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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

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

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

P.J. Juvekar - Citigroup Inc, Research Division

Brian Maguire - Goldman Sachs Group Inc., Research Division

Trey Grooms - Stephens Inc., Research Division

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Abhiram Rajendran - Crédit Suisse AG, Research Division

Duffy Fischer - Barclays Capital, Research Division

Ivy Lynne Zelman - Zelman & Associates, Research Division

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

Matthew McGinley - ISI Group Inc., Research Division

Eric Bosshard - Cleveland Research Company

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

Charles A. Dan - Morgan Stanley, Research Division

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

Charles Edward Cerankosky - Northcoast Research

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Dmitry Silversteyn - Longbow Research LLC

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

John E. Roberts - The Buckingham Research Group Incorporated

The Sherwin-Williams (SHW) Q3 2012 Earnings Call October 25, 2012 11:00 AM ET

Operator

Good morning. Thank you for joining the Sherwin-Williams Company's review of the third quarter 2012 financial results and expectations for the full year. With us on today's call are Chris Connor, Chairman and CEO; Sean Hennessy, CFO; Al Mistysyn, Vice President, Corporate Controller; and Bob Wells, Senior Vice President, Corporate Communications.

This conference call is being webcast simultaneously in a 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 Thursday, November 25, 2012, at 5 p.m. Eastern Time.

This conference call will include certain forward-looking statements as defined under U.S. federal securities laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which 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 the review of third quality results, we will open the session to questions. I will now turn the call over to Bob Wells.

Robert J. Wells

Thanks, Jesse. As usual, in order to allow more time for questions, we've provided balance sheet items and other selected information on our website at sherwin.com under Investor Relations Third Quarter Press Release. Summarizing overall company performance for the third quarter 2012 versus third quarter 2011, consolidated net sales increased 4.8% to $2.6 billion, due primarily to higher paint sales volumes in our Paint Stores group and selling price increases. Acquisitions increased consolidated net sales approximately 1% in the quarter, and unfavorable currency translation rate changes decreased net sales 2.2%. Consolidated gross profit dollars increased $112 million to $1.15 billion. Gross margin increased 240 basis points to 44.2% of sales from 41.8% in the third quarter last year. The increase in gross margin was primarily due to higher year-over-year selling prices, improved fixed cost absorption from increased sales volumes and slight sales mix benefit.

Selling, general and administrative expenses for the quarter increased 5.2% to $799.8 million. As a percent of sales, SG&A increased to 30.7% in the third quarter this year, from 30.6% last year. Interest expense was essentially flat at $10.4 million. Consolidated profit before taxes in the quarter increased $82.7 million or 31.8% to $343 million. Profit before tax as a percent of sales increased to 13.2% from 10.5% last year.

Our effective tax rate in the third quarter was 31.5%, compared to 30.9% in the third quarter of 2011. For the full year 2012, we expect our effective tax rate to be in the low 30% range.

Consolidated net income increased $55.1 million to $235 million compared to $179.9 million in the third quarter of 2011. Net income as a percent of sales increased to 9% from 7.2% in the third quarter last year. Diluted net income per common share for the quarter increased 31% to $2.24 per share from $1.71 per share in 2011. Unfavorable currency translation decreased diluted net income per common share $0.05 in the quarter. Acquisitions had no significant impact on earnings per share.

Looking at our results by operating segment. Sales for our Paint Stores group in the third quarter increased 9.6% to $1.55 billion. Higher paint sales volumes across all end market segments and selling price increases accounted for most of the increase in sales comparable store sales, that is, sales by stores open more than 12 calendar months, increased 8.9% in the quarter compared to third quarter last year.

Regionally, in the third quarter 2012, our southeastern division led the sales performance followed by Southwestern division and Midwestern division -- I'm sorry, Eastern division and Midwestern division. Two Paint Store divisions reported sales increases of above 10% compared to last year. Segment profit for the group increased $63.7 million or 26.9% to $300.6 million in the quarter as higher sales volume and selling price increases were partially offset by higher year-over-year raw material costs and selling, general and administrative expenses. Operating margin increased to 19.3% from 16.7% in the third quarter last year.

Turning to our Consumer group. Sales in the third quarter decreased 1% to $348 million due primarily to lower sales volumes to most of the group's retail customers, partially offset by acquisitions and higher selling prices. Third quarter segment profit for the consumer group increased $16 million or 39.1% to $57.1 million, due primarily to improved operating efficiencies and higher year-over-year selling prices that were partially offset by higher raw material costs. Segment profit as a percent of external sales increased to 16.4% from 11.7% in the same period last year.

For our Global Finishes Group, sales in U.S. dollars also decreased 1% to $491.8 million in the quarter, due primarily to unfavorable currency translation rate changes and lower paint sales volume, partially offset by selling price increases.

In the quarter, unfavorable currency translation decreased sales in U.S. dollars by 4.6%. Stated in U.S. dollars, third quarter segment profit increased $8.8 million or 32.1% to $36.4 million. Higher selling prices and good expense control more than offset higher raw material costs and unfavorable currency rate changes. Currency rate changes decreased segment profit by $5.1 million in the quarter. As a percent to external net sales, segment profit increased to 7.4% from 5.5% in the third quarter last year.

Finally, for our Latin American Coatings Group, third quarter net sales in U.S. dollars decreased 4% to $208.7 million, due primarily to unfavorable currency translation rate changes partially offset by selling price increases and higher paint sales volumes. Unfavorable currency decreased net sales by 13.8% in the quarter. Stated in U.S. dollars, segment profit increased to $21.9 million in the quarter, from $15.9 million last year. Unfavorable currency translation rate changes decreased segment profit $3.7 million in the quarter. As a percent of net sales, segment operating profit was 10.5% in the quarter, compared to 7.3% in the third quarter of 2011.

That concludes my review of the results for the third quarter 2012, so I'll turn the call over to Chris Connor, who will make some general comments and highlight our expectations for the remainder of the year. Chris?

Christopher M. Connor

Thank you, Bob. Good morning, everybody, and thanks for joining us today. The third quarter was a solid quarter for Sherwin-Williams in terms of both sales and profit improvement. Consolidated sales increased almost 5%, despite soft market conditions and currency headwinds across most of our nondomestic markets. We also had to overcome the diminishing effect from last year's price increases and a strong revenue growth comparison from the third quarter of last year. Despite that, in many of the financial metrics Bob just walked you through, notably the $2.6 billion in sales for the quarter, $235 million in net income and $2.24 earnings per share, are high watermarks for any quarter in our company's history. Year-to-date, our flow through on operating income is over 31%.

As encouraging as these results are for us, we still see room for improvement. Three of our 4 operating segments reported soft sales in the quarter, and many of end minivan markets we serve, for example, domestic commercial construction in particular, have not yet emerged from recession. Although we've made progress on the gross profit line, our consolidated gross margin remains well below our all-time high of 46% on a full year basis.

If you look at our third quarter results by segments, they were pretty much in line with our expectations. Paint Stores group once again delivered strong year-over-year sales growth at a pace that we believe is comfortably ahead of the industry, roughly half of the segment's revenue growth came from volume. Our investments in new store openings and superior store staffing continues to drive market share growth. Our Consumer group, Global Finishes group and Latin American Coatings Group, reported strong profit for the quarter despite weak demand in many regions of the world. Combined sales of the 3 segments declined slightly, while combined profit increased more than 36%.

The silver lining around weakening international paint coatings demand is the effect it has on raw material cost. Over the past 6 months, the price of high grade chloride, titanium dioxide had eased somewhat due to declining global demand. We've also seen a modest downward trend in the price of propylene, a key feedstock for monomers, latex, solvents and containers. We believe these trends are likely to continue. Based on these developments, we now expect average year-over-year raw material cost inflation for the paint and coatings industry to be in the mid-single-digit range in 2012, down from our previous guidance of mid- to high-single digits. Although the rate of input cost inflation appears to be moderating, the 240-basis-point increase in our third quarter gross margin was helped by better operating efficiencies in our Consumer group. Comparing our 9-month gross margin of 43.9% to last year's 42.7%, perhaps provides a better representation of the progress we've made in offsetting multi-year, raw material inflation with price increases and mix improvement.

SG&A spending was up $40 million in the quarter and increased 10 basis points as a percent to sales. Through the largest contributors to this increase for the new stores opened in the past 12 months, higher incentive compensation as a result of strong financial performance and incremental SG&A from acquisitions.

In the third quarter, we generated $367 million in net operating cash, bringing our 9-month net operating cash to $569 million, an increase of $123 million over the same period last year. Year-to-date, cash from operations has increased $182 million to $628 million. Nine month free cash flow, and we measure free cash flow as net operating cash less CapEx and dividends, was at $346 million. We continue to use this cash to invest in the company and expand our control distribution platform, complete suitable acquisitions, increased our dividend and purchase shares of our stock for treasury. In the first 9 months, our Paint Stores group added 28 net new stores, 8 of which were opened in the third quarter. This brings our total store count in the U.S. and Canada and the Caribbean to 3,478 locations, compared to 3,421 a year ago. Our plan calls for Paint Stores group to add approximately 60 to 65 net new store locations during this year.

In the third quarter, we bought back 500,000 shares of our common stock on the open market, bringing our year-to-date total to 3.8 million shares at an average purchase price of $113.96. On September 30, we had remaining authorization to acquire 17.25 million shares.

Last week, our Board of Directors approved a quarterly dividend of $0.39 per share, up from $0.365 last year. It is increasingly obvious that the global economy is slowing, and that risk to the U.S. economy has increased accordingly. However, to date, paint and coatings demand in our domestic businesses has been resilient. We remain optimistic that U.S. architectural paint market volumes primarily in the residential segments, will remain positive in the fourth quarter of 2012 and well beyond, and domestic demand for most industrial coatings will continue to expand. The greatest challenges going forward are likely be worsening market conditions in Latin America and Europe, and the increasingly difficult comparisons. Our outlook for fourth quarter 2012 is for consolidated net sales to increase in the mid-single digits, compared to last year's fourth quarter. With sales at this level, we expect diluted net income per common share for the quarter to be in the range of $0.98 to $1.18 per share, compared to $0.14 per share in 2011, which included a $0.71 per share charge last year for our IRS settlement. For the full year 2012, we expect consolidated net sales to increase by a high single-digit percentage over last year. With annual sales at that level, we've raised our expectation for diluted net income per common share for 2012 to be in the range of $6.35 to $6.55 per share, compared to $4.14 earned in 2011. 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 comes from the line of Jeff Zekauskas of JPMorgan.

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

I guess I'm struck by your overall incremental gross margin in the quarter, which I think was about 95%, and it looks like your cost of goods sold didn't really change year-over-year. So I imagine that some of the raw material benefits that the industry is seeing are now making a larger impression on your income statement even in this quarter. Is that right?

Sean P. Hennessy

I would not say it, Jeff. And I would tell you that, I'd like to paraphrase it this way, and hopefully, it'll explain it. When raw materials are rising, your LIFO expense is catching up. It's always -- is, it's like trying to catch up, and when you start to hit the peak, our LIFO index will still be greater than 1 this year, but that's why we continually talk about the year-to-date, because of all the different things that are going through that cost of goods sold and what you're seeing is last year, the raws were rising dramatically in the third and fourth quarter of last year, so our LIFO is catching up, and that's why we continue to do some of those things. So when I look at it, I think, as Chris said, the 43.9% versus the 42.7%, when you start doing those analysis instead of -- when we start looking at cap variances and LIFO and all the other things that are going on that are affected by those different things, but I think that our year-to-date is probably a better indication. I think the fourth quarter, our gross margin will be higher than last year. I think our gross margin for the year will be at or slightly higher than we are year-to-date. So I think you're going to see, progressively, our gross margin continues to get stronger, and I think that's when you're going to -- I think you're going to see that more in the future, but I think that you can't look at the gross margin in third quarter versus last year, that percentage and say, okay, that's what we're going to see in the future. Last year gross margin in the fourth quarter is 42.8%. That's why I really -- it's, I got a lot of confidence we're going to repeat last year's but, that's why I think year-to-date, we're actually going to see a 43.9% or slightly above that.

Operator

Our next question comes from the line of Ghansham Panjabi of Robert W. Baird.

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

Just going back to the store count of 28 versus your guidance, 60 to 65. Is this sort of a timing issue? Or is there a larger store network that's available that's, perhaps giving you some pause as you build out your stores?

Christopher M. Connor

Ghasham, this has been the historic pattern at Sherwin, despite -- lots of attempts to the contrary. We like to lay these stores in on a little bit more of an orderly path, but for a variety of reasons, many of them outside of our control, for example, real estate developers, communities getting permits passed, et cetera. This always tends to be a heavy fourth quarter waiting. So all the work that we've been doing on these single store, real estate negotiations, getting ready to open these stores, they all just tend to kind of unwind here in the fourth quarter. So we'll hit that number through individual stores.

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

Okay. And just a sort of a higher-level question, right, so Europe isn't huge for you, and a lot of companies in different industries are sort of reassessing whether they want to be in Europe longer-term. Just given what's happened there, does that change any of your strategy or strategic ambitions for that market over time for Sherwin?

Christopher M. Connor

Yes, we've been pretty clear about our interest in Europe. We do not have an architectural paint -- desire to be there for a variety of reasons. We, we're in the country, to participate in the Global Industrial Coatings businesses, primarily industrial wood coatings. And at this point in time, there's not been any indication that we'd be strengthening our position over there. I'm happy to have business that we have, and working hard to get them integrated and improve their operating margins.

Operator

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

P.J. Juvekar - Citigroup Inc, Research Division

Can you talk a little bit about the volume breakdown between the same-store channel and the consumer channel? It seems like there was a big dichotomy between the 2 channels, with contractor market really turning around this year. And then just a follow-up on that is, do you expect the contractor market to grow at the same level next year as this year?

Christopher M. Connor

Yes. So your first part of your question, P.J., is absolutely correct. The stores had a solid quarter again, almost 10% sales gain, and we commented that approximately half of it was from volume. So again, outperforming, we think, the market conditions. And our consumer group had a soft quarter in sales and there were some pricing there as well, so volumes were even a little softer than that. So there is that dichotomy happening. We've been commenting about the rebounding residential markets in the United States. We're seeing really good numbers coming out now on new construction, and then the result of that, I think the contractor is strengthening, as a larger portion of the U.S. architectural purchasing.

Robert J. Wells

And as far as the question of next year, we're, we always give guidance on our January phone call when we really don't have any indication on the gallonage forecast for 2013. We'll give you guidance in January when we report the full year numbers.

P.J. Juvekar - Citigroup Inc, Research Division

Okay. And just quickly on the Paint Stores group. Chris, I think you had mentioned earlier at your Analyst Day, that you're keeping your stores open longer, anticipating higher demand? Can you just give us an update on that? And also, on your Platinum paint, which is I think your paint plus primer for the contractor market?

Christopher M. Connor

Yes. So from a store hour perspective, P.J., let's say we're always kind of looking at that and tweaking that and we've marginally increased our hours across some markets, a little bit later on weeknights, a little bit longer on Saturday and Sunday, but I don't think that's a significant impact to the company's overall performance. Our recent innovative product launch is in stores, primarily been focused around Emerald, which is this high-end, top-of-the-line zero VOC performance product, which is really doing quite well for the company. As a reminder, when we talk about new product sales, we're identifying those products that have been introduced and have 3 years of run life still, and as group, they account for less than 10% of our revenue. So while we're excited about this new product launch, and what it's doing in the market for our overall mix, it's not a dramatic mover for the company.

Operator

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

Brian Maguire - Goldman Sachs Group Inc., Research Division

It's actually Brian Maguire on for Bob today. I was wondering if you could comment on your level of inventory on titanium dioxide, and maybe compare it to, say normal levels or where you were a year ago. And then just kind of related to that, as you mentioned over the last 6 months, high-grade chloride, TiO2 prices have come down or at least moderated a bit, and there's definitely a perception that they're going to continue to decline at the year end into the first quarter. So would you look to run down your inventories even further in anticipation of lower prices in the coming year?

Christopher M. Connor

No. We look at our inventory of titanium dioxide, as a raw material. It's very comparable, what it has been for the last few quarters, including last year. We didn't dramatically change, and I don't see us changing that anytime soon. We turn our raw materials so quickly, especially on some of these raws, and as we go into the end of the season, the production plan in the fourth quarter will be normal as, and we're going to make less payments fourth quarter than we have in any other quarter. And then in the first quarter, we'll start to ramp back up. But no plans on changing that normalized view of what we're going to do with our raw materials.

Sean P. Hennessy

And Brian, with respect to our expectations for TiO2 pricing from here, I'm sure it didn't go unnoticed that earlier this week, one of the major TiO2 producers reported earnings and reported volumes in the third quarter down 18%. I suspect that probably the other global chloride producers experienced similar volume declines in the quarter, and that would tend to put pricing pressure on TiO2, downward pricing pressure on TiO2. To your point, we think that, that spot market pricing in TiO2 is probably down in the 10% range, year to date, and perhaps with quite a bit further to go.

Brian Maguire - Goldman Sachs Group Inc., Research Division

So I guess I might just have been confused why wouldn't try and run down the inventories more or is it just the case that you are already kind of at safety stock levels in and now or do you expect prices to decline in response to the volume drop.

Christopher M. Connor

Yes. We don't really think about it, running raw inventory down based on cost, I mean we run an efficient, lean supply chain here. We're turning these raw materials multiple, multiple times a year. We store this stuff in slurry tanks and it really, we have the raw material we need to make the paint we're going to make in the next week or 2. So not a lot of room to run this stuff down.

Sean P. Hennessy

We'll turn titanium back, set between 30 and 34 times a year, so you're talking a 1.5 weeks’ worth of supply. That's 10 days. We sit there and say, moving at the 5 days, what is the net effect? It's not that great.

Operator

Our next question comes from the line of Trey Grooms of Stephens Incorporated.

Trey Grooms - Stephens Inc., Research Division

Kind of following on that TiO2 being here, just some of your competitors have been out mentioning that they'll be able to substitute a significant amount of their chloride TiO2 consumption with the lower-priced sulfate TiO2, and I know in the past, you guys have said that you have a limited ability to kind of do that. Can you kind of give us an update, kind of where you stand on that today? And then also, kind of what do you think of the impact could be on TiO2 pricing as these coatings guys tend to do more substitution there?

Christopher M. Connor

Yes, Trey, I think we've heard a number of our competitors comment about the ability to eliminate 5%, 10%, perhaps of their annual chloride titanium demand based on replacement technologies, innovative chemistry, a whole host of practices. I think what we've commented is that we don't see that number being unreachable for us either. We just would be a later adopter. Professional painting contractors, demand for the consistency in our product means that some of these technologies will more likely wind their way into our next round of new products we launch as opposed to going into our core product line and replacing chloride with some of these other technologies. Outside the United States, I think we can do that a little bit easier. We don't use tint base and in-store tinting as much. In Latin America, for example, we do a lot more factory color blending. In that environment, you can switch from the chloride grade directly to the sulfide grade. So some of that activity's taking place as we speak. But I think this is going to be in the margin in terms of replacing it. Though the bigger impact here is that Bob has mentioned in the past has been this softening in the global demand and as a result of that, pricings will come down.

Trey Grooms - Stephens Inc., Research Division

Okay, thanks. And then a question on the Emerald line that you touched on earlier. Can you give us a little bit more color on, kind of what the reception has been? It sounds like it's been pretty good, but is that more kind of DIY-focused or more contractor-focused, and then, also kind of how the pricing differs there?

Christopher M. Connor

Yes. It's rarely that we bring a product line out that doesn't have to serve all customer segments, and there's a huge component of this product that we expect the residential repaint contractor to find attractive, and in fact, that's exactly what's happening, Trey. We've seen really good demand across that line. The things that we use to kind of measure the strength of the new product introductions for the company. One would be, are we kind of hitting the targets of gallons that we've set forth at its launch, and we're well ahead of that pace, and secondarily, and perhaps even more important, you hear us talk often about the mix shift inside our company. And as we bring these products out on the very high-end of our product assortment, often times we'll see customers move up inside the other product lines, but had been defined as product is now one level below, and we're seeing nice volume gains in that product which is a product we call Duration as well. So it's having all the kind of impact we'd like to see as a result of this kind of product launch, and quite pleased with it at this point in time.

Operator

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

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Chris, if you had to hazard a guess, where would you see U.S. architectural coatings industry gallonage finishing up for 2012? Trying to get a sense of how far below normalized levels we are still at this point?

Christopher M. Connor

I would think the growth number, Kevin, is probably going to be around 2% to 3%, and I think we're commenting around 2% to 4% halfway through the year. It appears to be moderating a little bit. So on a basis of 615 million gallons for the industry last year, approximately 2% to 3% pop from there.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay. And so if I peg normalized at maybe 730 to 750 or so, it sounds like you're maybe 15% below, is that fair?

Christopher M. Connor

That's fair.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay. And then, just a follow-up, Chris. Be curious to hear your updated views of what you're seeing in the private market since the Geocel deal, which wasn't all that large, you've been pretty quiet or disciplined, shall I say. With the downturn overseas, do you anticipate any opportunities to kind of reinvigorate acquisitions in overseas markets?

Christopher M. Connor

Yes, Kevin, I think we've stayed very disciplined around the strategic targets that we've shared with the Street repeatedly, namely architectural businesses in the Americas that can kind of strengthen our control distribution play or have really strong compelling brands throughout the Latin American markets, and then smaller bolt-on acquisitions to support our Industrials Coatings businesses, wherever they may be around the world. The fact that we've had a little bit of a softer period here on M&A has not -- anything to do with our interest or the number of doors we're knocking on and the folks we're courting. And when we find things that fit those models and return the kind of disciplined returns we expect, we'd be one to pull the trigger. We have commented that traditionally, a lot of these architectural businesses are owned by private families, and they tend to not want to sell into the down market, but as things start to improve, they've become a little bit more interested in valuing their assets, and so we would expect that maybe over the next couple of years, we'll start to see a little bit more activity there, but nothing to report on today.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay. And then, final question if I may, I'll turn it over, is on tax rate. Sean, it's just been creeping up ever so slightly the last 3 quarters. Is that a function of geographic mix? And do you have any preliminary thoughts on where you might be tracking for 4Q in 2013?

Sean P. Hennessy

Yes. I think you're 100% right. It is geographic as -- our Stores group, Consumer group has done very, very well. I think that, we still think that we're going to be able to maintain the tax rate in the low 30s. But, I would say, we're going to be slightly below or slightly above next year where we finish the year this year.

Operator

Our next question comes from the line of John McNulty of Credit Suisse.

Abhiram Rajendran - Crédit Suisse AG, Research Division

This is Abhi Rajendran calling in for John. A quick question on raws and pricing, I guess with the softness in both TiO2, and then even some of the rest of your baskets. Are there any areas where you're having to give back on pricing? Maybe you could just touch a little bit on that?

Christopher M. Connor

Yes. I think, Abhi, we've commented that in past cycles like this, typically the industry's done a nice job of hanging on to pricing. It's sticky on the way up -- I'm sorry, it's tough on the way up and rather sticky at the top. We did comment that we're still quite a ways below our all-time high in gross margins. So I think there's still work to do that here. We would expect to see in the industry, on large commercial projects heading into next year, if in fact these raws continue to roll over, that we will see some lower prices quoted on these significant volume opportunities. But again, that's somewhat consistent with past practices as well. So we'll see how this one plays out, but that would be our expectation.

Abhiram Rajendran - Crédit Suisse AG, Research Division

Okay, got it. And just a quick follow up, could you talk a bit about any potential availability issues or upcoming increases is cost for your acrylics purchases?

Robert J. Wells

We don't anticipate any tightening in those markets. Propylene has been trending down, along with TiO2. We're paying a lower price for propylene per pound today than we would at the beginning of the year. And that, to us, kind of signals ample supply in the market. So we don't see any problems with acrylic pricing or any of the petrochemical-based materials we buy being tighter going forward.

Abhiram Rajendran - Crédit Suisse AG, Research Division

Okay, got it. And then last quick one, if I may. On M&A, I guess do you have any preferences as to smaller, bolt-on acquisitions? Or are you looking at more medium-sized opportunities as well? Maybe you could just touch a little bit on that.

Christopher M. Connor

We like the ones that return the best profit for the shareholders, regardless of size.

Operator

Our next question comes from the line of Duffy Fischer of Barclays Capital.

Duffy Fischer - Barclays Capital, Research Division

I want to go back to the question on incremental and I was looking at incremental EBIT margins throughout the year. It's been very healthy, kind of running anywhere between 23% and 47% this quarter. Could you split out, in those incremental margins, how much is kind of been the volume leverage, and how much has been catch up on raw material price increases from a year ago?

Christopher M. Connor

I think when you take a look at our gross margin year-to-date, 120 basis points, and you look at the volumes that the stores group has created year-to-date, and consumers' year-to-date results, I think that both of those, well over 75%, I don't have an exact numbers, volume. I think that we do, we give a lot more leverage on volumes than we do price, and because a lot of times, the price is really motivated by higher raw materials. So to answer your questions, it's the majority of volume.

Duffy Fischer - Barclays Capital, Research Division

Terrific. And then, if you take a quick look forward to '13, what do you see that, this year might've been one-off? So we had the warmer Q1, so when we think about year-over-year comps going into next year, what things could we be looking for that might not repeat, either good or bad?

Robert J. Wells

Yes. I think when you take a look at the first quarter, I think you said it correctly. I think as -- we're not prepared to talk about next year, but we think that the first quarter, when you look at the sales increase and the gallons increase and the weather that we experienced, some of it had to deal with weather. And I think over the full year, I think that might be timing, but I do think that we still feel that, if the market, in the total year goes up, we're going to gain market share. And so, we think that's really our long-term thought. So we look at it. Besides that, I don't think -- I can't think of anything that was -- I think this has been one of the more normal years, expect for the first quarter.

Operator

Our next question comes from the line of Ivy Zelman of Zelman & Associates.

Ivy Lynne Zelman - Zelman & Associates, Research Division

Chris, you mentioned that the domestic resiliency that you're experiencing should mitigate the slowing globally? And we certainly saw strength in the Paint Stores and obviously, coming from the underlying strength of the new construction market that you spoke to. But can you dig in a little bit more for us, understanding the end markets with respect to what's happening, mass merchants versus a retail or a consumer-oriented customers, as well as sort of the non-res commercial markets. We know public spending, is obviously, it's got a major headwinds versus private spending. What you could drill in at any more detail, and whether you're optimistic that you're seeing anything that would suggest things are going to lag, like they normally do, the residential improvement and new construction.

Christopher M. Connor

Yes. So there's a lot to chew on there, Ivy. But let's start with, kind of the mass merchants' performance. We reported that our consumer group had a soft quarter. And when we look inside our own stores, at our own DIY business, it was one of the poor performing of the segments inside that store's business, so I think there may be some softening there a little bit. Hard to tell, if it's just a blip for the quarter or a longer trend. What impact the election, I mean, the uncertainties having in that area. I think it's a little early to make that call. Some of the more dependable segments that we can look at and think through and plan out on both residential, whether that's new residential or residential repaint, continue to be the real strength for the company. These are our segments that are performing high single-digits, low double-digits, in terms of year-over-year performance in the quarter, and then as we've commented briefly in the opening statement, relative to the commercial market still, it's lagging, and we would expect that to be that way, it tends to follow housing, so if housing comes back, we would expect new commercial construction to rebound and that would be a little bit of a tailwind for the company. We're encouraged by the housing start permit numbers that we saw out this week, and I mean, to Sean's point, we look at the next year, I think we're feeling pretty good that this residential market in the United States has still got a lot of runway.

Ivy Lynne Zelman - Zelman & Associates, Research Division

If you broke out and looked at the business, excluding public spending for non-res projects, would it look any different? Or is it also soft within that spending market if you take it in sort of an aggregate look?

Christopher M. Connor

Right. We -- when we break it down by ZIP code and so forth, it's the softness is -- public in, public, Ivy.

Operator

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

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

Hoping you can just shed some light on a couple of things. One, you mentioned the efficiencies inside the Consumer group. Can you give us a little bit more detail about what it is that you're doing to improve those efficiencies? And then second, I know your SG&A growth as a percent of sales growth looked a little high in this quarter. I think you generally target that around 40% or 50%. And then the last thing is if you can give us the gross margins by category, at least those gross profit cells that are so helpful every other quarter, and I'd appreciate that.

Sean P. Hennessy

Sure, okay. The couple of things on the consumer group, I think just by on putting gallons through those plans, I think that you gain efficiencies. We have many projects that are ongoing, whether they're raw material delivery or fill lines and so forth, and you're -- really a lot of singles and doubles there that continue to do very well for us. As we continue to get other plants underneath that management team, Geocel and so forth, you're going to see improvements there. But #1, is really just getting those gallons through and the efficiencies that those gallons will create. The second question, I think, hopefully I remember all 3. But your SG&A, you talk about the SG&A and I think that the SG&A, a lot of the SG&A growth we had was in the United States. And where -- as we continue to develop new stores, as we continue to put new stores in, putting people in the stores, hours in the stores, as well as we've continued to spend on the -- in the admin segment. As for IT projects that eventually, down the road, will create higher cash flow for us in nondomestic markets. So when the FX effect had so much effect on the sales in a couple of our segments, in the U.S., the SG&A will go up. And I think when you look at us, compared to sales, but I think if you look at it year-to-date, and notice the 30.7% in the quarter versus 30.6%, we're up 10 basis points. But year-to-date on SG&A, we're down 60 basis points, and I think when you start to look at it on a year-to-date basis, those targets that we usually hit are, we're a lot closer to that. So I think that all the operating margins by operating segment, our operating margins are fine, but things are going pretty well. On the -- on the Paint Stores group sales, incremental margin dollars were $93.7 million. Consumer group was $20.7 million. Global Finishing group was a positive $3.9 million and Latin American group was actually negative $5.7 million.

Operator

Our next question comes from the line of Greg Melich of ISI Group.

Matthew McGinley - ISI Group Inc., Research Division

This is Matt McGinley on for Greg. If we go back to the Consumer group for a minute. I'm still not sure I completely understand what happened with the units here. Did you see a draw down on the sundry product that you sell, as well as the coatings? And in terms of, if you have access to point-of-sale data, are you seeing a self -- issues of sell-through versus inventory depletion, and have the channel partners that you sell into there, have they, perhaps attempted to reduce their inventories to try and push back on price? Or are you starting to have those conversations with those retailers?

Christopher M. Connor

Matt, on the mix between paint and various sundries, I would say is, it's very consistent across the board of all the baskets and material we sell, that it was just a soft quarter. Then I think that's more indicative of the kind of foot traffic and a little slower out-the-door performance. As usual, this time of year, we do see some inventory focus from some of these partners where they're trying to squeeze inventory a little bit, and that happens frequently, and so I don't think that we can put it entirely at that. For the 9 months, numbers for all these categories there all positive, and they're all doing well, and so we'll just have to see what their -- this is a, falling off or just a little bit of a quarter blip here. In terms of pricing, we're always have those conversations with our partners, and they're -- pay close attention to the feed-stocks of these businesses and so I would expect that, that's something we'll be dealing with going forward.

Matthew McGinley - ISI Group Inc., Research Division

Great. And then my second question is back on the SG&A. Given you had pretty good sales growth, and I understand that you had your -- you're doing investments, there's new stores you're putting out, you've done some acquisitions and I assume that the higher incentive expense wouldn't stay that high forever. But at what point would you expect to leverage SG&A at a higher level? Is it -- should I think about it terms of the unit growth? Should I think about it in terms of a sales level that you would achieve? Or, I guess when would you have better SG&A leverage, given the pretty high rate of sales you experienced this year?

Sean P. Hennessy

Yes. And I think when you take a look at it, we've -- it's also where the sales growth has come in the stores group. I think they'll continue to invest, I think again, you've mentioned the comp. I think that the comp -- but I think we've set the company up, that we're going to have a couple of years of nice SG&A growth. I think, or I mean, not growth, but improvement as a percent of sales. We hit our highest 35.7%, last year around 33.1%. I think -- as -- or 33.8%. I think you're going to see some of that improvement over time.

Christopher M. Connor

I think, for the next period of time over the next couple of years, you're going to see that SG&A improve.

Matthew McGinley - ISI Group Inc., Research Division

What do you think that, that would get to as a percentage of sales over time?

Sean P. Hennessy

What we've commented is, that we used to just talk about a 33%, 33.5%, we think that, and then we start seeing the 10, 20 basis points improvement. With the change, we think that we're probably at 33%, and then you're going to start seeing that 10 or 20 basis points improvement. And that's an annual number. I know we're below that through the first 3 quarters.

Operator

Our next question comes from the line of Eric Bosshard of Cleveland Research Company.

Eric Bosshard - Cleveland Research Company

Two things. First of all, you talked about gaining share, a good amount in the Architectural Paint business, I think that's sort of what you're talking about. Can you talk about what's driving that? And then also, related to that, you've taken them, if there's a little bit cautious and more cautious to you on growth. Can you just again, define what you're seeing different, in terms of growth?

Christopher M. Connor

Yes, Eric, I think from a share perspective, there's a couple of things that we can look at. Industry gallon data, which used to be reported by the federal government, is not anymore, we're cobbling together these points from raw material suppliers and other industry sources. Our sense is that the market's grown, probably on a volume basis, around 2% to 3%, and so we're able to look at the kind of gallons we're putting through our footprint here and feel comfortable that, that's outperforming the market. When we look inside the performance in the individual segments, these professional painting contractor segments are outperforming, and just as we saw those get harder hit in the industry downturn, they're the ones that are rebounding a little quicker as we're going forward. So our expectation would be that we continue to see that kind of share shift towards the painter, and we continue to benefit from them.

Sean P. Hennessy

On the second one, Eric, when you asked about our outlook. One of the things that we've commented on the last few calls is that, the gallons may continue to be strong, but the selling price is going to -- it's not going to be as strong. Think about couple of -- and I'll tell you right now, when you look at the third quarter to fourth quarter, you heard Chris comment on the Stores group, half of that growth was volume, half of it was approximately price. We think that the price between third and fourth quarter of 2012, we're going to have half of what we realized in the third quarter, in the fourth quarter. So and we also think that the headwinds on the nondomestic will not be as strong, and I think that all comes back to that mid-single digits. So I think that it's not so much that we feel we're not that worried about our get a little worried about volume. I think it's we're seeing less and less price in that Paint Stores group.

Eric Bosshard - Cleveland Research Company

Great, and then secondly, you talked about gross margin relative to the peak at 46%. I'm just curious what you think the path from here to there is what drives that, how long that path might be.

Christopher M. Connor

Yes. The path will be along the lines of the pricing, finishing off and as you know the last price increase we've announced through our Stores business was in February, so that one’s just about behind us. You're going to see the efficiency through the whole supply chain adding some lift to that, as volume continues to go through that fixed asset base in our Consumer group, and then obviously, as the raws tip over, and we can hang onto pricing per the earlier question. That'll help us get there. Whether that happens in the span of a year or 2 or 3, we're not making any comments on that.

Sean P. Hennessy

And we also need some help from non-stores and nonconsumer segments. I think when you look at the lower operating margins, I think that some of the things we've done to improve, especially in the Global Finishes Group, again, we feel pretty good about the ongoing integration, and we think that'll help us with our gross margin, as well as operating margin in the future, and that'll help us get back on the peak.

Operator

Our next question comes from the line of Chris Nocella of RBC Capital Markets.

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

Just in Latin America, you had very strong margins in the third quarter, both sequentially and year-over-year. Maybe you can just help us understand how you will achieve those margins? And maybe give us your early read on demand in Latin America as we enter their seasonally stronger period now?

Christopher M. Connor

I would tell you right now, we hit positive volumes in Latin America in the third quarter, and you're right, the fourth quarter is stronger for us than the fourth quarter (sic), just having more of that will help us improve our margin in the fourth quarter versus third quarter. And I think it's going to be volume in there, and also just -- we're continuing to work on selling prices in the Latin America group.

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

Okay. And can you just comment on your outlook for new store growth for next year?

Sean P. Hennessy

We've been saying that we'd expect to continue to increase that and ramp up. We identify kind of that 50 store pace, or 1 store a week is kind of idle speed and as markets improve, that we would be ramping that back up. We haven't given guidance on that yet, but we have said that over a longer decade period, on a more normalized run rate, kind of 70 to 80 stores is the right average to be at. So we'll be north of the 60 to 65 number that we're going to do this year and next year, and we'll you some more clarity on that on the first quarter call.

Operator

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

Charles A. Dan - Morgan Stanley, Research Division

Just to clarify, do you guys have any LIFO liquidation benefit in the quarter?

Sean P. Hennessy

I would say no.

Charles A. Dan - Morgan Stanley, Research Division

Okay. And it seemed like you slowed down the pace of your share repurchases and brought down the leverage on the balance sheet. Can you give us some perspective on why that might have slowed, and how we should think about the share count going forward?

Christopher M. Connor

Yes. I think when we look at a stock buybacks, we're always talking about an annualized number. So far this year, we've brought back 3.8 million shares, spent $433 million, that's about $100 million more than last year. Our -- we feel pretty good about where we are, I think that we probably bought it. We're watching a lot of different things right now. We're -- we like where our balance sheet is. Our balance sheet's in a pretty good spot if some of these assets would become available here in the fourth quarter or early first quarter, so we're watching that. And that's what we've always said. We don't see over time that our debt is going to go down. Our EBITDA's been strong. So we're still going to target that 1:1 when it comes to EBITDA. So over time, we'll spend that money either on acquisitions or stock buybacks. So we've looked at it. We still feel pretty good about where we are, buying 3.8 year-to-date, and that's what we do. We looked a lot at it, on an annual, not a quarter-by-quarter number.

Operator

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

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

Just have a couple of quick questions. First, for the quarter, what was the -- your material cost, up year-over-year?

Sean P. Hennessy

We will -- maybe you talk about the full basket, but for us, we never comment on ours, and usually we don't even comment on a quarter-to-quarter, but usually on a year-to-date. And I think what we've said is that, our raw material baskets, beginning in the year, we were looking at high single digit, low teens, and now we're saying that it's going to be in that low single digits. So you can probably tell that most of the increase was in the first half of the year.

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

Great. And then in the Paint Stores, I think you give the gross profit dollar increase, what was the SG&A dollars?

Sean P. Hennessy

That, I will tell you, I’ll have to look up the Q. I'll grab it out of the Q, and then -- it's 27.4.

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

Great. And then the last question is, when you look forward, you've had great leverage that you’ve shown, so it's like, I guess you're going to be in the high single-digit sales, and then somewhere around 30% type of earnings growth. Would you expect the same -- is -- would that ratio change, going forward over the next couple of years? Or is there any reason it would or wouldn't?

Christopher M. Connor

Yes, I think as Sean commented on one of the earlier answers, it really is about volumes, so the extent that, that volume number keeps going at that pace, that's the kind of leverage that we can get through the system.

Operator

Our next question comes from the line of Chuck Cerankosky of North Coast Research.

Charles Edward Cerankosky - Northcoast Research

I want to get back to the administrative costs and the SG&A costs. Sean, if I go through the segments and back out, a couple of adjustments, you guys show those administrative costs. How much of that is including IT projects and acquisition-related SG&A that's allocated to the quarters, or exclusive was allocated to the quarters, and how much is -- has to be explained by other things?.

Sean P. Hennessy

No, I would say the majority of it is, as we mentioned before and actually in the admin segments and you look at the admin segments through 9 months is $54 million higher than last year. You take out some of the environmental hits and disposition of assets, you're down to about the high 40s, just about half of that is in compensation. And probably another 30%, 40% of that is IT projects and investments and so forth and especially on acquisitions that eventually, we think they create cash flows from our nondomestic operations.

Charles Edward Cerankosky - Northcoast Research

Now with the volume growth in the stores business, how is the SG&A up? Because I would think that would be good opportunity to leverage occupancy and in store labor, but are there other things to consider?

Christopher M. Connor

Yes. We talked about the incentive compensation, Chuck. We were riding this market down, we’re paying a lot of bonuses. And we've told you, we've got practically that entire Stores organization on variable comp plans. So they're having a good year.

Charles Edward Cerankosky - Northcoast Research

So their incentive comp hits below the segments, as well as within some of the segments.

Sean P. Hennessy

That's true. Some of the variable compensation and RSOs and other things and annual bonuses are held at the administrative segment. But I wanted to correct something. When we did say that our SG&A in the store was up $27 million, I don't want to give you the idea that our SG&A there didn't -- did go higher in terms of sales, but it didn't dramatically go down, but you sit then take look at it, the operating margin is up, and it's been helped by margin as well as SG&A. I think when we were talking about the SG&A in total, because of those dollars, and then the other sales numbers were negatively affected by FX, those numbers then become -- it's more dramatic, higher global sales, not just store sales.

Charles Edward Cerankosky - Northcoast Research

Okay. And then on LIFO, can you give us what the LIFO charge was year-over-year, the comparable numbers?

Sean P. Hennessy

Yes. I think LIFO -- I'll tell you, I'm going to get back to you on that one.

Operator

Our next question comes from the line of Don Carson of Susquehanna.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Just 2 questions. One, just wondering why you're a little more cautious on overall growth, I think you said you thought total U.S. gallonage now is up 2% to 3%. You were thinking maybe 3% to 4% earlier in the year. And then on stores, I mean, you talk about how Paint Stores sales group is, contractors gaining share from the big box. But are you gaining share from some of your competitors’ stores? I noticed that Akzo had their U.S. stores volumes continue to be down year-over-year. Ben Moore's having issues, so I'm just wondering how much you're benefiting there, and does that create an opportunity to be more aggressive on store openings as competitors pull back a bit?

Christopher M. Connor

Yes, Don, regarding the U.S. growth of architectural market. I think we've been looking at some of the -- our competitors releases here, and commenting about some softness in the U.S. architectural market. We don't really have a good data other than when it comes lagging to us a little bit. So I wouldn't read too much into our earlier estimates was 2% to 4%, now we're 2% to 3%. It could be very much in line with what we've been saying. As Sean commented on one of the earlier questions, the volume numbers through our store business has been fine, we've just been seeing the impact of price roll back a little bit. So we're not feeling very cautious here in our guidance. We're feeling that we're still seeing the strong U.S. residential, architectural market and we're feeling good about the position the company is in. And capitalize on that, increasing store counts next year over this year, so all those things are making us feel like we've got a long way to go here to capitalize on this rebounding residential market. In terms of gaining share within the channel against some of the other small, independent paint store chain operators and/or regional or national operators as you mentioned Akzo. Yes, I think we would feel comfortable that we're doing that as well. We know that just by store count, for one way to get at it, we've put these or plan to have these 60 to 65 stores in this year. That will be a significant multiple of the rest of the competitors combined, and in fact, on those independents, we've seen quite a number of those stores. We think perhaps as many as 1,000 of them have gone out over the last 3 to 4 years during this downturn. So clearly gaining share inside the paint store channel as well.

Sean P. Hennessy

Don, one more kind of color point on the residential repaint market. Chris mentioned in his opening comments that DIY was one of the market segments that was probably softer than most. Don't read that as a decline in demand in -- for residential repaint, because residential repaint contractor volume is actually pretty strong. What we may be saying is kind of this discretionary shift back towards the contractor and away from DIY.

Operator

Our next question comes from the line Dmitry Silversteyn of Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

I just wanted to follow-up on a couple of questions or the couple of comments you made about the raw material pricing. You said that propylene pricing is coming down, and you implied you're buying propylene. Are you in fact, buying propylene? Are you buying propylene derivatives?

Christopher M. Connor

It's the latter. We are actively buying propylene-based commodities.

Dmitry Silversteyn - Longbow Research LLC

Right, okay. Is your -- is the products that you're purchasing, whether it's resins or packaging or solvents, have you seen pricing there decline?

Sean P. Hennessy

We have. It typically declines on a 90 to 120 day lag. So we're just starting to feel the impact of the decline in propylene. And as you know, the decline in propylene has been kind of a long, slow decline, as opposed to a sharp drop.

Dmitry Silversteyn - Longbow Research LLC

Okay. So the important point though is that you are seeing the downstream products made from propylene starting to decline for you in price?

Christopher M. Connor

Yes, some of them.

Dmitry Silversteyn - Longbow Research LLC

Excellent. Then the second question, on the Global sales I -- or the Global Group sales. I'm sort of finding that the comments in the press release a little bit confusing. You talked about 9 month or through the 9 month year-over-year, having about a 2.4% contribution I think you said from acquisitions, which implies that the acquisitions were negative in the third quarter. That doesn't make sense. Can you take me through the sales components in the Global group?

Sean P. Hennessy

I'll tell you what. How about if we go to the next question, we'll come back -- let me, give me a second to pull that out, okay, Dmitry?

Dmitry Silversteyn - Longbow Research LLC

That's fine. And then, my last question, again, has to do with the Consumer group and the -- sort of the declining volumes have [indiscernible] margin based on more gallons processed. I think that, that refers to the gallonage growth that you're seeing in the -- in your store group, which flows through the consumer group margin. Is that the right way to put it?

Christopher M. Connor

Yes. That's exactly right. The consumer group is the North American supply chain provider for the company. So every gallon manufactured, distributed through the chain, supporting their consumer's external brands, as well as other stores go through that P&L, so you're getting the lift as volume goes through that control asset base, we transfer that on a fully loaded price to our stores. But as volume comes and efficiencies are enhanced, consumer can get the leverage on that operating margin, and that's how they get to the numbers you saw today.

Sean P. Hennessy

And Dmitry, if I go back to that answer for the acquisitions, you're right. The acquisitions on a 9 month is 2.4%, and it was 0 for the third quarter. That's because we've annualized it.

Dmitry Silversteyn - Longbow Research LLC

Okay. So my calculation is correct. It just sounded...

Sean P. Hennessy

Yes. We no longer put the quarter in there because we've annualized it. I understand what the confusion there was, but no, it wasn't flat or down.

Operator

Our next question comes from Nils Wallin from CLSA.

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

The NAHPs remodeled index came out and it's at above -- it’s at 50, and it's probably at one of the highest levels since '05, and even in the peak. But most of it seems to come from the owner occupied side, as it goes to rental properties or in major alterations. So I'm wondering if the rental part of that index or the major alterations, if those move up towards 50, is that going to have a meaningful impact on your results?

Sean P. Hennessy

Yes, it will. And multifamily's an important segment for us, and unlike the owner occupied residential, which can be a DIY project or a painting contractor project, typically in multifamily, you're seeing a paying contractor being employed to do that, so as that segment strengthens, that's good for our industry.

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

So then, would you say that most of your contractor business is then still focused on the single-family, as opposed to the multifamily? Or is there just -- I mean is there just a different mix there?

Christopher M. Connor

Well the weight in the country would indicate that we have probably 60% to 65% of American citizens are in an owned-occupied thing, 35% to 40% would be in rental property. So to the extent that of contractors are doing a lot of work in the residential repaints for an owner-occupant, that still the larger segment for us, but we still have a sizable business in this multifamily. As that improves, as occupancy rates improve, as turnover improves, because that's when you get the painting opportunity, those will all be drivers for volume through our stores group.

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

Great. And then just one final question. The kind of softness in Global Finishes. I know that you've obviously, you highlighted regions outside of North America were you don't have as big a presence as some of your competitors, but I was wondering if you would be able to drill down to say, whether it was on the Protective and Marine side, or auto with finishes, if there's any differences there in those different end markets.

Christopher M. Connor

Yes. The biggest peak for business we have in Global Finish group is our OEM product finishes. This is where we're coating durable goods in a manufactured factory environment for sales and I think that's been probably the softer of the 3 segments. The Protective and Marine coatings, which is also embedded in here has probably been the stronger of the 3 segments and Automotive would be somewhere in the middle.

Operator

Our next question comes from the line of John Roberts of Buckingham Research.

John E. Roberts - The Buckingham Research Group Incorporated

One of your largest global competitors had some uncertainty in the executive suite right now, and their U.S. strategy has been a little bit debatable. Does that already see to maintaining some flexibility here over the next couple of quarters to see whether or not they shift gears?

Christopher M. Connor

No. I think that there's a lot of different things out there right now. I don't think specifically that asset is causing us to keep our balance sheet flexible.

John E. Roberts - The Buckingham Research Group Incorporated

Okay. How about store openings? Might want to wait to see what happens to store openings?

Christopher M. Connor

No. Their store model has been diminishing as an impactful competitor and our plans to continue opening stores are in line with our long-term strategy of building out density, strengthening some of the weaker markets, and that doesn't change regardless of their actions.

Operator

Our final question of the day comes from the line of Jeff Jeffrey Zekauskas as a follow-up question of JPMorgan.

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

I wanted to follow-up on the question I asked an hour ago. In asking you about TiO2, I think Chris made a throwaway comment where he said, "Well, I think there's a lot more room for TiO2 prices to fall." And I was wondering why you thought that?

Christopher M. Connor

Well, I think we're historians here, Jeff, as you know, and we've been through a number of these titanium runs in the past. I think if some of the earlier questions about the industry moving aggressively to try to find replacement technologies and a lot of that work's just coming to fruition, as we see continuing softness in some of these global markets. As demand continues to remain weak here, history would indicate this commodity will continue to have some softness in pricing. Time will tell. We are just starting the early tipping over points. Now we see the spot market is retracted probably 10 percentage points plus or minus a little bit from the peak, and our expectation would be that in past cycles, that wasn't the end of the pull back, that it would continue from there.

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

So what caused the tip in that TiO2 demand to stand very, very weak now, for almost a year, and then finally, in the second or at the end of the second quarter, it sort of broke. What caused the break? Or how did the timing work?

Christopher M. Connor

I think it's all in demand. We talked about the price announcements that were put in by the industry, softening beginning as early as last year about this same time, where they had previously been getting 100% of their announced price increases for the better part of 8, 9, 10 quarters, and then the fourth quarter won about 50% effectiveness similar to first quarter, and we think the industry basically did not take the second quarter announcement at all. So it didn't just break recently, it's been softening now over the past 12 months, as demand has been falling off, and that's all that demand.

Operator

There are no further questions at this time. I would like to turn the floor back over to Mr. Wells for any closing comments.

Robert J. Wells

Thanks again, Jesse. Those of you who are still on the call have gone above and beyond the call of duty with an 1 hour and 10 minutes. As usual, we'll be around today and all day tomorrow, to take your follow-up calls. We'd like to thank you once again for joining us today, and thanks for your continued interest in Sherwin-Williams.

Operator

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

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Source: The Sherwin-Williams Management Discusses Q3 2012 Results - Earnings Call Transcript
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