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Edited Transcript of SHW earnings conference call or presentation 20-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Sherwin-Williams Co Earnings Call

CLEVELAND Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Sherwin-Williams Co earnings conference call or presentation Thursday, April 20, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allen J. Mistysyn

The Sherwin-Williams Company - CFO and SVP of Finance

* John G. Morikis

The Sherwin-Williams Company - Chairman, CEO and President

* Robert J. Wells

The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs

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Conference Call Participants

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* Arun S. Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Christopher S. Parkinson

Crédit Suisse AG, Research Division - Director of Equity Research

* Dmitry Silversteyn

Longbow Research LLC - Senior Research Analyst

* Donald Carson

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Ghansham Panjabi

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Gregory Scott Melich

Evercore ISI, Research Division - Senior MD, Head of Consumer Research Team and Senior Equity Research Analyst

* Jeffrey J. Zekauskas

JP Morgan Chase & Co, Research Division - Senior Analyst

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* Kevin William McCarthy

Vertical Research Partners, LLC - Partner

* Matthew James Gingrich

Morgan Stanley, Research Division - Research Associate

* Michael J. Sison

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Michael James Leithead

Barclays PLC, Research Division - Research Analyst

* Michael Joseph Harrison

Seaport Global Securities LLC, Research Division - MD and Senior Chemicals Analyst

* Robert Andrew Koort

Goldman Sachs Group Inc., Research Division - MD

* Rosemarie Jeanne Morbelli

G. Research, LLC - Research Analyst

* Scott Andrew Mushkin

Wolfe Research, LLC - MD, and Senior Retail and Staples Analyst

* Scott L. Rednor

Zelman & Associates LLC - VP of Research

* Stephen F. East

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Steve Byrne

BofA Merrill Lynch, Research Division - Director of Equity Research

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Presentation

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Operator [1]

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Good morning. Thank you for joining the Sherwin-Williams Company's review of first quarter results for 2017. With us on today's call are John Morikis, Chairman and CEO; Al Mistysyn, CFO; Jane Cronin, Senior Vice President, Corporate Controller; and Bob Wells, Senior Vice President, Corporate Communications.

This conference call is being webcast simultaneously in listen-only mode by Issuer Direct via the Internet at sherwin.com. An archived replay of this webcast will be available at sherwin.com beginning approximately 2 hours after this conference call concludes and will be available until Wednesday, May 10, at 5 p.m. Eastern Time.

This conference call will include certain forward-looking statements as defined under U.S. federal securities laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which the statement is made, and the company undertakes no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the company's earnings release transmitted earlier this morning.

(Operator Instructions) I will now turn the call over to Bob Wells.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [2]

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Thanks, Jesse. Good morning, everyone, and thanks for joining us. In the interest of time, we have provided some balance sheet items and other selected financial information on our website, www.sherwin.com, under Investor Relations April 20 press release. You will also notice, as we go through our results, for comparison purposes, our first quarter 2016 results have been restated to reflect the adoption of ASU 2016-09.

I'll begin by highlighting overall company performance for first quarter 2017 compared to first quarter 2016 then comment on each reportable segment.

Consolidated net sales increased $187.4 million or 7.3% to a record $2.76 billion, driven primarily by higher paint sales volume in our Paint Stores Group. The change in revenue reclassification adopted last year increased consolidated sales 2.2% in the quarter. Currency translation rate changes did not have a significant impact on sales in the quarter.

Consolidated gross profit dollars increased $81.4 million or 6.5% to $1.34 billion. Our consolidated gross margin decreased 40 basis points in the quarter to 48.6% of sales from 49% last year.

Selling, general and administrative expenses increased $13.8 million or 1.4% to $1.02 billion in the first quarter but decreased as a percent of sales to 36.8% from 38.9% in the same period last year.

Interest expense in the quarter was roughly flat to last year at $25.7 million.

Consolidated profit before taxes in the quarter increased $90.2 million or 41.7% to $306.6 million due primarily to improved operating results from our Paint Stores Group and Global Finishes Group.

Our effective tax rate decreased to 22% from 23.8% in the first quarter of 2016. For the full year 2017, we expect our effective tax rate will be in the mid- to high 20s.

Consolidated net income increased $74.3 million or 45% to $239.2 million. Net income as a percent of sales increased to 8.7% compared to 6.4% in the first quarter last year. Currency translation rate changes did not have a significant impact on net income in the quarter.

Diluted net income per common share for the quarter increased 44.6% to $2.53 per share from $1.75 per share in 2016. The $2.53 includes $0.08 dilution from the acquisition-related expenses and $0.34 accretion from the reduction in income tax provision.

Looking at our results by operating segment. Sales for our Paint Stores Group in the first quarter 2017 increased 12.1% to $1.81 billion from $1.62 billion last year. Paint Stores Group sales increase was due primarily to higher organic paint and equipment sales volumes across all end markets and the impact of a change in revenue classification.

Comparable store sales, that it sales by stores open more than 12 calendar amounts, increased 7.5%. The change in revenue classification is not reflected in comparable store sales. Implementation of the December price increase has also been successful thus far.

Regionally, in the first quarter, our Southeastern division led all divisions, followed by the Canadian division, Southwestern division, Midwest and Eastern division. Sales and volumes were positive in every division. Segment profit for the group increased $50.5 million or 20% to $304 million. Segment operating margin increased to 16.8% of sales from 15.7% in the first quarter last year.

Turning to our Consumer Group. First quarter sales decreased $40.6 million or 10.7% to $337.5 million due primarily to lower volume sales to most of the group's retail and commercial customers. Segment profit for the Consumer Group decreased $3.4 million or 5.3% to $60.6 million in the quarter from $64 million in the first quarter last year. Segment profit as a percent of external sales increased to 18% from 16.9% in the same period last year. Most of the improvement in the first quarter segment profit margin was from improved operating efficiencies and good SG&A expense control.

For our Global Finishes Group, sales in U.S. dollars increased $16.2 million or 3.6% to $470.3 million in the quarter. Currency translation rate changes did not have a significant impact on sales in the quarter. First quarter segment profit stated in U.S. dollars increased $3.9 million or 8% to $52.4 million due primarily to higher paint sales volume and selling price increases that were partially offset by higher raw material costs. As a percent of sales, segment profit increased to 11.1% from 10.7% in the same period last year.

For our Latin America Coatings Group. First quarter net sales stated in U.S. dollars increased $16.2 million or 12.9% to $141.4 million primarily due to selling price increases and favorable currency translation. Currency translation increased sales in U.S. dollars by 5.7% in the quarter.

Segment profit in U.S. dollars increased to $1.2 million in the quarter from a loss of $900,000 last year. Segment profit was aided by selling price increases, which were partially offset by higher raw material costs. Currency translation had a minimal effect on our Latin America Coatings Group segment profit in the quarter. As a percent of net sales, segment operating profit increased to 80 basis points in the quarter compared to a loss of 70 basis points in the first quarter 2016.

That concludes our review of our operating results for the quarter. So let me turn the call over to John Morikis who will make some general comments and highlight our expectations for second quarter and full year. John?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [3]

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

First quarter 2017 was a good quarter for Sherwin-Williams from both a revenue and profit perspective. But there was one obvious exception and, as is our nature, I'm going to address it first. Our Consumer segment had a bad quarter. There are 2 reasons I feel it's important to address this up front: one, because I don't want you to think that our strong consolidated results diminishes the urgency we feel to address the challenges this group faced in the quarter; and two, because you need to know that nobody is more disappointed in how this quarter unfolded than the women and men responsible for driving this business. Consumer sales in the quarter were weak in most product categories across most market segments in most geographic regions all 3 months of the quarter. This was not the result of soft sales to 1 customer or of 1 product line. We were comping against the first quarter 2016 load-in of the INFINITY product line at Lowe's, and I wish the explanation for the weakness this year was that simple. I believe Consumer Group saw the flip side of the obvious strength in the professional paint market, reflected in soft DIY demand in the first quarter, but they will remain focused on expanding our retail presence and driving sell-through.

You also need to know that I have the utmost confidence in this group. I know they will rise to the challenge. You should expect better results from our Consumer segment over the balance of the year.

The positive momentum we saw in our Paint Stores Group in the fourth quarter last year accelerated in the first quarter. Sales to residential repaint contractors continued its double-digit growth trajectory, followed closely by sales to new residential painters, property management contractors and commercial contractors. Equally encouraging, our pro customers continue to report large project backlogs. Protective & Marine coatings sales and volume turned positive in the quarter but lagged the pace of growth in architectural paint.

During the quarter, Paint Stores Group added 10 net new stores. While this pace is slower than first quarter 2016, the difference is entirely attributable to timing issues. Our plan still calls for full year store openings in the range of 90 to 100 net new locations compared to 94 opened in 2016. Today, our total store count in the U.S., Canada and the Caribbean stands at 4,190 compared to 4,099 a year ago.

Latin America Coatings Group delivered high single-digit revenue growth in local currencies in the quarter, although gallon volumes were still recovering in most countries in the region. As market demand slowly recovers, our management teams will continue to make progress on managing operating expenses and mitigating raw material cost inflation.

Global Finishes Group delivered solid top line growth in the first quarter with revenues up across all businesses and volumes up in most. Once again, the group did a commendable job of managing both gross margin and SG&A, resulting in a cycle-high 11.1% first quarter operating margin, 30 basis points better than first quarter last year. We continue to see positive demand momentum in many of our industrial coatings businesses in North America, Latin America and Europe, and this team is well positioned to flow through revenue growth to profit improvement.

To get a more accurate picture of our profit performance in the quarter, you need to back out the effect of the 2 accounting changes we adopted last year plus the acquisition-related expenses. Excluding these items, consolidated gross margin increased 60 basis points to 49.6% of sales. SG&A improved to 37.2% of sales compared to 37.7% last year. And PPG margin was 11.8% this year compared to 9.8% last year.

Our reported tax rate in the first quarter this year was 22%. If you back out the tax benefit from the adoption of ASU 2016-09, our effective tax rate would have been approximately 33%, net income would have been $214.1 million, an increase of approximately 25%, and earnings per share would have been $2.27 per share, up 25.4%.

Net working capital increased slightly year-over-year as a percent of sales to 11.5% compared to 11.2% first quarter last year as accounts receivable and inventory both increased to support the strong sales momentum early in the year. In dollar terms, the increase in working capital was $97 million in the quarter compared to an increase of about $80 million in the first quarter last year.

Despite the higher March 31 year-over-year working capital, we generated $231.8 million in net operating cash, an improvement of more than $290 million compared to the first quarter 2016, due primarily to the increase in net income and reduction of cash used during the quarter to service accounts payable compared to first quarter 2016.

Our capital expenditures in the quarter totaled $41.5 million, depreciation was $44.6 million, and amortization was $6.2 million. In 2017, we anticipate capital expenditures of approximately $230 million, depreciation of $175 million to $185 million and amortization of about $30 million.

Capital spending will continue to run higher than normal in 2017 as we complete investments in IT infrastructure, capacity and new stores.

Our cash balance on March 31 was just over $1 billion compared to $890 million at the end of 2016. We will continue to build cash on our balance sheet over the coming months to reduce total borrowings required to finance the completion of the Valspar acquisition. Therefore, we made no open-market purchases of our common stock for treasury during the quarter and will suspend share repurchase activity throughout 2017.

On March 31, we had remaining authorization to acquire 11.65 million shares. Yesterday, our Board of Directors approved a quarterly dividend of $0.85 per share compared to $0.84 per share last year.

North American architectural paint demand should remain strong throughout the year, driven by a steady increasing level of residential remodeling activity and, to a lesser degree, new residential construction.

As we move into the prime painting season, we're also encouraged by growing signs of more robust nonresidential activity and improving demand for many of our industrial products. While growth in the U.S. do-it-yourself market will likely continue to lag the professional painter market, we expect positive sales growth in our Consumer segment in the quarters ahead.

On our year-end 2016 earnings call, I said our expectations for average year-over-year raw materials inflation was in the low single digits. Given the recent uptick in crude oil, relatively high propylene pricing in the first quarter, tight market conditions in certain key monomers used in the production of latex and low TiO2 inventories, we now expect raw materials inflation to be in the mid-single-digit range. The price increases we have announced to the market thus far in the year appear to be gaining traction, and we have not made any additional announcements. We will, however, continue to monitor changes in the raw material environment and will respond appropriately to changes as we go through the year.

Our outlook for second quarter 2017 is for consolidated net sales to increase mid- to high single-digits percent compared to last year's second quarter, driven in part by the revenue reclassification. With sales at that level, we expect diluted net income per common share for the second quarter to be in the range of $4.15 to $4.35 per share compared to last year's record $3.99 per share.

Our guidance range for second quarter includes acquisition-related expense totaling $0.25 per share. As a reminder, second quarter 2016 earnings included $0.16 per share in acquisition-related expenses.

For the full year 2017, we expect consolidated net sales to increase over 2016 by a mid-single-digit percentage. With annual sales at that level, we are updating our full year guidance to be in the range of $13.65 to $13.85 per share compared to $11.99 per share in 2016.

Our updated full year 2017 earnings guidance includes a $0.40 per share charge for acquisition-related expenses, which is $0.40 less than the charge included in our initial full year guidance, and an increase in the income tax provision benefit of $0.25 per share, more than forecasted in our original 2017 EPS guidance. These 2 items account for all of the change in our full year 2017 EPS guidance.

As a reminder, full year 2016 earnings per share included $0.86 per share related to the Valspar acquisition and $0.40 accretion from the adoption of ASU 2016-09.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is coming from the line of Chris Parkinson with Crédit Suisse.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [2]

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Can you just talk a little bit more about the implementation of your PSG price increases and just the rough breakdown of how you think it's going between both short- and long-term contractors? I'm assuming most short-term contractors have immediately accepted it. And then also, is your expectation for the resin solvent and latex baskets still to moderate in the second half? And if not, it sounds like another price increase would be under consideration. Am I -- are we thinking about that correctly?

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [3]

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Chris, this is Allen Mistysyn. I'm going to take the first part of your question related to the price increase in our Paint Stores Group. As a reminder, the last price increase we went out with was the first quarter of 2014. We announced the price increase in December 1, 2016, about 3% to 5%. And while none of our customers like seeing their prices go up, they understood the cost environment we are operating in, and they're accepting that price increase. And I would say the rate of realization or effectiveness of that increase is slightly ahead of where we expected it to be.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [4]

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And Chris, this is Bob. Let me handle the question on raw materials. We often talk about the many moving parts of the raw material basket. And as John indicated, we've seen a fair amount of movement in a number of areas since our year-end call. While our outlook for TiO2, in fact, hasn't changed much, we still expect mid- to upper single-digit inflation for the year in TiO2. We are seeing more pressure in some of the petrochemical-based materials. It's -- this is a result of a number of factors, most importantly, higher propylene costs in the first quarter, higher than we expected, in fact, and tight market conditions, which we think are transitory, tight market conditions in certain monomers, in particular, MMA and VAM. And while the effect of these petrochemical factors may be somewhat transitory and aren't likely to result in a runaway raw material basket, they have pushed our expectations up from low single digit to mid-single digit. And in the first quarter, we think we were probably at the top end of that low single-digit range, maybe in the 3% to 3.5% range. We do expect to see some incremental inflation in the second quarter. And we think that the year-over-year inflation is likely to peak in the second quarter. Then we start rolling through the price increases taken in TiO2 last year, which the year-over-year inflation should ease somewhat in the second half.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [5]

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That's great color. And just a quick follow-up. Could you just give a little more color on your expectation for the Consumer Group on a go-forward basis, including any incremental growth spend you see, key trends you're seeing in the big boxes and/or any benefits potentially from a full year of INFINITY we should be considering?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [6]

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Yes. So we don't talk about any specific customers, so I'm not going to address the INFINITY directly. I will say that, as I mentioned earlier, that the overall performance for the quarter fell short of our expectations. And while we found ourselves in a situation where we felt there was weakness across the board, and it was a very challenging market. We just -- we don't accept that. And so to answer your question, our expectations moving forward are to be the best partner possible to our customers. And that means helping them get product off the shelf. It's not our desire to fill their shelves; it's to help them get product off the shelves. I don't want to get into a lot of specifics on our strategy to be able to do that. I will say that our teams -- we have great confidence in our teams. We've got, I think, a terrific strategy. We are looking forward to the combined business once we close on Valspar. We think the added assets together, the people, the brands, everything will make us better, and we're focused on every one of our customers and helping them to be more successful.

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Operator [7]

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The next question is coming from the line of Arun Viswanathan.

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Arun S. Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [8]

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First, I guess, I just wanted to ask if you could elaborate on some of the comments you made on volume. You said that you are starting to see some improvements in some of your markets. Maybe you can break that out on resi repaint and new construction and nonres and so on.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [9]

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Yes. I would say that we're very pleased in the store's segments performance. While we don't give specific numbers, I will tell you that residential repaint once again had a double-digit gain. This will be the 12th of 14 quarters that we've had double-digit gains, and we feel as though there is terrific momentum. I've got such great respect for that team, and what they're executing on right now has just been terrific. I would like to take you back to the second and third quarter of last year, when we started talking about the challenges that some of our customers were talking about at that time, which was their view of the world included a great confidence in the projects that they were working on and the bidding that they were doing. And if there was any concern in their comments, it was typically that they had more work than labor. And so while our residential repaint business has been growing for 12 of 14 quarters, I have more confidence right now probably than ever because our team has really responded. We're not exactly sure what the second and third quarter has in store for us as it relates to labor and any constraints that they -- that our customers might experience. But we're not waiting, and our teams have been working very aggressively in filling the pipeline with new accounts to try to offset any slowdown that our customers might have in growing their business. It's a matter of are they at capacity or not. So residential repaint, we're very excited about, and the momentum. The others, commercial, new residential, I mean, we -- it's really a very strong quarter, [ our ] stores organization. In fact, even Protective & Marine, we had a couple of years of softness in Protective & Marine through our stores. We had a positive quarter in sales of Protective & Marine, and that's some of the bottoming out of the oil and gas, but we've been talking about pivoting into different segments and trying to accelerate in those segments. We'd like it to be faster without exception, but we're starting to see some momentum there.

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Arun S. Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [10]

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Great. And just as a quick follow-up, given the strong volume, I would have expected a slightly higher margin, but I understand that the raws were definitely a pressure. So maybe you can just discuss how you're thinking about gross margin relative to your typical ranges and how that should progress through the year.

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [11]

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The gross margin, I think, in our first quarter, we were pretty happy with that result. On the core, we saw a 60 basis point improvement. As the year unfolds, as Bob mentioned, the second quarter, we expect year-over-year raw material inflation to be -- to peak. We're confident that we can recoup the inflation in the market. It just doesn't happen real time. And as we see the rest of the year unfold on the effectiveness of our price increase, on where raw materials trend out, at the end of the second quarter, we'll have a better line of sight to our gross margins and update accordingly.

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Operator [12]

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The next question is coming from the line of Jeff Zekauskas with JPMorgan.

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Jeffrey J. Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

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In the paint stores business, did your price increases offset your raw material inflation?

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [14]

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Yes. I believe that in the first quarter, our effectiveness was better than we thought and more than offset the raw material increase.

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Jeffrey J. Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [15]

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And are your raw material increases in the United States greater on a percentage basis than your raw material increases in the offshore markets?

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [16]

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Latin America would be higher. But across the rest of the globe, I'd say the U.S. because of the impact of titanium dioxide that has on our U.S. business, it's probably a little higher in the U.S.

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Jeffrey J. Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [17]

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Okay. And could you provide the gross profit changes in your divisions?

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [18]

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Yes. So Paint Stores Group increased $82.5 million; Latin America Coatings Group increased $4.9 million; Global Finishes Group increased $6.6 million; and Consumer decreased $10.2 million.

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Operator [19]

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Our next question is coming from the line of Ghansham Panjabi with Robert W. Baird.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [20]

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John, just going back to the Protective & Marine sales turning positive. Is that just a function of easier comparisons after several tough quarters? Or do you actually sense some more activity and optimism at the end market level? How should we think about that?

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [21]

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Well, yes, it's certainly some easier numbers. But I would definitely say that it has an equal, if not more, result of the efforts that out teams are putting forth. I think that we're seeing some benefit in the market. We're seeing some easier comparison, and we're certainly witnessing some benefit of the pivoting into some of the other segments that I spoke of.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [22]

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So that being said and going back to the first quarter and upside on earnings relative to your initial guidance, what actually drove the bulk of that upside? Was it just P&M sort a little bit better than you thought, pricing realization being a little bit better or was it just the volumes in Paint Stores Group?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [23]

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Volumes in Paint Stores Group were very strong. And as I mentioned, I could go on, on every segment just as much -- with as much passion as I started with res repaint. But I -- each one of our segments have really shown terrific growth, and we're feeling really good about it. And Protective & Marine wasn't the headwind that it had been in the past.

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Operator [24]

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Our next question is coming from the line of Steve Byrne with Bank of America.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [25]

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How would you rank these potential drivers of the strength that you saw in volume in your Paint Stores Group, potentially better than expected, whether the backlog that your contract customers have a shift towards more of the pro contractor versus DIY versus just kind of a backlog in resi repaint demand?

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [26]

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Yes, Steve. This is Bob. I think if I were to rank those items, the number one would be, as we've discussed on a number of quarters, our customers -- our professional customers are labor-constrained in the high-season quarters, second and third, much less so in the first and fourth. So we saw a rebound of comps in the fourth quarter. That rebound actually accelerated in the first quarter. It tends to be their smallest-volume quarter. So I think the fact that we're seeing a flattening out of volume in the industry from the traditional bell-shaped curve to more volume in the out-quarters. That's -- that would be number one. I think number two is the shift from DIY to contractor. I think we are -- with rising home values, rising equity markets, increasing consumer confidence, a stronger employment backdrop, all those things that the homeowners are really getting confident in hiring contractors as opposed to doing projects themselves. One of the things that is driving incremental volume for us is by our own doing. And it's not a market for us. It's more our focus on new account activation on growing share of wallet amongst our small-share customers is certainly driving volume growth in that segment and leading to what we believe to be a probably 2x plus rate of growth -- volume growth in Paint Stores -- 2x plus the market rate of growth. We don't think weather had an impact on the first quarter.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [27]

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And then on the retail and commercial customer side of the business, would you say your volumes lagged overall volume growth in those channels? And if so, why?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [28]

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Are you talking about in our stores organization, Steve?

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [29]

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No, through the retail and independents.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [30]

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Oh, in the Consumer. Yes, the Consumer did lag. And that's the comments that I made earlier as far as the -- we found some challenging markets and customers. There's not one that I would point to, to say that there was one customer or one geography. As I mentioned earlier, there was -- there were some challenges that we faced throughout nearly every market with many customers facing some tougher sales. And our focus remains on helping them to be more successful.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [31]

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I guess my point on that one, John, were you in line with the overall market or not?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [32]

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It's hard to say. I don't -- I will say that we didn't experience any shelf loss. We've not found ourselves in situations where we feel as though we've lost shelf to our competitors. We're just really trying to focus on helping our customers sell more product off the shelf.

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Operator [33]

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The next question is coming from the line of Vincent Andrews with Morgan Stanley.

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Matthew James Gingrich, Morgan Stanley, Research Division - Research Associate [34]

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This is Matt Gingrich, on for Vincent. I was just wondering if you had a sense of how the do-it-yourself sales in the Paint Stores Group trended in the quarter.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [35]

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A little softer than our pro business, positive.

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Matthew James Gingrich, Morgan Stanley, Research Division - Research Associate [36]

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Okay. And then in terms of the monthly cadence of the Paint Stores Group performance?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [37]

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In do-it-yourself as well or...?

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Matthew James Gingrich, Morgan Stanley, Research Division - Research Associate [38]

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No, just broadly.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [39]

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I don't think there was a significant difference throughout the quarter.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [40]

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If you adjust for days.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [41]

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If you adjust for days, right.

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Operator [42]

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Our next question is coming from the line of Robert Koort with Goldman Sachs.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [43]

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John, can you help us scale the non-architectural book of business through PSG and maybe the big components of that, so we can sort of think about those markets bottoming and what they might contribute as you come out of that down-cycle, if you will?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [44]

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I'd say the non-paint categories remain strong. And I'd say the growth rates are in line with paint demand. We're seeing good momentum in those categories.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [45]

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I guess, I meant the industrial coatings that you sell through your paint stores.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [46]

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Oh, P&M, you're talking Protective & Marine?

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [47]

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Yes. Or whatever else you would consider non-architectural paint.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [48]

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I'm sorry. I thought you meant non-paint. Sorry. No, I think that -- as I mentioned, Protective & Marine sales were up but not in the same range of our architectural category. So it's certainly in our expectation that they wouldn't go from a direct headwind to a strong tailwind. And so we feel as though, as I mentioned, it's bottoming out in the industrial businesses inside our stores and, through a lot of effort and some of the market improving, we feel as though it's going to help us. It won't turn into a terrific tailwind for us immediately, though.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [49]

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And Bob, the Protective & Marine is really the only material non-architectural business in Paint Stores Group. The rest of that would fall into Global Finishes.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [50]

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And then you mentioned, just timing on the store count, but obviously, if you're going to get up to 90 or 100, you've got to start adding quickly in the prime paint season in front of you. So should we expect 30 or 40 units added in the second quarter?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [51]

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Yes. It's funny, we have this discussion every quarter, and we'd like to see those numbers a little smoother. But as you would expect, with just different construction regulations and ordinances, it's just a little bit of a challenge to smooth those out, Bob. I -- yes, we're going to load up. We're confident in the year. No one should read anything into the number a little softer in the quarter than what we'd have liked. But it was truly just a matter of, in some cases, getting permits, occupancy permits. We're on the same plane we should be.

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Operator [52]

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Our next question is coming from the line of Don Carson with Susquehanna Financial.

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Donald Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [53]

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John, I want to go back to the Consumer Group. With -- are you seeing any destocking or inventory reduction at the big boxes given that they're seeing lower overall levels of demand? And have you been able to get any price increases this year in -- from your Consumer Group customers?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [54]

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On the inventory piece, that's always something that we're trying to work with, with our customers. We want to -- as part of being the best supplier, we want to be the ones that can offer them the best service, so that they don't have working capital tied up in that. And so there's always those discussions, and I wouldn't say that, to any greater extent than we would expect or, quite frankly, that we would want, we want to help our customers in those turns. And regards to pricing, we don't comment on the pricing on that side of the business. We've spoken to our stores, and we've spoken to the raw material basket. But we -- because of the competitive nature of those customers, we don't speak to any specific customers outside of our stores.

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Donald Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [55]

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Okay. And then a follow-up on the overall market. You talked about how not only is architectural demand strong but you're seeing strong nonresidential and industrial demand. I think last year, you said the market grew at 2.5%. Would you -- it sounds like you're expecting higher growth in the overall market this year. Is that an accurate reflection?

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [56]

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Hey, Don, you are talking about the U.S. architectural market or the overall paint and coatings market?

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Donald Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [57]

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U.S. architectural market, because it sounds like you're seeing some positive things on the commercial side of that as well.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [58]

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Yes. And we've learned over the last couple of years that the tale of the tape for market growth is going to be determined in the second and third quarter. It really depends on the labor supply in the professional painter market. We know that labor supply is growing. Is it growing at the rate of demand growth? Doubtful. So to what extent, market-wide, labor is a constraint to volume growth this year, time will tell. We think the -- that the demand in the market is sufficient to drive industry growth well ahead of low single digits, well into the mid-single digits.

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Operator [59]

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The next question is coming from the line of Duffy Fischer with Barclays.

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Michael James Leithead, Barclays PLC, Research Division - Research Analyst [60]

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It's actually Mike Leithead, on for Duffy this morning. Just wanted to come back to the commentary you made on strong paint stores volumes in the quarter. Is it fair to say you're seeing somewhat of a shift, I guess, in your customer behavior to kind of compensate for that tight labor market in 2Q, 3Q, so maybe the seasonal falloff of paint store during 1Q and 4Q should maybe a little bit less so as contractors try to get projects done that are either pushed out or pulled earlier?

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [61]

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I think you're right, Mike. I think you'll see some flattening of the bell curve. Certainly not on all exterior projects, but where possible, there are certainly going to be some products -- or projects that get pushed out into the fourth quarter that may have been completed in the third.

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Michael James Leithead, Barclays PLC, Research Division - Research Analyst [62]

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Got it. And then a bit of a technical one here for my follow-up, so I apologize in advance. On the income tax provision accounting change, you realized $0.34 benefit this quarter, and now the new full year guide assumes $0.45 benefit for the full year. Where should we think about that remaining $0.11 being? I'm assuming there's none in 2Q because you guys didn't call it out in your guide. Is that correct?

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [63]

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Well, Mike, what we've done in our typical practice in the past is, as we've analyzed these types of changes, we start including them in our core, and that's why we didn't call it out in our second quarter. I think what you see is, if you look at how the adjustments rolled out in the quarters last year, they may be a little bit muted from a timing standpoint, but they're smaller and probably typical of what you'll see going forward. I would say our first quarter was higher than what we were certainly expecting, higher than last year. And it was just the pure function of the amount of options that were exercised and the run-up in our stock price after the first -- our year-end call.

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Operator [64]

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Our next question is coming from the line of Kevin McCarthy with Vertical Research Partners.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [65]

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You indicated that your SG&A ratio to sales was down about 210 basis points year-over-year. I was wondering if you could address what you're doing broadly to control costs and achieve that, and specifically, the extent to which you can address costs in anticipation of the Valspar deal, and whether or not that is part of the tailwind there, so to speak?

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [66]

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Sure, Kevin. If you go back and look at the sales out of our -- coming out of our third quarter last year, rightfully so, the teams took action on SG&A with the reduced sales with an eye towards the risk of that and the delevering we saw. And we're seeing the benefit of -- benefits of those actions in our first quarter. And the expectation is that we'll manage our SG&A tight until we get through the second quarter. We see the initiatives that John had talked about, about the new account activation and how those are progressing. And with an eye towards making sure that if the labor constraints occur again in our third quarter like they had the past 2 years, we'll be positioned well to overcome those. As far as an eye to Valspar, that is absolutely a consideration. But I think we have a responsibility to manage our core and the operating margins related to our core. And we'll manage the Valspar integration as soon as it closes, and we're well prepared for that.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [67]

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And Kevin, a quick point of clarification. The SG&A as a percent of sales improvement was magnified by the change in revenue classification or the revenue reclassification. Apples-to-apples comparison, it was actually down 50 basis points.

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [68]

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50 basis points, right.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [69]

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And then second question I have was on pricing. You mentioned that your pace of realization exceeded your prior expectation. I guess, 2 facets. Number one, was all of the December 1 increase implemented by March 31? Or is there a residual to come? And then second, given your expectation of higher raws, again, relative to last quarter, are there increases recently announced or on the table outside of architectural in the balance of your portfolio?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [70]

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So on the first piece, no, I wouldn't say that it's been fully executed. We're working with customers across all businesses on stepping those price increases in. On the second question.

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [71]

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Yes, so on the second question, we have gone out in -- with price in our other businesses. We don't typically talk about those on magnitude and that. But we have -- we're certainly seeing pressure from a raw materials standpoint.

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Operator [72]

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Our next question is coming from the line of Scott Mushkin with Wolfe Research.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD, and Senior Retail and Staples Analyst [73]

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I actually had 2. I wanted to dig into a little bit more on the Consumer Group issues where you said it was a bad quarter, obviously, and you were going to fix it. I guess I'm just trying to understand, I think you also said it was across geographies, across retailers, that it was kind of across the board. I think you've referenced some softness in DYI. But looking at it a little bit deeper, I was wondering if you could give us a little bit more color on what you think exactly led to such broad-based conditions in that segment and how you fix it?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [74]

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Yes. I'm a little hesitant to do that. And only because, from a strategic standpoint, I want to play my cards here just a little close to our vest. I do feel though that it's fair to say that the teams that we have around the world, but particularly here in the U.S. because of the size of this business, are focused on those areas, as I mentioned earlier, on trying to help our customers to be more successful by selling more product rather than getting product in the shelf. Laying out the specifics on how we plan on doing that is something I'd rather show you the results than explain to you be -- as we are working on these, what we're doing.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD, and Senior Retail and Staples Analyst [75]

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And how about what went wrong, I mean, do you think it was specific to you guys or do you think it's just a weakness in the market, I mean were -- maybe some light there on what went wrong?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [76]

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Yes. I mentioned that we've not experienced any shelf loss. I wouldn't say that we're -- we're feeling as though we're on the back-end of any deals that went the other way. And I -- but at the same time, we're far from complacent, assuming everything is okay. We have very high expectations of our team and I do think that they found themselves, as I mentioned, in a challenging market. That said, we have higher expectations for ourselves and our investors should higher expectations of us.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD, and Senior Retail and Staples Analyst [77]

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All right, so switching gears and that goes right to my next question is in the Paint Stores Group as we've seen -- we saw last summer things slowed down, some of that was labor. But also there was this idea, I think it came up in the third quarter, that do-it-yourself is really just not all that robust and of course we were just having that other discussion where that's a DYI market mostly. I mean, how confident are you as we get to the second and third quarters here, particularly at third quarter, which even the Paint Stores Group has more of a DYI component to it that we won't see the same slowdown we've been seeing -- we saw last year.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [78]

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Well, as I mentioned and Bob mentioned as well, we're not waiting to see. Last year, second quarter, when we started to hear from our customers that they were concerned with their ability to grow their business. We started right then, mobilizing our sales organization to effectively increase the number of accounts that we have, an account activation program. So the good news that we see is, is that the fundamentals of the market are very, very strong. It's a matter of how much our customers can apply product, and so many of them, as we expect -- as we've said, found themselves at capacity. Well when you find your customers at capacity and you want to grow your business, you've got to find new customers. And so we've been working very, very hard at both the share of wallet, customers that are currently in our store that offer more opportunity as well as customers that are in other locations buying product. And we've had some success there. So we're not waiting for the second and third quarter to play out. We're taking steps right now to control our future. And we'll see how effective we were compared to what the constraints in the markets are. But we're not just waiting for things -- good things to happen to us.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD, and Senior Retail and Staples Analyst [79]

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I mean that's great news. And then just one technical. How big is DYI in the Paint Stores Group in the third quarter? Is it proportionately a lot bigger? And then I'll yield.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [80]

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Scott, we've described DIY as being between 10% and 15% of the segment. It would be less than that. It would be smaller in the first and fourth quarters.

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Operator [81]

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The next question is coming from the line of Scott Rednor with Zelman and Associates.

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Scott L. Rednor, Zelman & Associates LLC - VP of Research [82]

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John or Bob, whoever wants to take it. But just a question on that. Given that you posted growth at DIY at the stores and that's a pretty big gap relative to what you're calling for market in the consumer. How would you explain that differential?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [83]

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Well, a few things, Scott. First, the DIY number that Bob just quoted as far as our percent of sales, was a total year. It's a -- first quarter is a relatively small quarter for us in DIY. There is a shift -- clearly, there is a shift from do-it-for-me to -- or do-it-yourself to do-it-for-me, but there is still an awful lot of opportunity for us to continue to grow our business. Inside our stores, we talked to the DIY consumer because it's an important component not only in trying to grow our business but the DIY is a relatively small piece. We want that homeowner accepting our product coming in the door with a painting contractor. So in the first quarter, while it was up slightly, I'd say, it's a relatively small percentage of our business, and it is the first quarter.

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Scott L. Rednor, Zelman & Associates LLC - VP of Research [84]

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And then I just wanted to ask about the approach to guidance. I mean, even with that headwind on consumer and you think it's getting better. Stores came in better than you thought in the first quarter and you guys beat by $0.20 on a kind of a core basis. So recognizing you have raws coming up, can you maybe just explain the approach to holding the full year stable even though you're coming out of 1Q better than you thought.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [85]

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Yes, you're right. We're pleased with our results in Q1. And again, pointing to stores and even our Global Finishes Group momentum. We feel good about that. We've got great confidence in our strategy and great confidence in our team. So as I -- I feel like I've repeated a few times here, it's an important part of our culture here in Sherwin, there's no complacency despite the fact that we had a good first quarter. But that said, and if you'll pardon a sports analogy, and I know you're a Yankees fan. But I'll use our beloved Cleveland Indians, which we're very proud of. First inning of the game, they may put a lot of runs on the scoreboard but they don't start packing their bats after the first inning. And so Scott, I'd say we're not packing our bat after the first quarter. We typically earn about, I'd say, between 15% and 20% of our full year EPS in the first quarter. And I'd say probably, what else, 65% to 70% in the middle 2 quarters. And so in other words, we make our year in those middle quarters. So not to overuse it, but after the first quarter, we're not ready to pack up our bats and go home. We've often said here at Sherwin that there is a -- a strong week in July can make up for a weak month in the first quarter. So while we're confident in our outlook and we have plans in place to sustain our momentum throughout the year, we prefer to wait until we get the second quarter under our belt before making any adjustments in either direction to our full year guidance. A lot of confidence but we just think it's prudent to see this through.

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Scott L. Rednor, Zelman & Associates LLC - VP of Research [86]

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I appreciate that, John. Hopefully the hot start for the Yankees will continue, too. But -- and then just lastly, maybe Al, just on the cash flow, obviously it was very strong in 1Q, atypical that you generate any cash. Is there anything we should be aware of as we think about the full year timing or some normalization?

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [87]

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Yes. If you look at our cash benefit in the first quarter, net income obviously grew very nicely. We did get the benefit of the cash flow hedge settlement in our first quarter. That was about $88 million. And then if you remember coming out of our year-end 2015, our working capital as a percent of sales was really low, it was 8.6%. And then when you look at the impact of working capital on cash flow, it's the change first quarter versus year-end. So we saw a much bigger change in our first quarter '16 than we saw in our first quarter '17 due to the timing of payments and so you won't have -- you'll have that roll out. But it'll be much more muted as the year goes on.

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Operator [88]

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The next question is coming from the line of Mike Sison with KeyBanc Capital Markets.

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Michael J. Sison, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [89]

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In terms of your outlook for industrial demand, it sounds like its incrementally gotten better as the quarter unfolded. What are your thoughts there as you head into 2Q and with Valspar close here. Any general thoughts, do you feel even more excited if -- on what Valspar could do given they've got more industrial exposure?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [90]

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Yes. We better, right? We're going to spend a lot of money to get that. So yes, we're very excited about what they bring. They're very complementary in nature. We've gotten to know some of the people inside Valspar, deeper into the organization, and we're just absolutely thrilled with the team, their approach, their attitude. We're anxious to be able to exchange more information, but we know that's right around the corner. You're right, our feeling about how our team on the industrial side of our business has been doing, has us feeling more bullish than we have in the past, and that comes from a number of different areas. One is, they have, there was a question earlier, I think Greg asked, about SG&A and our management of SG&A, and on the Global Finishes Group side, they've been managing that business very well. So they're positioned, quite frankly, to be able to flow a lot of profit through on incremental sales. And the pipeline of customers that they've been working on in line trials and the confidence that they have going forward has definitely improved. So we're feeling pretty good about that team and what they're trying to accomplish and the likelihood that they'll get there.

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Michael J. Sison, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [91]

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Great. And then one quick follow-up. For the Consumer Group, if your team and plans are successful, would you expect sales to turn positive this year at some point in the given quarter? Or is that too early of an expectation?

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [92]

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No. Mike, I think if you look at our sales guidance, again, in our second quarter, mid- to high-single digits. In that guidance, you have to expect that our Consumer Group will perform better than it did certainly in our first quarter.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [93]

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Yes, we've not lowered our expectations of that team, so.

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Operator [94]

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Our next question is coming from the line of John Roberts with UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [95]

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On the Valspar purchase price premium. I assume that you'd like to assign as much as possible to writing up finished inventory to market. Should we expect that you and Valspar are producing and holding as much inventory as you can prior to closing, so you can expense more of the premium in the first year?

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [96]

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No. John, I would -- that is not the case. I think what you probably saw in our results, we carried more inventory in our first quarter and the reason we did that is, with the strong sales of our Paint Stores Group coming out of the fourth quarter and the momentum they carried into our first quarter, we wanted to make sure we continued to service our customers at a high level. So we ended up carrying more inventory on the Sherwin side and that's why you saw the working capital up a little bit year-over-year. But I would not say that's a driver of the inventory.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [97]

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No. And John, and I know from our past discussions that you know this, but I'll repeat it. We couldn't coordinate anything like that with Valspar anyways. I mean, that's on the other side of the wall. So we're not allowed to have those types of discussions.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [98]

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Do you have any update to the amortization expense for 2018 or first 12 months?

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [99]

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I do not. We're still working through that valuation. And again, on that side, it's really Valspar's working on that. And we'll see that as soon as -- the detail related to the valuation as soon as we close. But we're not yet able to see all the detail related to a step up in assets and the like. As soon as we know, John, we will be out and giving you that information.

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Operator [100]

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Our next question is coming from the line of Dmitry Silversteyn with Longbow.

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Dmitry Silversteyn, Longbow Research LLC - Senior Research Analyst [101]

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Well, I guess mine is the first good afternoon question. A couple of questions. First of all, just trying to understand your margin performance by divisions. You've had very strong growth obviously in volumes in the Store Group and that seems to have -- with the offset on price increases in raw materials it drove the margin up year-over-year, which I get. What I'm struggling to understand a little bit is your Consumer Group where your revenues were down, your volumes were down. I don't think you got price increases in there. Your raw materials were up and your margins were still up better than a point year-over-year. So can you talk about sort of what you're doing on the cost side or the mix side to allow you to get that margin lift?

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [102]

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Sure, Dmitry. First off, I think the team has done a nice job at reducing their SG&A in this environment. But the other thing you have to remember is, our global supply chain runs through that segment. And we're seeing nice operating efficiency improvement with the gallons that Paint Stores is producing and flowing through that group.

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Dmitry Silversteyn, Longbow Research LLC - Senior Research Analyst [103]

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Okay, so that's also volume impact from the Paint Stores, okay. Okay, and then second question, you really haven't spent a lot of time talking about your Global division, which is more industrial and more global as the name implies. So can you provide a little bit more of sort of a granular color on perhaps some of the regions or some of the business lines or industries that have done well for you, I mean, the mid-single-digit growth you delivered is a little bit higher than you've averaged the last 2 or 3 years in that division.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [104]

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Yes, you're exactly right, Dmitry. And across the board, in all 3 of those areas, we saw an improved run rate. And I'd say, we're feeling good, as I mentioned just a moment ago, about the pipeline of tests and trial runs that we've had continues to move in the right direction. We've been aggressive in the SG&A side on that business. And at the same time, we've been investing in new products and people that we feel can help drive our business forward. And so I'd say that across the group through the 3 different businesses, we saw sales gains, across all 3, we're feeling good about the momentum that they're gaining as they go forward. And as I mentioned, the number of qualified trial runs that we've been on has improved. So we're feeling better going forward.

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Dmitry Silversteyn, Longbow Research LLC - Senior Research Analyst [105]

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Okay. And then one last question. You mentioned that foreign exchange didn't have much of an impact on revenue growth in the first quarter. But I am imagining it wasn't 0 impact. So what was the foreign exchange contribution or the headwind in the first quarter on the revenues.

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [106]

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Man, it was less than 0.1%.

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Operator [107]

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The next question is coming from the line of Mike Harrison with Seaport Global Securities.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD and Senior Chemicals Analyst [108]

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I'm wondering if you can address your marketing spend in the first quarter. Obviously, we've already talked a little bit about the SG&A declining as a percent of sales. And I'm wondering if there were any changes related to timing or spending on the marketing front.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [109]

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No, there were really no significant changes in the spending or timing, Mike. I'd say there were -- as we looked at SG&A, I think we have looked at those types of efficiencies where we might have had 2 different business units buying different products from different suppliers or partners. I mean, just the basics that you would have expected. But given some of the size of some of our spend, it can be a fair savings. So I mean, we're looking at trying to be as smart as we can with our spend without impacting the face to the customer.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD and Senior Chemicals Analyst [110]

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I was also hoping that you could talk a little bit about the -- as you're moving toward closing on the Valspar acquisition, how do you plan to handle the Valspar brand at Lowe's? Obviously that's one that Lowe's and Valspar spent a lot of money on. And that was a big marketing push, but probably less efficient for both you and Lowe's to support both of those brands going forward. Any thoughts on that?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [111]

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Well, sure. We have a lot of thoughts about the value of that brand. I mean, that's a tremendous asset and one we want to get behind. We help it -- we think it helps us with all our customers and certainly not just Lowe's, but it helps us with current Valspar customers as well as customers that are currently buying Sherwin-Williams-branded products as the technology that we purchase can be moved into other different brands for other different customers. But all of those -- all of those decisions always come back to what I mentioned earlier, which is working with our customers on helping them to develop the best plan to help them grow more -- or grow more product going out of their stores. So you asked specifically about Lowe's that -- but it could be with every customer that we're going to have combined. We'll sit down with each one of them and develop a plan on how to best utilize all the assets that we have.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD and Senior Chemicals Analyst [112]

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All right. And then last one I have is on the Latin America business. You opened 23 new stores in Q4, then you only opened 3 in Q1. Can you provide any sense on where you expect the store count to be at year-end 2017 relative to the 342 that you had at the end of Q1?

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [113]

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I think what you'll see is, we opened 47 new stores last year. I think you'll see a slightly lower number than that and it's based on timing and the markets and similar types of issues we run into in the U.S.

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Operator [114]

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The next question is coming from the line of Rosemarie Morbelli with Gabelli & Company.

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Rosemarie Jeanne Morbelli, G. Research, LLC - Research Analyst [115]

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I was wondering if you could talk about the potential impact from a big infrastructure bill coming up potentially.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [116]

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We love big infrastructure bills. Our Protective & Marine team has a good position in many aspects of the structural steel, the bridge and highway, water -- wastewater, pretty much across the board. So we have, we believe, a terrific product line, an outstanding distribution model, which we can utilize various stores that are properly equipped to take care of our customers. We've got terrific technical people and a wonderful sales organization. So we've got a good position there and we'd love nothing better to see spending in this area.

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Rosemarie Jeanne Morbelli, G. Research, LLC - Research Analyst [117]

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Have you included any potential gains in your current expectations for the year or it will be a bonus on top of whatever you are expecting now?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [118]

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We've not included any specifics to any kind of infrastructure bill.

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Rosemarie Jeanne Morbelli, G. Research, LLC - Research Analyst [119]

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Okay. And then if I may, you have given the June 21 as the date to close the Valspar transaction. Could the timing of that closure change? Can it be sooner than June 21?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [120]

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It certainly can. We -- our expectation would be that, it is like -- most likely to close before the June 21 date. It doesn't -- we've not given that as the date of close. So the agreement that we had signed originally with Valspar provided for -- through a provision, a 3-month extension that happened to land on June 21 that was the 3-month extension. So our hope and expectation, as we move through that process, is that we'll be able to close before then.

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Rosemarie Jeanne Morbelli, G. Research, LLC - Research Analyst [121]

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And do you have total a CapEx number for the combined companies?

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Allen J. Mistysyn, The Sherwin-Williams Company - CFO and SVP of Finance [122]

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Not quite at this point, Rosemarie. I think the -- I mean we're both running around 2 -- a little bit over 2%. And short-term, I would say that's probably going to hold. But mid- to long-term, we'd see that come down as a percent of sales.

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Operator [123]

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Our next question is coming from the line of Chuck Cerankosky with Northcoast Research. We will move on to our next question, which is coming from the line of Greg Melich with Evercore ISI.

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Gregory Scott Melich, Evercore ISI, Research Division - Senior MD, Head of Consumer Research Team and Senior Equity Research Analyst [124]

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Did you -- I think you said price/volume/mix were all positive. But could you give us a little more insight as to how much of that -- the Paint Stores Group comp was volume versus price/mix?

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [125]

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Yes, Chuck we talked about getting good traction on pricing -- I'm sorry, Greg. We talked about getting good traction on pricing so far in Paint Stores Group, but the vast majority of Paint Stores comp was volume.

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Gregory Scott Melich, Evercore ISI, Research Division - Senior MD, Head of Consumer Research Team and Senior Equity Research Analyst [126]

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Okay. So I could assume that's like better than 5%.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [127]

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Yes.

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Gregory Scott Melich, Evercore ISI, Research Division - Senior MD, Head of Consumer Research Team and Senior Equity Research Analyst [128]

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Would be a vast majority. Great. And then a follow-up and maybe it's a -- it's circling around, you've touched on a little bit in Latin America and we were finally -- I think I heard in the prepared comments that we got top line growth, but the volume is now improving but less negative. Did I get that, right? And if that's so, are there any markets where it actually is up and maybe...?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [129]

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There absolutely are. I'm sorry. Go ahead, please.

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Gregory Scott Melich, Evercore ISI, Research Division - Senior MD, Head of Consumer Research Team and Senior Equity Research Analyst [130]

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So just if you talk a little bit about that like volume in Latin America was still down, but down less? And then just sort of highlight some of the markets that were outliers, would be great.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [131]

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Yes. So we've had a couple of markets there that have moved in the right direction from both a sales and volume standpoint. We've had mix and we've had a couple that have not broken through that line yet. I would say that even in those areas that were a little under pressure, we still saw improvement in specific segments. And so we're feeling better about Latin America as a whole. We're now to the point, after really screwing down the expenses there, we've invested a little bit of the money in some of the things that we think will continue to drive business. Clearly, we'll keep that on a short leash. But we don't break up by country or business unit down there, Greg. But I'd say that it's safe to say that we've had positive momentum in all of them. Some of them are, in fact, positive volumes.

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Gregory Scott Melich, Evercore ISI, Research Division - Senior MD, Head of Consumer Research Team and Senior Equity Research Analyst [132]

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Great. But the volumes overall are still down, but just down less than they have been in a while.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [133]

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Just slightly negative. Just slightly.

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Operator [134]

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The next question is coming from the line of Stephen East with Wells Fargo.

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Stephen F. East, Wells Fargo Securities, LLC, Research Division - Senior Analyst [135]

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John, I'll apologize to you before I ask another Consumer question. But as you look at the monthly progression through the quarter, what did it look like and, following on that, how much, as you look in the forward quarters, how much of this is market recovery versus what you all are doing with specific actions?

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [136]

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I'd say from a quarter-to-quarter -- I'm sorry, month-to-month within the quarter, there was choppiness. There was no trend that I could speak to. It -- and quite frankly, that's a little bit why we were able to manage the SG&A as we did because we didn't see any traction earlier on in the quarter. And so, since the November/October time last year, we've been really trying to manage the expenses on this business. Going forward, I'd say that the expectations that we have would have to include catching up on some of the business that we had expected to see already. And it's going to be hard to say how much of that is market improvement and how much of that is some of the product that we had hoped would have been shipped prior to this moment actually getting shipped. So it's going to be a little difficult for us to have that clean of line of sight. Again, I'd reiterate that we're feeling good about the relationships that we have with our customers and not having experienced a specific loss of any space. We truly believe that working with our customers, and this is what we have been working on, to make them better is going to be the answer.

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Stephen F. East, Wells Fargo Securities, LLC, Research Division - Senior Analyst [137]

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Okay. And then in the spirit of the first 100 days of the administration, your first 100 days with Valspar. Where do you all sort of rank into order your focus areas very early on in the combination of the 2 companies.

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John G. Morikis, The Sherwin-Williams Company - Chairman, CEO and President [138]

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Customer is number 1, always number 1. We want to get in front of as many customers as we can. We've got a very detailed plan on how we approach this, and we're anxious to get in front of those customers as quickly as possible. Number 2, employees, we've got -- because the line of sight of our customers is somewhat muted, we don't have specific customers to see, we can't exchange that information. We have plans to be -- in certain business units, to visit with those key customers. But we do know where the employees are. And so getting in front of those customer -- employees and working with them to really put them at ease on the exciting future that they're going to have with Sherwin-Williams would be second. From there, there's a great deal of effort that has gone into the blueprinting of the businesses. How we're going to move forward in areas such as removing complexity, value capture, exchange of information, exchange of technology in each business unit and it has mapped those out in great detail. Again, there are limits in what we can exchange but there is a lot of things that we can. And so we've had the right people engaged in the room and talking about what those priorities are and we've got that down business-to-business, line-by-line and we're very excited. If there has been any positive at all to this business taking a little longer to be combined than what we would have liked, it's been our ability to work in greater detail on some of the things that we may not have gotten to until month 2 or 3. But with the additional time, we've been able to get deeper where legally allowed.

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Operator [139]

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Thank you. It appears there are no additional questions at this time. So I'd like to pass the floor back over to Mr. Wells for any additional concluding comments.

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Robert J. Wells, The Sherwin-Williams Company - SVP of Corporate Communications & Public Affairs [140]

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Thanks, Jessie. Back on April 3, we announced that we are rescheduling our financial community presentation from our original May 25 date to October 3. Our intent all along this year was to focus the meeting on the details of the Valspar transaction and integration progress. And needless to say, with the delay in closing the acquisition, these details aren't going to be available on May 25. We think postponing the event to fulfill our original intent will be more valuable to you and the presentation will still be held at the Marriott Marquis in New York. We hope you can join us. Registration details will be emailed late summer. And we look forward to hosting a great meeting, and we thank you for your flexibility. 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'd like to thank you again for joining us today and thank you for your continued interest in Sherwin-Williams.

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Operator [141]

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