The Sherwin-Williams Company (SHW) Q2 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to The Valspar's Fiscal 2015 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session later. As a reminder, this call is being recorded. I'd now like to turn the call over to our host, Vice President of Investor Relations, Mr. Bill Seymour. Please go ahead, sir. Bill Seymour - Vice President-Finance & Investor Relations: Good morning and welcome to our fiscal 2015 second 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 risks 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. Before I hand over to Gary, let me cover one housekeeping item. We have updated accounting policies relating to the classification of freight costs for shipments to our customers. This reclassification has no impact to our overall results. We provided more details of this in our supporting earnings slide presentation on the IR site. With that, I'll 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 highlights of our second quarter performance. Jim will provide additional detail on the quarter's financials and our outlook for the year. I'm pleased with the results for the second quarter, which were right in line with our expectations. We grew EPS 4% in the quarter. We achieved this despite significant headwinds from the impact of currency translation and the expected volume decline in our Paints segment in North America. Of note in the quarter was continued strong performance in Coatings, driven by new business wins and benefits from productivity and cost savings. In the Paints segment, our international business has had a good quarter with volume and sales up in local currency. Moving on to cover some segment specific highlights, our Coatings segment had a seventh straight quarter of solid growth. This great business continues to show the benefit of our diversified, yet focused portfolio and strong market positions. In Q2, Coatings volume was up, sales were up in local currency, and net new business was up 5%, driven by market share gains. We grew EBIT by 160 basis points, as we leveraged our growth, restructuring and productivity initiatives. I'll turn now to our Paints segment where I'll cover a number of important initiatives ongoing across the world. Let me talk about our largest paint business first in North America. As we expected, volumes in North America were down in the quarter, driven by two factors. One, the previously disclosed product line adjustment at Lowe's; and two, the difficult prior year comparisons relating to new product launches at both Lowe's and Ace last year. As you all know, we lost a price point at Lowe's as we entered the paint season this year. The good news is that sell-through of the remaining products at Lowe's was up double digits in the quarter. This strong performance is testament to our great brand and to our world-class team working with consumers in Lowe's stores every day. We have a very strong product line up at Lowe's that spans many price points. In this spring, we introduced a new lineup of Pro paint. The new Valspar's series of professional paint products includes multiple SKUs, including lines that are now zero VOC. And speaking of zero VOC products, a leading consumer publication recently rated Valspar Reserve the number one zero VOC paint in the U.S. And overall, Valspar had four of the top eight ranked paints. In the independent hardware channel in the U.S. where, just as a reminder, Valspar has sold in over 8,000 stores, we just finished setting a new Cabot stain program at Ace and we jointly kicked off a new marketing and advertising campaign. We continue to make great progress in this channel. Our international consumer paint business had another good quarter of performance. Volumes and sales were up in local currency in all regions. China had strong volume growth, driven by continued expansion of our distribution network. In Australia, we continue to see good growth at both Masters and in our stores business. Sales were up high single digits in the quarter in local currency in the stores channel, and it was the seventh quarter in a row that we've grown share with professional painter in Australia. More good news in that region. Mitre 10, a leading home improvement retailer in New Zealand, recently selected Valspar as its new strategic paint partner. Valspar Paint will be available in all 81 million Mitre 10 stores this fall. In the UK and Ireland, we're now set in all B&Q stores, and we've had great feedback on our paint and the new advertising campaign launched this spring. So, looking at the quarter in aggregate, our overall results were solid and in line with our expectations. Our performance once again demonstrates diversity and strength in our business portfolio. And today, we're pleased to announce that we have further strengthened our portfolio with the pending acquisition of the performance coatings businesses of Quest Specialty Chemicals, which includes coatings for automotive refinish and industrial applications. In 2014, these businesses generated sales of approximately $190 million. Quest Automotive Products, the larger of the two businesses, brings advanced technology products for professional refinishers, primarily in North America and Europe. This acquisition will effectively double the size of Valspar's existing auto refinish business. Our customers will benefit from an expanded portfolio of preferred brands, a broader suite of high performance products, increased distribution channels and a stronger service network. Quest Industrial Products serves both the professional and consumer market with aerosol spray products and highly specified coatings for industrial applications. This business nicely complements our existing aerosol business with enhanced supply chain, technology and distribution. These businesses are a great addition to our portfolio and we expect the acquisition to be accretive to earnings in the first full year. With that, I'll turn over to Jim to provide more details on results and our outlook.

Thanks, Gary, and good morning, everyone. I will review our second quarter performance, discuss expectations for the balance of fiscal 2015 and provide some additional context on the Quest acquisition we announced this morning. Starting first with Q2 performance, reported sales decreased 7% and volumes were down 3%. Excluding FX, sales declined 2%. These results were in line with our expectations that called for a continued volume growth in Coatings to be offset by lower volumes in Paints. The decline in Paints was the result of the Lowe's product lineup change and the difficult comparisons to several large product launches last year during the second quarter. Similar to last quarter, the FX translation impact from the strengthening U.S. dollar lowered our reported results. We estimate the currency changes lowered sales by approximately $55 million and adjusted EPS by $0.04 in the second quarter. Excluding the impact of FX, adjusted EPS growth in Q2 was approximately 7%. Looking at sales in the Coatings segment, we delivered another strong quarter of growth. Sales increased 5% in local currency and volumes grew 3%, driven by new business wins. Coatings growth in the quarter was led by strong performance in the general industrial and coil product lines. In packaging, sales in local currency increased and volumes were down slightly. The volume decline was the result of lost business comprised of lower margin products. New business wins in non-BPA products increased sales and more than offset the impact of this volume. As Gary said, Coatings is having a very good year. For the first half, volume was up 7%. Sales in local currency are up 8% and adjusted EBIT margins are up 140 basis points. Moving on to the Paints segment, Q2 sales decreased 12% in local currency and volumes declined 12%. We saw another good quarter of growth from our international paint businesses where volumes increased. This growth was more than offset by a double-digit volume decline in North America. The decline was driven by the product line changes at Lowe's and the difficult comparisons to last year's Ace rollout and the launch of Valspar Reserve. The Paints segment also includes our auto refinish product line, which in the future will reflect the results of the acquired Quest businesses. In Q2, Valspar's existing automotive refinish product line increased volume high single digits and improved sales mid single digits in local currency. Moving on to gross margin, we finished the quarter with total gross margin of 36.5%, up 280 basis points year-over-year. The improvement in gross margin was the result of several different factors. The largest driver was improvements tied to our productivity initiatives and restructuring activities. These included benefits from supply chain restructuring programs and manufacturing consolidations in North America and Europe. In addition, we had favorable comparisons to last year when we incurred some one-time costs related to supply chain disruptions. Second was from cost price. We saw some modest benefits on select inputs including solvent-based items and input costs in Asia. As we move into the second half of the year, we do not anticipate a similar level of improvement to the gross margin rate as we experienced in the second quarter. Costs are showing signs of firming in Asia and other markets. In addition, we will not have the benefit of favorable comparisons to the prior year as discussed above. Looking at expenses in Q2, OpEx of 21.9% of sales increased 140 basis points due in part to deleverage from lower sales in the Paints segment. However, operating expense dollars were down slightly, driven by the impact of FX and benefits from our productivity initiatives. Bringing it all together, consolidated adjusted EBIT increased 3% and EBIT margins increased 140 basis points to finish at 14.5% in the second quarter. In the Coatings segment, adjusted second quarter EBIT of $110 million increased 9%. The increase in EBIT was primarily the result of benefits from productivity initiatives, cost price and increased volume. In the Paints segment, adjusted EBIT of $47.3 million was down 17% from the prior year. This decline was driven by the impact of lower sales from the product line adjustments and difficult comparisons to last year that I referenced earlier. While total Paints segment EBIT declined in Q2, Paints EBIT growth outside of North America was up mid single digits. Wrapping up the quarter, we paid $24 million in dividends, representing a per share increase of 15% and repurchased 1.1 million shares of our company's stock for a total investment of $93 million. With this as context on Q2, let's move on and review the outlook for the balance of fiscal 2015. We continue to expect annual adjusted EPS in the range of $4.45 to $4.65. As noted in the release today, we modestly lowered our annual sales guidance to a decline in the low single digits compared to fiscal 2014. This change reflects an updated estimate of the impact from FX for the fiscal year. We look forward to adding the Quest businesses to our portfolio during the third quarter. Let me provide you with some quick comments on the expected financial impact of the acquisition. First, the fiscal 2015 guidance we just discussed does not include the impact of the pending Quest acquisition. But let me give you an idea of what we preliminarily expect. Given the partial year of sales and expected integration investments, the EPS impact from Quest is expected to be slightly accretive in fiscal 2015. More importantly, looking forward into fiscal 2016, we preliminarily expect the acquisition to add approximately $35 million in EBITDA. From an EPS perspective, this would result in approximately $0.07 to $0.09 of adjusted EPS in fiscal 2016. This preliminary estimate includes the negative impact of $0.04 to $0.05 in non-cash amortization charges related to purchase accounting. In closing, our Q2 results reflect solid performance. With half the fiscal year complete, we've performed in line with our expectations and remained focused on delivering on our full year performance goals. With that, we'd like to open up the call for your questions.

And our first question will come from Bob Koort with Goldman Sachs. Please go ahead. Robert Andrew Koort - Goldman Sachs & Co.: Thanks very much. Gary, you had mentioned that in the Paints segment, both Asia and Australia had a very good volume trends, but the sales realization wasn't as great. I assume a function of that currency, is part of that also the continued move towards affordable housing in Asia and was there any move down in the price point curve in Australia? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yeah. In China, Bob, it would be – as we have really strong volume – less sales and volume because we're – the non-affordable house – the affordable housing segment or we also refer to it as non-exclusive distribution is still growing strongly and that's the reason that you're correct when you call that out. In Australia, it's all currency. I mean, the Australian dollar has probably been impacted more than any other currency that we translate back. So, yeah, we had really good quarter in Australia. Volume was up high single digits, sales were up mid-single digits, but as it translated back, it looked – it didn't look that good. Robert Andrew Koort - Goldman Sachs & Co.: Can I ask you on your initiative at B&Q, I noticed they've got a new Chairman or leader and there's been some change in strategy a little bit under B&Q store based closing some stores. Do you sense that creating any headwinds for you or reducing the growth expectations you had previously? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Not really, Bob. I mean, it's – I think they announced that their plans were to close about 15% of the stores in their network. I think it's safe to assume that those stores were underperforming to begin with. They believe that they can keep at least a third of the volume from those stores, so if you do that math, it says that the potential business that we had with B&Q is reduced by, say, 10%. And if you remember, our number there was 100 – a little over $100 million, so it's immaterial to – certainly to the company. It will still be good and profitable business, but I think more importantly as we've said a number of different times, B&Q for us is an important venture because of the optionality it gives us on the rest of the European consumer market which is very, very large, $6 billion or so and very fragmented market. So, it gives us the opportunity in addition to partnering with a great retailer. We're building a team, we're building a supply chain and we believe that we'll be able to expand that business from that base. Robert Andrew Koort - Goldman Sachs & Co.: Perfect. And just an editorial gratitude to Jim and Bill in terms of getting those slides out, it's much more helpful, I appreciate the greater disclosure there. Thanks. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yeah. You're welcome.

And our next question will come from Eugene Fedotoff at KeyBanc Capital Markets. Please go ahead.

Good morning. Thank you for taking my questions. Just to follow up on Europe, could you tell us what the volume growth was in the region in the quarter? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yeah. Volume growth in Europe was flattish. And it's mainly as a result of our packaging business and I apologize this issue now I'm sure will come up later because we have been showing strong volume growth in our packaging coatings business for the last several quarters and this year, it was slightly negative. And now as a result, as Jim mentioned, of a competitive situation in Europe on a large volume, low margin product, and one of our competitors got a little bit more aggressive on price than we were comfortable with. So we let the business go. But packaging in Europe overall had a good quarter, offsetting that volume loss and had sales in the low single digit, approaching mid single digit range. So, in Europe, in general, had a good quarter, sales were up mid single digits in local currency. So, the headlines to that, say, Europe is improving, that's possible certainly our business there remains strong.

Thanks for the color. And then, North America, the changes at Lowe's, was the impact on volume in the quarter? Was it more or less than you guys expected? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Right in line.

Got it. Thank you.

And our next question comes from David Begleiter with Deutsche Bank. Please go ahead.

Hi. Good morning. This is Ram Sivalingam sitting in for David. How are you? A quick question on raws. Can you just parse out what you're seeing in solvents versus resins? I would sort of expect given much weaker propylene and propylene derivative pricing, you guys would look to see a bit of a benefit as we work into the back half of the year, but just curious to hear your thoughts there. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yeah. We usually don't talk about – we had a policy of not talking about individual commodities. And – but we will say that and Jim said it, I think, in his prepared remarks is that we did see some softness in pricing in the quarter in the commodities that are related to oil and that would be solvents that – the type of commodities that you expect to see behave cyclically. So we saw that in the quarter. And as Jim also said, toward the end of the quarter and certainly as we look forward through the remainder of the year, we see pricing firming in those commodities, particularly the ones that are related to oil, which on average is at a higher price now than it was during the second quarter for us.

Understood. And then, just on your performance coatings acquisition, is it possible just to give a little bit more color on the mix? How much is comprised of refinish versus industrial? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yeah. It's about three quarters auto refinish and about a quarter industrial. I mean – so there are two businesses that we acquired, Ram, one is the auto refinish business and that's the larger of the two, and then the smaller is an industrial aerosol business. Both businesses are highly complementary to our existing businesses and broaden our product offering and distribution channels. The auto refinish piece, which I'm sure most of the folks on this call know (21:58-22:05) extremely attractive from sales and will increase our presence in the North American market more than that percentage. We'll finally be at a significant scale in the North American market. The industrial business – the industrial aerosol business, I think you know we have an aerosol business that's mainly a consumer business today. It's highly complementary from the standpoint of supply chain, manufacturing, and technology. So we're very excited about these businesses and we expect they're going to be great contributors to Valspar earnings going forward.

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

And our next question comes from Jeff Zekauskas with JPMorgan. Please go ahead.

Hi. Good morning. In terms of the Quest purchase, you probably can't disclose precisely what you're paying for it, but is it roughly $400 million? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Less than that, Jeff.

I'm sorry, couldn't hear you. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: I'm sorry, Jeff. Bill Seymour is controlling – Seymour is controlling the electronics here. For some reason, he had you muted. So it's less than $400 million.

Less than $400 million. Okay, that's great. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yeah. Jeff, yeah, it's – I would say the transaction is consistent with industry multiples in terms of our purchase price. After synergy, we're looking at something like paying seven times EBITDA.

Okay. And your prices were up a couple of percent in Coatings, can you talk about which areas were up, was that a particular industry area or a particular end market? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: I don't believe that we got any significant pricing in the quarter. Jeff, what you're looking at is a mix improvement.

Is a mix improvement. Or where was the mix better? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Packaging with the increased sales of non-BPA coatings.

And the coil business. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: And our coil business, which had a really strong quarter and we leveraged the strong growth into stronger margins. And we also had – we had a number of different product launches in our coil business over the last couple of quarters that have incremental margins that are higher than the base.

Yeah. The coil business also as part of the mix grew in the first half of this year. Remember, we had very difficult weather conditions in the first half of last year, so coil mixed heavier in the portfolio this year.

All right. So I think early in the call you said something like on an apples-to-apples basis, you are up double-digit at Lowe's, meaning exclusive of the price points that you lost. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: You're right.

Was that growth faster or slower or the same as the other suppliers to Lowe's. Do they also have a similar increase or do you feel you're doing better or worse than competition? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yeah. I don't know the answer to that, Jeff, and I am not sure if I did I – it would be appropriate to answer that specifically. It was – we were very pleased with that. As you know, we have several hundred, over 400 Valspar employees that work in the Lowe's stores supporting Lowe's sales efforts. And as I said in my remarks, the strength of our brand and the strength of our product lineup combined with those 400 professionals led to really strong growth in the quarter.

Lastly, when you think about your raw materials, were there particular regions where raw materials were down more and particular regions where raw materials were down less? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yeah. Asia was the largest – we saw the largest reduction in costs in our Asia business, Jeff.

Um-hum. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Europe and North America were more or less similar.

Okay, great. Thank you so much. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: You're welcome.

And our next question will come from Duffy Fischer with Barclays. Please go ahead.

Yeah. Good morning, fellas. First question probably for Jim. On the comments we're – coming out of Q1, we're going to be flat on overall sales, now down low single digits. But the change in your accounting policy actually increases your year-over-year or your sales from last year. So was some of that dropped down to low single digits down because of that accounting change or can you help me apples-to-apples year-over-year?

Yeah, Duffy. Thanks for the question. No, the change in our estimate does not reflect that accounting change, reclassification change because what we've done, Duffy, is we've adjusted both years.

Okay.

So we're looking at an apples-to-apples sales number for the full year end for the individual quarters. So really it's just updating our expectations around what we've seen happened with FX since our Q1 call and it's about, call it, $50 million to $60 million sales impact due to worse FX since our last estimate.

Okay. Fair enough. And then, on the Lowe's product change, is there still going to be a little bit of a hangover in Q2 next year in that there was still some of that price point that was sold this year that will go away next year?

I think most of it will be wrapped up by Q1 next year, Duffy. I mean there might be immaterial parts certainly in the first part of Q2, but as we get through the first quarter of next year, we'll have anniversaried most of the product line-up change.

Okay. And then the last one and you teased a little bit of it out, but I was wondering if you could just ramp the whole segment. Coil coatings looks like it crushed it for you guys up double digits and I'm not sure if it was Gary or somebody mentioned maybe it was a little bit of weather in there. But can you walk through why that was so much better on a volume basis being it's a fairly mature industry?

Well, our teams have done a great job winning new business in that space. That's one driver. The other driver, as I mentioned in, I think, in the Q&A session, is that we talked in the first half of last year about softer results due to the abnormally cold weather and wet weather in Q1 and Q2. So we're lapping some – a little bit easier compares, but the vast majority of the reason is our team did a nice job winning new business.

Great. Thanks, guys.

Yeah. Thanks for your questions.

And the next question will come from Arun Viswanathan with RBC Capital Markets. Please go ahead.

Yeah. Thanks, guys. I guess I just wanted to follow up on the Paints segment a little bit. Just trying to understand, you said, you know, you were up double digits existing business at Lowe's and I didn't fully understand that. So do you think it was due to some share gains or is it really strong start to the paint season this year or what do you think is going on there? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: I think our people in the stores are doing a great job (29:12-29:21) selling, and when a customer comes in, they intercept that consumer and they are helping Lowe's grow their Paints department by selling Valspar.

And so, as you look out over the next year or two, do you expect that that growth to continue and potentially offset some of the share loss you did experience last year? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Yeah. That's a good question, Arun. Let's just – let the paint season play out. The first quarter or the second quarter of this year is not the high volume of the year, it's not the high volume quarter...

Sure. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: ...as the third quarter is. So let's see – let's defer that question until our third quarter call and I'll be able to give you more specifics. I'd just be speculating now.

Right. And then last question I have was just in Coatings, what are you seeing in heavy equipment and then also in Europe, are you seeing any emergence of green shoots or do you expect that to emerge in the next couple quarters? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Well, as I said, our Europe – address Europe first. Europe business had a good quarter. And that comes on the back of several – many actually, good quarters. So we haven't been impacted in Europe to the extent that, say, other businesses have. In the heavy equipment market, I'll just say it's still down. I mean you – I'm sure you read the announcements from the main branch Caterpillar and Deere. They're not expecting a strong year in heavy equipment. Our heavy equipment segment is doing extremely well, because we've taken significant amount of market share with local players in the China market as well as some others globally. The Inver acquisition was a real enabler of our growth strategy. So we've taken share in the off-road market in Europe. And as I said, we've done really well in the China market as well. So we're offsetting the softness at the few large customers where market share growth was.

Okay, great. Thanks.

And the next question will come from PJ Juvekar with Citi. Please go ahead.

Good morning. It's Dan Jester on for PJ. Can we go back to the strategic rationale for the Quest acquisition? Did you feel like you need to get bigger in the auto refinish business to compete for the multi-shop operators that seem to be consolidating slowly the U.S. auto refinish market? And the auto refinish business doesn't seem to have been historically as big of a focus for you in the past, but going forward, is this going to be the fifth leg of your Coatings platform, and should we expect more investment in auto refinish in the future? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Dan, those are great questions. I'll answer the last one last. Yes, we do expect this to be a fifth leg to our Coatings platform. And we didn't need to do the Quest acquisition, but we wanted to do the Quest acquisition. We have, I think you know it was in our Investor deck, the refinish business, that's about $150 million pre-acquisition of Quest, and it's been growing nicely. We've been in the refinish business for 15 years and it's always been a reliable grower, it's always been a very profitable piece of our business and we've always wanted to get larger in refinish. The Quest acquisition gave us that opportunity.

Okay. And then, just on the New Zealand business that you won that you mentioned briefly in your prepared remarks, 81 stores by the end of this year. What kind of revenue and profit contribution can we expect from that in the future? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Well, it's not huge, Dan. New Zealand is a small country, but we called that out because for that team in Australia, New Zealand, $10 million or $15 million of business, which is roughly what we're talking about initially is significant and more significant is that the brand – our brands are – will be more widely distributed in the New Zealand market.

I think as we've also talked about in the past, our business there, we spent last few years restructuring the cost base of the business. So, it's highly sensitive to improvement based on adding incremental volume. So, examples of adding Mitre 10 really helps build the infrastructure of the business and allows us to get to the level of profit that we anticipated from the Australian portfolio.

Okay. Thank you very much.

Thanks for your question.

And our next question comes from Vincent Andrews with Morgan Stanley. Please go ahead. Vincent Stephen Andrews - Morgan Stanley & Co. LLC: Thanks and good morning. Just a question on your other segment showed less of a loss in the quarter sequentially in year-over-year and I think in general just wondering what caused that and if that whatever it is sustainable?

Yeah. Good morning, Vincent. Thanks for your question. Yeah, a lot of companies I know consider the other part of their portfolio to be primarily corporate expenses and things of that nature. I just remind people on the call that for Valspar that other business segment includes our internal and external resin business. It also includes some of our furniture protection business that we have and it's got some corporate expenses in there as well. The biggest change in the improvement in that segment during the quarter was really the performance of our resin business. Our resin business has been increasing volumes, high single digits and doing a nice job of growing their portfolio both in the Q1 and Q2 with a much smaller part of the change was really timing of corporate expenses within the quarters. But again, biggest element is business driven volume increase from our resin business. Vincent Stephen Andrews - Morgan Stanley & Co. LLC: Okay. And just as a follow-up, I just want to make sure I understand the bridge on the guidance because if I heard you correctly and I might have missed part of it. You reduced your sales forecast on FX, but the EPS range is staying the same, but you're not anticipating really any material – raw material benefit in the second half. So I am just wondering what are the other moving part – and Quest isn't in there, what are the other moving parts that keep you in the range or so just what the other moving parts, I guess?

Yeah. So let's go back once. You're correct. We commented that the impact of the Quest acquisition, which is expected to be accretive, but not significant for the year will roll in the full impact of that after we close of the deal and when we talk about our Q3 results. From an EPS standpoint, excluding the Quest business, what I said was we've lowered our sales guidance slightly simply to reflect our updated view of what we think FX is going to do for the year, so we'll see where that actually lands. The other comment we made in our prepared remarks is that why we expect our gross margin rates to improve in the back half of the year, they will not be at the same rate that we experienced in the second quarter because of the anniversarying of some of the benefits we saw in the back half of last year especially Q4 and the fact that we see some of the prices in the marketplace firming as we look into the back half at this point in time. So we do expect gross margin expansion in the second half, just not at the rate we saw in the second quarter. Vincent Stephen Andrews - Morgan Stanley & Co. LLC: Okay. Thanks very much. Appreciate it.

And our next question comes from Dmitry Silversteyn with Longbow Research.

Good morning, guys. A couple questions, if I may, mostly follow-ups. On the packaging business, when do you expect to anniversary this loss of the large low volume business that's been sort of holding back the last couple of quarters, is it going to be done by the end of the year or is it going to carry over into 2016?

It will probably carryover, Dmitry.

Okay. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: It will probably. By the way, you know this business really well and you know what the product line is. This happens. We win some. There are basically two suppliers in this segment and we buy them back and forth a little bit year-in and year-out. So this is not a big deal. And it's not particularly profitable, so – but – and it usually lasts about a year before you have another opportunity to bid. So let's call it a year before we anniversary.

Got you. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Fourth quarter next year – sorry, second quarter 2016.

Got you. Okay. Can you talk a little bit about the pricing environment in Coatings? I know in Paints that's generally fairly stable and is kind of independent of raw materials, at least some are deflating. But Coatings tends to be a little bit more fragmented and a little bit more competitive business. Has the raw material really been meaningful enough for coating suppliers due to starters containing share gains through lower prices or customer pressures of lower prices? Can you talk about the pricing environment both in the second quarter, but more importantly, your outlook for the rest of the year? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: I think our customers understand our cost structure pretty well, Dmitry, and understand that we've got long-term relationships with most of the customers in our Coatings businesses and they understand that commodity driven fluctuations in raw material costs are not the basis to talk about structural reductions in pricing or structural increases in pricing if it goes the other way. And the impact just hasn't been significant enough, yeah, for us to engage in extremely detailed conversations with most of our customers.

Okay. So you would characterize the environment as being fairly benign in the sense of not much changing. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: I would say fairly benign is the way I would say, yeah.

Okay. All right. With respect to the tough comps that you are seeing in terms of getting the Cabot stains into Ace and the Valspar lines into Ace last year and Reserve into Lowe's, when do you expect to anniversary the channel fill? Is it pretty much done in the second quarter, beginning of the third quarter or is it going to impact you for the rest of the year and we have to look towards 2015 to see more robust delivered year-over-year growth?

Yeah, Dmitry, it's Jim. You went through a couple of different pieces there. Let me just break them down. So the first is that you commented on Cabot, that's really a – that's the activity we're doing this year...

Okay.

...in the Ace stores. So it really doesn't have – but doesn't put pressure on this year's results. Obviously, it's a tailwind. In the North American business, if you recall, in Q1 and especially Q2 of last year, we were just finishing the build-out of the over 3,000 Ace stores with the Valspar brand. We also launched Valspar Reserve at Lowe's, a lot of those sales got loaded in Q2 – our fiscal Q2 last year so that our retail partners could sell them during the paint season. So we'll see some of the pressure of those headwinds mitigate in Q3 in the business. The pressure that we have from the product lineup change in Lowe's, though, it's going to continue through the balance of the year and into the first quarter.

Okay. That was – my second question, you preempted a little bit, but...

I was reading your mind, Dmitry.

You are, but I'll rephrase it a little bit. Is the biggest impact of the loss of the Lowe's product points, was it in the second quarter or will be – the biggest impact will be in the first quarter in terms of year-over-year comps?

No, it's pretty similar in really Q2 to Q4. It'll be a little heavier during the key paint season in Q3, but not meaningfully.

Okay. Okay. Fair enough. Thank you.

Yeah, thanks for your questions, Dmitry.

And our next question comes from John McNulty with Credit Suisse. Please go ahead, sir. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker): Yeah. Good morning. Thanks for taking my questions. Quick one on the Quest business. It looks like – at least at first glance, it looks like the margins are at least a little bit lower than your Coatings division margins. I assume with synergies that that more than gets taken care of, but I guess can you walk us through how to think about the magnitude of the synergies and as they – how we should think about them rolling in over the next couple of years?

Yeah, John, a couple of things. So we'll put this business like we have our existing auto refinish business in the Paints segment. So our EBIT margins are actually a little better in this business and our EBITDA margins will even be greater because the thing that I called out in my comments as well is we're going to have some non-cash amortization that's going to impact EBIT margins. But I think as we look forward into the synergies not unlike the deals the company's historically done like Inver, we're going to have manufacturing synergies, we're going to have commodity synergies, and most importantly, we're going to have sales synergies being able to leverage both of the companies' products against the existing distribution networks in the companies. So looking at a EBITDA margin, call it, roughly 18% today that can continue to grow over time with those synergies and go north of 20%, we think it's a great attractive business to not only deliver higher bottom-line results but also to accelerate the top-line in our refinish business. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker): Absolutely. Okay. And then thinking about other M&A opportunities, I guess do you see a relatively decent pipeline out there or should we view this as a one-off and this does look like a pretty decent asset for you. So I guess how should we think about opportunities for more of that to come throughout the year? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: I mean they're just – they're unpredictable, John, as you know. I mean we have a number of things that are in progress, nothing at $200 million, but a number of smaller ones, at least one or possibly two I would expect to come through in the balance of the year, but maybe not just – deals come and go and sometimes we pause and revisit, so we'll just have to go. But as you know, it's still a rich landscape in the paints and coatings industry particularly in Asia and in Europe still extremely fragmented. We've been a consolidator. We expect to continue to be a consolidator. And the historical growth that we've achieved through M&A as our target growth for the future which is about half of the company's growth that gets come through M&A, we expect that will be the case in future. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker): Okay, great. And then maybe just one last question. So now that you're ramped up at B&Q kind of full out, I guess how long – because you've said this is the first step into potentially targeting a much bigger platform throughout Europe. I guess how long do you go through this trial period to see if it resonates well, if the strategy works before you either move to the next level with your partner, or maybe put it on hold or put an end to it. I guess how should we think about the signpost or what we should be looking for in terms of whether this gets taken to the next level or not?

Yeah, minimum. We want to get a full year behind us, certainly with B&Q where our focus right now, John, as Gary mentioned, is on winning with that retailer, winning with consumers of that marketplace and seeing how the business plays out with the full year of advertising, full year of training and support of the stores. That will put us in a good position to read out either a) how we should make some modest adjustments to the model; or b) can give us continued confidence that we can invest behind that with other retailers in the marketplace. But it's good to get a full year's result behind us through a full paint season to understand how the consumers are reacting to the value proposition. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker): Okay. So thinking about it from a one-year to two-year perspective is probably the right timeframe, is that right?

Yeah. I think so. I mean really at the end of this year, we'll probably have a full year of a complete set underneath of our belt, good time to re-evaluate. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker): Great. Thanks very much.

Thanks, John. Gary E. Hendrickson - Chairman, President & Chief Executive Officer: Brett, this will be our last question. Thank you.

You're welcome. Thank you. And that will come from Nils Wallin with CLSA. Please go ahead.

Good morning and thanks for taking my question. A question on wood. Last quarter, it was up double digits in terms of volume. This year, it's down low single digits year-over-year. Could you help us understand what's driving that volatility in volumes between the two different quarters?

Yeah. It's primarily coming from the performance in our Asia business. So if I blend the two quarters together, I probably have a more representative run rate. There are some changes that have been taking place in the Asian marketplace around the government providing – or requiring taxes on certain types of solvent-based products. So we believe we have some customers pre-order some inventory in advance of those regulatory changes. So really if you look at blending of the two quarters together, we probably have a more representative, very strong run rate in that business and the North American business has performed pretty consistent in both those periods.

Got it. Then just on your FX headwind, it seemed a little bit lower, what dropped to the bottom-line was maybe a little bit less than one would expect, was there any transactional benefits there or is there something else that's preventing the FX headwind from really hurting you as much on the bottom-line?

No, it's really all translation and just given the mix of the business we have in each of those markets. As you would imagine, some of our European businesses aren't at the same margin levels as our established, more profitable North American count – as our established more profitable North American counterparts. So it really has more to do with the regional mix of EBIT.

Got it. And then just finally, Masters is rolling out some new store formats in Australia, but then they're also looking to reduce at least or they are decelerating the amount of store openings that they are looking for in the next couple of years, but how – netting all that out, how is that going to look for your volumes in that part of the business going forward? Gary E. Hendrickson - Chairman, President & Chief Executive Officer: I don't expect a material change, Nils. I mean, we've been growing nicely with Masters and they are about 10% of our business in Australia and so a modest change in their plans doesn't impact us very much.

Understood. Thanks for taking my questions. Bill Seymour - Vice President-Finance & Investor Relations: Thank you, everyone.

And that does conclude the conference for today. Thanks for your participation, and for using AT&T Executive TeleConference service. You may now disconnect.