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The Sherwin-Williams (NYSE:SHW)

Q1 2012 Earnings Call

April 19, 2012 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

P.J. Juvekar - Citigroup Inc, Research Division

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

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

Dennis McGill - Zelman & Associates, Research Division

Charles Edward Cerankosky - Northcoast Research

Brian Maguire - Goldman Sachs Group Inc., Research Division

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Dmitry Silversteyn - Longbow Research LLC

Eric Bosshard - Cleveland Research Company

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

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

Operator

Good morning. Thank you for joining The Sherwin-Williams Company's Review of First Quarter 2012 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, a Vice President, Corporate Controller; and Bob Wells, Senior Vice President, Corporate Communications.

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

[Operator Instructions] I will now turn the call over to Bob Wells.

Robert J. Wells

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

Summarizing overall company performance for the first quarter 2012 versus first quarter 2011, consolidated net sales increased 15.1% to $2.14 billion due primarily to higher paint sales volume and selling price increases. The combination of acquisitions and currency translation had little effect on sales in the quarter. Consolidated gross profit dollars increased $112.4 million for the quarter to $909.8 million. Gross margin decreased 40 basis points to 42.6% of sales from 43% in the first quarter last year.

Selling, general and administrative expenses for the quarter increased $66.6 million over first quarter last year to $557.7 million. As a percent of sales, SG&A decreased to 35.5% in the quarter this year from 37.2% last year. Interest expense decreased $338,000 compared to first quarter last year. Consolidated profit before taxes in the quarter increased $47.6 million or 50% to $142.3 million.

Our effective tax rate in the first quarter this year was 29.6% compared to 27.9% in the first quarter of 2011. For the full year 2012, we expect our effective tax rate will be in the low 30% range compared to last year's rate of 40.4%. As a reminder, our 2011 income tax expense included a onetime income tax charge of approximately $75 million to satisfy our settlement with the IRS.

Consolidated net income increased $31.9 million to $100.2 million. Net income as a percent of sales was 4.7% compared to 3.7% in the first quarter last year. Diluted net income per common share for the quarter increased to $0.95 per share from $0.63 per share in 2011.

Looking at our results by operating segment. For our Paint Stores Group in first quarter 2012, sales increased 20.9% to $1.12 billion from $929.3 million last year. Comparable store sales, that is sales by stores open more than 12 calendar months, increased 20.4%. The increase in sales for the segment was due primarily to higher paint sales volumes across all end market segments and higher selling prices. Regionally, in the first quarter, our Midwest division led all divisions, followed by the Eastern division, Southwestern division and Southeastern division.

Segment profit for the group increased 63.7% to $112.7 million in the quarter, as higher sales volume and selling pricing increases more than offset higher raw material costs and SG&A spending. Segment operating margin increased to 10% from 7.4% in the first quarter last year.

Turning to the Consumer Group. Sales in the first quarter increased 8.6% to $320.4 million as a result of selling price increases and volume increases. Segment profit for the Consumer Group increased 34.6% in the quarter to $55.3 million. Segment profit as a percent of external sales increased to 17.3% from 13.9% in the same period last year. The improvement in operating margin was due primarily to continued tight expense control and price increases that were partially offset by raw material cost increases.

For our Global Finishes Group, sales in U.S. dollars increased 11% to $483.1 million in the quarter due primarily to higher paint sales volume, selling price increases and acquisitions. In the quarter, acquisitions increased net sales by 3.9%, and unfavorable currency translation rate changes decreased sales by 2.3%. First quarter segment profit increased 47.3% to $28.6 million due to higher sales volume and selling prices, partially offset by higher raw material costs. Currency rate changes and acquisition had no significant impact on segment profits in the quarter. As a percent of sales, segment profit increased to 5.9% from 4.5% in the same period last year.

For our Latin America Coatings Group, first quarter net sales increased 7.1% to $208.6 million due primarily to selling price increases and higher sales volumes, partially offset by unfavorable currency translation. Currency translation rate changes decreased sales in U.S. dollars by 5.6% in the quarter. Stated in US dollars, segment profit in the quarter increased 14.5% to $19.9 million due primarily to higher sales volume and price increases partially offset by raw material cost inflation. Currency translation rate changes decreased segment profits by $1.4 million in the quarter. As a percent of net sales, segment operating profit was 9.5% in the quarter compared to 8.9% in the first quarter 2011.

Turning now to the balance sheet. Our total debt on March 31, 2012, was $1.32 billion including total short-term borrowings of $677 million. Total debt on March 31, 2011, was $1.34 billion. Our cash balance at the end of the quarter was $25.5 million compared to $53.9 million at the end of first quarter 2011. Total borrowings to capitalization were 46.7% at the end of the quarter versus 45.4% at the end of the first quarter last year. Long-term debt to capitalization was 22.8% at the end of the quarter this year compared to 22.4% last year.

In the first quarter 2012, we spent $32.8 million on capital expenditure. Depreciation expense was $37.9 million, and amortization expense was $6.6 million. For the full year this year, 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. In California, the Santa Clara case involving 8 cities and counties in California and 5 former lead pigment manufacturers, continue to move through the discovery phase. A pretrial hearing is scheduled for May 22, and the court has set a trial date of September 10, 2012. Once discovery is completed, the parties will have the opportunity to file dispositive pretrial motions.

That concludes our review of the results for first quarter 2012, 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. And good morning, everybody. Thanks for joining us today. The preannouncement we issued on April 9 took some of the suspense out of today's release. Our practice is to update guidance when it becomes apparent that we will exceed the top end of our original EPS range by the greater of 10% or $0.10 per share. Our results in the first quarter easily cleared both of these hurdles. Response to our preannouncement also gave us insight into some of the questions you're likely to have regarding our results for the quarter. And I'm sure you'll have some additional questions, but let me take a few minutes to address the obvious ones, namely, the sustainability of the strong demand we experienced in the quarter, the current trajectory of raw material costs and the success of our recent price increases.

Starting with the demand front. First quarter consolidated volumes net of acquisitions grew at the strongest pace we've seen since the first quarter of 2004. Compared to our performance in the first quarter of last year, demand strengthened in virtually every product category, with every customer segment in every geographic region. While it's difficult to quantify the impact of favorable weather in the United States had on first quarter volumes, we are certain it did have some positive impact. We're equally certain that the strong sales trends in the quarter are an indication that market demand is, in fact, improving.

Let me offer a couple of data points from our Paint Stores Group that I think support these conclusions. First, exterior paint sales volumes grew at a faster pace than interior, which does suggest an early start to the exterior painting season. However, both exterior and interior grew at double-digit rates in both revenues and gallons. Second, we looked at our sales results by geographic region. As Bob pointed out in his comments, our 2 northern Paint Stores divisions turned into strongest year-over-year sales increases, which would again suggest some weather impact. However, 3 of our 4 divisions grew sales by more than 20%, and the fourth was up in the high teens. The spread from the highest growth rate to the lowest was just over 5 percentage points.

We think this data confirms that there was likely some weather benefit in our first quarter results with equally convincing evidence that fundamental demand in the market is strengthening. Even with the volume improvement we saw in the quarter, the good news is that the market still has a long way to go to get back to what we consider to be sustainable levels.

Sales volume growth, particularly by our Paint Stores Group, was the overriding reason earnings came in above our initial expectations. Consolidated gross margins in the quarter declined 40 basis points year-over-year, primarily to the annualization of the raw material inflation we experienced in the last 9 months of 2011. Although the price of high-grade chloride titanium dioxide continues to rise, the magnitude of the price increase announcements has diminished in recent quarters and global demand for TiO2 has softened, but it remains to be seen whether these increases will be fully implemented. At this point, however, year-over-year raw material cost inflation appears to be on pace with the high single digit to low teens rate we anticipated for the year, with most of the pressure coming from titanium dioxide.

We continue to make progress in implementing the price increases required to offset these raw material cost headwinds. In the quarter, pricing contributed just over half of the increase in our consolidated sales. As our Paint Stores Group makes further progress in the October and February announcements, the impact to pricing and revenues should increase modestly in the second quarter, again, which should result in sequential gross margin expansion. It appears that the first quarter will be our most challenging quarter from a cost price standpoint.

Working capital for the company, which is inventories plus receivables minus payables, decreased as a percent of sales to 12.7% from 13.9% in the first quarter last year. The change in working capital accounts and the increase in net income each added approximately $30 million to net operating cash in the quarter. This increase in net operating cash was offset by a payment of $59 million to the IRS to complete our 2011 tax settlement.

During the quarter, we acquired 1.8 million shares of the company stock for treasury at an average cost of $100.44 per share for a total investment of $181 million. By March 31, we had remaining authorization to acquire 19.25 million shares. Yesterday, our Board of Directors approved a quarterly dividend of $0.39 per share, up from $0.365 last year, keeping our string of 34 consecutive years of dividend increases intact.

We also continued to invest in our control distribution platform during the quarter. Paint Stores Group added 5 net new stores, bringing our total store count in the U.S., Canada and the Caribbean to 3,455 stores compared to 3,397 one year ago. Our plan continues to call for Paint Stores Group to add approximately 60 to 65 net new store locations during 2012.

Looking ahead, we remain cautious in our outlook on raw material costs, but are increasingly convinced that the improvement in market demand we've seen over the past few quarters will prove durable. We anticipate that our consolidated net sales in the second quarter will increase 10% to 15% compared to last year's second quarter. With sales at that level, we expect diluted net income per common share for the second quarter to be in the range of $1.92 to $2.07 per share compared to last year's record performance of $1.66 per share.

For the full year 2012, we expect consolidated net sales to increase over 2011 by a high single digit to low teens percentage. With the annual sales at that level, we've increased our expectations for full year diluted net income per common share to be in the range of $5.75 to $6.05 per share compared to $4.14 per share earned in 2011.

Again, I'd like to thank you for joining us this morning and now the team would be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from P.J. Juvekar of Citigroup.

P.J. Juvekar - Citigroup Inc, Research Division

SG&A spending was up almost 10% year-over-year. I was wondering if there was any pull forward or promotions or marketing expenses from spring season into 1Q.

Sean P. Hennessy

P.J., this is Sean Hennessy. And we marginally spent a little more SG&A on merchandising and advertisement, but really no pull forward. I think that the advertising plan that we -- had planned in the first quarter we ended up doing. I think the majority of that, when you take a look at that SG&A increases with the sales increase that we had, I think the hours in the stores and start seeing us putting more service hours in the store to make sure that the customer service is maintained. So our SG&A did go down as a percent of sales. It did have an increase as a percentage, you did mention. But when the gallons are going that way, you're going to see us continue to add service in the store to make sure that proper customer service is handled.

P.J. Juvekar - Citigroup Inc, Research Division

Okay. And secondly, what are you seeing in the DIY versus the contractor channel? And is the contractor business coming back sustainably in your opinion?

Christopher M. Connor

Yes, P.J., both of those segments, as we commented, had strong quarters for the company. Speaking on our Stores business, specifically, the DIY business also enjoyed a double-digit sales, which is consistent with the performance we've been seeing in the DIY side of that now for the last 5 or 6 quarters. The good news in the quarter, and the one that we've been saying should come at some time, was the strength in the contractor segment, again, across all segments. And for us, that will be the new residential painting contractor, the commercial painting contractor, property management, the residential repaint. All of these segments are clicking and generating strong sales and volume gains.

Operator

Our next question's coming from Kevin McCarthy of Bank of America Merrill Lynch.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Chris, with regard to your same-store sales growth of 20.4% in Paint Stores, will you elaborate on how much of that might have been derived from volume versus price in the quarter roughly?

Christopher M. Connor

Yes. I think we've been commenting, Kevin, that our price impact in the Stores business had been in the high single digits over the last kind of third and fourth quarter of last year. That trend continued into the first quarter of this year. So slightly more than half of that lift for the company in the segment for the quarter was volume.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay, great. And then, given the trends that you're seeing on raw materials, have you taken any very recent price actions since the 8% increase that I believe you were implementing for Feb 1? Or would that be likely in your view?

Christopher M. Connor

Okay. No additional pricing activity has taken place since the February announcement to our stores. As is our practice with the investment community, we don't preannounce any pricing activities. We cover that off with our customers first and then provide great transparency to you. So no comments on that at this time.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Fair enough. And then finally, Chris, on the splits on the exterior architectural coatings versus interior, I think you mentioned that those were up double digits. Would you care to comment on the magnitude of that spread and how that would compare to normal trends with an eye toward disentangling the weather effects?

Christopher M. Connor

Yes. It's a little meaningless in the first quarter because, historically, our interior gallons are much, much greater as they should be at that time of the year than exterior gallons. So the percentage improvement, one relative to the other, kind of skews that. I think the point that we'd like to make sure that the investment community understands is that the interior gallons were up double digit, and that really gives us the confidence of the underlying strength in the market. So exterior gallons outpaced that. It was a good quarter for that, but it's the interior numbers that really drove the quarter.

Operator

Our next question is coming from Jeff Zekauskas of JPMorgan.

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

I was wondering about your Latin American operations. Do you use chloride-based TiO2 there or sulfate-based TiO2?

Christopher M. Connor

Predominantly chloride.

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

And is there very much of a price difference between chloride-based TiO2 these days and sulfate-based TiO2 on average?

Christopher M. Connor

Jeff, I don't have any data of -- at my fingertips on the spread. I do know that a spread has opened up between chloride and sulfate. I don't know what that spread is on the spot market.

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

Okay. And then lastly, are you looking at any large acquisitions this year, or what's the probability that Sherwin-Williams might make a multibillion-dollar acquisition in 2012?

Christopher M. Connor

Yes. Jeff, I think inappropriate to prospectively comment on acquisitions. I think the best guidance for you is to look at the historical way the company's approached that. Our track record has been to really find these terrific bolt-on acquisitions to strengthen our control distribution platform in the Americas or add technology to us. And to the extent that we can continue to find those that add shareholder value, we'll do those. I think that's all we have to say on that at this time.

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

So a big acquisition, the probability would be pretty small?

Christopher M. Connor

Well, just the logic of how many of those targets remain in the industry, so -- I mean, I wouldn't care to comment on that one way or the other.

Operator

Our next question is coming from Dennis McGill of Zelman & Associates.

Dennis McGill - Zelman & Associates, Research Division

First, Chris, I just have to compliment you on knowing the underlying chemical makeup of the TiO2 in Latin America. Impressive. So just one big picture question. You gave great data to understand the breadth of the recovery. I guess just in your professional opinion, kind of the gut reaction, what's the best answer as to why? Why do you think it's so broad-based? And what happened of late that's kind of turned the corner for this for the consumer?

Christopher M. Connor

Yes, Dennis, we've been commenting for a while about the unsustainable gallon volume numbers for the American professional coatings industry. And as you recall, after a rough start to the year last year with negative volumes, flattening out in the second, slightly up in the third and then trending better in the fourth, I think we commented on the fourth quarter call that that momentum would be continuing to carry through. We were confident there was pent-up demand for normal maintenance and decorating that was needed to be addressed. And I think as -- we just said 4 years is an awful long cycle to go through, that the past cycles would show that this would start to rebound. We expected the contractor share of the end market would rebound back towards the 50% more historic run rate level, and that having gained share in the downturn that we feel in good position to capitalize on it. And all those factors kind of started to come to fruition in the first quarter.

Dennis McGill - Zelman & Associates, Research Division

Okay, I appreciate that. And then, the second comment, I imagine you'd normally only dream about double-digit volume growth. So now that you've seen it and you've seen how the cost structure reacts, what would you say, relative to your expectation heading into this year, about your ability to lever volume in which you found in the first quarter relative to that?

Sean P. Hennessy

Yes. I think we feel very good about the leverage that we've had. If you look at the flow-through that Stores had, and I think we've made comments for many, many years that when we give volume, we'd have flow-through and last year [ph], we used to talk about 3%. And once we got past 3%, you'd see it. And then after the downturn that Chris talked about with the volumes in North America and when you take a look at the increases in the flow-through we had in the first quarter, we feel pretty good about the operations and net of gallons continue -- will continue to flow through operating profit.

Dennis McGill - Zelman & Associates, Research Division

So Sean, is it fair to say that what you saw in the expense leverage is what you would have expected for this, given level of volume?

Sean P. Hennessy

Yes.

Operator

Our next question is coming from Chuck Cerankosky of Northcoast Research.

Charles Edward Cerankosky - Northcoast Research

First question, looking at the 260 basis points of margin improvement in the Paint Stores segment in the quarter, I don't think you got any help with the gross margin line there, so it was all leverage. Sean, what kind of -- what does that tell us about the opportunity for further margin expansion or the cadence thereof over the rest of this year?

Sean P. Hennessy

Yes. Chuck, as I'm sure you recall, 15.5% operating margins was our peak at Stores Group and that happened in 2007. And as the volume went down -- last year, we were in the 13s. So we take a look at it. We think that -- we always felt that the 15.5% was not a -- not just a onetime event. I think that we thought that eventually we could get back to that point in the way that we structured and the way that we've continued to build out the Stores group, we feel that that's not the ceiling. That we think, eventually, we'll be above that 15.5% operating margin.

Charles Edward Cerankosky - Northcoast Research

You think you'll hit it this year?

Sean P. Hennessy

Well, we don't forecast segments and so forth. So -- but I'll tell you what, first quarter is up 2.6%. We were 13.1% in the year. If we did that every quarter, we'd be at 15.7%. We're not forecasting our -- we're not giving guidance for that though, Chuck.

Charles Edward Cerankosky - Northcoast Research

I read you, I read you. It was pretty impressive. Am I right though, you had gross profit margin pressure in Paint Stores in the quarter?

Christopher M. Connor

Yes.

Sean P. Hennessy

Yes. In the Q, when you get a chance, when we submit our Q and a add-on line [ph], you're going to see that the incremental gross margin dollars were up $80 million. That will be what we write and so right there you'll see that that will show you that's where we were.

Charles Edward Cerankosky - Northcoast Research

All right. When you look across your various paint lines, whether it's DIY or contractor brands or it's Pratt & Lambert or Dutch Boy or Sherwin-Williams, with the price increases that we've seen, what quality levels were your customers buying in the quarter? Maybe there's not a general answer to this, but were they trading up for quality? Were they affected? Is product mix affected by price?

Christopher M. Connor

Yes. We've commented on that historically, Chuck, and I think the same trends are in effect here. We continue to enjoy the modest shift mix towards better quality products. Again, if the contractor business has strengthened, they tend to be a high-quality purchaser to reduce their labor costs. So all good news there, nothing new to report.

Charles Edward Cerankosky - Northcoast Research

All right. And in the rest of the year, you're going to have -- well, I guess more for the second quarter by a 10% price tailwind. With this kind of volume growth, it seems to me your sales expectation is a little conservative. Would that be a fair way to characterize it?

Sean P. Hennessy

Yes. We've also got some -- we're taking a look at the currency and someone mentioned Latin America Group earlier. Latin America Group had a pretty sizable currency and you look at what's happened in Real, and you look what happens with the Mexican peso and then euro. Last year, the euro was about $1.34. Right now, we're watching the euro. So I think -- we don't do segments, but I think if you look at the segments, that'll probably tell you that of all the segments, we think probably Stores Group is going to lead us again in the second quarter.

Operator

Our next question is coming from Bob Koort of Goldman Sachs.

Brian Maguire - Goldman Sachs Group Inc., Research Division

It's Brian Maguire for Bob this morning. Just one other data point on that is something you could provide. Maybe just comment on the inter-quarter trend you saw there and how that -- those volume numbers really trended, particularly at the end of the first quarter when you got into some more normal weather patterns and maybe even into April if you got any data you could share?

Christopher M. Connor

Yes. I think that the quarter was pretty steady throughout all 3 months, which again, back to your comment, Brian, should give some comment to the underlying market strength as opposed to the particular weather. The best day we had in the quarter was February 29 because leap year goes up against nothing. When you're a retailer, leap year matters. But other than that, it was just really a very solid quarter throughout the entire 3 months.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Great, yes. And then looking at the difference between the Consumer growth and the Paint Stores growth, you try and extrapolate the volume growth and Consumer, maybe it was low-single -- low- to mid-single digit volume growth. But it seemed like maybe 1/2 to -- 1/3 to 1/2 of what it was at the Paint Stores. How do you kind of reconcile the big difference in the volume growth between those 2 channels?

Christopher M. Connor

There's a couple of things. We don't -- the reason we always -- when we try to give you a flavor for the comp stores is really for pricing. We don't really release unit volume gallon, just volume throughout the Consumer, because in Consumer you have Thompson there. You have Minwax. You have brushes, rollers, caulk, frame and paint. So unit movement is really tough to see, but there's no doubt that the Stores Group was definitely stronger than in the Consumer. But there was a lot of other moving parts in that Consumer relating to a lot of other product lines.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay. And then -- and just one last question, if I might, on the -- your inventory levels. Have you been doubling inventory? Or -- we've heard from some of the -- 2 producers, that they continue to see de-stocking in their chains. Have you tried to take advantage of some of the softness there to do some pre-buying, or building your inventory levels? I guess you're kind of peaking on your inventory levels now or as you head into the more normal painting season. But any sense of any change versus 1 year ago in the inventory?

Sean P. Hennessy

We always build inventory in the first quarter. If you watch, we do have enough capacity to supply every gallon of paint that we sell in June, July and August. So there's such a sales curve in our business. In the first quarter, we're always going to build inventory. If you look at it, we feel pretty good about where our inventories are. We had more inventory in finished goods last year. But last year, there was a lot of concerns about titanium dioxide shortages or raw material shortages, and that's really what drove it last year. We find that pre-buying or doing different things with different raw materials, the efficiencies of our operation, we're better off -- instead of having more invested, the amount that you're going to pre-buy or pre-produce really doesn't change a great deal so -- versus trying to find locations to bring that inventory in and handle it multiple times. So we feel this quarter was a pretty normal quarter. It went up against last year where we did pre-build some finished goods inventory. But this year's pretty normal, and we feel pretty good at where we're at.

Operator

Our next question is coming from Don Carson of Susquehanna Financial Group.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

A question on -- first on guidance. I know you beat the midpoint of your original first quarter guidance by about $0.30, yet you're only taking up your full year guidance by about $0.38. As we get into the seasonally strong second quarter, shouldn't this emerging volume recovery both in the overall market and contractor sales lead to more earnings leverage?

Sean P. Hennessy

Yes. Don, I would tell you that typically -- we talked about the sales curve here. The first quarter is our lowest and smallest quarter. So when you put that gallon through, that has a nice effect on us. And I think that typically, I would tell you it's a -- very few times have we changed our full year guidance after the first quarter up or down because sometimes we'll actually say, a good week in June takes care of a month of February -- a bad month of February. But when you sit there and take a look at it, the first -- the full year guidance, there's a lot of different things moving in and out. And you typically, in the first quarter, we'll see what happens in the second and third. Someone had just mentioned to me that the last time we had 20% comp store gains were back in 1994. So to sit there and say that that occurred at the smallest quarter of the year -- will that continue in the larger ones? But it's only happened once in the last 18 years. So to project that out to the next 3 quarters, we don't have that in our guidance.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

A question for Chris on your view of the overall market. I think by your numbers, you're showing, what, 612 million gallons of U.S. volumes last year for the industry, which was down slightly. What kind of recovery do you see this year in percentage terms? And do you still think that maybe 700 million-plus is the normalized level for the U.S. market?

Christopher M. Connor

Yes, Don, we're absolutely convinced that over 700 million gallons is the normalized volume level for the U.S. market. That would indicate that housing starts would be back over 1 million, 1.2 million, 1.3 million perhaps. Existing home turnover numbers would be back to more normalized run rates in the plus or minus 6 million units per year, and then a more normalized maintenance and decorating schedule. So as we come out of this historic downturn in volumes and to your point, negative again last year to 612 million, we think there's a several year ramp-up here of maybe 2x, 3x the GDP growth, which has been the historical growth rate for architectural gallons. And to Sean's point, it's very difficult after one quarter and the lightest quarter of the year to indicate that that's going to be that strong going forward. We do take great comfort in all the anecdotal conversations that we have with thousands and thousands of painting contractors in our stores every day and listen to them talk about the work they have lined up for the year, the fact that they're hiring crews and adding painters to their teams or purchases of the kinds of equipment and materials that they would need for a busy season are ramping up as well. So all these would indicate to us is that 612 million gallon number that the industry saw last year should, in fact, be moving towards the positive direction. And time will tell how long it takes us to get back up over 700 million gallons.

Operator

Our next question is coming from Dmitry Silversteyn of Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

Just wanted to follow through on the raw materials situation. You gave kind of your expectations for the year, which should maintain at high single digit to low teens. If you look at the impact of raw materials had on your quarter, can you talk about both on year-over-year and quarter-on-quarter basis what you saw and what you expect to see in the second quarter?

Sean P. Hennessy

Yes, Dmitry. Without getting too specific, the first quarter would obviously have the most annualization impact in it from the inflation that we saw in 2011. So with a high single digit to low teens expectation for the year, even if there was very little incremental inflation from Jan 1 to March 31, you would expect that first quarter raw material costs would be at the high end of that range for the year.

Dmitry Silversteyn - Longbow Research LLC

On year-over-year basis?

Sean P. Hennessy

Yes.

Dmitry Silversteyn - Longbow Research LLC

Okay. And versus the fourth quarter, your raw materials kept going up, and I would imagine that the fourth quarter raw materials purchases flowed through your P&L in the first quarter. So was raw material actually a benefit to your margins in the first quarter?

Sean P. Hennessy

No. There was some incremental inflation from 4Q to 1Q sequentially.

Dmitry Silversteyn - Longbow Research LLC

Okay. Was there a deflation in 4Q versus 3Q of last year, do you remember?

Sean P. Hennessy

No. Each quarter, with the increase of our raw materials, the increases occurred. Second quarter was higher than the first quarter. The third quarter was higher than the second quarter. And the fourth quarter was higher than third quarter.

Dmitry Silversteyn - Longbow Research LLC

So you didn't see the raw materials declining in the fourth quarter like most other petrochemical purchasers have seen?

Sean P. Hennessy

Well, we didn't necessarily make that comment with reference to any specific component of the raw material basket, but the basket in total inflated each quarter last year, primarily driven by titanium dioxide.

Dmitry Silversteyn - Longbow Research LLC

Got it. Okay, that's helpful. Okay. And the second question, obviously, double-digit rate of growth may not be sustainable. Certainly, I don't think it's sustainable for the year. But do you think at least high single digits is possible as we get into the second quarter that, in other words, whatever external paint demand was pulled into the first quarter should not -- as you mentioned, it wasn't meaningful enough to impact, assuming weather cooperates, the normal painting season in the second quarter. So you're still looking -- I'm assuming you're still looking for close to double-digit growth in volumes in the second quarter of the year as well.

Sean P. Hennessy

Well, we did forecast sales at 10% to 15%, and I think that that's the consolidated number. And I think that when you take a look at it, Chris mentioned how much was the selling price was for the Stores Group, but I think that you make your thoughts on that.

Dmitry Silversteyn - Longbow Research LLC

Okay. And then final question, given that you probably have more volume leverage, I would assume in your Stores Group than in the Consumer Group, and your Stores Group volumes look like they were stronger year-over-year in terms of growth versus the Consumer Group. What's accounting for the fact that your margins in the Consumer Group expanded so much more than it did in the Paint Store Group?

Sean P. Hennessy

Well, I think, number one, they had a nice sales gain, and I think that they've been working on some margin improvement. And I think that if you look at the Stores Group, we were increased on our SG&A. We're feeling that whereas in the Consumer Group, you don't see it. And then [indiscernible] the takes as the Consumer Group is making the paint for the Paint Stores Group. And so when you see that volume increase, you'll see that they do get the benefit of that.

Dmitry Silversteyn - Longbow Research LLC

On the gross margin side, but not necessarily on the -- not necessarily in the operating margin side, right, because you don't have the fixed cost of your stores in the Consumer Group?

Sean P. Hennessy

Right, which is why I'm saying that when the one went from 7.4% to 10%, which was pretty strong, we feel pretty good about it, Consumer actually grew faster than that and that's because of the incremental SG&A that went into Stores.

Dmitry Silversteyn - Longbow Research LLC

Got it. And that incremental SG&A, was that just considered a onetime campaigns and setting up posters and new displays? Or is it going be an ongoing...

Sean P. Hennessy

No, it was headcount. I mean, it's ongoing. We did put more hours into the store to satisfy the customer's needs.

Dmitry Silversteyn - Longbow Research LLC

So as long as there's good demand, you expect to continue to pay your guys overtime, which is a high-priced problem to have?

Sean P. Hennessy

Right.

Christopher M. Connor

And not so much overtime. It just -- when we say putting hours in, we're ramping up. We're hiring more people and staffing these stores at a better level, Dmitry.

Operator

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

Eric Bosshard - Cleveland Research Company

A question on gross margin. We saw the volume posit that held forward [ph] in the first quarter. In terms of the gross margin recovery, I think you've talked about 43% to 46%. I'm just interested if that's still the range you're targeting and how you think the pace of recovery plays out back towards that as we move forward. Not necessarily talking about the second quarter, but over the, call it, medium term.

Sean P. Hennessy

Yes. I think that the long term, we still believe the 43% to 46% number is a good number, Eric. And in the meantime, in the short term, I think that -- or midterm, whatever you want to call it, we think that -- we talked about the first quarter really being the toughest when it comes to this raw material annualization. We think that we're probably going to start seeing some better comparisons to last year. Last year, we came in at 42.7% for the year. So on a quarter-by-quarter basis, I think you're going to see better comparisons, and I think you'll see the first one in the second quarter.

Eric Bosshard - Cleveland Research Company

Great. And then secondly, on the SG&A and -- on the SG&A -- rate of SG&A growth, and I understand in 1Q, there were a few moving parts, but can you talk about a little bit about the discipline of how SG&A should grow relative to either sales dollar growth or volume growth? I know you talked a little a bit about that last quarter, but can you just sort of refine how we should be thinking about that?

Sean P. Hennessy

Yes. I think that -- and this is where you get into -- we -- we're always looking to get improvement in the operational efficiencies. So we look at our gallons per full time equivalent. We also look at sales per full time equivalent. Some of those have been tougher to watch, Eric, because of the selling prices have gone over the last 2 to 3 years. You can imagine it was easier to get sales per full time equivalent increase than it was gallon per full time equivalent. So it's hard to give you a metric that I would tell you, "Here's how you should build your models, and here's why." When you take a look at where we are, a lot of times on the plant side, we know pretty well where we're going to be in total capacity and where we are in capacity utilization because around the country, you might have stores that are in different spots of the utilization. So as those gallons grow in certain parts -- and you can imagine, we're very tight when it comes to the fourth quarter and first quarter on overtime and part-time hours. And when the demand came and there was demand everywhere, you saw SG&A and hours growing at -- in the Midwest division and Eastern division. So I think that probably the best venture I can tell you, if we have those kinds of gallon gains for the short period, you're going to see our SG&A grow in the 6% to 8% to 9%. When that starts coming down, then I think you'll see that go down.

Operator

Our next question is coming from Nils Wallin of CLSA.

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

First off, I guess, is there a way either quantitatively or qualitatively to break out the type of demand you saw? How much of that you thought was pent-up demand? How much of it was the normal type of growth you would see from maintenance and property management?

Christopher M. Connor

Yes. That's a good question, Nils. I don't know that we have much more data to offer you than kind of the historic growth of the industry. We long believe that architectural paint volumes move pretty much in lockstep with GDP growth. So to the extent that the market's growing -- the broader economic market is growing in a 1% to 2%, gallons should move at that pace. Sherwin has long believed that we can gain share in any cycle and that we would grow at 2x that. And then you put our kind of strong gallon performance for the quarter and figure out that some of that is rebound and pent-up demand and some of it is outperforming our competitors. Not quite sure that I can offer much more than that.

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

Okay, fair enough. It looks like you've built out more stores -- or extended more stores in the Southwestern division kind of year-over-year or at least 2011 versus 2010. And I'm wondering, is that a conscious decision because some of those areas were the most hurt during the downturn, so you figured those will be the ones that will rebound the quickest? Or is it lack of representation or share gains?

Christopher M. Connor

Yes. We take the long-term view on the right markets to be putting our stores in. I think we've shared with the investment community a density map that shows that the western part of the United States is where our household penetration is at its lowest levels. Last year's numbers reflect a little bit more of a focus in California real estate development and strong store count adds in that market drove that number.

Operator

Our next question is coming from Aram Rubinson of Nomura Securities.

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

Two things. One is would you mind giving us a little bit more color on that gross profit dollar that you gave us for the Paint Stores Group for the other divisions, if you don't mind?

Sean P. Hennessy

Sure. What's going to happen is -- and just give me a few seconds here. Stores group was $80 million and the incremental gross margin dollars, I think, was $60 million. And the Global Finishes Group, I think, it's right around $10 million. And then you have over in the Latin America group, $16 million -- oh, I'm sorry, I said that wrong. $3 million.

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

Okay, so $80 million, $60 million, $10 million and $3 million?

Sean P. Hennessy

Yes.

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

Two other quick ones, just to follow up. I appreciate that opening stores is a difficult task, both between situating them and also having human capital to open them professionally. There are companies like Dollar General that are opening 650 stores while you guys are opening 60. So in other words, it's probably possible to open more effectively. I'm wondering when you'll step on the gas and what you'd still need to see and what -- how high is up maybe on that metric for you?

Christopher M. Connor

Well, our hats off to Dollar General. 2 stores a day for a year, that's a hell of a pace. We've run as hard, Bob [ph], as 100 to 120 at our peak. And I think that we've commented in the last couple of years that with the significant downturn in the market, we've kind of considered ourselves at idle speed at this 50 to 60 store pace. Our expectations are that that number will begin to ramp up. We expect to do more this year than last year. And I think that we're going to continue to do more going forward.

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

Okay. And then the final question, if you don't mind, is just a comment on the administrative segment. It looks like a very high number, $74 million. I think that was the -- maybe there was one other quarter that was that high in the past 10 quarters. What should we think in terms of modeling for that since it's a little bit less of kind of a straight line? How can we think about number for the year?

Sean P. Hennessy

Yes. I think when you take a look at that $74 million, we were up $22 million, so we're up over 40%. Last year at around $243 million for the year. I don't think we're going to grow at 40%, but I could see that growing at 10% to 15% for the year.

Operator

[Operator Instructions] Our next question is coming from Chuck Cerankosky of Northcoast Research.

Charles Edward Cerankosky - Northcoast Research

Yes, Sean, just as a follow-up. I was looking at the others items in your P&L. The foreign currency gain was a nice swing in your favor. Was that cash, or is it just a function of booking assets held outside the U.S.?

Christopher M. Connor

It was the latter, Chuck, and it was really just an intercompany asset between us and Mexico with the Mexican changes there. So that's where -- you're right, the $5 million versus last year's $1.3 million. But there was the pounds from Great Britain and the Mexican peso with the assets on the balance sheet.

Operator

At this time, there are no further questions. I'd like to hand the floor back over to Mr. Bob Wells for any closing remarks.

Robert J. Wells

Thanks, Jackie. As a reminder, our annual financial community presentation is scheduled for Wednesday, May 23. It will be held at the Park Plaza Hotel in Boston. The program will consist of our customary morning presentations with questions and answers, followed by a reception and lunch. And if you haven't signed up and would like to attend, there's still time. Please send me an e-mail at rjwells@sherwin.com, and I'll reply with a link to our registration site. Thanks again for joining us today, and thank you for your continued interest in Sherwin-Williams.

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