The Sherwin-Williams Company (SHW) Q1 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Valspar's First Quarter Fiscal 2015 Conference Call. And as a reminder, today's conference call is being recorded. I would now like to turn the conference call over to your host, Vice President of Investor Relations, Bill Seymour. Please go ahead. Bill Seymour - Vice President-Finance & Investor Relations: Good morning and welcome to our fiscal 2015 first quarter earnings call. We have two speakers today, Gary Hendrickson, our Chairman and Chief Executive Officer and Jim Muehlbauer, our Executive Vice President, Chief Financial and Administrative Officer. As always, after our prepared remarks, we'll have plenty of time to take your questions. Let me also remind you that comments made by me or by others representing Valspar may contain forward-looking statements which are subject to risk and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. These filings can be found in the Investor Relations section of our corporate website at valspar.com. Also please note that our reported results this morning include non-GAAP financial measures. These results should not be confused with the GAAP numbers in today's earnings release or with the GAAP numbers we will report in our Form 10-Q. For GAAP to non-GAAP reconciliations of the reported to adjusted results and guidance, please refer to the supplemental schedules in this morning's news release. And finally we have posted a new supplemental slide presentation to the IR site, which includes commentary on our first quarter results and historical data for fiscal 2014. We will provide this in future quarters as well. With that, I will turn the call over to Gary. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Good morning, everyone, and thanks for joining us. Today I'll cover some of the highlights of our first quarter performance. Jim will then provide some additional details on the quarter's financials and our outlook for the year. We're pleased to report a good start to the year. Sales increased 4% and adjusted EPS was up 21%. These results reflect continued growth in both sales and profitability in our Coatings segment, benefits from new business wins, strong performance from China and the positive impact of our ongoing productivity initiatives. Like most multinational companies in the U.S., the strengthening of the U.S. dollar impacted our results for the quarter. Q1 sales growth in local currency was up 7%. We've not changed the full year outlook in local currency terms, but the impact of a stronger U.S. dollar has led us to modestly revise our sales outlook for 2015. Jim will take you through that later. Now I'll cover some specific highlights for the quarter. I'll start with our Coatings segment, which had another very strong quarter. In fact all product lines and regions grew both volume and sales even with the currency headwinds. EBIT in our Coatings segment also increased significantly in the quarter as a result of leveraging higher volumes and internal productivity initiatives. Some highlights include very strong volume growth in our general industrial and wood product lines driven by new business wins and market share gains. Our coil product line also benefited from new business wins. In our packaging product line, we continue to grow our sales and market share in all regions and in the non-BPA segment of the market. Looking at our Coatings segment from a geographic point of view, all regions grew, with growth in China being particularly strong. Turning now to our Paints segment, volumes increased and sales were up modestly in local currency. Strong volume growth in our international regions was partially offset by the expected softness in North America. So let me provide a little bit of additional context on Paints sales in Q1. As you may recall, we had a very good first quarter in the Paints segment in 2014, when total Paints sales were up 10%. This growth was driven by the rollout of Valspar-branded paint at Ace Hardware. And our paint business in China was up more than 30% in the first quarter last year. In the quarter we just completed, we faced those tough comparisons and we also began to see the impact from the previously disclosed adjustment to our product line offering at Lowe's. That being said, our international regions in Paints performed very well. As I mentioned earlier, our overall business in China was strong and our paint business was no exception. Volumes in China were up almost 10% against the extremely strong comparisons in 2014. In the UK and Ireland, the Valspar Paint program has now been set in all 350 B&Q stores. And during the quarter, we began shipping to B&Q from Europe as a result of a recently completed manufacturing agreement. We're excited to be in all stores, and we'll begin our advertising program as we move into the spring. In Australia, we continue to see good growth at both Masters and the Pro channel. At Masters we're benefiting from strong sell through of new products and Master store growth. In our trade business, sales to professional painters were up in the high single-digits in the quarter in local currency, and we continue to grow share in this channel. Into North America, we're looking forward to the first full year with Ace Hardware. In addition of Valspar being Ace's national paint brand, Ace has recently chosen Cabot as their national stain brand. Cabot will now be available in over 1,500 Ace stores starting in the spring. In the North America home improvement channel, we're looking forward to the paint season and growing the Valspar brand of a reset base. We continue to have a very strong product line up at Lowe's that spans price points and categories. At the high end, Valspar Reserve continues to sell very well and in the Pro category, we continue to make inroads. We have an excellent relationship with Lowe's and look forward to continuing the successful growth of the Valspar Paint brand in this channel. So in summary, we're pleased with the solid start and are optimistic about the rest of the year. Our first quarter results once again demonstrates the diversity and strength of our business portfolio. With that, I'll turn it over to Jim to provide more details on the results and outlook.

Thanks, Gary and good morning everyone. I will review our first quarter performance and discuss our expectations for the balance of fiscal 2015. I'll focus my comments this morning on the key drivers in the quarter. As Bill noted, we've posted some additional details on our segments and product line performance on our website. Starting first with our Q1 performance highlights, sales increased 4% and volumes were up 7%. The impact of FX lowered sales by approximately 3% in the quarter. Sales improved 7% in local currency. Our Coatings segment delivered a very good quarter. Segment sales increased 7% and grew 10% in local currency. Volumes increased 10% in the quarter and reflected improved momentum from Q4, when Coating volumes were up 5%, excluding the impact of the 53rd week. Volume was up in all Coatings product lines. General industrial sales and volumes were up double-digits, driven primarily by new business wins in Asia and in the U.S. Wood product line sales and volumes were also up double-digits in the first quarter. This growth was the result of new business wins and market share gains within the Asia market. The coil product line had another strong quarter with volumes and sales up mid-single digits. Growth in coil was also driven by new business wins. The packaging product line also continued to grow with volumes and sales up mid-single digits in the quarter. Sales in local currency were up high-single digits, reflecting solid growth in all regions. Moving on to the Paints segment, total sales decreased 1%, but sales were up 2% in local currency. Total volumes increased 5% driven by double-digit volume increases in China, Australia and Europe. China growth was driven by market share gains in the non-exclusive retail channel, where we increased our distribution points by 1,400 locations. In Australia, volume growth was driven by growth at Masters, and in our stores business. And in Europe, the significant volume growth was driven by the rollout of Valspar Paint across the remaining B&Q stores. The increased volume from international was partially offset by a single digit decline in North America. This decline was the result of the two items that Gary touched on earlier. First, we had very difficult comparisons to Q1 last year when North America Paint volumes were up over 15%. These very strong results included the initial shipments of Valspar-branded Paints to Ace in the first quarter of last year. Second, in Q1 this year, we began to experience the impact of the adjustment to our product line offering at Lowe's. Both of these factors were included in our plan assumptions for the year. In Q2, the difficult comparisons will continue, given the new product rollouts to Ace Hardware and from the launch of Valspar Reserve last year. In addition, the impact from the adjustment in our product line offering at Lowe's will increase in the balance of the year as this transition fully occurs. Moving on to gross margin, we finished the quarter with total adjusted gross margin of 34.1%, essentially flat to last year. Improvements from productivity initiatives and leverage from higher volume were offset by unfavorable product mix, primarily in the Paints segment. Looking at expenses in Q1, adjusted OpEx in the first quarter decreased 40 basis points to 22.4% of sales. Operating expense dollars increased 2%, driven by increases related to higher sales, partially offset by productivity initiatives and the impact of FX. Bringing it all together, consolidated adjusted EBIT increased 9% and EBIT margins increased 60 basis points to finish at 11.8% in the first quarter. In the Coatings segment, adjusted first quarter EBIT of $91 million increased 16%. The increase in EBIT was primarily the result of significantly higher volumes in the quarter, along with the benefits from our productivity initiatives. In the Paints segment, adjusted EBIT of $29 million was down 16% from the prior year. As I discussed earlier, our Paints segment was up against a difficult comparison to last year, when sales were up 10% and EBIT was up 50%. The decrease in EBIT in the first quarter of this year, was primarily driven by the impact of the initial shipments of Valspar at Ace and very strong results in China last year. Q1 EBIT was also impacted by the customer product line adjustments that I referenced earlier. Moving on to a couple of other items in the quarter, our Q1 adjusted tax rate of approximately 29.5% improved 340 basis points driven primarily by favorable tax credits and the geographic mix of our earnings. We continue to expect that our annual tax rate will be between 31% and 32% for fiscal 2015. Q1 reported results included a pre-tax gain on the sale of assets of approximately $48 million. This gain was from the sale of assets, primarily IP, related to a non-strategic product in our Coatings segment. The gain has been excluded from our adjusted results for Q1. This sale will have an insignificant impact on sales and operating results in the fiscal year. On our Q4 call, we discussed plans to issue new long-term debt in fiscal 2015. In the first quarter, we issued $500 million of debt, which included $250 million in 10-year notes and $250 million in 30-year notes. As a reminder, our fiscal 2015 guidance reflects approximately $75 million in annual interest expense. Wrapping up the highlights for the quarter, we paid $25 million of dividends representing a per share increase of 15% and repurchased 983,000 shares of our company stock for a total investment of $84 million. With this as context on Q1, let's move on and discuss the outlook for the balance of fiscal 2015. We continue to expect annual adjusted EPS in the range of $4.45 to $4.65. Let me provide you a little more color on a few components of this guidance. First, as you saw on the release today, we modestly lowered our annual sales guidance to approximately flat sales compared to fiscal 2014. This compares to our previous guidance of growth in the low single-digits. This adjustment reflects the impact of a stronger dollar on our sales outside the U.S. As you know, over the past few months the U.S. dollar has strengthened against many key currencies. The assumptions utilized in our original guidance from November did not reflect these recent changes. Second, in terms of phasing for the year, our plans continued to reflect that the Paints segment will be up against more challenging comparisons in the second quarter from the continued rollout of both Valspar Paint at Ace and the launch of Valspar Reserve last year and from the product line changes at Lowe's. In closing, our Q1 results reflect strong performance and execution. It's early in the year, but we're off to a good start and remained focused on delivering on our full-year performance goals. With that we'd like to open up the call for your questions.

We'll first go to the line of Michael Klein with Piper Jaffray. Go ahead. Michael A. Klein - Piper Jaffray & Co (Broker): Hi. Good morning. General industrial grew faster than the market, can you talk about what you're seeing in the end-markets to support continued growth and maybe provide some color around the types of productivity initiatives that we can expect as the year progresses? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yes, Mike, it's Gary. Good morning. Yes, we had a really strong quarter in general industrial, which followed a good year last year. So we're seeing good growth in our pipe business, our partnership with Maersk in container is proceeding well and that plant in China is up running full time. And we also saw extremely good growth in the construction and off-road segment in China. So China was a pretty significant driver of the really solid results that we saw in general industrial, as well as I mentioned the pipe coatings globally. So we are always – relative to productivity, I mean I can't give you a – I won't you give a specific comment except to say that every one of our product lines and businesses has productivity goals for the year, and there is a whole spectrum of things that they could do to achieve that productivity from restructuring on the one hand through many other activities around Lean Six Sigma. So productivity, we have a saying at Valspar that it's productivity forever and there are many, many things that are aggregated into that catch phrase.

Mike, it's Jim. Just to add on to Gary's comments, from a productivity standpoint, you may recall, we did some restructuring activities last year that were provided as a result of the Inver opportunity. So in the general industrial business, we're able to lower some of our manufacturing cost with those restructuring activities, and that's some of the benefits that we're realizing in the P&L now. Michael A. Klein - Piper Jaffray & Co (Broker): Sure. Okay. That's helpful. And as a follow-up, can you talk about the impact from low oil prices and how much of the potential benefit you think you can capture? I don't think you have many long-term sales contracts in Coatings. So I would assume those conversations are pretty fluid with customers? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Well, to the last part of your question, I mean it's a natural question for a customer to ask, given the headline of crude prices that are substantially lower than they were. But I'll say this, in Q1 we saw de minimis raw material benefits. The reason for that is that our raw material basket is not weighted heavily to oil based materials, and in fact only a small portion of our basket is linked directly to oil. We buy complex chemistries that are well down the process and value stream from crude oil. So supply and demand is much more determinant of our raw material cost than the price of crude. Even the relatively small amount of materials linked to crude, there's a lag between the price of crude declining and a price change in the downstream commodity. So that's the past up until now. Looking forward for the balance of the year, we would expect to see a modest benefit if a lower oil price is sustained and the way we're thinking about that is potentially a low single-digit decline in overall basket for the rest of the year. Michael A. Klein - Piper Jaffray & Co (Broker): All right. Thank you very much. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: You're welcome.

Thank you. And next we go to the line of Ivan Marcuse with KeyBanc Capital. Go ahead please.

Hi. Thanks for taking my questions. The first one I had, so you mentioned a lot about new business wins. How much of your growth was driven by I guess new business wins versus organic if there is any way to split it out? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: I don't know Ivan. We have a metric that we track internally, which we call net new business, which is business won by business lost. And in the quarter that number was approaching high single-digits for us. So how much of that is organic growth and how of it is new, it's really hard to tell with thousands of customers. But my guess is, it's maybe 5% of it was new business and 2% was market, something like that.

Great. And then, Jim, you mentioned when you gave your outlook in November about FX being an impact on EBIT. So how much has that increased? And how much did you see it impact I guess in the quarter and now sort of your outlook for the full year versus when you gave the guidance in November?

Sure. Well, if you recall back in November, Ivan, we talked about the impact of FX that was embedded in our guidance of roughly 2.5% to 3% for the year. As we look now and we see where rates have gone, that number is probably looking more like 4% to 5%. So as Gary mentioned, we felt it prudent to take down our top-line expectations for the year based on the expected changes in FX, but we're still marching due to the same local currency plans we have for sales in each of our businesses.

So is there not a change in your, I believe, you gave an EPS impact?

Yes. Clearly there is a flow through impact to the bottom line as well that we partially factored into our guidance, but we're going to have a little bit more headwinds from that. In the big scheme of things, given the fact that we're only in the first quarter, we've got a lot of business in front of us for the balance of the year. And we've got a $0.20 range in our EPS guidance. We think it's prudent at this point in time just to let the business play out and we'll update our view of the year as we get more business behind us.

Great. And then last question, I'll jump back into queue. You mentioned that you're now sourcing supply from paint to go into B&Q. How much of a savings will that cause? And is it just basically a total agreement or did you have to build a plant or what's sort of the moving parts and how's that going to be impactful to B&Q's profitability going forward? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yes. It's a total agreement with a company in mainland Europe, Ivan. And I think we called it out. It's in the low single-digit millions of dollars in terms of freight savings that we'll achieve.

Great. Thanks a lot for taking my questions. I appreciate it. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: You're welcome.

Next we'll go to the line of Duffy Fischer with Barclays. Please go ahead.

Yes. Good morning. Could you give us a quick tutorial what actually happened in France with the BPA coatings in January? And it looks like the UK and some others are trying to sue them. Have people actually rolled over to non-BPA on coatings? And is there a chance that that goes back, or can you kind of just layout what is actually happening around France and maybe the contagion to that other areas? Or does it get put back in the bottle at the end of the day? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Sure, Duffy, it's Gary. On January 1 of this year a ban went into effect in France. So there are no BPA based coatings on cans being sold in France today. And I'm actually not familiar with what you referenced in terms of someone suing. I hadn't heard that, so I'll just tell you a little bit more about what I do know. What I know is that a fairly significant part of the food and general line market and other segments in Europe have started the conversion to non-BPA coatings. And with respect to beverage, there's been some conversion of beverage containers to non-BPA coatings as well. So I think you may have called it a contagion. I don't know I'd go that far but people are, brand owners are switching their coatings from epoxy-based coatings to non-BPA coatings in a pretty significant way across most of the packaging segments in Europe.

Okay. Thank you. And then, if you use that as a reference point, obviously you would have had some market share in the epoxy base before going to now the non-BPA or whatever the politically correct term is for it. How would your market shares compare kind of before and after in the sample set that we have so far? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Our market share on Europe it is materially higher than it was in the past.

Okay. Thank you guys. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: In the segments that I just mentioned.

Perfect. Thank you. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: You're welcome.

And we'll now move to line of Bob Koort with Goldman Sachs. Go ahead, please. Robert Andrew Koort - Goldman Sachs & Co.: Thanks. Good morning, guys. And I appreciate the added disclosures and color in the slide that makes our lives a little easier. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Anything to make your life easy, Bob. Robert Andrew Koort - Goldman Sachs & Co.: What about – Gary, just what you are seeing on two counts around customer deferrals or maybe some deceleration; one, you mentioned raw materials haven't shown much relief for you yet. Is there a sense from your customers that maybe there could some coming? Have you seen any inventory destock in more raw material sensitive businesses? And then secondly, maybe across things like oil and gas and pipelines and maybe some of the end markets where there continues to be a little bit more challenge, have you seen any changes in order patterns there?

No. the short answer is, no to both of your questions, Bob. I mean, it would be logical if crude pricing – natural gas pricing stays low for a long time, that you would see some projects laid off, but we certainly haven't seen that yet. And with your first question about supply chain, it looks like, most if not, all of our supply chains are behaving the way we would expect them to at this point in the year. Robert Andrew Koort - Goldman Sachs & Co.: I think Gary you guys do sell some resins to other paint companies, adhesives companies, et cetera, have they demonstrated any behavior that would be consistent with expecting some help on pricing there? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: No. No, most of the paint companies are buying as we do. We don't buy inventory. We don't necessarily arbitrage the input costs versus carrying finished goods inventory. So I can't help you on this line of thinking because we just haven't seen it, Bob. Frankly I think it's because, as I mentioned when I answered Mike's question in the beginning is that we're not seeing a ton of change in our raw material basket yet. And I'm not certain that we will, and I think others are probably feeling the same way. Robert Andrew Koort - Goldman Sachs & Co.: And if I might ask one last one, Jim you gave some indications that some of the year-on-year comps in North American paint were going to remain tough. How should we think about that relative to the year-on-year erosions you saw in the first quarter? Does it get greater, lesser? And how does it cycle through towards the end of the year?

Yes. Bob, it's similar to my comments on the Q4 call. It's going to be more in Q2 for the following two reasons. We're going to continue to have the impact of the rollout that we did last year at Ace. We also loaded in some inventory at Ace last year in the second quarter to support promotional activities that they were announcing. And then you may recall we started to load in Valspar Reserve at Lowe's last year in the second quarter. So those two factors combined with the product line of change at Lowe's, we'll see a bigger impact of that in Q2 than we saw in Q1 because the transition was just starting at the end of Q1 on that product line. Robert Andrew Koort - Goldman Sachs & Co.: Got it. That's helpful. Thanks guys.

Yes. Thanks, Bob. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Thanks, Bob.

Our next question will come from the line of Dave Begleiter with Deutsche Bank. Go ahead.

Thank you. Gary and Jim, given those headwinds in Q2, plus any weather impact potentially, could you grow earnings overall in Q2 year-over-year on EPS basis?

Hey Dave, its Jim. What we are focused on obviously is growing the business for the entire year. So we're going to be up against some challenges in Q2 in the Paints segment for the reasons that I just highlighted. So those challenges at this point aren't any greater than what we assumed in our planned guidance for the year. So we're going to have the most pressure on earnings in the second quarter for the top line items I talked about. But we're committed to delivering the year as originally outlined earlier based on what we see in the marketplace so far.

So would a flat year-over-year assumption for Q2 be reasonable?

Dave, we don't give quarterly earnings guidance. But what I'm trying to do is give you enough color, to shape your phasing to reflect the outcomes for the full year.

Understood. And just on your Coating margins year-over-year were very strong up 120 basis points roughly. Would you expect the similar progression in Coatings margins year-over-year for rest of the quarters?

Yes. The margin growth in Coatings is really been driven by the favorability of the higher volumes that we're experiencing and also the benefit of the productivity and restructuring initiatives that I talked about earlier. So those initiatives are going to continue, as we move into the year. We'll have a little bit of comparison pressure as we get later in the year, because we made some of those restructuring moves at the end of last year, but you know on balance we continue to feel like we're going to have a very nice run this year in the Coatings business and drive EBIT growth.

Thank you very much.

Thanks, Dave.

We'll now go to the line of PJ Juvekar with Citibank. Go ahead.

Yes, hi. Good morning. So far you've talked about sort of limited raw material impact on your business. Gary, can you discuss how lower raw material prices impact each of your segments, sort of differentiate for us as it relates to the magnitude and timing on each segment? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: I'm not going to do that PJ. As I said, we're not seeing it yet. So, I would be speculating – to answer that question will be pure speculation on my part. I said earlier that, I think that if we see sustained lower oil price and we're going to see some bleed through into our overall raw material basket in the low-single digits. But that's about as far as I think we can say at this point in time.

And can you talk about historically, last time, when oil prices went down, whether you... Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Well, that's interesting because the last time that we saw a decline like this was 2008-2009. And if you did the research, you probably have to model, you saw that margins for most coatings companies were up at that time, yet the interesting thing though is, you actually have to look back a little further than that and see that just prior to that big oil price decline, we had massive inflation in our raw material pricing and most coatings companies were out with pricing. I think the timing was such that pricing was hitting just as the price of oil was declining. And it may have looked to people like the margin expansion was due to a correction price of oil, when in fact that was not true. What was true was that pricing went through and improved coatings margins, at the same time that we randomly saw a reduction in the price of oil. So that's context. To answer your specific question, we would expect – I'll say it again this way, we would expect that if oil pricing remains depressed for a sustained period of time that we're going to see a modest benefit to our overall basket.

Okay. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: I can't say more than that now because we haven't seen, we haven't ever seen a period of time when the oil price stayed low for a long time. Even back in 2008-2009, it was more or less a V-shaped recovery, it dropped from wherever it was to about $40 and then it started climbing pretty rapidly after that.

Thank you. Thank you for that. And just one more question from me on TiO2. The supplier seemed to be struggling with pricing, do you anticipate any pricing this year in TiO2? Thank you. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: I think TiO2 pricing is probably reached bottom and is pretty stable, and I don't expect any movement one way or another PJ.

Great. Thank you.

Our next question comes from Ghansham Panjabi with Robert W. Baird & Company. Go ahead please. Mehul M. Dalia - Robert W. Baird & Co., Inc. (Broker): Hi, good morning. It's actually Mehul Dalia sitting in for Ghansham. How are you doing? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Good. Thank you. Mehul M. Dalia - Robert W. Baird & Co., Inc. (Broker): Great. The 10% volume growth in Coatings was impressive. How sustainable is that number, it seems like it was mostly driven by new business wins, but was there any one-offs in the quarter worth noting?

No, no material one-offs, it's really a continuation of the strength we experienced last year and as we highlighted during our prepared remarks, each of our product lines within the Coatings segment contributed to that growth. So I would not call out a specific one-off in that mix. Mehul M. Dalia - Robert W. Baird & Co., Inc. (Broker): Okay. Great. And I appreciate the color on the progress of B&Q. Has there been any pushback from competitors, any new competitors there just given your push into the European market? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Well, I mean, the only place that they could push back would be B&Q and there was some promotional activity a while ago, but I don't think that we're seeing anything unusual. Mehul M. Dalia - Robert W. Baird & Co., Inc. (Broker): Okay. Great. And then just one last one. Do you expect Paint volumes overall for the year to be positive regardless of the North America share loss, just because of international growth that you're seeing?

Yes. Well, it's difficult to grow the total volumes in the business, given the change that we talked about in North America. What we're focused on obviously, is continuing to drive the positive growth that we see in our international markets, and we'll have to just play though the rest of paint season in the North American business. But volume growth overall, we're not expecting material volume growth in the Paints segment, as a result of the changes in North America. Mehul M. Dalia - Robert W. Baird & Co., Inc. (Broker): Great. Thank you so much.

Yes. Thanks for your questions.

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

Thanks very much. Can you remind me again, how much business on an annual basis you believe that you lost at Lowe's? And in the quarter, I imagine that this wasn't a stronger quarter because the transition is not entirely done. Can you sort of size how much that business was down in the quarter?

Yes, Jeff, it's Jim. Just to remind you that the original expectation for the year, when we laid out guidance, we said that the net impact of the changes in the product line at Lowe's, we estimated to be about $150 million to $180 million sales impact to the business. I'm not going to go through kind of the quarter-by-quarter build on that, but as you correctly noted, that transition really just started to happen at the end of Q1 and those product sets are going to start moving into the Lowe's stores. So we did see some impact, but the impact will be much greater in each of the next three quarters as that transition fully takes place.

All right. Are Cabot stains being deemphasized at Lowe's, and is there some sort of trade-off between Cabot going down at Lowe's and going up at Ace? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: No, we don't sell Cabot at Lowe's, Jeff.

Okay. And then, is there any – do you expect any sequential price decreases in your coatings business or do you think that that would be pretty flat in the scheme of things? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: In aggregate, I would expect that it would be pretty flat. As I said, those price reductions come around two ways generally through competitive situations, which I would say the competitive dynamic in most of our markets is as it usually is. There's nothing unusual about this year. And for raw material reductions, and as I said, we may see some modest raw material reductions and our customers may ask to participate in that, and in fact, we will have a constructive conversation about what's there.

Okay. And then, lastly what's the revenue impact of the asset sale or the intellectual property sale, if there was one for 2015?

Yes, Jeff, it's going to be really modest, probably a little less than $10 million.

Right.

It was really a nonstrategic product line of the business.

Okay. Great. Thank you so much.

Thanks for your questions, Jeff.

Yes.

We'll go now to the line of Don Carson with Susquehanna. Go ahead.

Just had a question on your paints mix. Price mix was down 3%. It looks like your price mix was actually positive in North America because sales were down less than volume. So is the negative price mix just the fact that as international sales grow, that tends to be at lower price points?

Yes, two things, Don. From a total Paints segment standpoint, biggest impact on price mix is that last year in the first quarter, we were selling in a much higher, richer mix of Valspar branded product at Ace, which has got higher price points. Second piece as you noted is as we have been successful in growing our international business, the price points on those products, especially in China, are lower than our average for the segment, so the combination of the two of those is what drove the negative price mix variance.

To follow-up on coatings, you mentioned the container initiative with Maersk. You haven't talked about that for a while. Where are we in that whole container coatings cycle? You had outlined quite a drop from peak to trough recently. Are we starting to see a recovery there or is it just that you're getting better economics with onsite manufacturing now? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yes, Don, this is Gary. I don't think much has changed in terms of overall demand for containers. But with Maersk, we're up and running and that's a significant factory and it's a big factory, and it's consuming $30 million, $40 million worth of coatings on its own. And one interesting dynamic that's occurred is that the Chinese government has levied a tax on solvent-based materials in some areas where container manufacturers are operating, and we think that's a net benefit for us as our Aquaguard material is a water-based product. So there is a bit of renewed interest from some customers that we are not currently doing business with. They've been trialing our water-based material as a consequence of that solvent tax. So, we're still sanguine about the container industry in the long-term, but it's not robust at the moment.

Thank you.

And our next question comes from the line of Vincent Andrews with Morgan Stanley. Go ahead please.

Hi. This is Matt Gingrich on for Vincent. To clarify, in regards to the guidance range being maintained, but full year sales are now expected to be lower than previously anticipated. I'm wondering if you could clarify how your perspective on margins might have changed. Is there any expectation of raw materials embedded at this point?

Yes. Once again, it's Jim. It's early in the year. We took the top line down, just given the changes in FX. And just want to highlight, we're at the end of the first quarter. As we look at the full year and the various puts and takes we see from a business and macro standpoint, our view in total hasn't changed materially. We have enough levers at this point in time in the year to manage within the guidance range we have. And as we get more business behind us and see how all the lines of the P&L perform, we'll be in a better position to judge what the full year impact is going to be.

Okay. Thanks. And then in regards to packaging, with some of your competitors taking more aggressive aim at non-BPA business inside of the can, I'm wondering if you've noticed any changes in the competitive landscape there. And then at what point would mean reversion be possible in terms of your multiple of growth to the overall can consumption?

I mean anything is possible. But we feel very comfortable with our leadership position in non-BPA coatings. As I said earlier, our market share in Europe as an example was materially higher than it was before the start of the transition. So we feel like we're leading and we're not going to comment on this call specifically about competitors, but the packaging business is a large global segment. And there are others that would like to be in it, and would love to have the position that we have.

Okay. Thanks.

And we'll go now to line of Dmitry Silversteyn with Longbow Research. Go ahead.

Good morning, guys. Thanks for taking my call. Just a follow-up on that last question. I mean you've been gaining share in packaging fairly consistently through this BPA transition, as well as before, and I understand not all the gains are BPA related. You're already a market leader, so it stands to reason that at some point your growth rate will start approximating more market growth rate. How long of a runway do you think you have in packaging, where you can continue to materially outperform the market and your competitors? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: I think, if you went back to – Dmitry, it's Gary. If you went back to our Investor Day when we talked about packaging, we are a global market leader. But we're not the market leader in Europe, and we're not the market leader in Asia and Europe. But we are the market leader in North America, but in those two other markets we're not. And those other two markets combined are much larger than the North America market. So we've got a very long runaway ahead of us, as this non-BPA transition occurs, and frankly as the packaging market continues to grow. Our business, in the quarter, in Asia as an example was up 20%, which is about two times, at least two times the market growth. And that's not a non-BPA market, that's an epoxy market. So we feel good about our packaging business. We've got positive volume growth for 10 quarters in a row, significant volume growth in the last three quarters or four quarters and we expect that to continue for a while.

Okay. Very good. Just kind of circle back on the Australian paint market. We had a little bit of a recovery I guess, after a couple of years of some housing issues. But now it's – at least from what I'm reading, it looks like the housing market may be losing steam a little bit there. Currency obviously is going to be a significant headwind for you. Is it possible for you to maintain, the growth rates, that you've seen in your Australian business and more importantly, are you getting sort of the needed leverage, from volumes, and margins to where you are, getting close to your double-digit intermediate goal for that business? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: I think most of the growth that we've seen over the last number of quarters, and it's been five quarters or six quarters now at least, we've seen positive volume growth in Australia, Dmitry, has been through Masters. And so, to think about two channels, a retail channel and a paint stores channel, those are our two main channels. And Masters continuous to build stores and we continue to win shelf space at Masters, and which we've been growing there. And then on our stores business, we did a lot of things, two years, three years and four years ago that shrunk the size of our business, but they were the right things to do, to get to the cost structure that we needed and the right store footprint. And we're now starting to see the benefit of the things that we did and we're growing off of that reset base. So, I would – as we said, our stores business was up high single digits this quarter. My guess is that, most of that is market share wins, not market growth.

Okay. And as far as your margins goals in that business where are you versus sort of your plan, as you revised it and versus your long-term goals? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Well. I would say that we're right on the glideslope.

All right. Fair enough, Gary. One final question on general industrial, you talked about some of the strengths in the businesses including sort of the off-road and construction part of the market, agricultural and mining equipment markets continue to be fairly weak, they are – to my understanding, at least a meaningful portion of your general industrial business. Can you talk about what's going on there, sort of, both on year-over-year basis and sort of how the market feels going forward and what the upside could be, should that business recover in 2016? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: So, just to size it, Dmitry, that whole segment for us globally is about $125 million to $150 million segment, right. So it's reasonably big, but it's – we're a $4.5 billion company. So you've seen the headlines from our two main customers and they're projecting a pretty weak year ahead. We are going to feel the impact of that. But on the flip side, but they are not our only two customers. And so we're – we've had an initiative going on in China and in Europe post the Inver acquisition to expand our point of view on that whole market segment. And we're achieving some significant success both in China and in Europe, so in the quarter and last year in the face of declining agricultural equipment sales and construction equipment sales we are growing that business. So that's the way we think about it. We think that that team has got to grow through whatever weakness that occurs in that market, and we can do it, because we're not a huge player, $150 million is not significant in the context of a multibillion dollar overall global market.

Okay, but thanks for sizing that business, because that's – that answers my second part of the question on what the recovery there can do for you. Thanks, Gary. That's all I had. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: You're welcome.

Our next question will be from the line of Rosemarie Morbelli with Gabelli & Company. Go ahead, please. Rosemarie J. Morbelli - Gabelli & Company: Thank you, and congratulation on a great first quarter. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Thank you. Rosemarie J. Morbelli - Gabelli & Company: Looking at packaging coatings, Gary, you had a very strong first quarter, but then the comparison with last year's – you know next three quarters and particularly the second half of the year, which showed a top line growth of 16% and 15% is becoming really quite difficult. Can you still grow year-over-year in the second half or are we more likely to have a flattish type of revenue? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: I expect that business to grow in the second half, Rosemarie. Rosemarie J. Morbelli - Gabelli & Company: Okay. And looking at paints, if we look at – considering Ace, considering Lowe's, and B&Q can it be down more than 5% year-over-year in what is becoming the strongest season and therefore the strongest impact on your top line?

Yes, Rosemarie, it's Jim. As I mentioned earlier, as we look at total volumes for the year in our Paints segment, given the changes that we've seen in some of the North American businesses, it can be very difficult to grow total volumes significantly. With that said, we continue to expect strong volume growth in Europe, based on the initiatives at B&Q, continued volume growth in our business in Asia, as we expand the points of presence within the non-exclusive retail channel and grow the balance of the wall and room business, and as Gary just mentioned, based on the growth we continue to have from a market share standpoint in Australia. So, we're expecting solid gains internationally to be muted by the impacts in North America. Rosemarie J. Morbelli - Gabelli & Company: Thanks. And if may, regarding China are you doing a lot better than the market? Are you seeing some help from the government changes regarding the housing, pushing housing or at least helping housing or is it all your own, and we have yet to look forward to that particular tailwind? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yes. I think, the results we've seen in the quarter are really driven by the expanded point of distribution in the non-exclusive channel. So adding 1,400 new locations is really about building share in that marketplace, less from recent announced changes around the Chinese government supporting the housing sector. Rosemarie J. Morbelli - Gabelli & Company: So, you haven't seen anything, not even any signs of some kind of a tailwind coming your way? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yes. I'm not personally close enough to know, but I see nothing material that has shown up in the first quarter results. Rosemarie J. Morbelli - Gabelli & Company: Okay. Thank you. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Thanks for your questions, Rosemarie.

And we'll move now to the line of Nils Wallin with CLSA. Please go ahead.

Good morning and thanks for taking my question. You mentioned certainly the effects of some of the restructurings you did last year flowing through this year, but curious as to any additional productivity programs you might be able to either enact this year and pull forward and how much of the overall productivity gains are likely to help you make your guidance for this year? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Well, we've got our annual productivity assumptions that are built into our guidance as they always are every year. So we're going to continue to see benefits of some of those productivity restructuring initiatives, as we go on through the balance of the year. As we identify opportunities to improve our cost structure and improve customer service, we'll be happy to look at those future restructuring activities, but embedded in our guidance for this year is no material changes from new restructuring initiatives.

Yes, thanks. And then just in terms of Ace, I know that there was a differing levels of contribution between the Ace branded products and bringing in the Valspar brand. Would you help us know where you are right now in terms of the different shares and how much you think additional share gains by Valspar in the Ace retail channel could help your price mix? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yes, well, maybe to back up a little bit from a historical standpoint, talk about the mix of branded and private label just from a context standpoint. You may recall Nils when we introduced the Valspar relationship with Ace, we initially started providing them just private label products in the first – really first three quarters of our relationships. So, we were closer to – we were a 100% private label that point in time, that mix last year shifted dramatically more towards branded as we loaded in the initial product sets for the store. So as we look at this year, our mix is going to be more heavily weighted towards private label than branded, which is always been the plan in the business, and we anticipate that we're going to continue to be able to grow the branded – the branded sales within the portfolio with the partnership with Ace as we grow that business going forward.

So did the – the year-on-year comps in private label versus branded was that a negative effect or positive effect on price mix in the quarter? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Put them together in Q1, we were loading in much more branded product in Q1 last year than we did this year. So it was a negative impact this quarter.

Okay, thanks very much. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: You are welcome. Thanks for your question. Bill Seymour - Vice President-Finance & Investor Relations: This will be the last question, please, operator.

Okay, thank you. And that will come from the line of Arun Viswanathan with RBC Capital Markets. Go ahead, please.

Thanks guys. Yes, so I just had a couple of questions, I guess first off in U.S. architectural, do you think we can get back to kind of a normalized level of gallons that we saw post recession maybe around 750 million gallons or so and what would be Valspar's participation as we climb up from maybe the 700 million or 750 million level where we're now? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Well, you correctly point out, that we've got a ways to go to get back to the levels that were available pre-recession, I think, that certainly achieving those levels from an industry standpoint, that would require a level of new housing starts, that we're probably not going to see in the near future anyway. So I think the broader point certainly from the model that supports the investment thesis that we've laid out for our business is that, the North American housing recovery is going to continue to grow modestly and given that we've got a very widely distributed brand in North America through the various channel that we participate we think continues to provide a very nice tailwind of growth for our businesses. So, continued growth in housing in North America is a positive for the business and we look forward to having the Valspar brand available for a full year within the Ace business, and then certainly with our relationship in the home improvement channel with Lowe's, having Valspar reserve available for a full year as well as consumers continue to generate awareness around those brands.

Okay. Great, and just as a quick follow up on the raw material side. Can you just help us understand how long your supply agreements are in those kind of propylene based materials and TiO2, is it less than a quarter or how do you look at that? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yes, sorry, Arun, we're not going to talk about that.

Fair enough. Thanks. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Welcome. Bill Seymour - Vice President-Finance & Investor Relations: Okay. That was the last question operator. Thank you.

Thank you. Ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation and for using AT&T Executive TeleConference service. You may now disconnect.