The Sherwin-Williams Company
Q2 2015 Earnings Call Transcript

Published: 16 Jul 2015

[Operator:]

Good afternoon. Thank you for joining The Sherwin-Williams Company Review of Second Quarter 2015 results and expectations for the third quarter and full year review. [Operator Instructions]. I will now turn the call over to Bob Wells, Senior Vice President, Corporate Communications.

[Bob Wells:]

Thank you, Jessie. Good morning, everyone. Thanks for joining us. We're going to begin the call today with some prepared remarks by Chris Connor, our Chairman and CEO, and John Morikis, President and Chief Operating Officer. Following their remarks, we will open the call to your questions and Sean Hennessy, our Chief Financial Officer, and Al Mistysyn, Corporate Controller are with us to participate in the Q&A session. But before I pass the microphone to Chris, let me remind you that this conference call will include certain forward-looking statements. As defined under 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. You'll find a full declaration regarding forward-looking statements in our earnings release transmitted earlier this morning. In the interest of time, we've also provided some balance sheet items and other selected financial information on our website at www.sherwin.com, under Investor Relations July 16 press release. With that, let me turn the call over to Chris.

[Chris Connor:]

Thanks, Bob, and good morning, everybody. Back in January on our year end 2014 conference call, we issued guidance for 2015 that some would say was out of character for Sherwin-Williams. It was aggressive on both revenue and earnings per share growth. The confidence we had in our outlook for high single-digit sales growth came primarily from the continued strength of the North American market, which as you know, accounts for more than 75% of our revenues. This optimism was slightly tampered somewhat by declining oil and gas infrastructure investment worldwide and the weakening currencies in Latin America and Europe, because sales volume drives productivity and margin improvement, our bullish sales outlook prompted equally bullish expectation for 25% earnings per share growth at the midpoint of our range. Although this guidance might have seemed out of character for us, we believe it was appropriate given the market environment we saw at the time. Today, we are revising our expectations for the full year. We now expect consolidated net sales for the year to increase 3% to 5% compared to full year 2014, and diluted net income per common share to be in the range of $10.60 to $11 per share, a 23% increase at the midpoint of the range over last year's $8.78. By any measure, 0.3% earnings improvement and mid single-digit sales growth is a very good year, just not quite as good as we originally expected. So what's changed? The most obvious answer is also completely out of character for us. As most of you know, it is our long-standing practice to not give weather reports on earnings calls, but the unprecedented rainfall across most of the United States during the past three months is hard to ignore. 16 states recorded above-average rainfall in the month of April. That number increased to 22 states in May, with 12 of those recording much above average and Texas, Oklahoma and Colorado setting all-time rainfall records. And then in June, the rain moved to the Midwest and Northeast, with 24 states recording above-average rainfall, and three of those, Illinois, Indiana and Ohio, setting all-time rainfall records. The impact of these extraordinary weather patterns can be seen in national home building data as well. Residential building permits were up 25% year-over-year in May, while actual starts were up only 5%. Year-to-date, residential permits have increased at twice the rate of starts. Non-residential construction projects have suffered similar delays. We're breaking with tradition in talking about this weather impact today, not so much to explain our soft sales results for the second quarter, but to illustrate why we remain upbeat on the future. Bad weather doesn't destroy demand for paint. It only postpones it. The change in our full-year guidance is not a reflection of lost confidence, but the reality of lost days. We believe market demand remains strong, but we've reached the point where it is unlikely the delays caused by weather will be fully recouped in this calendar year. I want to turn the call over to John to review our results for the second quarter and I'll be back to provide a little more color and walk you through our expectations for the third quarter. John?

[John Morikis:]

Thanks, Chris, and good morning, everyone. I'll begin by highlighting overall company performance for second quarter 2015 compared to second quarter 2014, then comment on each reportable segment. Consolidated net sales increased 2.9% to $3.13 billion driven primarily by solid performance in our paint stores and consumer groups. Consolidated group profit dollars increased $120 million year-over-year to $1.5 billion and gross margin increased to 48.8% of sales from 46.3% in the second quarter last year. Selling, general, and administrative expense for the quarter increased 3.1% to $999.2 million. As a percent of sales, SG&A increased 10 basis points to 31.9% in the second quarter this year from 31.8% last year, due primarily to the incremental investment to support the HGTV Home rollout at Lowe's. Interest expense for the quarter was $12.9 million, a decrease of $3.5 million compared to the second quarter last year. Consolidated profit before taxes in the quarter increased $78.5 million to 18.3% or 18.3% to $507.7 million. Our effective tax rate in the second quarter this year was 31.1% compared to 32.1% in the second quarter of 2014. Consolidated net income increased $58.5 million, or 20.1%, to $349.9 million. Net income as a percent of sales increased to 11.2% compared to 9.6% in the second quarter last year. Diluted net income per common share for the quarter increased 25.9% to a record $3.70 per share compared to $2.94 per share in 2014. Looking at our results by operating segment, Paint Stores Group sales increased 5.4% to $1.98 billion. Comparable store sales, sales by stores opened more than 12 calendar months grew 3.9% in the quarter over last year's comparable period. Regionally in the second quarter, our Midwestern division led all divisions, followed by southeastern, eastern, and southwestern. Sales and volumes were positive in every division. Paint Stores Group segment profit for the quarter increased $57.5 million, or 15.3% to $433.4 million. Segment profit as a percent of sales increased in the quarter to 21.8% from 20% in the second quarter last year. Consumer Group also turned in a solid performance for the quarter. Sales increased to 13.1% to $490 million due primarily to shipments of the HGTV by Sherwin-Williams paint to Lowe's stores. Segment profit for the Consumer Group increased $21.7 million to 23.5%, or 23.5% to $114.2 million from $92.5 million in the second quarter last year. The profit improvement for the quarter was due primarily to higher sales volumes and improved operating efficiencies that were partially offset by higher SG&A spending related to the HGTV Home launch. Segment profit as a percent of external sales increased to 23.3% from 21.3% last year, an increase in six months to 20.2% from 18.9% last year. For our Global Finishes Group, sales in US dollars decreased 7.1% to $505.8 million in the quarter, as unfavorable currency translation was partially offset by modest volume increases. Unfavorable currency translation decreased net sales for the segment by 7.7% in the quarter. Segment profit in US dollars increased to $57.3 million from $54.9 million last year. Our results last year include charges in the quarter totaling $4.5 million related to the exit of our business interests in Venezuela. In second quarter 2015, unfavorable currency translation rate changes reduced segment profit $8.3 million in the quarter. As a percent of net external sales, Global Finishes Group segment profit increased to 11.3% in the quarter compared to 10.1% last year. Our Latin American Coatings Group continued to operate in a very challenging economic environment. Second quarter net sales for the group stated in US dollars decreased 17.2% to $150.1 million. Volumes in the quarter were negative and unfavorable currency translation decreased net sales by 17.4%, both of which were mitigated to some degree by selling price increases. Segment profit in the second quarter stated in U.S. dollars decreased to $4 million from $5.7 million in the same period last year. Currency translation decreased segment profit $2.3 million in the quarter. As a percent of net external sales, segment operating profit was 2.7% in the quarter compared to 3.1% in the second quarter of 2014. That concludes our review of results for the second quarter, so I'll turn the call over to Chris, who will make some general comments and highlight our expectations for third quarter and full year.

[Chris Connor:]

Thanks, John. My comments on the call focus on sales in the quarter because that's clearly where our results deviated from our original expectations. There were some noteworthy bright spots. Residential repaint sales through our Paint Source Group, Pro and DIY combined grew double digits in the quarter. This robust demand was offset by sluggish sales to the new construction segment and protective and marine. Our consumer group completed the rollout of the HGTV Home by Sherwin-Williams paint program in all Lowe's stores by May 1 and the program continues to build momentum as awareness grows. Sales volumes in most of our nondomestic businesses were positive, but gallon growth was insufficient to offset the currency devaluation which was slightly worse than anticipated in the quarter. From a profitability standpoint, the picture is certainly brighter. Earnings per share in the quarter increased 26% and consolidated sales growth of less than 3%. Our incremental margin on consolidated profit before tax was more than 80%. As a percent of sales, both gross profit and operating profit expanded 250 basis points compared to last year, and profit before-tax improved 210 basis points. SG&A actually was the only line on the P&L that went the wrong way in the quarter and that was by design to support the rollout of HGTV Home at Lowe's. During the quarter, our paint source group continued to expand its store footprint, opening 20 new stores and closing five redundant Comex locations. This brings a year to date net openings to 22. We remain very confident in the long-term market opportunity for this group and likewise, remain on pace to open between 100 to 110 new stores this calendar year, as well as close between 20 and 25 redundant store locations. Today, our total store count in the U.S., Canada and the Caribbean stands at 4025 compared to 3941 locations one year ago, an increase of 84 stores in the past year. In the first six months of 2015, we generated $349 million in net operating cash, an increase of $17.4 million compared to the first half of 2014, driven by higher six-month net income. Working capital was a use of cash in the quarter and first half, increasing by slightly more than $80 million. Most of this increase was to support, again, the HGTV Home program at Lowe's. Working capital as a percent of sales increased 11.8% of sales from 11.7% in the second quarter last year. During the quarter, we acquired a quarter million shares of the company's stock for treasury. This brings our year to date share repurchase total to 2.25 million at an average cost of $284.46 per share for a total investment of $640 million. On June 30, we had remaining authorization to acquire just under 3 million shares. Yesterday our Board of Directors approved a quarterly dividend of $0.67 per share, up 22% from the $0.55 per share we paid last year. Our outlook for raw material supply pricing is virtually unchanged from the view we provided on our first quarter call. As a steady decline in petrochemical feed stock prices over the past year combined with improving monomer supply has continued to put downward supply on latex and resin prices over the first half of the year. At the same time, high grade chloride titanium dioxide pricing has softened a bit in recent quarters due to continued weakness in global demand and excess supply. Based on these developments, we still expect average year-over-year raw material costs for the industry be down in the mid single-digit range in 2015. As I said in my opening comments, we remain optimistic that U.S. demand for architectural paint will strengthen as residential and non-residential builders scramble to make up for first half weather delays. This growth, when it comes will continue to be offset to some degree by challenging conditions in many nondomestic markets and currency headwinds. Our outlook for the third quarter of 2015 is for consolidated net sales to increase 3% to 5% compared to last year's third quarter for the last year's third quarter. With sales at that level, we expect diluted net income per common share for the third quarter to be in the range of $3.75 to $3.90 per share compared to $3.35 earned per share in the third quarter of 2014. Again for the full year 2015, we expect consolidated net sales to increase 3% to 5% over full-year 2014 and diluted net income per common share to be in the range of $10.60 to $11 per share compared to $8.78 per share earned in 2014. Again, we would like to thank you all for joining us this morning and now we would be happy to take your questions.

[Operator:]

[Operator Instructions]. Our first question is coming from the line of Ghansham Panjabi with Robert W. Baird. Please proceed with your question.

[Ghansham Panjabi:]

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

[Chris Connor:]

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

[Ghansham Panjabi:]

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

[Chris Connor:]

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

[Ghansham Panjabi:]

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

[Sean Hennessy:]

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

[Operator:]

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

[Bob Koort:]

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

[Chris Connor:]

We can only hope, Bob. Yes, we absolutely did say that. I think for going on three years now on these calls, we've commented about the residential repaint being the real strength of the rebounding architectural market in the United States and that remains accurate as well. We do see these numbers a little more granular when we break out interior coatings versus exterior coatings, we certainly see the weather impact there. But the strength of that market, despite the weather that we commented in a number of these areas generated a double-digit performance there. I think what you should take away from that is the highlight of the softness that we're seeing on the new construction side of it, as we commented on the delays in starts and projects, both commercial and residential, by the way.

[Bob Koort:]

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

[John Morikis:]

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

[Bob Koort:]

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

[Chris Connor:]

Yes, so the market is [indiscernible] interior/exterior market break out and why we see a little bit more interior for DIY.

[Bob Wells:]

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

[Bob Koort:]

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

[Chris Connor:]

I'm not sure I understand the question.

[Bob Koort:]

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

[Chris Connor:]

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

[Bob Koort:]

Chris, I applaud your consistency.

[Operator:]

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

[Vincent Andrews:]

Last winter obviously, the winter before this bad winter was obviously a bad winter. So I guess my question is can you kind of get us up to date on through the course of '14, did you feel like you made up the demand that was deferred out of, say the first quarter of '14 through the balance of the year? Did we come into '15 with some of that pent-up demand, then we have the winter, now we have the rainfall. I'm just trying to get a sense of, you know, what you think the lag effect is on your underlying sales versus, sort of continued improvement we're seeing in terms of the broader macro housing data, whether existing home sales or housing prices or so forth?

[Chris Connor:]

So in 2014's bad winter, as in so many bad winters before, Vincent, we would typically say that, you know, a good week in June can make up for an entire horrible month of February. The problem was we didn't have the good week in June in 2015. We absolutely caught up throughout 2014 and we didn't feel that we came into the beginning of this year with any pent-up demand. Projects were completed. In 2015, we're amending those thoughts a little bit and that was the intent that we're just running out of days with having lost so many paintable days in the second quarter. Not even so much painting days, but just construction days. We haven't been able to pour concrete to get pads set for houses to come out of it. Big commercial projects, trains and sky lines across the country are delayed and behind because of the impact of weather in these markets. Anecdotally, we can comment on Dallas, Texas, where there is north of 30 trains on the skyline. A good 2/3rds of those should be in the painting stage right now. We're just on two or three of them as a result of delays given the significant rain they have had down there. So we are going to have pent-up demand as a result of this particular year. We don't expect we'll get caught up and so that should bode well for a little bit of a better start in calendar year 2016.

[Vincent Andrews:]

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

[Sean Hennessy:]

The environmental. We had a little bit of environmental. We show that broken out on the other, but we had approximately year-to-date, about $10 million. Most of that happening in the second quarter as we took on the [indiscernible].

[Vincent Andrews:]

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

[Sean Hennessy:]

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

[Operator:]

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

[Chris Bottiglieri:]

Had a quick question on droughts, can't imagine it would affect your business directly, but maybe you could walk us through if there is an effect if you see customers prioritize more lawn outdoor or do they kind of switch to indoor painting projects?

[Chris Connor:]

Well, Chris, we're rooting for a drought in Texas, Illinois, Ohio, and on and on and on. California and the Southwest where we have been experiencing drought part of the country has been in for such a long, sustained period that year on year comparisons really aren't particularly affected there. So, you know, hot, baking sun creates opportunities for residential exterior paint projects to protect and sustain properties, given the rigors of that environment. We haven't seen any significant change that we can point to, to your point that discretionary spending's being moved to landscaping purchases, etcetera. We have heard recently about a trend where people are starting to paint their lawns green because they can't afford to water them, so that might be a new market opportunity for us.

[Chris Bottiglieri:]

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

[Chris Connor:]

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

[Operator:]

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

[Arun Viswanathan:]

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

[John Morikis:]

Couple things. You're absolutely right. You look at the weather we've had in July, kind of like June 30, the weather changed. I think that July continues to be pretty variable. I think that couple of things, when we take a look at what we think the foreign exchange hit is going to be in the third and fourth quarter versus what we thought was going to be during the third and fourth quarter, you know, it's going to be a larger headwind for us. And then finally, I think there is still some projects that are being delayed from the first half that they still have not been able to get to. So there is a lot of different work that just isn't ready to be painted that's still in the process of getting to the paint stage. So there has been a lot of delays and those things, there is only so many days. I think Chris mentioned in his script there's only going to be so many days. So we think that's going to negatively affect our sales gain throughout the remained der of the year.

[Arun Viswanathan:]

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

[John Morikis:]

Well we'll have to wait and see how the year unfolds and our competitors reports will follow. You know, don't forget that this is a company that that skews heavily to the professional paint contractor and a lot of this the delay tends to be more contractor-driven because of the construction comments we're making. So time will tell. I think over the long run, Arun, the point is that the model's intact. We don't think anything structurally has changed here, and, you know we can only delay this, not destroy this demand. So we think we're going to be fine. It's going to be a little choppy getting there.

[Arun Viswanathan:]

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

[Bob Wells:]

Arun, this is Bob. If TiO2, if trajectory of TiO2 comes in where we think it will, that implies the mid single-digit decline in the basket that we've been guiding to for the last couple quarters. So we don't necessarily see more goodness in the current trajectory of TiO2.

[Operator:]

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

[Don Carson:]

Just a follow-up Chris on your industry view, you showed some slides back in your May investor meeting the issue of 2.8% last year to 720 million. So where do you see the industry this year versus last year? And a related question to that, you talk of a normalized band of 740 million to 760 million gallons frankly looks like we'll be almost at the lower end of that band this year. Yet obviously housing remains well below normalized levels. So what do you think of the kind of true normalized level of demand going forward in terms of industry gallons?

[Don Carson:]

So we'll have to wait and see, Don, as we said earlier, but our expectations that that industry growth will be lower than we guided to at the beginning of the year for the reasons that we talked about. We've commented on that band over the years and said that we tend to be on the conservative side of that. We believe that as the market rebounds, it will have to actually run above that normalized band for a period of time because we've been below it for so long. So even a million gallons is not an unrealistic number, we see that from a lot of other folks that have opine on what the demand might be in this space. Again, plenty of opportunity for growth here. That's why we continue to remain bullish and open these stores at the pace we're on, one every three days and fully expect that we're going to see that materialize over the coming years.

[Don Carson:]

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

[Chris Connor:]

You know, you're absolutely right. You're looking at 48 that we have in the second quarter. We've been talking about this band of 43 to 47.5, we said we would be at the high end. We're going to actually probably see it just slightly above the high end of the band. You got to remember, we are in LIFO. And so we take projections of what we think are going to come in in the second half and we actually get to adjust our cost of goods sold from FIFO to LIFO. So some of that raw material that we're projecting and you're projecting are already reflected in that gross margin. So we see that many times the, we're pretty close to full year gross margin at the year-to-date in the second quarter.

[Operator:]

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

[Dennis McGill:]

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

[Sean Hennessy:]

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

[Dennis McGill:]

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

[Chris Connor:]

I'm not sure I understand exactly what you're getting at--

[Dennis McGill:]

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

[Chris Connor:]

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

[Dennis McGill:]

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

[Chris Connor:]

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

[Dennis McGill:]

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

[Chris Connor:]

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

[John Morikis:]

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

[Dennis McGill:]

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

[Chris Connor:]

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

[Dennis McGill:]

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

[Sean Hennessy:]

Yes.

[Operator:]

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

[P.J. Juvekar:]

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

[Chris Connor:]

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

[P.J. Juvekar:]

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

[Chris Connor:]

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

[P.J. Juvekar:]

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

[Chris Connor:]

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

[Sean Hennessy:]

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

[Operator:]

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

[Jeff Zekauskas:]

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

[Sean Hennessy:]

You're close. You're off by, you know, a few basis points. But it's clear that we have a soft quarter in the consumer group when you back out Lowe's. For all the same reasons we've been talking about. Weather has had an impact across that customer segment. I think we've heard softer reports on various important weekend sales activities. But in terms of the consumers' profile of their customer base, their share shelf, energy behind their program, nothing has changed in that regard, Jeff. I was just going to say, Jeff, you know, you also have to look at the history. If you look at our consumer group last year in the second quarter, it was up 10%. It was up 8% for the first six months. We finished the year at around 5.9. So when you take a look at the comps, this is going to be a very hard comp quarter for the consumer group, with or without Lowe's.

[Jeff Zekauskas:]

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

[Bob Wells:]

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

[Operator:]

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

[John Roberts:]

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

[Chris Connor:]

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

[John Roberts:]

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

[Chris Connor:]

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

[John Roberts:]

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

[Chris Connor:]

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

[John Roberts:]

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

[Chris Connor:]

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

[Operator:]

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

[Nils Wallin:]

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

[Chris Connor:]

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

[Nils Wallin:]

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

[Chris Connor:]

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

[Sean Hennessy:]

As we've talked about this opportunity to put 5000 stores into the United States, Canada and the Caribbean, as we've commented, we're slightly above 4000, accelerating into the store openings for the remainder of the decade. So this is a solid plan, being well executed and confident that it will continue to drive share gains for us.

[Nils Wallin:]

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

[Chris Connor:]

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

[John Morikis:]

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

[Operator:]

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

[Dmitry Silversteyn:]

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

[Chris Connor:]

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

[Dmitry Silversteyn:]

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

[Chris Connor:]

Yes.

[Dmitry Silversteyn:]

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

[Chris Connor:]

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

[Dmitry Silversteyn:]

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

[Chris Connor:]

It's dilutive mix but it would have skewed to interior versus exterior to the reasons we've articulated.

[Dmitry Silversteyn:]

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

[Chris Connor:]

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

[Dmitry Silversteyn:]

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

[Operator:]

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

[Eric Bosshard:]

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

[Sean Hennessy:]

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

[Eric Bosshard:]

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

[Chris Connor:]

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

[Eric Bosshard:]

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

[Chris Connor:]

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

[John Morikis:]

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

[Eric Bosshard:]

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

[Chris Connor:]

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

[Operator:]

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

[Christopher Perrella:]

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

[Chris Connor:]

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

[Christopher Perrella:]

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

[Sean Hennessy:]

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

[Christopher Perrella:]

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

[Chris Connor:]

Well, it always picks up in the fourth quarter and first quarter. So I mean, we'll be comparing to those kinds of performance. I don't think it will have any impact on the raw material or the currency. They will be driven by much broad economic issues than whether the paint industry's having a ramping up in demand.

[Operator:]

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

[Eugene Fedotoff:]

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

[Sean Hennessy:]

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

[Eugene Fedotoff:]

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

[Sean Hennessy:]

Yes.

[Chris Connor:]

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

[Eugene Fedotoff:]

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

[Sean Hennessy:]

We have them slightly higher in an in the second quarter.

[Operator:]

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

[Rosemarie Morbelli:]

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

[Chris Connor:]

That could happen.

[Rosemarie Morbelli:]

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

[Chris Connor:]

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

[Rosemarie Morbelli:]

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

[Chris Connor:]

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

[Rosemarie Morbelli:]

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

[Bob Wells:]

We do believe that in fact the weather patterns we've seen in the first half of the year is probably going to draw the housing recovery, you know, the path back to normal out even a little more than we anticipated. So certainly three more years to this recovery to reach a peak is certainly foreseeable. On the repaint side, not just the homes that are being put in place, the existing homes that are trading hands, but also the overall appreciation in home values that we've seen in the markets should drive remodeling and repaint activity in the out years. So we think that this is, that the story is still intact. It's just a little bit postponed as a result of the weather.

[Operator:]

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

[Greg Melich:]

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

[Chris Connor:]

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

[Greg Melich:]

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

[Chris Connor:]

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

[Greg Melich:]

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

[Sean Hennessy:]

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

[Greg Melich:]

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

[Sean Hennessy:]

Yes.

[Greg Melich:]

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

[Sean Hennessy:]

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

[Operator:]

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

[David Wang:]

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

[Chris Connor:]

Well, I would tell you this. It's not by design and it's a discussion that we have with our teams on a regular basis. We typically towards the end of the year, as our developers are pushing to get their projects done, have a run at the end of the year and then we're reloading going in throughout the year. And we're trying to spread those out a little more evenly throughout the year, but it's not by design. We're pushing these through and getting them in as quickly as we can and we've got a lot of confidence in the models. We're continuing to invest in those stores.

[David Wang:]

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

[Chris Connor:]

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

[David Wang:]

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

[Chris Connor:]

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

[David Wang:]

Any idea how high you guys see it peaking?

[Chris Connor:]

You know, the last cycle peaked at 2.3 million. We hope this cycle doesn't get to that level.

[Operator:]

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

[Bob Wells:]

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

[Operator:]

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