Robert Wells - Senior Vice President of Corporate Communications & Public Affairs Sean Hennessy - Chief Financial Officer and Senior Vice President of Finance Christopher Connor - Chairman and Chief Executive Officer

Jeremy Brunelli Stephen East - Ticonderoga Securities LLC Brian Maguire - Goldman Sachs Group Inc. Stuart Pulvirent Eric Bosshard - Cleveland Research Company Donald Carson - Susquehanna Financial Group, LLLP Jeffrey Zekauskas - JP Morgan Chase & Co Saul Ludwig - Northcoast Research John McNulty - Crédit Suisse AG John Roberts - Buckingham Research Group, Inc.

Kevin McCarthy Unknown Analyst - Dmitry Silversteyn - Longbow Research LLC P.J. Juvekar - Citigroup Inc

Thanks, Claudia. In order to allow more time for questions, we've provided balance sheet items and other selected information on our website at sherwin.com under Investor Relations second quarter press release.

Summarizing our overall company performance for second quarter 2011 versus second quarter 2010. Consolidated net sales increased $211.7 million or 9.9% to $2.35 billion, due primarily to selling price increases across all segments, acquisitions completed in the past 12 months, and improved sales by our Global Finishes Group.

Acquisitions increased net sales by 5.1% in the quarter and favorable currency translation rates increased consolidated net sales 1.7%. Consolidated gross profit dollars increased $50.9 million for the quarter to $1,022.7 million.

Gross margin decreased 200 basis points to 43.4% of sales from 45.4% in the second quarter last year. Selling, general and administrative expenses for the quarter increased 9.3% to $755.6 million.

As a percent of sales, SG&A decreased to 32.1% in the second quarter this year from 32.3% last year. Interest expense for the quarter was $11.7 million, a decrease of $14.6 million compared to second quarter last year.

Consolidated profit before taxes in the quarter decreased $2.2 million or just under 1% to $257 million. Our effective tax rate in the second quarter this year was 30.3% compared to 29.9% in the second quarter of 2010.

For the full year 2011, we expect our effective tax rate to be in the low 30% range compared to last year's rate of 31.8%. Consolidated net income decreased $2.6 million to $179.1 million from $181.7 million in the second quarter of 2010.

Net income as a percent of sales was 7.6%, compared to 8.5% in the second quarter last year. Diluted net income per common share for the quarter increased to $1.66 per share from $1.64 per share in 2010.

Looking at our results by operating segment. Sales for our Paint Stores Group in the second quarter 2011 increased 4.3% to $1.3 billion.

Comparable store sales, or sales by stores opened more than 12 calendar months, increased 4%. The increase in sales for the segment was due primarily to selling price increases implemented during the past year and improved domestic architectural paint sales to DIY customers, residential repaint contractors and property management contractors.

Regionally in the second quarter, our Southwestern division led all divisions, followed by Midwestern division, Southeastern division, and Eastern division. Sales by all 4 Paint Stores divisions increased in the second quarter compared to last year.

Paint Stores Group segment profit for the quarter decreased 2.5% to $206.6 million from $212 million in the second quarter last year. And segment margin decreased to 15.9% from 17% last year due primarily to continuing raw material cost increases that were only partially offset by selling price increases.

Turning to our Consumer Group. Sales in the second quarter decreased 8.4% to $375.6 million, due primarily to the loss of a portion of a paint program with a large retail customers that was partially offset by selling price increases.

Segment profits for the Consumer Group decreased 23.9% in the quarter to $61.4 million. Segment profit as a percent of external sales decreased to 16.3% from 19.7% in the same period last year, due primarily to higher raw material costs that, again, were only partially offset by selling price increases, and lower volume throughput in our manufacturing and distribution operations.

For our Global Finishes Group, sales in U.S. dollars increased 39.5% to $678.9 million in the quarter, due primarily to acquisitions, selling price increases, higher paint sales volume and favorable currency translation rate changes.

In the quarter, acquisitions increased Global Finishes Group net sales by 22.5%, and favorable currency translation rate changes added 5.9% to net sales in U.S. dollars.

Second quarter segment profit increased 15.3% to $46.1 million, due primarily to higher sales volumes and currency translation. Favorable currency rate changes increased segment profit by $3.3 million in the quarter, and acquisitions had no significant impact on segment profit.

As a percent of net external sales, Global Finishes Group segment profit was 6.8% in the quarter, compared to 8.2% last year, due primarily to gross margin dilution from acquisitions. Turning to the balance sheet.

Our total debt on June 30, 2011, was $1,224,900,000 including total short-term borrowings of $571.1 million. Total debt on June 30, 2010, was $908.6 million.

Our cash balance at the end of the quarter was $71.6 million compared to $48.4 million at the end of second quarter last year. Total borrowings to capitalization were 41.2% at the end of the quarter versus 37.2% at the end of the second quarter of 2010.

Long-term debt to capitalization was 22% at the end of the second quarter this year compared to 29.1% last year. In the second quarter 2011, we spent $42 million on capital expenditures.

Depreciation expense was $37.5 million, and amortization expense was $6.7 million. For full year 2011, we anticipate capital expenditures for the year will be approximately $150 million to $160 million.

Depreciation will be about $150 million, and amortization will be about $30 million. Finally, I will conclude my remarks for the quarter with a brief update on the status of our lead pigment litigation.

In the California public nuisance suit, discovery has commenced and will take place over the next 8 to 10 months, after which the parties will again have the opportunity to bring dispositive motions based on the evidence that comes out of that process. A September 2012 trial date has been set by the judge, and as it now stands, the case will be tried to a jury in Santa Clara County.

We are still awaiting a decision from the Mississippi Supreme Court in the Gaines case. The court heard our appeal of that $7 million verdict on April 19, and the decision could come at any time.

That concludes our review of the results for the second quarter of 2011. So I'll turn the call over to Chris Connor, who will make some general comments and highlight our expectations for third quarter and full year.

Chris?

Thanks, Bob. And good morning, everybody.

Thanks for joining us today. With one important exception, the second quarter turned out very much as we expected.

Domestic paint sales volumes were down modestly from second quarter of 2010 due to the loss of a portion of our business with Wal-Mart and a tough second quarter 2010 comparison for our Paint Stores Group in the domestic architectural market. As expected, our Global Finishes Group delivered solid volume growth across all product lines.

Revenue from the acquisitions we completed last year came in on budget, and we continue to make good progress in implementing the price increases we announced over the past 3 quarters. As a result, our consolidated sales for the quarter finished comfortably in the middle of our guidance range of plus 8% to 13%.

Likewise, our SG&A spending was also on budget for the quarter, both in dollars and as a percent of sales. Interest expense was down year-over-year as expected, and our tax rate for the quarter was comparable to last year.

The one line on our second quarter P&L that didn't go quite as we expected was gross profit. A portion of the 200 basis point gross margin contraction we recorded was due to dilution from acquisitions, which was no surprise, but the frequency and magnitude of raw material cost increases in the quarter, particularly in titanium dioxide, continued to outpace our ability to recoup in the short term.

In our last earnings call, I've made mention of the impact of higher raw material costs would likely get worse before they got better. At that time, we predicted that the coatings industry would experience average annualized year-over-year raw material price inflation in the mid-teens for all of 2011.

Over the past 3 months, we have revised our internal raw material cost projections 3x. We now believe our year-over-year raw material increase in the high teens to low 20% range is more realistic.

As we've discussed in the past, when raw material costs rise, we have a duty to our customers to push back on our suppliers to avoid or postpone these increases, if failing that, to focus internally in ways to offset higher raw material costs. But the rate of increases we've seen over the past 6 months have overwhelmed these efforts and left us with few options.

In early June, again, we announced additional price increases in the high single-digit range across most of our product lines. Although we are in the early stages of implementing these increases, they should help to offset the raw material cost increases we incurred in the second quarter.

And not surprisingly, price realization in our Paint Stores Group is running ahead of our other segments. The raw material environment is also affecting our management of working capital.

The change in our working capital in the first half of 2011 increased $177 million, and total working capital rose to 14.9% of sales. Approximately $90 million of this increase went to fund working capital requirements of our acquisitions.

Backing out the working capital from acquisitions, our core working capital increased to 14.4% of sales from 12.3% last year. This was primarily the result of higher raw material costs in working process and finished goods inventory, combined with concerted effort to build inventory ahead of raw material price hikes, as well as protect against potential material shortages.

In the first 6 months of 2011, we generated $108 million in net operating cash, which was down from the first half of last year, due primarily, again, to the working capital increase. Although respectable in this environment, first half net operating cash is below the level we have achieved in recent years, we remain confident that over the long-term, the company is capable of generating net operating cash in the range of 10% of net sales.

We continue to invest the company's cash to purchase shares of our stock or treasury, increase our cash dividend, and expand our control distribution platform. During the quarter, we invested $41.7 million of the company's cash to buy back 0.5 million shares of our stock, bringing the year-to-date total to 1.6 million shares.

At quarter end, we have remaining authorization to purchase 4.15 million shares. So far this year, our Paint Stores Group has added 18 net new stores, 11 of which were opened in the second quarter.

This brings our total store count in the United States, Canada and the Caribbean to 3,408 stores, compared to 3,360 one year ago. Our plan calls for Paint Stores Group to add approximately 50 to 60 new store locations during the year, while the number of store closings should fall back in line with our typical low to mid single-digit pace.

Our decision to continue to expand our controlled distribution platform throughout this cycle was affirmed by the latest wave of our annual painting contractor survey. Survey results indicated that the market shift from contractor to DIY has abated, and that contractors remain steadfastly loyal to the specialty paint store channel and, increasingly, to Sherwin-Williams.

Our store growth over the past 3 years, combined with solid new product introductions, marketing programs and sales initiatives, have resulted in steady market share gains in most contractor segments and double-digit DIY sales growth in 6 of the past 8 quarters. In Global Finishes Group, the steady stream of acquisitions and related integration work often overshadows the outstanding results they're achieving in their core businesses.

Excluding acquisitions, this team has delivered 5 consecutive quarters of double-digit sales growth in protective and marine coatings, OEM product finishes, automotive finishes and architectural coatings. Our balance of sales outside of North America now stands just shy of 25%.

Looking ahead, our second half volume comparisons should ease somewhat, but raw material cost will continue to be a headwind of earnings. We are cautiously optimistic that domestic architectural paint market volumes, primarily in the repaint segments, will turn positive over the balance of the painting season, and global demand for most Industrial Coatings will continue to expand.

Our outlook for the third quarter of 2011 is for consolidated net sales to increase 10% to 15% compared to last year's third quarter. With sales of this level, we expect diluted net income per common share to be in the range of $1.55 to $1.75 per share, compared to $1.60 per share in 2010.

For the full year 2011, we expect consolidated net sales to increase in the high single digits to low teens over the previous year. With annual sales at that level, we are updating our diluted net income per common share expectations to be in the range of $4.55 to $4.85 per share, compared to $4.21 last year.

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

Just a couple of questions on the raw material front. It looks like -- obviously, TiO2 is still racing higher, but it does look like propylene and some of the acrylic chain is starting to break down.

I guess I'm wondering how you're thinking about how those 2 balance each other out over the second half of the year?

Well, John, first, as you know, we buy the majority of our raw materials in the first half. So any release in propylene-based materials in the second half will have somewhat of a muted effect on our raw material basket for this year.

Secondly, propylene has come down in recent weeks, but only -- it's still above the level that it was in January 2011, if my data is correct. So we've seen a hump this year, but in terms of year-over-year relief, it's got a ways to go, I think, before it gets down to the average cost for 2010.

Okay. And then just one follow-up.

I know, typically, it seems like demand for coatings is relatively inelastic with regard to price. But as you, I guess, indicated in your opening remarks, it seems like we're in an unprecedented environment at this point in terms of how much you have to put through on price increases.

So are you seeing any push back at all that would say that maybe we will see a little bit more elasticity of demand around price? Or is still going to be inelastic but your customers are just, kind of, aggravated by it?

John, this is Sean Hennessy, and we watch that question carefully. We continue to look at other mix of products and so forth, and the increase of raw materials is, like you said, unprecedented.

But we still believe over the long-term, eventually, we're going to be able to recover this raw materials in the marketplace and recover our gross margins.

I'm just wondering if you could compare and contrast your price realizations in the Paint Stores segment versus your other distribution channels?

I think when we take a look at it, I guess we sort of mentioned before, we think that the price realization, covering those raw materials into the market, we're in a better position inside the Stores Group versus the Global and the Consumer Group. And that's why, usually, they start to recover the gross margin quicker, and it's still going in that same kind of direction.

Just any thoughts regarding the magnitude of that differential, how much more price you're able to get through your own stores versus big boxes, for example?

I think, Kevin, what we've talked about is, when we announced our pricing, we said that we'd take very similar pricing increase levels across all segments of the company. And I think in terms of timing and ultimate implementation, that's where we see a little bit of difference.

For the most part, when we're all done with all of these, they're all very close to each other in terms of the range.

Okay, very good. And then just a follow-up, if I may, on the volume side.

Chris, how would you characterize industry volumes at this point for U.S. architectural coatings on a year-over-year basis?

In the first quarter, Kevin, we did get a look at some of the federal government information on architectural coatings for the United States. It was down north of 4% in gallons.

We think the second quarter will also be soft, as well, when we get that data. We've not seen that yet.

And as a result of that, our gallon performance has outpaced that, and we're confident that we'll gain share.

If you look at the suppliers of TiO2, and I know DuPont's announced another price hike, and I don't know when that starts to flow through. But is there -- I know you all have looked at China a lot, is there a way to move the Chinese manufacturers from low-grade to high-grade?

And if so, how long does that process take, et cetera?

Stephen, we have a lot of work being done right now in our industry, and certainly here at Sherwin on that very subject. There are a number of what heretofore has been left a great titanium suppliers that are rapidly working to get their quality levels up.

We have quite a bit of that material in various stages of testing both in laboratories as well as in manufacturing facilities, and time will tell. China is one of the locations, Eastern Europe is the other.

And I think at price levels where they are today for titanium, we're seeing far more interest in capacity coming onstream and development happening.

Is this more, Chris, a 2012-type event?

I think you're starting to see it trickle into our products right now. It's just not going to be a substantial enough volume to make much of a difference in offsetting the increases that we've been talking about now in the low 20% range.

Okay. And then switching gears a little bit.

The general demand picture looking at domestically residential versus commercial, and then if you look at the global demand versus the U.S.

I'd say that architectural demand in the quarter just completed was trending positively throughout the quarter. April was difficult.

Weather across the United States was not favorable, and the exterior house painting season, May, wasn't much better. We began to see some nice performance in June, and that's continuing as we go forward.

We made the comment on our call just recently that we thought that the second half of the year, we'd see better volume comparisons in the domestic architectural businesses. Likewise, the Global businesses have been doing terrific, and we've been seeing strong double-digit gains in architectural, and OEM, in automotive, all the things we've commented on.

So U.S. is lagging that, and we think the second half will be better.

Okay, I appreciate that. One last quick question.

Administrative, your loss dropped pretty sharply. How should we look at that over this year and next year?

Yes, I think when you take a look at the administrative loss, we're -- year-to-date, we're down right around $13 million. Our interest was down $15 million a year ago.

We did expense -- we brought in some hard year notes, so we expensed the warrants. We have a smaller tranche of that in the fourth quarter.

We think that administrative expense the remainder of the year will be down this year, probably slightly less than what the effect of those 2 are. And then probably next year, taking a look at it, we'll start growing that again, probably a little bit slower than sales.

You kept opening new stores in the downturn. So 2 questions.

First, is this a contrarian strategy that when the upturn comes, you'll have more stores? And then secondly, are these new stores more DIY friendly?

Yes, I think, obviously, P.J., we're expecting an upturn, and mathematics would indicate that we absolutely will have more stores when that begins to happen. Not only just in a gross number for our count, but also in the comparison to our competitors.

As we've commented, the gap between us and the remaining specialty paint store operators is widening, so that will continue. As we've also commented in the past, P.J., we have a number of different types of stores beginning with the neighborhood paint stores that we're most noted for, which would in fact be aimed at servicing the DIY customer as well.

All the way up to store locations that are in more industrial locations to service professional painting contractor needs. Various markets have needs for different types of stores at different times.

I don't think we're opening any more of a percentage of our stores towards this DIY market that we have in the past. Having said that, the ratio of these neighborhood paint stores or these more industrial stores is probably 80% to 90% of our stores fall in that category, as with our new store count this year also be in that 80% to 90% would be focused on DIY, as well as servicing the residential paint contractors.

Okay. And then secondly, I think your annual price increases in your store's group that was announced was between 15% and 20% over the last 8 to 12 months?

Over the last 3 price increases consolidated?

Yes, if you combine all those.

Yes.

How much of that do you think actually is stock? I know it takes time for you to get to all the pricing.

Yes, when we take a look at it -- again in April, one of those did fall off. June, we did put another price increase out there.

So a little bit of a timing and differential. But over the long-term, we still believe we're going to get between 70 and 75 of these.

Last December, we're 2 quarters into that, and when we look at that, we usually after about 2 quarters, we're in that 55% range, and we are right there. And eventually we're going to get all 75% of these.

Did gallonage grow in the stores business in the quarter year-over-year?

No, it didn't. It did not grow.

It actually declined.

Is it sort of flat to down-ish? Or was it a little bit more than that?

A little bit more than that.

A little bit more than that, okay.

And Jeff, when you take a look at last year, this was in Chris opening comments in his remarks, this was the quarter we expected, if we were going to go against any quarter that was going to be difficult. We had that new housing credit, and that cost a lot of activity over a 2-, 3-month period.

And we're going up against that.

Okay. And in the quarter, I think you took something like a $12 million pretax charge for the pay down of your debt.

What income items does that show up in, income statement item?

Interest expense. If you take a look at our interest expense for the quarter, Jeff.

I'm going to pull that out real quickly. The interest expense in 2010 for the quarter was $26,340,000.

This year, it was $11,747,000.

So in other words, if we took out the charge, your interest expense would've been 0?

Probably the -- no, no, the $15 million was in 2010. So that $26 million would've gone down to about $11.5 million last year.

And we're in $11.7 million in interest expense this year. So the change is very small, but the expense would not have gone down to 0.

I don't mean to belabor it, but I thought that the number that you reported in the quarter was $11.7 million, which includes the charge?

No, no, no. That is the amount of interest that we paid in the third -- for the 3 months ending June 30, 2011.

The charge we took to bring back that -- to pay down that 100-year note occurred last year.

Forgive me. And then lastly, it sounds like the reason why you're a little bit more pessimistic about your earnings outlook this year, has to do with the inflation in raw material costs.

When do you think your prices catch up to your raw materials?

Yes, I think it's absolutely raw materials, Jeff. I mean, we're feeling very good about most of the segments of the company in the way that they're headed.

And we think were coming into a better second half on volumes. We've been very clear with the investment community about the unabated run off in this raw material costs.

We took pricing again in June to the market. And as Sean commented, this price increase will go in as others have.

As you know, it takes us a better part of 9 to 12 months to be fully implemented. And at full implementation, we'll have about 75% of it in.

So if all raw material cost increases stopped today, we would be somewhere into the first half of next year to have our pricing catch up.

The first one kind of hinges on what you touched on there, Chris, in the last question. We're feeling comfortable with a lot of the end channels.

The guidance range for top line is still pretty wide when you back into it for second half of the year. So just wondering how we should think about that.

And I guess how you guys are thinking about the contents of the guidance, as to why you didn't tighten that up, or if there's anything particularly concerning you that leaves that range pretty wide.

I think that we're still in a market that is clearly bouncing along the bottom on housing and new construction. We have a pretty good view into the repaint activities that are going to be taking place.

And I think the range reflects the fact that there's still quite a bit of uncertainty in this market.

Okay. The second, just having to do with the exterior category, realizing that hopefully is just a onetime drag.

Any way you can quantify what your exterior products did during the quarter, just to get a sense of how big of an impact that was?

We don't give that number out specifically, but I think we have commented that in the quarter specifically, given the impact of unseasonable weather pretty much across the entire eastern half the United States, tornadoes, hurricanes, floods, significant rain, that our exterior gallons definitely lagged the quarter's performance. And as we also commented, we saw that start to rebound in May, and June was a much better month for us.

In the admin section, was there any reversion of any accrual for incentive comp given your more modest full year outlook?

No. And I think when we take a look at it, our compensation this year is up modestly.

We do have the Global Finishes Group and some other segments that are doing very well with the company. So we're still accruing at the same levels, Saul.

Okay. And then I noticed the environmental, you actually had a credit.

It's sort of very unusual. How should we think about that, a, why a credit, and how should we think about environmental going the rest of the year?

I think when you take a look at it, Saul, for the first 6 months we were at -- the environmental was $4,650,000, last year was $4,722,000, so relatively flat. We think that environmental for the year is going to be flat or just up slightly.

I would tell you, it's timing. We've done a pretty good job of selling a couple of different older facilities, and we just had some environmental accrued for some of that, then we ended up reversing that accrual in that quarter.

But for the full year, you can see us right on with last year, and we're going to be flat to up slightly.

Yes, gross margins, you commented were down 200 basis points. And given your more favorable outlook for volume in the back end of the year and the price increases, would you still expect gross margins to be down, but not as bad as the 200 basis points drop, or do you think they could be comparable to where you were a year ago?

Yes. I think when you take a look at it, Saul, when we look at the company in total, and you look at some of the effects of the acquisitions and the rapid rise of raw materials, we've constantly talked about a range of 44% to 47%.

I think that when you look at where we are in the short-term, we still think long-term we're going to get that 44% to 47%. We think that with the effects of the acquisitions and with the rising raws, in the short term, we might be in a 43% to 46%.

And so I think that this year, if I was putting a forecast out there, which we're not, but I would you're probably looking more at the lower end of the 43% to 46%.

And then the final question. You've always said that these price increases take 9 to 12 months to get fully implemented.

Could you just reeducate us? Why does it take so long?

Yes, let me do that, Saul. If you look at the effect of the pricing in the first quarter, we are getting a pretty good jump on these things and we see quite a bit of it in there.

As you know, we honor our price commitments on quotes that we've given to professional painting contractors, industrial coating segments, et cetera. Particularly when you take pricing at this time of year in the middle of the paint season, you've got a lot of jobs that have been quoted, and we stand behind those.

So that's why you see a tail on these things, it just takes a little longer.

And then just a final question. The volume decline that you experienced in the consumer sector, looks like it could have been about 15%.

To what extent was that all Wal-Mart? Or was there also a decline in the non-Wal-Mart business, and should we expect similar declines in the balance of the year as you anniversary the Wal-Mart business?

Yes, when we take a look at that, it wasn't 100% Wal-Mart. When we take a look at the business, outside of Wal-Mart, the Wal-Mart is performing just like we thought it was going to be.

But in the first quarter, I think we talked about -- I know we talked about the timing of shipments of some larger retailers and they were positive for us. So when we look at the total year-to-date, our consumer is just about flat, x Wal-Mart.

And I think when we look at the total year, except for Wal-Mart, we think it's going to be right around that range.

Chris, just wanted to clarify a few volume issues. I noticed that the DOC was out yesterday revising down both 2010 and the first quarter.

I think they got to a more meaningful realistic 1.4% rise last year and then down 3% in the first quarter. So my question would be, were you down more than 3% in the second quarter given that the weather exacerbated some of last year's government stimulus comps?

And for the full year, I noticed you said you'd be up in the second half, but would you still expect full year industry volumes to be flat or up? And then finally, on your own volume initiatives, I know you talked in the past about the potential for maybe making inroads into a big box.

Just wondered if you could update us on any of those activities.

First of all, the government data, Don, that is absolutely correct. We've commented in the past that we have to be slightly suspect of this information because it does get revised, and very much appropriate this time revised significantly downwards.

You referenced the 3% first quarter decline. We actually saw 4.2% in the data that we were looking at, and we think that's probably pretty close and certainly more accurate than what we were seeing from them last year.

And as we also commented, our gallon declines were not at that level, even with the comment that Sean just did with the last caller, regarding the impact on the consumer segment. So our expectations are that in the second half of this year, when the comparisons get easier, because we also commented that the second quarter last year was a positive gallon quarter for us and not so much in third and fourth, we expect that we're going to have gallon flat to up, and that we're going to be outpacing the industry over that period of time.

Regarding our opportunities as a big box customer, we've also been very consistent for a long period of time to advise both the major big box players, as well as a number of smaller regional ones, are all customers of ours, and we have an ongoing concerted calling effort in there. And we would welcome the opportunity at the right time with the right brand, to play a role in there.

And we have nothing further to comment on that at this point in time.

Okay. And then just a quick follow-up on inventory.

You mentioned that you built inventory, but it's not sequentially. Dollar inventory was relatively flat.

Just wondering if you can talk about -- and I imagine as you said too, it was inflated by higher prices of raws and finished goods. So what exactly went on with inventory?

Were you continuing to build in Q2 ahead of second half raw material increases?

Yes. When we talked about this and we look at the second quarter, our dollars were up, as you said, somewhat due to the raw materials.

They're relatively flat. We actually built most of this inventory on a comparison basis in the first quarter.

This past quarter, we maintained it relatively flat, but it's still higher than we were last year. And we usually start seeing it start to come down in the second quarter, but that's not what happened in the second quarter here.

A little hard to tell how high you can get prices before you affect demand, but I think you commented in the past that your highest price paints were the best sellers. There's some sort of comfort that you haven't reached the limit yet.

Is that still the case?

Yes, John. I think the elasticity of pricing and demand is, obviously, something we watch extremely closely.

We've commented in the past that through all these pricing activities we've taken over the past decade, that we very carefully watch the mix inside the company, and are continuing to experience favorable or at least steady mix even with the pricing that we've had to take.

Okay. And then secondly, how is the HGTV roll out going?

Have you gotten early signs on whether is it impacting store traffic like you thought it would, and your ability to maybe upsell to customer when they come in?

Yes, we're very excited about this program. It was officially launched in June.

And in preparation for that, it had started to show up in the stores as early as April and May as we were getting material and point of purchase displays sent in ahead of time. I can tell you that through the first full month, as well us a little bit of a pre-support, it's on budget and doing well.

July is tracking much stronger than June, as we're now starting to see the advertising kick in. The HGTV programming, as well as our own outreach to their database of followers has been robust and terrific.

And we're seeing great foot traffic in the stores, intrigued with the whole color offering and the idea. To your point, there is some upselling happening, as we would expect, as the customers get in and understand that there are higher quality product choices.

So I would say that from our perspective, we're pleased with the early signs. And it's tracking exactly as we had expected.

This is Brian Maguire on for Bob. Just had a follow-up question on the inventory build and some of the pre-volume that you've been doing that you mentioned.

Can you kind of quantify the benefit you got, or you think you got on that, or how much worse might margins have been without that pre-buying.

No, we don't have any kind of a metric that I can give you. I think that it's all in our forecast, but we specifically haven't done like a PPV on pre-buying.

Okay. And then just on the HGTV, another follow-up question on that.

Was there a significant SG&A spending in there in the quarter, or will it be a little bit higher in the third quarter than it was in the second quarter?

Yes, we had some modest increases in advertising expense and some merchandising, not significantly. I think that was all embedded in the SG&A, which was under control.

And we would expect that to remain the case for the rest of the year, Brian.

Okay. And then just on couponing or discounting, have you had to step up your level of discounting and couponing to get people into the stores?

We don't do couponing, per se, but the paint industry, including Sherwin, has always used promotional activity, dollars and percentage off to drive traffic and sales, particularly during the height of the paint season. As we commented on the early part of the call, 6 of the last 8 quarters, we've had strong double-digit DIY sales gain through our stores.

And so I would say that this goes back about 2 years ago, where we started to be a little bit more aggressive with our promotional schedule. Those have continued pretty much at the same level over that cycle, and it's helping drive additional traffic to our stores.

Okay. Then just one last one for Sean.

The tax rate, it's come in -- I think, it's averaged about 29% in the first half. Is that still a good run rate for the back half or.

. .

We think it's slightly higher than that. Still in the low 30s, but just some timing of some of discrete items brought it down to that 29%, but the second half would be slightly higher.

But lower than last year's kind of 33%?

Yes.

And back to the -- back on the promotional activity, Brian, I would be remiss if I didn't tell you, we're having our biggest sale of the year this weekend, so stop on by.

In the SG&A dollar growth you had in the first half, you were up about $142 million. How should we think about that growth into the back half of this year, because a lot of that, I think, is from acquisition.

Does that rate fall off significantly, or do the dollars kind of increase at that rate?

Yes, I think the third quarter, we're still going against an acquisitions. September, we're fully annualized on those.

I think that you'll see some fall off, but it won't call it dramatic. And then we have this Leighs coming in, but that's not that dramatic.

Okay. And then as a quick follow-up on the gross margin decline you experienced, the 200 basis points.

How much of that was driven by the acquisitions versus raw material cost increases?

It definitely was affected negatively by the acquisitions, but we really don't break that out.

Okay. And then one last one.

On the revolver that you issued the 8-K on last week. Can you give any commentary on why you increased the capacity from $500 million to $1 billion?

And are you still intending to issue CP in the future or...

I'll take it in reverse. We definitely are definitely going to be continuing to stay in the commercial paper.

Right now, the low end, we're paying less than 25... [Technical Difficulty] It's been a pretty good financing for the company.

We took the opportunity -- really, we wanted to be $1 billion, but 15, 18 months ago, we did the last one, the prices were so high, and we still had the letter of credit CDSs. We still had $750 million of those.

Now those will start -- one came out in June, another one will come out next year. So we thought with the prices coming down, and we actually were able to take our $500 million up to a $1 billion with lower costs.

So as those come off, we felt it was important to have it at $1 billion.

A lot of mine have been answered, but I do have a couple of follow-ups, if I may. I think when we're talking about -- when you talk about inventories and why is it going up, there is some pre-buying, you had price increases, but then you also mentioned that you were trying to address or ensure that there were no shortages of material.

I mean last year we had the acrylic resin problems. What raw materials are in short supply this year?

Is it just TiO2 being tight or...

Yes, there is -- TiO2 is tight for sure. And I think it's the year-over-year working capital impact of having that material versus the shortage we had last year that was impacting it more than any concerns we have about inability to get raws.

Got you. So in other words, last year, the inventory was a little bit lower because you couldn't get the stuff that you needed.

This year, it's more normal?

That's correct.

Okay, I understand that. Second question, on the -- you kind of provided some updates on how the Global businesses is doing, particularly in Latin America.

How are your acquisitions in Europe doing, the 2 Wood Coatings businesses you acquired, in terms of where you are in integration, learning about the end market and perhaps getting other products into those plants beyond wood coatings. Can you update us on what's going on in Europe for you?

Yes, I'd be happy to, Dmitry. And I would say that both of the major wood acquisitions we made in Europe last year, of Becker Acroma and Sayerlack, are performing well.

They're on pro-forma budget for the company. We are beginning the early stages, as you pointed out, of expanding from wood coatings into some of the other Industrial OEM finishes.

That the company has good technology and good share position in the United States. And the teams that we have on the ground in Europe are excited to have additional new product technology and opportunity to sell.

So all that's going well. I would comment further that, as Sean has commented in his answers to the gross margin questions, that this is an area where we need to improve.

We've seen a little bit of a gross margin erosion with these businesses. I think that's not to be unexpected at a time of an acquisition.

We have larger customers with this business as opposed to the types of customers we enjoy through the control distribution in the Stores business. And we've been a little more careful with pricing there until such time as we calm the waters and all the changes that are affiliated with the acquisition.

Our expectations are that the management teams are doing great. We have very much been able to retain the leadership that we had hoped to keep.

And we're moving forward to fix and address some of these pricing issues to get us back on track. Overall, I'd say that the company is very pleased with the way that these acquisitions are tracking.

That's very good. And then one final question.

I'm sure you couldn't help but notice that there's a lot of M&A activity happening in the chemical space right now, including some fairly large deals for public companies. How do you look at the M&A landscape?

I mean, I know you try to be incremental more than transformational, but given the cost of debt and given your strength of the balance sheet, given some of the struggles you're having with the architectural space market, which may or not be solved in the next few years. Has your outlook and appetite for acquisitions changed?

I'd say it's been constant through the cycle, Dmitry. We've done 4 major acquisitions in the last 12, 15 months.

We continue to be focused and disciplined about the types of businesses that we think would make sense for us to look for. We are talking to a number of interesting targets as we speak.

As you made mention, Sean has done a terrific job of making sure company has access to all the capital we might need to do that. And I think you should expect a very continual, similar size deals that we've been doing in the past years to continue.

All right. But we shouldn't wake up one morning and find out a transformational deal?

Who knows?

Couple of things. First of all, the sales guidance in 3Q.

I think you're guiding sales to grow faster than 2Q, and the full year sales guidance was increased from the prior guidance. Can you just talk a little bit about why in the conviction that you're seeing, anything in the business side that gives you that conviction?

Well, a couple of points there. As we commented, the comparisons get much more favorable for us going forward, Eric.

We had the toughest comparison quarter that we've just come through in the second quarter, relative to the first time homeowner tax credit program that really created a little blip of volume demand in 2010. And then a corresponding falloff to that in the second half of the year, which we don't expect to happen this year.

Also our own data would indicate that we're trending throughout this year in a better model. We've talked about how April to May to June changed and then July is remaining strong.

So given the fact that we have a significant volume through that store's platform, which really drive that number, that's why we're guiding stronger.

And as well as, Eric, we do have a little more price in the second half of the year than we had in the second quarter.

And is that, Sean, the kind of the explanation for the full year increase that this price is at the core of that increase?

Yes.

And then I don't know if you have any interest in helping us to understand the delta between April and May and June, it looks like that the store volumes were down, the store gallons were down perhaps 3 points in the quarter. Can you give us any sense of how different April was relative to -- or April, May relative or to June?

You're right. We don't have any interest in helping you with that.

My other question then, the Global -- the acquisitions in the Global group, I think you said they added roughly $90 million to sales and nothing to operating profit. I was wondering if there were any thoughts, if there's any expenses that were quarter-specific in nature for those businesses to make no money on those degree of sales, and I guess especially the thoughts in the second half of those businesses to start to generate any degree of operating profit?

I think there were some expenses, I'll just say, but I would not say that's the reason why, at that level, that $90 million level. We did have some acquisition integration on the IT cost, some IT cost and so forth, but I won't hang my hat on that.

I would say it was more really due to the gross margin in some of these that it happened. I think in the second half through the year, they will be accretive.

But now that we have Leighs, I think that the Leighs will probably offset where we're at. So we're going to start to see accretion.

And at those -- $90 million quarters for those 2. But Leighs will be a little -- will be dilutive, although slightly higher than what they are right now in our forecast.

So that's what's going on with acquisition.

Just a quick question on gross margins across the segment. In the 10-Q, you usually give a pretty good commentary first quarter, same-store groups were up, Consumer Group up 700 bps, and then Global Finishes down 320 and overlapping, and I think easier comparison in Global Finishes and Consumer Group.

Can you give us any color around the magnitude of the gross margin decline across the segments?

Yes. We definitely will.

And in the queue, we will have it. So right here, I will tell you that Global Finishes Group and Consumer were down 1.7, 170 basis points for the quarter.

And I know that Stores Group was 1.4, 140 basis points. That takes stores, on a year-to-date basis, to 60 basis points decline.

And if we give me 10 seconds here, I'll give you that number for Consumer and Global. And Consumer will be down 70 basis points year-to-date.

And the Global Group will be down 220 basis points.

Great. And then just a quick follow-up on DIY business.

You've, in the past you, talked about how there's a better margin differential from DIY to pro. So the question is, can you give us a sense or the magnitude of the differential?

And then I know historically, pro represents 85-ish of your sales coming out of your stores. What is it kind of today?

Is it much higher, and should we continue to expect a benefit from that?

Yes, the mix in our stores remains very much skewed toward professional painting contractors. Given the strength of the DIY recently, we may have come off of the 8515 to maybe closer to an 8020 range, but it's not dramatically different.

And the gross margin percentages, our DIY business, as we become a little more promotional, are not substantially different than the kinds of margins we make on the residential repaint contractors, et cetera. So those kinds of mix changes are not impacting the margins near to the extent that the raw material prices are.

You've answered a lot of questions, but maybe on volume, I had 2 that are related. One is how much of your bond goes to like federal, state and local governments?

And obviously, with budgets, maybe maintenance is being deferred? And second, on the positive side, we did mention some of these unfortunate disasters around the country, but do you get a bounce once we -- everyone sort of collects their thoughts and starts rebuilding?

Yes, we do enjoy quite a bit of business with various government facilities, both federal, state and local across the country. And as a percent of our sales, it's not significant.

I don't know that number off the top of my head, but it would be single digits at best. In terms of the bounce on the backside of natural disasters, that has typically been the case.

These particular tornadoes that were on the ground in the Southeastern part of the United States during April and May were really quite strong, wide and lengthy periods of time. It did more damage than a typical tornado would.

And so we would expect, we see nice rebuilding activity in those communities. Paint is the late cycle on that kind of construction, so perhaps later this year or certainly early next year, we'd expect to see some work from that.

Can you guys talk about the professional pricing versus your do-it-yourself pricing? And when you offer these promotional events for do-it-yourself customers, does that not have any impact on how you're selling to the professionals?

Correct, it does not. And the reason being is that professionals buy every single day at various discount levels based on their size and volume.

And typically, those prices are better than what the retail DIY customers would buy even on promotion.

Chris, just a follow-up on the commercial versus residential. Is commercial actually up year-to-date?

And what type of trends are we seeing? And about how much of -- what percentage of your U.S.

business is commercial?

Steven, this is Bob. Commercial new construction is down this year.

In square footage terms, it's down high single digits year-to-date through June. On the repaint side, we've seen a little recent strength in property management, but year-to-date, gallon volume in the market in property management is slightly negative.

Okay. All right.

And how much of that -- how much is commercial of your business?

When we breakdown the market, we talk about commercial or non-residential business being about 30% of the repaint market and closer to 40% of the new construction market. And as a reminder today, new construction in total represents in the low teens percentage of total gallon consumption.

So if new construction is 14%, commercial would be about 40% of that. And that would leave high 80s, 85%, 86% for repaint, and non-residential will be 30% of that.

We would be skewed just a little more than the market toward non-residential.

Okay. All right.

And then just DuPont's announcement this past week or so about TiO2 going up, is that -- I assume that's something new. It's not a regurgitation.

And is that -- how long would it take for you all to typically see that?

Well, you're right. DuPont announcing titanium price increases is nothing new.

We've been hearing that for -- on a quarter-after-quarter basis for literally decades. Obviously, they have much more commitment to the enforcement of those price increases over the last couple of years.

Again, we've been consistent with our communication to the street. We've talked about the fact that the entire basket of raw material increases for the industry has been going up each quarter that we give you guidance, we are now on the high teens, low 20s.

The vast majority of that is in the titanium. It remains to be seen what kinds of impact it will have going into 2012.

And we'll be commenting on that as we get closer to year end.

You commented that gallonage was down for the quarter in North American Architectural? Was it down in June as well?

That's hard to say, John, because you're talking about the industry, right?

Actually, I was talking about you, but however you want to answer it.

Yes, I'll think we'll go with the industry. We're not going to start giving -- we just don't give monthly buy-ins, or really at all.

We're pretty sure for the industry with gallon volumes in the first quarter being down low to mid single-digits against a really weak first quarter '10. The industry is going against a pretty strong second quarter '10.

It's very likely that gallon volume for the industry in architectural was down mid-single digits or more.

We'd like to thank you all once again for your participation on the call this morning. As always, I will be available over the balance of the day and week to take your follow-up questions.

We appreciate you joining us. And thanks for your continued interest in Sherwin-Williams.