared to say. As John mentioned, we're really right in the middle of this rollout. May 1st is the official and national rollout day. We will absolutely be set in every store and ready to go. I’d say we probably have two-thirds of the store set at this point [John]. And so we are starting to see some really strong reorders and excitement inside the aisles at Lowe’s stores. The color merchandising unit that is gone in and it's been terrific, it's really creating quite a stir. And so, I would say that from every angle that we can look at it this program is really on track with our expectations and off to a good start.

[Sean P. Hennessy:]

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

[P.J. Juvekar:]

And Chris in the past you had talked about your global ambitions and making acquisitions outside the U.S. with a strong dollar, it seems like a good time. Can you just talk about your price line and what are your thoughts about that?

[Chris Connor:]

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

[Operator:]

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

[Don Carson:]

Two questions, first on consumer, Sean I think on the last call you said that operating margins were actually declining year-over-year because of the cost of the HGTV rollout and yet you’re slightly higher. So I’m just wondering what went on consumer to offset that from a margin standpoint? And then secondly, just wondering on sort of you Q2, Q3 paint season, what are your contractor customers telling you in terms of their bookings outlook, both on residential and non-residential?

[Sean Hennessy:]

Don, I would tell you probably one of the very nice surprises was the ability for our Consumer Group to have operating margin improvement. And I think there is two pieces, there was the piece on the selling side. But on the manufacturing and the logistics side, they had a very good quarter. And because of that ability, they actually were able to have a operating margin $0.01 higher this year than last year. But they were helped by the incremental gallons that they were producing and so forth -- and they put some of those gallons on our balance sheet, which took a little debit and put it on there that you didn’t see come up in the second quarter. But that’s what really drove the operating margins in the first quarter to be one-time higher.

[Chris Connor:]

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

[Operator:]

Thank you. Our next question comes from the line of Kevin McCarthy with Bank of America Merrill Lynch. Please proceed with your question.

[Kevin McCarthy:]

Good morning. In Paint Stores, will you comment on how your spray equipment volumes would have compared to the segment average same store sales figure 6.4%?

[Chris Connor:]

Our spray equipment sales are extremely strong, very strong.

[Kevin McCarthy:]

Double-digits, perhaps?

[Sean Hennessy:]

Yes.

[Kevin McCarthy:]

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

[Sean Hennessy:]

I can tell you a very quick that we just added here an accelerated factory purchase in ASR in the first quarter. So in the month of February, as John commented, we did purchase 2 million of shares in the first quarter. We did that use in an ASR. And so that’s why, you saw a use of cash of approximately $585 million. So in the last few years, we’ve been a little more cautious in buying stock in the first quarter. But this year, when we were looking at the cash generation of the Company and what we’re going to do with the cash, we feel very good and we want the 2 million shares. At the end of the year, we still believe that our debt, our total debt will be in that one-to-one range with our EBITDA.

[Kevin McCarthy:]

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

[John Morikis:]

I don’t think there is anything noteworthy in that. And I’d like to just be really clear on that HGTV. We have some projections on how this would rollout. And this is just simple matter of having some areas that we’d planned on moving a week or a couple of days in some cases just falling on the other side of line of the quarter. So, to be clear, not sending the wrong signal here it’s just a matter of very simple timing and where the quarter landed in the midst of this rollout. So it’s according to understand now as well.

[Operator:]

Thank you. Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

[Arun Viswanathan:]

Just wondering if you can give us an update on what you’re seeing I guess earlier on the spring paint season to safely get out as we expected. Thanks.

[John Morikis:]

We expected a strong start to the season and our contractors would tell you that they’re very excited about that. There is a strong pipeline of this as I mentioned earlier and there is a good feeling about that. I think many of the contractors experienced a little bit of delay in some of those projects starting with some of the weather that they face. So, we’re excited about paint season.

[Chris Connor:]

And Arun, to clear a little context around that, the American Coatings Association came out with their forecast of volumes for 2014 and ’15, a couple of days ago, and their outlook for this year is for annual growth of 5.6%, but first quarter growth in more in the 3% range. So, they kind of anticipated a slow start but a really strong season to follow.

[Arun Viswanathan:]

And just some clarification on the industry numbers, and would that bring us closer to kind of a normal level of gallonage in 750 million range or where do you think we are tracking on the year?

[Chris Connor:]

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

[Arun Viswanathan:]

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

[Chris Connor:]

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

[Operator:]

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

[Bob Koort:]

I wonder if you guys could help describe for me when a consumer comes into a Lowe’s, what is the selling proposition to HGTV brand, what is the differentiator there and maybe what fits on that price point scale?

[John Morikis:]

When you walk into a Lowe’s store Bob, you're going to see immediately the impressive color presentation at the HGTV HOME by Sherwin-Williams makes. That really starts the shopping experience, those color centers are at the end of their drive aisles, they’re close to the very entry points to their stores, a good number of Lowe stores that we’ve been in since the rollout has begun. We were able to pick out that color center literally with the assessment time to store. So, I think that’s going to create excitement and impressions for the department. Once the consumers made that choice, if it's an HGTV color, then they are inclined to look for the HGTV product and then Lowe’s associates will be trained to help them make that. I think as we’ve commented in the past that both Valspar and PPG remain in the department. They will have product offerings as well too. So this will be a typical experience for all the boxes in managing multi-supplier lines in the department, and it’ll be the merchandizing and quality and then the association will help drive that preference for HGTV HOME.

[Chris Connor:]

The confidence factors, I think with the colors are lesser and the coordinating of the colors is another compelling feature of the HGTV. So the consumer with confidence can choose the color as well as coordinating colors go along with that.

[Bob Koort:]

And do you guys -- well you’ve completed by May 1 on the ground training at every Lowe’s location?

[Chris Connor:]

Absolutely.

[Bob Koort:]

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

[Chris Connor:]

The majority of the raw materials are price in U.S. dollar, so when the currency devalues it's in fact always a raw material increase for the different countries.

[Operator:]

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

[Nils Wallin:]

First off, I was wondering if you could size the accretion that you might have seen from Comex this quarter.

[Chris Connor:]

This integration is going great. And I think that what we’ve said is last year we’re at $0.28 and for the year we’re going to be at $0.10. We feel it's going to be here. But as it is so integrated now, where we don’t feel confident on a quarter-by-quarter basis to give you that kind of detail, so that’s why I think we’ve said that in the future, we’re not going to be commenting on this acquisition.

[Nils Wallin:]

I am curious there wasn’t -- I mean paint stores is usually pretty much a U.S. dollar type business. But obviously with Comex coming in, there is heavier Canadian footprint and the Canadian dollar did depreciate year-over-year. So, was there any sort of FX headwinds in the Paint Stores group?

[Chris Connor:]

Yes, you're exactly right, with the Canadian sales in the Paint Store Group. There was some headwinds but we break-out the 3.1% for the Company we don't break it out to that by the segments.

[Nils Wallin:]

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

[Chris Connor:]

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

[Operator:]

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

[Dmitry Silversteyn:]

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

[Chris Connor:]

What we've said is that if you think about it, we said that our sales were down 5.5% and we said that our gallons were up slightly. So, that we did quick pricing in there in the local currencies, but not enough to offset the currency hit. But the volume is up slightly.

[Dmitry Silversteyn:]

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

[Chris Connor:]

Yes.

[Dmitry Silversteyn:]

In terms of your guidance for the year, it sounds like with increased foreign exchange headwinds you’re nevertheless looking for high single-digit growth for the year sort of reported sales, so it sounds like the organic sales growth expectations have improved. Is that a correct read through and sort of what is behind that? Is it just the optimism in the stores business with the contractors benefiting from commercial construction, or are there other drivers to your more upbeat expectations for organic performance in 2015?

[Chris Connor:]

You’re right I think everything you said that was accurate. We still believe that for the full year we’re going to make it, and we also pleased that foreign currency is going to be a slightly stronger headwind than we get three months ago. I will tell you, we still remained pretty confident in that range, because as I tried to point out the 3.1% is very strong in the first quarter. Even if the currency remains exactly the headwinds in the second quarter and third quarter, that number should reduce. So -- and I would say you have to remember, if we did have some foreign currency devaluation in the guidance already, so that's frequent 1% with that 100% incremental, we did have some. So it's just that incremental piece. And when you look at the range of let's say 7% and 9% that 2% on $11 billion $220 million we still feel that we're in pretty good shape to get inside that range.

[Dmitry Silversteyn:]

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

[Bob Wells:]

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

[Dmitry Silversteyn:]

Okay. So, the back half will be mid to high single-digits. Okay. Got it. Thank you. That’s all the questions I had.

[Operator:]

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

[Dennis McGill:]

Good morning guys. Thank you. First one, Chris, you had mentioned I think -- the term used in February was a low in February and I think you said that it took until the second half of March to pick up, just want to confirm that the first half of March looked more like February? And then if you could maybe just frame a little bit what was the difference between what you saw kind of exiting the quarter and what you were seeing during that low Period?

[Chris Connor:]

That’s exactly why we [multiple speakers]. Yeah, sure Dennis. That is exactly what we said. February was a soft month for us and March started little softer, February started to pick up. But Sean made a brief comment about weather in the quarter, as we started to see some warmer days, we really were seeing the acceleration of all this confidence that -- and back there which is professional and training contractor. I think what's notable is that it's winter in the first quarter. It's supposed to be cold and Boston supposed to have the kind of snow at head, and we had stores closed, et cetera. That really wasn't the impact. It was the cold south of the Mason Dixon line that really had the impact. And just as we commented about our Southwestern division kind of lagging a division it typically lead to that time of the year. When we got some warm weather in those parts of the geography, we really started to see it's a rebound. And now that we're into the second quarter, weather really diminishes, has been impacted. And again back to the strong guidance we're giving there.

[Dennis McGill:]

And I guess just indirectly, the guidance you’re giving on the sales on an organic base in the second quarter sort of suggests Paint Stores sales are getting back to that high single-digit rate?

[Chris Connor:]

Correct.

[Dennis McGill:]

Okay. And then separately on the global side, I think when you back out FX, this quarter was modest growth and I think there’s something more in the four, five range recently. Can you just talk to where do you think that continues and if so just give some color on what you see in different geographies and different end users?

[John Morikis:]

The performance by business unit varied. And not surprisingly, our business in North America across every category was stronger than a relatively weaker performance in Latin America and Europe. And obviously part of that was due to the currency. We expect in local currency for these businesses to improve. And over the balance of the year, we feel we’ll get on top of it. So, we’re confident about the year and the projections we’ve given you.

[Dennis McGill:]

Okay.

[Chris Connor:]

In Latin America Dennis in the first quarter, we had volume gains in every country quarter with the exception of Brazil and it’s been a while since we’ve seen that, so we currently feeling better about our prospect there as well.

[Operator:]

Thank you. Our next question comes from the line of Greg Melich with Evercore ISI Group. Please proceed with your question.

[Greg Melich:]

I want to follow up quickly on SG&A, just to make sure I have this right. So, if you haven’t had the HGTV program with SG&A levered in the first quarter, and if you were to think about it going forward, we do expect the lever, the corporate basis in the second quarter but probably not in consumers. Did I summarize that right, Sean?

[Sean Hennessy:]

Yes, the only thing that we didn’t had say is that we would have shown some efficiencies in the first quarter with SG&A. Without that I think that we don’t want to break that out. And the reason we don’t want to do that is that how much we spend exactly on the Lowe’s program. But we would not have had the 5 times of increase in SG&A.

[Greg Melich:]

It would have gone the right way. It would have been down, we don’t know how much?

[Sean Hennessy:]

Yes.

[Greg Melich:]

And then the follow up, I want to talk a little bit more about the outlook there. I know we’ve talked about resi and it looks greater there in the contractors. What about commercial and industrial? What sort of region you see there? Is there any sort of project work going on or is that not dialed up or is that just sort of as planned?

[Bob Wells:]

No in fact -- Greg this is Bob, there is a quite bit of project work going on. And due to the long start to paint cycle in the non-residential space, you kind of got to look back a year or more at the data. And if you look at 2014 data in terms of signed contracts, non-residential rebounded pretty strongly, up about 7% in total with -- as we’ve pointed before, some really strong categories in office and bank, hotel and motel, manufacturing, et cetera. And so there are certainly -- there is certainly growth across the country. There are specific categories that we can target to grow faster than the market in total. And by the way, those were contract, I just talked about, but we also a big jump in starts in the fourth quarter of '14. There is lot of projects coming out of the ground that will be painted this year. So, it’s looking a lot better than last year. And that’s mostly driven by occupancy rate, which also implies that the retail market will be strong in non-residential this year.

[Greg Melich:]

And then lastly I know it’s early. But what do you expect the HGTV program at Lowe’s to do to the program in your own Paint Stores Group? Do you expect it to help to hurt anything in there in terms of your plan will be helpful.

[Chris Connor:]

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

[Greg Melich:]

And Chris is there a lag to that do you think or do you anything it sort of happened over the advertising, et cetera, kicks in or is it -- ?

[Chris Connor:]

I think we’ll see in the second and third quarter when we really expect the ramp up, the marketing activity type.

[Operator:]

Thank you. Our next question comes from the line of Ivan Marcuse with KeyBanc Capital Markets. Please proceed with your question.

[Ivan Marcuse:]

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

[John Morikis:]

Ivan, you are absolutely right. We believe that this range, we recently we talked about the 43 to 46, 44 to 47, we think we’re really in a 44.5 to 47.5. I would tell you that would be the range that I would give today.

[Ivan Marcuse:]

Okay, great. And then you mentioned there is whether every year, which there is. I’m curious have you seen any impact of the lower oil costs hitting the economies, the tax authority any other energy impacts in terms of construction or housing or anything to that effect?

[John Morikis:]

Not really. I mean we’ve spent some time with our team down there and they’re feeling pretty good about the marketplace. So there has not been any impact in our increase down there.

[Operator:]

Thank you. Our next question comes from the line of Jay McCanless with Sterne, Agee. Please proceed with your question.

[Jay McCanless:]

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

[Sean Hennessy:]

283.

[Jay McCanless:]

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

[Sean Hennessy:]

So we have required 306 of 283 so that makes 306 is about 93.5%.

[Jay McCanless:]

It's a meaningful part of the comp group at this point, you're not going to get any more catch-up from the stores rolling in.

[Chris Connor:]

We have approximately close of 4,000 comp store. So, there are 283 of the 4,000 stores, it's half of 1%, I am sorry I thought you were asking a question of how many remaining.

[John Morikis:]

September of ’13 right, so they are fully in the comp number that’s a point we’re making.

[Chris Connor:]

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

[Jay McCanless:]

No, I wanted to see if they were part of the comp group already, now you already answered that. My other question is on SG&A in 2Q ’14, is there any one-time items in there that aren’t going to reappear this year just trying to frame our model for how SG&A is going to look.

[Chris Connor:]

When you look at that SG&A with 31.8% and $970 million, it really was one-time only.

[Operator:]

Thank you. Our next question comes from the line of Chuck Cerankosky with Northcoast Research. Please proceed with your question.

[Chuck Cerankosky:]

You covered a lot of ground. But the one thing I want to ask you John is it looks like CapEx bumps up quite a bit year-over-year in the first quarter. Is there anything going on there?

[Sean Hennessy:]

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

[Chuck Cerankosky:]

Will you get them all done this year?

[Chris Connor:]

Go ahead John.

[John Morikis:]

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

[Chuck Cerankosky:]

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

[Chris Connor:]

No, I think that’s the major take there.

[Operator:]

Thank you. Our next question comes from the line of Jeff Zekauskas with JP Morgan. Please proceed with your question.

[Jeff Zekauskas:]

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

[Chris Connor:]

I don’t think we’ve ever given that dynamic. I think we’ve talked about the stores and so forth. But I don’t think we’ve ever given any. And the reason why is because it diversify, and we have brushes and rollers, we have costs and so forth. So, I don’t think we’ve ever given that metric.

[John Morikis:]

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

[Jeff Zekauskas:]

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

[Sean Hennessy:]

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

[Jeff Zekauskas:]

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

[John Morikis:]

We’ve been consistently at about 15% of that Paint Stores Group revenue [indiscernible] the DIY consumer. We don’t expect that to change substantially one way or the other.

[Operator:]

Thank you. Our next question comes from the line of Geoffrey McKinney with Bank of America Merrill Lynch. Please proceed with your question.

[Geoffrey McKinney:]

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

[Chris Connor:]

I think you should think about that it's going to come down our launch is at the end of the quarter it will be the first quarter. I also think, you should think about turning this out. We’re looking at issuing some bonds this year the timing is not exactly public yet because we haven’t decided exactly when. One of the things about it, you've seen our interest rate was -- our interest expense was 4 million less than the first quarter than last year, which is positive. Because when we did -- when the bonds matured, our five-year bonds matured in 2014, we did that re-issue. But we’re so heavy into short-term debt I think as I said earlier I think our debt by the end of the year will be in that one-to-one range of EBITDA and you will see fixed notes in a much higher percentage of our total debt.

[Operator:]

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

[John Roberts:]

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

[John Morikis:]

You should expect us to continue to run in around 100 new stores rate, we try to press these deals earlier in the year. For some reason a lot of them end up at the tail-end of the previous year. But there is a really very good pipeline that good teams working on it, we’re excited about our pipeline of new stores this year.

[John Roberts:]

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

[Chris Connor:]

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

[Operator:]

Thank you. Our next question comes from the line of Rosemarie Morbelli with Gabelli and Company. Please proceed with your question.

[Rosemarie Morbelli:]

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

[Unidentified Company Representative:]

Not significantly or haven’t impacted all I don’t think really. The large jobs are always competitive we close those accordingly. The raw materials are one element of the products that we are -- one component of what goes into the selling price are services that we provide and the quality of the product, the people that we have with our customers all are a component of that. So, I think we’re going to continue to see the pressure where we always have seen it, but nothing anymore than we have in the past.

[Rosemarie Morbelli:]

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

[Unidentified Company Representative:]

Well we never think that Rosemarie, as soon as we’re finished. But we continue to see, across the entire country, a shift towards the painting contractor away from the DIY just as a demographic that our country support, and aging population and less free time, et cetera. Having said that, the remaining portion of the market, which is around 40% of all the gallons of purchase price DIY, we would expect this to be a good year. Bob has mentioned about residential repaint being one of the strongest segments, residential repaint is both DIY and pro and we’ve seen nice growth there as well too. We have given color on our DIY sales gains inside the stores organization and the Consumer Group is mostly DIY. So, we would expect to see nice results for this year.

[Rosemarie Morbelli:]

And the HGTV is also DIY, correct?

[Unidentified Company Representative:]

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

[Rosemarie Morbelli:]

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

[Bob Wells:]

Rosemarie -- this is Bob. We’ve said kind of -- we didn’t think for the last couple of years, that we really like the pace of this recovery that we’re not seeing huge year-over-year increases in activity on either the residential or non-residential side of the market. And at this measured pace, depending on where the market peaks exactly, it could certainly go another three to five years. We think that 1.3 million to 1.4 million residential starts is normal. But we’ve been running below that normal rate for quite a while now for a number of years now. And so there should be some catch up required that would require us to go above the normalized rate at the peak of the recovery. So, we can be three to five years from the peak.

[Rosemarie Morbelli:]

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

[Sean Hennessy:]

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

[Rosemarie Morbelli:]

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

[Sean Hennessy:]

The interest expense.

[Operator:]

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

[Bob Wells:]

Thank you again, Melisa. As a reminder, our Financial Community Presentation is scheduled for Thursday, May 28 at The Langham Hotel in Boston. The program will consist of our customary morning presentation with a question-and-answer session, followed by a reception and lunch with the Company management. If you have not yet signed up and would like to attend, registration is still open. Send me an email at [e-mail] and I will reply with a link to our registration site. As always, I will be available over the next few days to handle any follow up questions that arise as you digest this morning’s call. I would like to thank you again for joining us today and thanks for your continued interest in Sherwin-Williams.