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The Sherwin-Williams (NYSE:SHW)

Q1 2013 Earnings Call

April 18, 2013 11:00 am ET

Executives

Robert J. Wells - Senior Vice President of Corporate Communications and Public Affairs

Christopher M. Connor - Chairman and Chief Executive Officer

Sean P. Hennessy - Chief Financial Officer and Senior Vice President of Finance

Analysts

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

Robert Koort - Goldman Sachs Group Inc., Research Division

P.J. Juvekar - Citigroup Inc, Research Division

Christopher J. Nocella - RBC Capital Markets, LLC, Research Division

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Nils-Bertil Wallin - CLSA Asia-Pacific Markets, Research Division

Matthew McGinley - ISI Group Inc., Research Division

Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

Charles Edward Cerankosky - Northcoast Research

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

John E. Roberts - The Buckingham Research Group Incorporated

Charles A. Dan - Morgan Stanley, Research Division

Eric Bosshard - Cleveland Research Company

John P. McNulty - Crédit Suisse AG, Research Division

Dennis McGill - Zelman & Associates, LLC

Dmitry Silversteyn - Longbow Research LLC

Richard O'Reilly

Operator

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

This conference call is being webcast simultaneously in listen-only mode via Vcall or via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com, beginning approximately 2 hours after this conference call concludes and will be available until Thursday, May 9, at 5:00 p.m. Eastern time.

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

I will now turn the call over to Bob Wells.

Robert J. Wells

Thanks, Robert. In order to allow more time for questions, we provided balance sheet items and other selected information on our website at sherwin.com under Investor Relations First Quarter Press Release.

Summarizing overall company performance for first quarter 2013 versus first quarter 2012. Consolidated net sales increased 1.4% to $2.17 billion due primarily to higher paint sales volume in our Paint Stores Group. Acquisitions increased net sales 1% in the quarter, which was fully offset by unfavorable currency translation. Consolidated gross profit dollars increased $53 million for the quarter to $962.9 million. Gross margin increased 180 basis points to 44.4% of sales from 42.6% in the first quarter last year. Selling, general and administrative expense for the quarter increased $21 million over first quarter last year to $778.7 million. As a percent of sales, SG&A increased to 35.9% in the first quarter this year from 35.5% last year. Interest expense increased $5 million compared to the first quarter last year due to an increase in long-term debt to finance the Comex acquisition. Consolidated profit before taxes in the quarter increased $26.1 million or 18.3% to $168.4 million. Our effective tax rate in the first quarter this year was 31% compared to 29.6% in the first quarter of 2012. For the full year 2013, we expect our effective tax rate will be in the low 30s compared to last year's rate of 30.4%. Consolidated net income increased $16 million to $116.2 million. Net income, as a percent of sales, was 5.4% compared to 4.7% in the first quarter last year. Diluted net income per common share for the quarter increased to $1.11 per share from $0.95 per share in 2012.

Looking at our results by operating segment. Sales for our Paint Stores Group in the first quarter 2013 increased 4% to $1.17 billion from $1.12 billion last year. Comparable store sales, that is sales by stores open more than 12 calendar months, increased 3.2%. The increase in sales for the segment was due entirely to higher paint sales volumes across most market segments. Regionally in the first quarter, our Southwest division led all divisions, followed by Southeast division, Midwest division and Eastern division. Sales were positive in 3 of the 4 geographic divisions. Segment profit for the group increased 15.1% to $129.7 million in the quarter, as higher sales volumes and gross margin improvement more than offset higher SG&A spending. Segment operating margin increased to 11.1% of sales from 10% in the first quarter last year.

Turning to our Consumer Group. Sales in the first quarter decreased 3.7% to $308.6 million due primarily to the previous disclosed elimination of some paint business with large retail customers that was partially offset by acquisitions. Segment profit for the Consumer Group decreased $1.3 million to $54 million in the quarter from $55.3 million in first quarter last year. Segment profit as a percent of external sales increased to 17.5% from 17.3% in the same period last year. The improvement in operating margin was due primarily to continued tight expense control and operating efficiencies driven by volume growth in the Paint Stores Group.

For our Global Finishes Group, sales in U.S. dollars increased 0.8% to $486.8 million in the quarter due primarily to selling price increases and acquisitions, mostly offset by unfavorable currency translation. In the quarter, acquisitions increased net sales by 1%, and unfavorable currency translation rate changes decreased sales by the same amount. First quarter segment profit increased 18.5% to $33.9 million due primarily to higher selling prices and improved operating efficiencies, partially offset by unfavorable currency and acquisitions. The combination of currency translation and acquisitions reduced segment profit by $1.8 million. As a percent of sales, segment profit increased to 7% from 5.9% in the same period last year.

For our Latin American Coatings Group. The first quarter net sales decreased 2.1 -- 2.9% to $202.6 million due to unfavorable currency translations that was partially offset by selling price increases. Currency translation rate changes decreased sales in U.S. dollars by 6.6% in the quarter. Stated in U.S. dollars, segment profit in the quarter increased to $20.8 million from $19.9 million last year. Good expense control and higher selling prices more than offset a $1.7 million drag from unfavorable currency translation in the quarter. As a percent of net sales, segment operating profit was 10.3% in the quarter compared to 9.5% in the first quarter of 2012.

Turning briefly to the balance sheet. Our total debt on March 31, 2013 was $1.7 billion, including short-term borrowings of $68.3 million. Total debt on March 31 last year was $1.32 billion. Our cash balance at the end of the quarter was $613.9 million compared to $25.5 million at the end of first quarter 2012. In the first quarter of this year, we spent $31.2 million on capital expenditures, depreciation expense was $38.9 million and amortization expense was $7.7 million. For the full year 2013, we anticipate capital expenditures for the year will be approximately $130 million to $150 million, depreciation will be about $150 million and amortization will be about $30 million.

I'll conclude this review with a brief comment on the status of our lead litigation. The Santa Clara case involving claims and public nuisance brought by 10 cities and counties in California against 5 dependent companies continues to move forward. The judge presiding over the case has set the case for trial on June 24, 2013.

That concludes our review of the results for first quarter 2013. So I'll turn the call over to Chris Connor, who will make some general comments and highlight our expectations for second quarter and full year. Chris?

Christopher M. Connor

Thank you, Bob. Good morning, everybody. Thanks for joining us today. There's been a lot of volatility in the market in recent weeks around U.S. housing and building materials, and it seems that every new data point is being dissected for clues about the durability of this recovery. While a few of the recent indicators appear to be heading in the wrong direction, most notably the NAHB builder sentiment index, as well as March single-family housing starts and residential permits, the majority of the data still points to a robust and sustainable recovery.

I think our sales results in the first quarter support that conclusion. Although our revenue growth was only 1.4%, keep in mind the 15.1% sales increase in first quarter 2012 was an extremely difficult comparison. Aside from the obvious difference in weather this year, the calendar was also a challenge. We lost the equivalent of 2 full business days in the quarter compared to last year, and Easter week fell in March this year versus April last year. Despite these expected headwinds, our consolidated revenue and volume were both positive.

The purest read we have in the health of the domestic market comes from our Paint Stores Group. With all the challenges we faced in Q1, our comp store sales grew more than 3%. If you look at interior paint sales versus exterior, you get an even better perspective on the difference between first quarter '12 and '13. Sales of interior products this year increased almost 10% on top of strong double-digit growth last year, while exterior sales were slightly better than flat. A relative softness in our exterior business was not only a drag in revenue and volume compared to last year but also on mix because exterior paint commands a higher average price per gallon and higher gross margin. This mix shift resulted in volume growth that was higher than revenue growth for the quarter.

Obviously, our Paint Stores Group wasn't the only segment affected by the weather and calendar. A loss of business days in the quarter reduced shipments across all segments of the company, and winter weather significantly affected demand for protected and marine products, as well as architectural. We commented on our first quarter call last year that unseasonably warm weather doesn't create demand for paint, it creates opportunity to paint. The good news this year is that normal seasonal cold and wet weather doesn't destroy demand for paint, it simply postpones it. And we are encouraged by the demand trends we've seen so far in the second quarter.

This was our fourth consecutive quarter of year-over-year gross margin improvement, clear evidence of the progress we've made in containing raw material costs and recovering the gross margin erosion we experienced in 2010 and 2011. We expect this trend to continue, although the rate of improvement should diminish as we go through the year.

Based on what we saw during the first quarter, we've tempered our raw material cost outlook for the year. Industry average pricing for most of the key raw materials used in paint and coatings continues to moderate as TiO2 pricing has remained stable, and propylene, a key feedstock for resins, latex and solvents, has come off its February highs. We now believe average annual raw material cost for the industry will be flat with 2012 versus our January outlook of low single-digit inflation.

Our working capital, which we measure as inventories plus receivables minus payables, decreased as a percent of sales to 11.7% from 12.7% in the first quarter last year. The reduction in working capital, combined with the increase in net income in the quarter, more than offset the $80 million cash contribution we made through our ESOP plan to satisfy our agreement with the Department of Labor. Taking all this into account, net operating cash in the quarter increased by almost $64 million compared to first quarter last year.

During the quarter, we acquired 0.5 million shares of the company's stock for treasury, at an average cost of $162.88 per share, for a total investment of $81.4 million. On March 31, we had remaining authorization to acquire 15.95 million shares. Yesterday, our Board of Directors approved a quarterly dividend of $0.50 per share, up from $0.39 last year.

Our Paint Stores Group added 9 net new stores during the quarter, and our plan calls for full year store openings in the range of 70 to 80 net new locations. Today, our total store count in the U.S., Canada and the Caribbean stands at 3,529 locations compared to 3,455 1 year ago. This year-over-year increase in store locations, along with the investments we made in store and territory staffing in the back half of last year, resulted in a 40-basis-point increase in SG&A as a percent of sales in the quarter. As our revenue growth accelerates, our SG&A will decline as a percent of sales, and we expect to finish the year below the 2012 level of SG&A as a percent of sales.

We remain optimistic that U.S. architectural paint market volumes, primarily in the residential segments, will strengthen as we get into the prime painting season. Our outlook for second quarter 2013 is for consolidated net sales to increase in the range of 5% to 9% compared to last year second quarter. With sales of that level, we expect diluted net income per common share for the second quarter to be in the range of $2.50 to $2.60 per share compared to last year's record, $2.17 per share.

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

Finally, I'd like to comment briefly on our progress on the Comex acquisition. We completed the regulatory review process in 2 of 3 countries. Although we remain confident that this transaction will close, it is impossible to predict the timing at this point. We remain hopeful that it'll be sometime in the second quarter. As you would expect, we are making productive use of this interim period to prepare our company for a seamless integration and a fast start once the transaction is complete. Until that time, I'm sure you respect the fact that we cannot disclose information about Comex operations, financial performance or additional details of the transaction.

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

Question-and-Answer Session

Operator

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

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Chris, the interior versus exterior paint demand differential that you pointed out, do you think the exterior's performance was a function of the tough comp from a year ago? Or is it just all the more unfavorable weather in March across the country?

Christopher M. Connor

Well, the answer is yes to both of those. I mean, that was the whole point. And we saw reasonable seasonal exterior sales gains in our Southern market, but it was the Northern markets that were painting outside last year that really saw a decline in exterior gallons. Take those 2 together, we delivered a flat exterior performance for the Stores Group.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

And then can you just kind of parse out what you're seeing residential versus commercial as best as you can tell?

Christopher M. Connor

Yes, I think as we've been commenting for some time, it is the residential portions of this architectural market that are rebounding, both in the new construction, as well as in the repaint. Commercial tends to lag that. We've begun to see some lift in the commercial repaint as occupancy rates improve, not so much a lift yet in the new construction portion of that business.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just one final one on Global Finishes. For the second quarter last year, it was a very, very strong performance from a margin perspective, seems like a tough comp. Do you think margins will be up in Global Finishes year-over-year during the second quarter of '13?

Sean P. Hennessy

Yes, I think when -- we were pretty happy with the operating margins in Global Finishes. We've done some things to structurally help that business. And we don't give guidance by segment. But we were not surprised that Global Finishes operating margin improved this quarter.

Operator

Our next question is from the line of Aram Rubinson with Nomura Securities.

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

A couple questions. One, just housekeeping, if you can help us with the gross profit dollar growth you sometimes share with us by segment, would be great.

Sean P. Hennessy

Sure. I've got it right here. The Stores Group, the incremental gross profit dollars were $37,663,000; the Consumer, incremental $2,891,000; and the Global Finishes Group, $13,734,000. And then LACG was negative. It was dilutive $793,000.

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

One or 2 other quick things, if I could. The 2-year volume trends underlying seem to be quite strong. If you did a 3 against what we had calculated as a 13, would put kind of the 2-year volume up near 16, and we had it about 8.9 in last quarter and 4 the quarter before that. Is that kind of a proper gauge of underlying momentum in the business?

Christopher M. Connor

I think you're directionally correct, Aram.

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

Okay. And then the last thing is on SG&A. Last year, SG&A as a percent of sales by quarter, you did 35.5% in the first quarter and a 31.5% in the second quarter. You did about 20% more sales in the second quarter than the first. So my question is this, if your volumes in Q1 were to grow by 20% over 2-year period of time, why wouldn't their SG&A ultimately get to where your Q2 SG&A rate is today?

Sean P. Hennessy

Because what ends up happening is, is that our SG&A rate is a step function. And so to get that 20% sales volume that you speak of, we'll probably have more stores. We'll probably have more reps. We'll have more SG&A that will flatline itself against the quarters. If that occurs, you're going to see to get that 20% increase in the first quarter. Actually, you also get a second quarter pop also. So that sales curve really -- when -- that's why a lot of times when people ask, "What's your fixed versus variable?" We think the fixed is a lot higher because store manager, assistant manager, all those things are fixed, and that sales curve to get that 20%. Now if you're saying, structurally, we were able to get the 20% more without any additions in stores, reps or other things, then you would see it drive down, yes.

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

Okay. Yes. Because I noticed you're still running about a little less than 70%. Let's say, the SG&A growth divided by revenue growth is maybe a good function too. Are you still trying to be in that kind of 55%, 57% kind of range?

Sean P. Hennessy

Yes. Yes.

Operator

Our next question is from the line of Bob Koort of Goldman Sachs.

Robert Koort - Goldman Sachs Group Inc., Research Division

Could you help decompose the same-store sales into price volume components?

Christopher M. Connor

Yes, that's a pretty easy answer, Bob. There's absolutely no price in the comp store performance this year.

Robert Koort - Goldman Sachs Group Inc., Research Division

And then what's your expectation, I think, Chris, you mentioned that none of the seasonal patterns or weather patterns alter underlying demand. So would you expect that in the Midwest and East, you're going to see a much better comp versus sort of the Southwest and Southeast in the second quarter?

Christopher M. Connor

Yes, absolutely. And I think that's implied in our guidance for the quarter's revenue being up 5% to 9%. As you'd expect, our stores numbers will outpace that, and that will be a result of the Northern division also starting to participate in the same kind of robust rebound we're seeing in these residential markets across the whole country.

Robert Koort - Goldman Sachs Group Inc., Research Division

Then my last one, if I could quickly, on raw materials. Can you give us a sense for what the residence time is between, on the outside, us seeing a propylene price move up or down and when it might reveal itself on a cost of goods line? And then, secondly, you seem a little bit more -- less aggressive about what's happening in TiO2 prices than maybe we've seen in the market. Is there some reason you wouldn't be fully benefiting from the sell-off in those prices?

Robert J. Wells

Bob, this is Bob. Let me take the second part of the question first. TiO2 thus far this year -- I mean, it certainly came down in the back half last year. But thus far this year, it's been relatively stable. And you know there are at least 3 producers in the market right now with price increase announcements. So we mentioned that there was a fair amount of volatility or that there was a fair amount of stability in TiO2, but we do not necessarily believe that it goes down in the back half from here. Time will tell. On propylene, the rule of thumb that we've been using is that it takes about 90 days for a moving propylene to get fully into the raw material basket, much faster on the solvents side of the business than on the resins and packaging side. So 90 days, I think, is a pretty good rule of thumb to see that -- the moving propylene fully priced into the raw material basket.

Robert Koort - Goldman Sachs Group Inc., Research Division

And is it possible on quick spikes that you could actually miss that or no? What we saw in the first quarter?

Robert J. Wells

We'll see it on solvents. Whether a quick spike, up and back down, gets into the acrylic chain or into plastic packaging...

Christopher M. Connor

Maybe not.

Robert J. Wells

Maybe not.

Operator

Our next question is from the line of P.J. Juvekar of Citi.

P.J. Juvekar - Citigroup Inc, Research Division

The big boxes seem to want a piece of the contractor business. I think one of your competitor is starting a new program at Lowe's. Historically, these big boxes haven't had much success with contractors. So how do you see that playing out this time?

Christopher M. Connor

Well, P.J., I think we've long said that we have tremendous respect for these competitors. And they have compelling product lines and offerings and are continuing to see what we see in the market, which is that the shift towards a professional painting contractor is the primary purchase of architectural paint. I think we've been competing with these folks for over 27 years now, recognizing these same demographic trends. And the data results that we've shared with you and the entire investment community would indicate that painting contractors continue to remain remarkably loyal to the dedicated paint store channel. So it's incumbent upon us that are in that space to continue to enhance the product offering, the service, the reasons that have kept them loyal there. And we'll take on this next challenge as we have all the other ones over the past 20 years.

P.J. Juvekar - Citigroup Inc, Research Division

And I think you've gained share with homebuilders during the downturn. So as the new residential construction picks up, should we expect better volume growth from you compared to the industry?

Christopher M. Connor

Yes.

P.J. Juvekar - Citigroup Inc, Research Division

Can you just give us what kind of share did you gain during the downturn?

Christopher M. Connor

Yes, I think we've talked about just kind of the top 25 U.S. homeowners and what our relative position has been there as opposed to any strict share number. And as the industry went into their downturn, a lot of these large builders consolidated purchasing activities from regional offices into a consolidated office. And Sherwin was uniquely in a position with a national footprint to be able to service these folks, regardless of what part of the geography they're operating in. So as a result, we're proud to comment that well north of 20, the top 25 builders now are good Sherwin's customers, and quite a number of them are exclusive with us. So as they come back up, that's a much stronger position than we were in the last time we went through one of these housing rebounds.

P.J. Juvekar - Citigroup Inc, Research Division

Okay. And I just have a quick clarification question maybe for Sean. In this Consumer Group segment, you talk about loss of large retail customer. You've talked about Walmart business in the past that you lost. Is that the same continuing issue here?

Sean P. Hennessy

Yes. We continue to have a step-down function into the fourth quarter. It's affected us negatively. And again, in the first quarter, it affected us negatively.

P.J. Juvekar - Citigroup Inc, Research Division

But wasn't the initial Walmart business lost a couple of years ago and that should have anniversaried by now?

Sean P. Hennessy

Yes. But as we -- it was not a complete severing. What it was, was a discussion and a movement from DSCs [ph]. If you remember, we had the majority, there was other -- 2 other paint companies in there. Those other 2, they did go cold turkey on those, but on us, it was a lock. And now they have the majority. And we've got another step function that affected us in the fourth quarter for this year.

Christopher M. Connor

Yes. Specifically, P.J., it's in the private label segment. So you're correct that the Glidden brand immediately replaced our brand. There's been this private label piece that's been a little less visible and is stepping down exactly Sean just took you through.

Operator

Our next question is from the line of Chris Nocella of RBC.

Christopher J. Nocella - RBC Capital Markets, LLC, Research Division

I just want to circle back on your comment that you're encouraged by the demand trends in the second quarter. Is it to say your order books are strong for some of the bigger projects? Or is it a little more broad-based than that?

Christopher M. Connor

Yes, it's more broad-based than that. And we don't typically have an order book per se. It's more the anecdotal evidence of the painting contractors that are in our stores. We get some future look at the types of products they're buying that are non-paint. So for example, we've always talked about spray equipment sales as being a good leading indicator of the confidence of painting contractors as they're heading into the paint season. Here again this year, on top of pretty robust numbers last year, our spray equipment sales are doing terrific. And we just are cognizant that these men and women have a lot of work lined up. They're hiring painters, they've got a full load ahead of them and a lot of confidence that this is going to be another repeat performance for a solid residential repaint year.

Christopher J. Nocella - RBC Capital Markets, LLC, Research Division

Okay. And just on Comex, I appreciate the deal hasn't closed and you don't have the full financials yet. But can you just remind us of the accretion potential that you expect, and the trajectory to get there?

Sean P. Hennessy

Sure. What we said is we feel that the first 12 months will be accretive, slightly accretive because of the closing costs, the inventory write-up and some of the other GAAP requirements. And -- but then after that, we believe that if we close here in a relatively short period of time, we're looking at $1 accretion the first full year we own it.

Operator

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

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Chris, question on gross margin potential. I mean, you started off the year with some pretty strong gross margins, even though your exterior mix went against you. So do you think you can be on track to equal that 46% gross margin peak you had back in '09?

Christopher M. Connor

I think we've been talking about continuing to move towards that. I don't think we're getting guidance that we're going to be all the way back of north of 46%. 180 basis points improvement we're making right now in this quarter will start to moderate, as we did start to have some margin recovery in the back half of last year as well, too. So that might be a little high, but we'll be moving towards that number.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Okay. And then just a question on industry volumes. I mean, the DOC doesn't put their series out anymore, but you've talked about maybe getting to normalized of 700-million- to 750-million-gallon market number in the U.S. Where did we end last year? And what kind of market growth are you looking for this year?

Robert J. Wells

Don, this is Bob. The American Coatings Association put out an estimate of volumes for full year 2012 that was in the mid-3% range. Our estimate was closer to 3% flat. So somewhere in that range feels right. That would have put us in the 630-million- to 640-million-gallon range. So still, probably incremental 100 million gallons to come back to the market over some recovery time frame.

Operator

Our next question is from the line of Kevin McCarthy with Bank of America.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Chris, you affirmed the guidance range for the year of $7.45 to $7.55. And I'm wondering if your embedded assumptions therein for existing home sales and housing starts are any different today relative to what they would have been exiting the fourth quarter.

Christopher M. Connor

No, I don't think we've really changed that assumption or impact on our guidance. As we commented, in my opening comments, about kind of the numbers were kind of jumping all over the place, I think there's enough other weight in this business, primarily in the maintenance of these projects, that are really the key driver for us. So we're still confident that we've got the right market dynamics to deliver the numbers that we're projecting.

Robert J. Wells

The other thing, Kevin, if you look at housing starts over the course of 2012, they ramped up over the year so that the exit rate from that year was a pretty good indicator of where we were going to be at least at the start of the year in 2013. So we weren't operating blind.

Sean P. Hennessy

And Kevin, this is Sean. Many -- for the last few years, many years, we've never really changed guidance for the full year after the first quarter. Goes back to the other question, you look at the sales curve, I think that even last year up for the first quarter -- because it was so dramatic, we changed it slightly. But when you really take a look at it, we usually wait until after the second quarter, which is a large quarter for us.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

So Sean, to follow up, it sounds like your raw material forecast has improved relative to what it would have been. Is it the case that you're being relatively conservative in keeping the range the same since it is early in the year? Or rather, is it the case that there's some offsets that you're cognizant of that would equilibrate it back to flat?

Sean P. Hennessy

Yes, I think -- I wouldn't use the word conservative. I think, I mean you have to -- there's a lot of moving pieces in these forecasts, and there's a lot of ongoing volatility on the pricing of many key raw material input. So again, we'll have better visibility on the year for raw materials, as well as a lot of the other factors after the second quarter.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Okay. And then final question, if I may, just to drill down a little bit more on your exterior coatings experience. If we were to lump together the Southwest and the Southeast, what would those exterior volumes look like relative to the Midwest and the East? Just trying to get a sense for what the magnitude of the variances there within the company, if there's anything you can share.

Christopher M. Connor

I would comment that we were down double digit in the Northern markets, and the Southern markets were a more normalized sales growth.

Operator

Our next question is from Nils Wallin of CLSA.

Nils-Bertil Wallin - CLSA Asia-Pacific Markets, Research Division

Just curious on the loss of the business at Walmart. When will this anniversary?

Sean P. Hennessy

Well, I think that, again, as in all of our – Walmart's a great customer. We're in there. We're showing them different products. We hope it never -- hope it ends very soon. But I would tell you that with this change, each -- this year, I think that the last time you'll see the effect of the Walmart will be at the end of the third quarter. It did affect us in the fourth quarter. So this change in the distribution centers from us to the other supplier will anniversary in the third quarter.

Nils-Bertil Wallin - CLSA Asia-Pacific Markets, Research Division

And by losing this business, is there actually a benefit on the mix at all? I mean, is this a low-margin business? Are you -- I mean, you probably don't want to lose the volume, but maybe on a positive side, it may not be the best in terms of margin.

Robert J. Wells

You know what, when you look at the Consumer Group margin, it did help the gross margin percent. It definitely did not help the gross margin dollars. And if we had a choice, we'd rather have the dollars. But -- and it was good business. I mean, the -- you had another supplier who wanted it because of the price of the SG&A. And the operating margin was a nice business for us.

Nils-Bertil Wallin - CLSA Asia-Pacific Markets, Research Division

Great. And just finally on Global Finishes. It looks like over -- when you layer in the drag from ForEx, that the, obviously, margin improvement year-on-year has been quite strong. And you point to operating efficiencies. Is there -- can you drill down a little bit more? Is there some capacity rationalization? What's driving this improvement so much on the operating efficiency side?

Christopher M. Connor

Yes, we talked last year, Nils, about the fact that after a fairly robust acquisition schedule over the past couple of years, that we were in the phase of really rationalizing, justifying the manufacturing distribution portion of that, particularly in Europe. And so there was some rightsizing of operations that we needed to address. So that's primarily behind us as we head into this calendar year. We've also commented a little bit about the pricing discipline that's been part of the company's operating mantra in North America, that we needed to get implemented in Europe. And we've seen that take place as well, too. So most of it's come from our European operations. We still have the opportunities ahead of us and some final little cleanups, both in Asia Pacific, as well as Europe. But pleased to see that this group is really on the right track. We've long said that we believe we can get this business into a double-digit return on sales operating margin performance, and they're making good strides toward that.

Operator

Our next question is coming from the line of Matt McGinley of ISI.

Matthew McGinley - ISI Group Inc., Research Division

On your guidance, you imply a pretty healthy step-up on the margin rates in the second quarter. It almost looks like it could be 2006- or 2007-type levels. Would you expect to continue to build that margin from a gross margin standpoint? Or would you leverage SG&A? And given the investment that you're making in the stores, what level of sales today do you think you need to leverage SG&A?

Robert J. Wells

I think that for the second quarter, where we are in the step function of the SG&A, I think you're right about the guidance. I think there's got to be efficiencies. And you can see the SG&A as a percent of sales show improvement. And I think going back to Chris' remarks by the end of the year, we believe that SG&A, we expect it to be lower as a percent of sales. So I think that tells you, being up 4/10 in the first quarter, I think we have to have improvement in each of the following 3. Gross margin, same thing. Echoing Chris' remarks, we felt that gross margin will show improvement. So I think we're going to see it in both. So I think we're at volumes that we're going to see efficiency.

Matthew McGinley - ISI Group Inc., Research Division

Great. And I have one on Mexico as a market. Can you tell us a little bit about how the trends are in your stores in Mexico? Is that a better market generally than maybe the rest of Latin America or the U.S.? And from a timing standpoint, with this Comex deal, is there a certain date that if you can't close it by, it would not be accretive, where the math wouldn't work out on a current year basis?

Robert J. Wells

Matt, this is Bob. Let me handle the first half of that question, and that is just the overall market environment in Mexico. Mexico had a rough year in 2012 due to some foreclosure activity, but long term, it is going to be a very attractive market. The rate of household formation per capita is much higher than that of the U.S. It's a young market, with more than 40% of the population under the age of 34. And per capita income and GDP is growing. So from a construction and maintenance standpoint, Mexico is going to be a very attractive market. And our business in Mexico has been performing well.

Sean P. Hennessy

Right. And as we speak of Comex and our expectations [indiscernible] that's why we continue to use the word 12 months, not in the current year. We believe that it'll be slightly accretive in the first 12 months and -- but you're right, the first quarter is going to be dilutive. And as -- the later it goes, the less chance it'll be accretive from a calendar year 2013 because of the closing. And you're right, there is a date that we cross that it won't be there. So -- but instead of sharing that date, we'd rather wait until we can close so we can give you a lot more details.

Operator

Our next question is from the line of Ivan Marcuse of KeyBanc Capital Markets.

Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

Most of them have been answered. Just real quick on the Brazil market, your volumes are flat in Latin America. Have you seen -- there's an expectation that you're going to have the Olympics, World Cup, et cetera, and that you should see construction pick up. Have you seen any signs of that? And what's sort of your outlook for that business going forward?

Christopher M. Connor

Yes, we're painting some stadiums in Brazil as we speak. So there's definitely work that's happening. I think, Brazil, by their own admission, would tell you that they're behind on their schedule of their construction projects. So there should be some acceleration as we get closer to the 2014 dates. The slowdown and softness in the Brazilian economy is much broader than just preparing for these games. So housing has been off a little bit, the construction has been off a little bit. I don't think that this administration has been as productive for the country's GDP as the previous one. And I know it was a concern of theirs. But here again, as Bob has commented, on the long-term prospects for Mexico, we remain bullish on the long-term prospects for Brazil as well and are continuing to strengthen our operations down there.

Ivan M. Marcuse - KeyBanc Capital Markets Inc., Research Division

Great. And then last question. I know this is small, but is there -- do you have any business in Argentina? And is that impacting that segment at all?

Christopher M. Connor

Yes, we do have business in Argentina. We've been in the country for over 80 years. Argentina has been a middle of the road performer in our Latin American operations, and I think they're doing fine.

Operator

Our next question is from the line of Chuck Cerankosky of Northcoast Research.

Charles Edward Cerankosky - Northcoast Research

If you start taking a look at the rest of the year, Chris, how would you describe the need or lack thereof for pricing in the Paint Stores Group in the U.S.?

Christopher M. Connor

Yes, I think to our comments about flat raw materials for the remainder of the year, that would typically be the environment that we hold pricing in. We've made no indications of our intention to the contrary. As you know, Chuck, our policy is always to let our customers know first. And shortly thereafter, we openly transcribe with the investment community. This date, we've got nothing to share with you.

Charles Edward Cerankosky - Northcoast Research

All right. With regard to industrial coatings markets, how would you describe those in the first quarter and the outlook for the rest of the year?

Christopher M. Connor

Yes, I think from the protective coatings, which -- are you talking about protective or more OEM?

Charles Edward Cerankosky - Northcoast Research

More protective, but OEM, I would lump in with that question as well.

Christopher M. Connor

Okay, so I think we commented on protective coatings as a soft quarter for us, and most of that is related to bridge and highway painting activities that were delayed due to weather this year compared to last year. But as we commented on the exterior gallons struggling, that impacted this business segment as well. But the underlying requirement demand for these products and the maintenance environments which really can't be delayed, that looks pretty good to us. We expect that business to rebound and continue on through the year. And the OEM product finishing segments, which are embedded in the Global Finishes Group, particularly in North America, continue to do nicely. A little softness in the European market demand, driven by the general softness in that part of the world. But, again, overall, a pretty good story for us this year.

Operator

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

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Your administrative costs fell about $4 million or $5 million year-over-year in the quarter, and that was in spite of your interest costs for the quarter going up about $5 million. So your net administrative costs or your pure administrative costs look like they fell about $10 million. Why did -- in the quarter. Why did they do that? And what's your outlook for that line for the year?

Sean P. Hennessy

Jeff, as you know, when you look at that administrative, we've had -- over the last 2 to 3 years, we've had some major growth in that area. And we continue to talk about some of the projects, IT projects, other things that we were working on and investing in. And we see that -- we're still working on a few of those projects, but we're trying to complete some of these and look for some efficiencies. You're also right, when you look at the interest, I think that the core without Comex because of the $1 billion that we did borrow at around 2 -- a little over 2%. It's going to cost us to have interest rates -- interest expense of $20 million, $5 million a quarter. I think that the first quarter, there was a few things that were -- we started to see with this. But I think we're still going to see some improvement without interest but -- throughout the year but without the Comex acquisition occurring. But it won't be as dramatic as it was in the first quarter.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Okay. And then lastly, everybody has different ideas about where paint raw materials will be. Yours are that they'll be flat for the year, and, I guess, mine are that they'll be lower for the year. If it turns out that I'm right, that is that raw materials are lower for the industry in general, do you think average paint prices in the consumer business will decrease or in the contractor business or that the contractor market generally will decrease? Or do you think that they would hold flat even in a declining raw material environment?

Christopher M. Connor

Well, Jeff, we hope you're right. And I would tell you that in past cycles like this, we've commented that we will see overall lower pricing, particularly on bid business where large projects -- when contractors are out bidding for that, they'll be giving competitive quotes, and we'll see folks go for gallon and market share enhancements. So as we have in past cycles, we would expect to see lower year-over-year pricing quoted on that type. And as a reminder, we think that represents about 20% of a typical demand of architectural products. The vast majority of our products, which we would call our typical shop account pricing, we've had a track record of being able to hang onto that pricing in that environment. So if that remains flat and the 20% dropped a little bit, you might see a little bit year-over-year deflationary pricing. On the consumer side of that, I don't know that we have as much insight into that or as much exposure to that, frankly, and have much beyond the comment on your analysis.

Operator

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

John E. Roberts - The Buckingham Research Group Incorporated

Could you update us a little bit on some of your initiatives, like Emerald? And you've now lapped yourself on HGTV. How are some of those programs going?

Christopher M. Connor

Yes, we've been thrilled with both of those introductions, John. Thanks for asking. Emerald, at the very high end of our architectural product line, both on interior and exterior, not that it would ever be the primary mover of products, but it does set the bar, and we kind of get that mix shift up the chain as we talked about it in years past. So meeting company's expectations for gallon growth. And I would say that HGTV probably is doing even a little better than that. We've commented, I think, not so much in this call but past several calls, that our DIY performance inside that stores group has been outperforming the industry. We believe we've been gaining share slightly from a low base. And HGTV clearly is helping the company skew to a lower age customer group. We can see that in our demographics through our POS information we get. And all that just portends to a better future. We're introducing customers to the advantages of shopping in the specialty paint store earlier in the paint-buying career, and they tend to be loyal to that cycle. So HGTV has been a big win for the company.

John E. Roberts - The Buckingham Research Group Incorporated

And then in your regional breakdown that you had, Bob, the Eastern region was mostly impacted by weather change. I assume like exterior was down a lot there. Was interior up in the Eastern region even though the total region was down?

Robert J. Wells

No, John, I don't know the answer to that.

Operator

Our next question comes from the line of Charles Dan of Morgan Stanley.

Charles A. Dan - Morgan Stanley, Research Division

First of all, just so we're all using the right number, can you tell us what interest expense you have for the full quarter that's in your guidance?

Sean P. Hennessy

Well, I won't share the guidance, but I think our interest expense and, we have it on the P&L, it's right here on the – I'll tell you right – I've got it here. Our interest expense was $15,311,000. Last year, it was $10,337,000.

Charles A. Dan - Morgan Stanley, Research Division

Okay. So that's a good run rate for the second quarter as well?

Sean P. Hennessy

Yes.

Charles A. Dan - Morgan Stanley, Research Division

Okay, fine. And my second question is on your -- it seemed like the cash drag in the quarter from building working capital in advance of the painting season is much less this quarter than it has been historically in prior years. Is that just reflective of lower raw material costs or more efficiency? Or what's explaining that? Or was it just something that's going to leak into the second quarter this year?

Sean P. Hennessy

Well, I think that 2 years ago, we come in and then we built inventory in the first quarter 2011, much higher than we had in the past. And it dealt with raw material availability and so forth. In '12, we felt a little less pressure as far as availability, and we allowed -- we had a more normal build. And this year, I would say we've adjusted, and we feel pretty good about the efficiencies in our supply chain. And we feel pretty good. I don't think -- I think this is probably going to be more of the normal curve going forward.

Operator

Our next question is coming from the line of Eric Bosshard of Cleveland Research.

Eric Bosshard - Cleveland Research Company

Obviously, with the weather, it's hard to sift through the volumes in 1Q. But as you think about the full year '13 relative to '12 in terms of the architectural growth, you talked what the government and your sense of growth was last year. But I'm interested, as your customers, what your sense is over the growth rate of '13 relative to '12 for the industry and then your relative market share performance in '13 relative to '12.

Christopher M. Connor

Well, I would say, Eric, that the industry growth rate, as we commented, historically, should run in that 1% to 2% from architectural. And because we're below age here, we said that double that is a reasonable number to start with. So let's assume that the industry is going to have gallon growth in the 3% to 4% range and we've been comfortable saying that stores business can run in a 1.5x that pace, so our expectation would be that our gallons this year are going to be north of 5%.

Eric Bosshard - Cleveland Research Company

As you look at the first, call it, 4 months of the year, what are the plusses and minuses relative to that? What do you see that gives you sort of positive thinking about that and where you have concerns in regards to getting to that level of growth in 2013?

Christopher M. Connor

We don't have any concerns about getting to that gallons number in 2013 right now.

Operator

Our next question is from the line of John McNulty of Crédit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

With regard to the SG&A jump that we saw year-over-year, which looked like it was about $20 million or so, how much of any of that is tied to preparing for Comex that might not be something that recurs going forward once you've actually closed on the acquisition?

Sean P. Hennessy

Yes, very small, less than $2.5 million, really, in the preparation of Comex. One of -- you're right, it was up around 21%. So less than -- probably around 10% of the growth was due to Comex.

John P. McNulty - Crédit Suisse AG, Research Division

Okay. And then if we think about getting back to normal paint volumes in the industry in that kind of 700 million to 750 million gallons area, so that's about a 15% to 20% increase in the volumes from here, regardless of the time frame, but assuming we get there, how should we think about what your SG&A growth to get to that -- or to manage through that kind of level?

Sean P. Hennessy

I think -- and, again, used to be that we used to -- you would see the growth rate. And you can go back to 2002, 2007, see what it grew back in that time frame. And we used to have a dynamic. And I'm thinking that our SG&A used to grow at around 45% to 55% of sales increase.

John P. McNulty - Crédit Suisse AG, Research Division

Volumes or sales, like we were just kind of pulling price out of that?

Sean P. Hennessy

Sales.

Christopher M. Connor

Sales.

John P. McNulty - Crédit Suisse AG, Research Division

Okay. And then just the last question. On your CapEx guidance of $130 million to $150 million, does any of that include the potential for at least some of the early changes in the Comex stores if -- assuming that you do any of them this year?

Robert J. Wells

No. We've kept our guidance -- all our guidance and reporting and so forth Comex-free so that when we do close in a lot of these numbers. And that's one of the numbers that will increase.

Operator

Our next question is from the line of Dennis McGill with Zelman & Associates.

Dennis McGill - Zelman & Associates, LLC

I'll be quick. Just on the same-store sales number that you provided us, Chris, you mentioned the days issue year-over-year. Is that number adjusted 4 days when you guys reported to us?

Christopher M. Connor

No, that's actual.

Dennis McGill - Zelman & Associates, LLC

Okay. So you're talking about a couple of points higher if it were?

Christopher M. Connor

Yes. This 3% -- a little over 3% comp store performance in the face of fewer days.

Dennis McGill - Zelman & Associates, LLC

Got it. Okay. And then when the Comex deal does close, how do you guys expect to communicate some of the numbers to us as far as -- and I guess aside from just updating guidance, is there a way that you're thinking about -- kind of talking about the business or the level of information that you expect to provide on the business to us?

Christopher M. Connor

Well, clearly, on the quarter call, immediately following the transaction, we'll be taking you through a great detail. Sean, do you want to add some color?

Sean P. Hennessy

We had planned, and if we would have closed before the financial community presentation, it would have been fantastic. We would have taken you through a few more things. There are different requirements when we have to show some of our numbers with the history. And we will -- at that time, you'll see 2012, if we owned it since January 1, 2012, and you'll see the quarters, as well as that year. So -- and then on an ongoing basis, I'm sure that we'll have some type of -- you'll see our sales with and without the acquisition, and we'll show you the EPS effect of that also.

Operator

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

Dmitry Silversteyn - Longbow Research LLC

First of all, on the consumer part of the business, can you give us a little bit more detail between the acquisition component and the FX component -- or, I'm sorry, the price mix component?

Sean P. Hennessy

Yes, I'm sorry...

Christopher M. Connor

In consumer, Dmitry?

Dmitry Silversteyn - Longbow Research LLC

Yes. In consumer, you talked about acquisitions having an impact, and then you talked about volumes being down. So I'm just trying to figure out if you have any price mix movement. Or was it flat like it was for the Paint Store Group?

Sean P. Hennessy

I would tell you that we reported that division down 3.7%. Without the acquisition, we would have been down 8.6%. But I would tell you -- on pricing, I would tell you that you look at that, that it was pretty consistent with stores.

Dmitry Silversteyn - Longbow Research LLC

Okay. That's helpful. Secondly, in your global business, that it's now becoming a more profitable part of the operation and, obviously, that's probably where the most profit improvement in terms of kind of the magnitude in margin improvement opportunity that you have left. Can you talk about the geographic mix of that business right now between Europe, Asia and the Americas? And you talked about the continuing restructuring and some cost actions that you can take in Europe. So we're just -- I'm just trying to understand how relatively sized these businesses are.

Christopher M. Connor

Yes. The United States North American component of that segment still exceeds more than 50% of the volume that we generate. Europe would be the second-largest continent of scale. And then Asia Pacific would be the third. And I would say that you kind of step down by half and half again as you go through that analysis.

Dmitry Silversteyn - Longbow Research LLC

Okay. So something like 30% and 15% or something like 30% and 20%, whatever it works out to be?

Christopher M. Connor

Correct. You're close.

Dmitry Silversteyn - Longbow Research LLC

Okay. Right. And then, finally, you talked about still having a couple of opportunities left to repurchase shares as far as shares outstanding. What's sort of your outlook on the pace of this share repurchase? You talked about dollar cost averaging and being fairly consistent, but your share count has gone up sequentially versus the fourth quarter. So is there an incentive to bring it back down to below 2012 levels?

Sean P. Hennessy

When you look at the absolute number, our share count is down. But as the selling -- as the price of our stock continues to go up, we have a dilutive effect on stock options. So over the course of the year, we're going to eliminate that. But we sort of got caught on the price of the stock and so forth. We really don't have -- so I think on a year-to-year basis, you'll see stock options not be dilutive. But I just think that the way the stock price went in the first quarter, it caught us after we were basically in a blackout. And -- but I will tell you, in general, our stock buyback went to the Comex acquisition, it's going to really be [ph] lower than it has been in the last decade on an annualized basis, but it will be enough to make sure that stock options are not dilutive.

Operator

Our next question is from the line of [indiscernible].

Unknown Analyst

I just had a quick question on the India market, where you've recently [indiscernible] business to the locals there. You showed [indiscernible] transaction and [indiscernible] behind that strategy in India. That's one of the emerging markets.

Christopher M. Connor

Yes, I think we've commented that the company's strategy going forward is really to be focused on developing the architectural business in the Americas and supporting our industrial coatings businesses around the world. India was a small architectural business that we tiptoed into the country a number of years ago. We made some assumptions about the country's readiness for the type of quality architectural products that we manufacture. Those proved not to be accurate. So after a very short and a very small investment, we decided it was best to pull out and wait for a better day. And we executed a transaction with the Berger Paints company, and we're out of India at this point in time.

Operator

Our final question is from the line of Richard O'Reilly with Revere Associates.

Richard O'Reilly

I might ask you to repeat yourself on something. But I want to go back to the 2-year trend. And I'm looking at the same stores up 3% versus 20%. That would imply some low double-digit growth rate, something greater than what you would think the market would have supported. What do you think your normal same-store growth should have been or will be if you can exclude all the noise that might be in there?

Christopher M. Connor

Yes. When we talked, Richard, over a longer cycle of being able to provide guidance by these segments, we said that the Paint Store Group should be a relatively high single-digit revenue performer over the long cycle. And we build that by talking about some pricing, some new store addition, and then comp store performance, which tends to run kind of in the mid-single digits, 4%, 5% range. And we build the rest of that to get to the higher percent. So over a long cycle, when an industry's growing at 1% to 2%, we think this comp store business can grow at a 4% to 5% pace. So clearly, in this environment, when we're having a rebound, we would expect to outperform that. Two things are happening here, not only are the gallons coming back, as we've talked about on this call already, but the mix shift is going back towards the painting contractor, where it had been drifting back towards the DIY, primarily as the new construction markets come back onboard that tend to skew entirely to painting contractors. And that's a good trend for this comp store number as well.

Operator

There are no further questions at this time. I will now turn the floor back to Bob Wells for closing comments.

Robert J. Wells

Thanks, Robert. I'd just like to close by reminding everyone that our annual financial community presentation is scheduled for Thursday, May 23, at our headquarters in Cleveland. The program, as usual, will consist of our customary morning presentation with questions and answers, followed by a reception and lunch. And regardless of the timing of the close of the Comex transaction, we intend to discuss more detail about the strategic fit of this acquisition, more about what the combined organization may look like and our previous experience integrating acquisitions of this type. In addition, we've got lots of other worthwhile information to share, so please join us. If you have not signed up or would like to attend, there's still time. Send me an email at rjwells@sherwin.com, and I will reply with a link to our registration site.

Thanks again for joining us this morning, and thanks for your continued interest in Sherwin-Williams.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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