Bob Wells – Senior Vice President-Corporate Communications John Morikis – President and Chief Executive Officer Al Mistysyn – Chief Financial Officer.

Arun Viswanathan – RBC Capital Markets Ghansham Panjabi – Baird Emily Wagner – Susquehanna Financial Group Scott Mushkin – Wolfe Research Duffy Fischer – Barclays P.J.

Juvekar – Citigroup Bob Koort – Goldman Sachs John Roberts – UBS Vincent Andrews – Morgan Stanley David Begleiter – Deutsche Bank Kevin McCarthy – Vertical Research Partners Mike Harrison – Seaport Global Securities Greg Melich – MoffettNathanson Christopher Parkinson – Credit Suisse Chuck Cerankosky – Northcoast Research Mike Sison – KeyBanc Capital Markets Steve Byrne – Bank of America Merrill Lynch Dmitry Silversteyn – Longbow Research Justin Speer – Zelman & Associates Nishu Sood – Deutsche Bank Pat Rizzuto – Bloomberg Eric Bosshard – Cleveland Research Patrick Lambert – Raymond James Jeff Zekauskas – JPMorgan Rosemarie Morbelli – Gabelli & Company.

Good morning. Thank you for joining The Sherwin-Williams Company’s review of Second Quarter 2018 Results and Expectations for the full fiscal year of 2018.

With us on today’s call are John Morikis, President and CEO; Al Mistysyn, CFO; Jane Cronin, Senior Vice President, Corporate Controller; and Bob Wells, Senior Vice President, Corporate Communications. This conference call is being webcast simultaneously in listen-only mode by Issuer Direct via the Internet at www.sherwin.com.

An archived replay of this webcast will be available at www.sherwin.com beginning approximately two hours after this conference call concludes and will be available until Monday, August 13, 2018 at 5:00 PM Eastern Time. This conference call will include certain forward-looking statements, as defined under U.S.

Federal Securities Laws, with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

A full declaration regarding forward-looking statements is provided in the Company’s earnings release transmitted earlier this morning. After the Company’s prepared remarks, we will open the session to questions. I will now turn the call over to Bob Wells..

Thanks, Jessie. Good morning, everyone. We’ve provided a supplemental slide deck with a breakdown of our results by reportable segment on our website, sherwin.com, under Investor Relations July 24th press release. Consolidated sales in the second quarter 2018 increased $1.04 billion or 27.8%, to $4.77 billion.

Compared to pro forma combined results from second quarter 2017, consolidated sales for the quarter increased 7.5%. Consolidated gross profit dollars in the second quarter increased $304 million or 17.5% to $2.04 billion. Consolidated gross margin in the second quarter was 42.7% compared to 46.4% in the same period last year.

Selling, general and administrative expenses increased $154.1 million or 13.4% to $1.31 billion in the second quarter, but decreased as a percent of sales to 27.4% from 30.9% last year. The decreases in both gross margin and SG&A as a percent of sales is primarily the result of a mix effect from the inclusion of Valspar.

As a reminder, second quarter 2017 included only one month of Valspar results. Interest expense for the quarter increased $36.8 million to $93.5 million. The increase was entirely due to the acquisition-related interest expense. Consolidated profit before tax in the second quarter increased $29.1 million or 5.7% to $538.1 million.

Our effective income tax rate for the second quarter was 25%. We expect our core effective tax rate for the full year 2018 to be in the low-20s. Second quarter diluted net income per common share increased 26.5% to $4.25 per share from $3.36 in the same period last year.

The $4.25 includes $1.23 per share in acquisition-related expenses, including purchase accounting and amortization, and a $0.25 per share charge from environmental expense provisions. Valspar operations contributed income of $0.91 per share in the quarter net of incremental interest expense.

We’ve summarized the second quarter earnings per share comparison in a Regulation G reconciliation table at the end of our second quarter 2018 press release. Let me take a few moments to break down our performance by segment. Sales for The Americas Group in the second quarter increased $187.4 million or 7.7% to $2.63 billion.

Comparable store sales in the U.S., Canada and the Caribbean increased 6.8% in the quarter. Regionally, in the second quarter, our Canada Division led all divisions, followed by Southwest Division, Southeast Division, Eastern Division and Mid Western Division. Sales and volumes were positive in every division.

Currency translation reduced net sales in U.S. dollars by 50 basis points in the quarter. Second quarter segment profit increased $37.2 million or 7% to $569.9 million.

Second quarter segment operating margin increased 20 basis points to 21.7% from 21.5% last year, but we realized an $8 million unfavorable swing in other income for The Americas Group compared to second quarter last year. Turning now to Consumer Brands Group. Second quarter external net sales increased $241.3 million or 45% to $777.7 million.

Incremental Valspar sales from April and May 2018 increased group net sales 42.7% in the quarter. Revenue reclassification related to the newly adopted ASC 606 reduced net sales by 5.1%. Segment profit for the Consumer Brands Group in the second quarter increased $14.8 million or 19.5% to $90.9 million.

Segment profit for the quarter includes a $28.5 million charge for purchase accounting-related items. Segment profit as a percent of sales for the quarter decreased to 11.7% from 14.2% last year. For our Performance Coatings Group, second quarter net sales increased $608.2 million or 79.9% to $1.37 billion.

Incremental Valspar sales from April and May 2018, increased group net sales 72.9% in the quarter. Currency translation rate changes increased segment sales $5.1 million or 67 basis points in the quarter. Segment profit for the Performance Coatings Group in the second quarter increased $81.8 million or 131.3% to $144.2 million.

Currency translation rate changes decreased segment profit $2.5 million in the quarter. Segment profit for the quarter includes a $47.6 million charge for purchase accounting-related items. And segment profit margin increased to 10.5% from 8.2% last year.

I’ll conclude my remarks on the quarter with a brief update on the status of our Lead Pigment Litigation. In our Santa Clara County, California lawsuit, we expect the trial court judge to issue a preliminary decision in August regarding the amount of the abatement funds.

This preliminary decision will be in advance of a hearing on this topic currently scheduled for August 17. We have the right to appeal if we disagree with the judge’s ruling on the abatement fund amount. In addition, on July 16, we filed a petition for cert with the U.S. Supreme Court seeking discretionary review.

We expect to hear whether the Supreme Court accepts the case during the fourth quarter of 2018. In the interim, we have filed a motion to stay the Santa Clara County, California proceeding while the Supreme Court petition is pending.

We continue to believe that the judgment of the California court conflicts with established principals of law and is unsupported by the evidence. That concludes our review of our operating results for the second quarter.

So, let me turn the call over to John Morikis, who will – to make some general comments and highlight our expectations for the remainder of 2018.

John?.

Thank you, Bob. Good morning, everyone. Thanks for joining us. I’ll offer my comments on our second quarter results in just a few minutes. but I’d like to begin by focusing on our outlook for the full year. As you read in our press release this morning, we’re raising our full-year outlook for diluted net income per common share.

This increase in our guidance is based on several factors that give us confidence in the second half of the year and beyond. First, our teams delivered a solid performance in the first half, and we exited the quarter with strong sales momentum, which is usually a reliable leading indicator.

Second, the positive demand trends we see are broad-based across most businesses and geographies, which should support our growth expectations over the balance of the year.

Third, we have great confidence in the ability of our operating teams to execute on growth initiatives, manage expenses and implement sufficient pricing to offset lingering raw material inflation. And finally, we feel good about our progress on the integration plans and synergy targets we laid out at the beginning of the year.

As for our specific guidance, we expect third quarter consolidated sales to increase at a mid-to high single-digit percentage rate compared to the third quarter of 2017.

Keep in mind; June 1st marked the one-year anniversary of the Valspar acquisition, which makes third quarter 2018 the first quarter in which our results will be fully comparable to last year. For the full year 2018, we continue to expect core net sales to increase mid-to high single-digit percentage compared to full-year 2017.

In addition, the incremental sales from Valspar in the first five months of 2018 added approximately $1.85 billion to consolidated revenues. As we’ve described on previous calls, the many moving parts in last year’s results and this year’s guidance can make it challenging to understand our underlying earnings per share performance.

We believe the most meaningful way to view guidance is to back out the Valspar acquisition-related costs and other one-time items.

On this basis, we are updating our expectation for our full-year 2018 adjusted diluted net income per common share to be in the range of $19.05 to $19.35 per share, a 27% increase at the midpoint compared to the $15.07 we reported last year on a comparable basis.

This adjusted EPS range excludes $3.80 to $3.90 per share in transaction, integration and purchase accounting expenses, and the $0.25 per share charge we took in the second quarter for environmental provisions.

Compared to the full year earnings guidance we provided three months ago, this revised range reflects our confidence that we will more than offset the earnings dilution from the rollout of the Lowe’s partnership we discussed on our first quarter call.

We’ve included a Regulation G reconciliation table with this morning’s press release to better illustrate all the moving parts. Our adjusted results in the second quarter were records for any quarter in our history in terms of net sales, gross profit and profit before taxes.

Underlying demand remained solid across most of our end markets, and the Valspar business continued to add to our momentum. At the same time, year-over-year raw material inflation was slightly higher than we anticipated at the beginning of the quarter.

This was primarily the result of higher-than-expected propylene pricing in May and June, which affected the cost of many petrochemical components in our raw material basket and resulted in a LIFO charge in the quarter.

The LIFO charge, combined with a modest increase in raw material costs versus plan, pressured operating margins in all three reportable segments. At this point, it’s unclear whether these factors will significantly alter our full year outlook for average raw material inflation.

What is clear is that we will continue to work to offset these escalating costs by controlling spending and implementing price increases where necessary. Given that we now passed the one-year anniversary of Valspar, this will be the last quarter that we break out core Sherwin-Williams results versus Valspar results.

Today, we are operating as a single integrated company. And from an accounting perspective, the divisions between the legacy businesses are becoming more blurred and less instructive. At this point, measuring operating profit across the legacy Sherwin-Williams and Valspar businesses is both difficult and somewhat arbitrary.

All three of our reportable segments made progress in the second quarter in driving revenue growth and profit improvement. The Americas Group continued to focus on growing share of wallet among existing customers, opening new accounts and driving higher trial across our premium product lines and our e-commerce platform.

Same-store sales in the quarter were fairly robust despite continuing market constraints in some regions, which slightly pushed some projects into the back half of the year. Sales to residential repaint contractors in the U.S. and Canada grew at a double-digit pace for the 17th time in the last 19 quarters. Protective & Marine coatings in the U.S.

and Canada also grew by double digits. And property management, new residential, commercial, DIY and health care segments all contributed to TAG’s growth in the quarter. Latin America sales increased 4.4%. It appears that the fundamental demand trends remains strong across the business.

The group opened 18 net new stores in the quarter, bringing our total store count to 4,642 at the end of the quarter. Our full-year plan calls for this team to add between 90 to 100 net new stores in The Americas by year-end.

TAG segment operating margin increased 20 basis points compared to the second quarter last year, despite the impact of slightly higher-than-expected raw material costs and the LIFO expense taken in the quarter. Operating margin on incremental sales in the quarter was in the mid-20% range.

Our Latin America business operating margin was negative low single digits, which was a which was a drag on segment profit in the quarter. Gross margin for this segment was down modestly compared to 2017, but SG&A improved as a percent of sales compared to last year.

Bob provided results for the Consumer Brand and Performance Coatings Groups compared to last year’s second quarter as reported. I’d like to look at our results for this quarter compared to pro forma combined results from second quarter 2017 to give you a clearer picture of the underlying performance of these segments.

Consumer Brands Group sales increased 1.5% on a year-over-year basis compared to pro forma sales from second quarter last year. As Bob mentioned, the adoption of a new revenue recognition standard reduced revenues by a little over 5% in the second quarter this year. So it’s a pretty solid sales quarter on a comparable basis.

From a margin perspective, if you back out the impact of purchase accounting items in both years, adjusted operating margin in the quarter was 15.4% this year versus 16.2% on a comparable basis a year ago.

The year-over-year decrease in adjusted operating margin was primarily a result of increased costs associated with the inventory build and load-in to support the expanded Lowe’s partnership, higher year-over-year raw material costs and a LIFO charge. The Lowe’s program is proceeding as planned and gaining momentum.

Selected product category resets have been completed nationally, with the remainder expected to be completed this summer. We remain confident in achieving our shared goal of accelerating top growth in the Lowe’s paint aisle. Performance Coatings Group revenues increased 11% compared to pro forma combined sales in the second quarter of 2017.

Sales were up in every product category, most by double digits, led by packaging coatings, general industrial, coil and Industrial Wood Coatings. If you add back the purchase accounting items, adjusted operating margin in the quarter was flat to last year at 40% on a comparable basis and well above the 12.1% recorded last quarter.

This sequential improvement in operating margin is a function of sales volume leverage, successful pricing initiatives, spending control and integration progress, all of which more than offset higher year-over-year raw material costs and a LIFO charge taken in the quarter.

EBITDA, or earnings before interest, taxes, depreciation and amortization increased, 29% to $1.33 billion in the first six months, compared to the same period last year. EBITDA margin for the first six months was 15.2% versus 15.8% in the same period a year ago.

Six-month adjusted EBITDA, which excludes one-time transaction and integration expenses, was $1.40 billion or 16% of sales. Net operating cash year-to-date was $579 million compared to $586 million a year ago.

As a reminder, net operating cash in the first six months last year included a benefit of approximately $88 million from settlement of a treasury lock hedge. On June 30, the company had $135 million of cash on hand that will be utilized to reduce debt and fund operations.

During the quarter, we declared a dividend of $0.86 per share, paying $81 million in cash dividends. The balance sheet reflects total debt of approximately $10.4 billion. We intend to reduce our net debt-to-EBITDA ratio to approximately 3:1 by the end of 2018. We remain committed to reducing debt by $1 billion by the end of this year.

Our capital expenditures year-to-date totaled $101.8 million. Depreciation was $144.1 million, and amortization of intangibles was $158.9 million. For the full year, we continue to expect capital expenditures to be approximately $330 million, which is about 1.9% of anticipated sales.

As we continue to invest in productivity improvements, systems and new stores, depreciation should be between $280 million to $290 million, and amortization will be about $325 million, including purchase accounting depreciation of $44 million and amortization of $300 million.

We continued opportunistic open-market purchases of company stock in 2018 at a level sufficient to offset dilution from option exercises. In the first six months, we purchased 850,000 shares at an average price of $393.12 per share. On June 30, we had remaining authorization to acquire approximately 10.8 million shares.

Finally, we continue to make good progress towards integrating Sherwin-Williams and Valspar into one streamlined, high-performance company. And I believe this progress is beginning to show in our results.

Much of the heavy lifting involved in creating a fully integrated North American supply chain is behind us, and a wide range of opportunities to improve our productivity and operating efficiency outside of the Americas has been identified and are in process.

We are on track to achieve our 2018 synergy targets and had booked a little more than half of the anticipated annual benefit to our P&L in the first half. Most importantly, our associates across all disciplines, sales and marketing, technical and operations, are embracing the vision and promise of this new organization.

I’d like to close by thanking all of our employees, who have worked so hard since we completed the Valspar acquisition on June 1st of last year. I’m extremely proud of the progress we’ve made, and my enthusiasm for the prospects of our combined organization has only increased over the past year.

I’m confident that we’ll continue to deliver superior value to our customers and reward our shareholders over the long-term. With that, I’d like to thank you for joining us this morning, and we’ll be happy to take your questions..

Thank you. [Operator Instructions]. Our first question is coming from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question..

Great. Thanks. Good morning, guys..

Good morning, Arun..

Yeah. Thanks John. So yeah, just a question on the raw material outlook. So I guess, just trying to understand what’s embedded in your guidance raise of about $0.55 at the midpoint.

Does that assume raw materials are stable from here or declining modestly or increase a little bit as well?.

Yeah. This is Bob. As we indicated in our prepared remarks, the raw material inflation for the industry in second quarter was slightly above our expectation, and that puts it just above the high end of our 5% to 6% inflation range for the full year.

We originally said we expected raw material inflation to peak in the second quarter and moderate in the back half. And based on the recent move in propylene and some of the crude oil derivatives, we now believe that year-over-year raw material inflation will be higher than we originally expected in the third quarter.

And we expect to see pricing stabilizing in the fourth quarter probably as opposed to declining meaningfully. So, our raw material outlook has changed somewhat, and that’s embedded in the full-year guidance..

Thanks, Bob. And then, Bob, on the tax rate, you’re now guiding to low-20s. I mean, when we look at that, you’ve previously guided at 20% to 25%. So is that, you’re basically saying that you expect 1% to 2% average lower tax rate for the year? And I mean, if so, does that equate to about $0.20 to $0.30 of EPS? Maybe, you can just talk about that..

Yeah, Arun. I do believe we’re going to be in that low-20% mark. I think the – based on lower first quarter and where the year estimate was, I think that equates – I think it’s closer to your $0.20 to $0.25 a share. But we did have goodness in our second quarter. We are consistently looking at lowering our tax rate.

One way to do that is by consolidating foreign entities, and we have a large number of foreign entities today with Valspar. It's just hard to predict timing and, sometimes, magnitude of those changes.

But we did have a consolidation in our second quarter that lowered the tax rate to that 20.5% core that helped drive that full year tax rate to the low 20s..

Great. Thanks. And just lastly on the comp store sales. You noticed an acceleration for 5.2% to 6.8% in the quarter. Does that break out at, say, 4% volume, 3% price or 2.8% price? So both of those accelerated sequentially? Or was it a slightly different makeup? And then maybe you can just talk about your outlook for the rest of the year on comp stores.

Thanks..

Yes. The price/mix effect, Arun, in the quarter was approximately 2.5%. And I would say our outlook for the comp stores going forward is very strong. We're feeling – the momentum that we have here is terrific. I mentioned the res repaint business, the Protective & Marine all growing very strong. Every segment's moving in the right direction.

So we're feeling quite positive about our stores, and we think that's only going to continue..

Great. Thanks guys..

Thanks, Arun..

Thank you. Our next question is coming from the line of Ghansham Panjabi with Baird. Please proceed with your questions..

Hey guys, good morning. Just to the follow-up to the last question on the 6.8% same-store sales growth.

Do you think that it was weighed upon in any material way from weather early in the quarter that seems to have tripped up a lot of your peer group as well?.

Well, I'd say that what it did do is create some pressure in the sense that, that first quarter was tough. So the construction industry got off to a slow start, not just painting. And so it's pushed some volume, we believe, into the third quarter. The momentum that we have here, we think, is terrific. We think we're growing share. We're growing momentum.

We think 6.8% comp is a good number, and we believe we're going to continue to grow..

What I would add to that, Ghansham, this is Al, is that as we even talked about on our first quarter call, we started up with a wet April. So as we progressed through the quarter, sales strength improved, which gives us that confidence going forward in the third quarter and the rest of the year..

Yes, coming out of the quarter, it was – we're gaining speed coming out of the quarter..

Can you share with us exactly what that was coming out of the quarter?.

No..

We don't want to get that granular by month, but we did see an improvement as the quarter went on..

I had to try. And just my follow-up question on the organic volume growth by segment. Performance in consumer, there's a lot of moving pieces with FX and pricing, et cetera. Can you just kind of break out the volume aspect? Thank you so much..

So in the second quarter, you look at – really, we had price across all the segments, and we don't comment about each of the segments in price. But you can – but that it's close in that 2% – a little over 2% range. FX was fairly mild in the quarter. For the consolidated, it was only up plus 1/10 [ph] and even within the segments, they're all below 1%.

And then, so if you just look at the sales of those segments, the rest has to be volume and mix. And Performance Coatings was very strong, with the double-digit gains on the pro forma. Consumer Group had a nice quarter when you – if you back out the revenue recognition adjustment that we took, which was almost 5% in the quarter.

So I would say volumes are up across the board, and we're getting price. .

Thanks so much..

Thanks Ghansham..

Thank you. The next question is coming from the line of Don Carson of Susquehanna Financial Group. Please proceed..

Good morning. Emily Wagner on for Don.

Just going back to raw materials, given your higher outlook for the year, at what point would you expect your year-over-year gross margin to recover as well as segment margin recovery?.

Our guidance at the midpoint of 19, 20, we do expect our gross margins to improve sequentially through the rest of the year. When we'll be able to get over the top of that, we're looking at early next year, assuming raw materials moderate some, as Bob talked about, in the back half.

So sequential improvement in gross margin through the rest of this year, and we'll be looking to get on top of the year-over-year margin going into next year..

Great. And as the follow-up in terms of the volume growth. So it seems like same- store sales, about 4% of it was volume growth. Does that imply that the U.S. market is growing at around 2% for the full year? What's your outlook for underlying U.S.

demand growth?.

Emily, I think it’s safe to say that the DIY business has been a lot slower than the contractor side of the business. That's been true certainly in our own stores. We measure DIY sales to our stores. It was the slowest-performing market segment in the quarter.

So while, clearly, the contractor business is growing well above that 2% range, it's – I think it's safe to assume that the market's probably grown between 2% and 3%. Our stores volume was a little ahead of 4%..

Great. Thank you..

Thank you..

Thank you. The next question is coming from the line of Scott Mushkin with Wolfe Research. Please proceed with your question..

Hey guys, thanks for taking my questions. So I guess, I had two things I wanted to ask you about. Number one is, I mean, obviously, everything is going really well for the company. Even I think Performance Coating had a great quarter.

As we look out with the fed raising interest rates, how do you guys think about, as we look beyond this year, just a general part of the business, and the fact that it's probably a little bit more exposed to the industrial economy..

Good question Scott. And obviously, rising interest rates would potentially have an impact on both the architectural side of the business and the industrial. If you look at the manufacturing sector in June, the PMI increased for the 22nd consecutive month.

And the market's expanding in all regions, and production in inventories are growing at a faster pace than they did last year. So it's hard to point to any effect that the fed raising had had on the industrial economy thus far.

On the construction and residential side of the economy, we believe the slower residential starts and resales are more indicative of supply constraints than they are weakening demand. So there may be constraints out there in the market, but they don't seem to be interest rate related at this stage..

Okay, that's helpful. And then, I guess, my second question. I think on the last conference call, you guys talked about maybe jumping back into the M&A market.

And I did want to think about that in context of where we are from a macro perspective and maybe just get an update on your thoughts, how much – are assets getting more expensive? Kind of just give us an update on that, that would be great. And then I'll yield..

It’s hard to generalize on the question of are they getting more – increasing in value, perceived value of the owners or not. I think that varies. I will say this. We continue to monitor the industry for what we believe to be a good fit for Sherwin-Williams.

And most likely, these deals in the shorter term will be smaller bolt-on that will help us expand technology and maybe add or enhance geographic – our footprint geographically. But we're out there. We're having good discussions. And we're engaged, looking for the right opportunities. We're not just out looking for anything to put us anywhere.

We're very disciplined in our approach, and we're excited about some of the discussions we're having..

Hey, perfect guys. Thanks for taking my questions..

Thank you, Scott..

Thank you. The next question is coming from the line of Duffy Fischer with Barclays. Please proceed with your questions..

Yes, good morning..

Good morning, Duffy..

Just around the big box business right now. Obviously, with DIY struggling, big shifts in the DIY aisle.

Are you guys seeing any difference in behavior, either marketing programs or discounts, from a normal year?.

Duffy, if anything, we're seeing a more rational pricing environment than a year ago. So we're feeling pretty good about the environment as it exists..

Okay. Fair enough.

And then could you give us some help with the mix shift on the SG&A line? That 27%, is that what we should kind of use to run forward? Or how will that line look over kind of the rest of this year and going into next year?.

Yes, Duffy, if you – the way I look at it, the first half – the second half – let me say it this way. Our SG&A as a percent of sales should be down in the second half versus the first half..

Terrific. Okay, thank you, guys..

Thanks, Duff..

Thank you. The next question is coming from the line of P.J. Juvekar with Citigroup. Please proceed with your questions..

Yes, hi, good morning..

Good morning, P.J..

A couple of questions on your Lowe's business. First, at Lowe's, you wanted to reduce number of combined SKUs and simplify the offering. Can you talk about that? And then you also mentioned the initial fill and loading at Lowe's.

Was there any benefit in the quarter from initial fill?.

Let me take the simplified product offering, and I'll ask Al to comment on your second part of your question, P.J. We're not going to give any of the specifics, but I will share with you the overall direction we are taking with Lowe's is to, in fact, simplify the offering. And part of that comes with less suppliers.

Another portion of that comes with the recognition that by simplifying the offering, we can make it easier for both sales associates and the consumer to understand. So we feel we have a terrific lineup that's going to be rolling out.

And we're really excited about our relationship with Lowe's in the future here, and we think it's going to be an opportunity for us to continue to add shareholder value..

So on the rollout, P.J., the – we're ahead of schedule with aerosols, interior and exteriors paints set nationally, and paint rolling out as we speak. The adjusted sales, over 6% on the pro forma basis, excluding rev rec, was solid. However, the costs were higher in the quarter for the Lowe's expenses than we had planned.

And as the – including the raw material, higher than we thought, our margin declined. So we're not going to break out how much is related to Lowe's going forward. We just want to be sensitive to our customer, and we also want to be sensitive to – they're driving the rollout, and we feel good about where we're at there.

That all being said, if you look at our year-to-date margins, along with price and good cost control and the volumes we're seeing, our operating margin's up, and I think the team has turned in a solid performance..

Great. Al, a question for you on LatAm. Sales were up 4.4%, but just in the last few months, currencies have come down significantly. They're down double digits year-over-year. Economy has slowed down, particularly in Brazil. I'm just wondering if you have any comments, given your negative margins in second quarter.

Do you see that getting worse before it gets better?.

Yes, because as you know, P.J., majority of the raw material costs are dollar-denominated. And as we see the devaluations, our costs go up. Raw materials are a similar percent to sale. Percent of cost of goods sold as in the U.S.

So we're going to be chasing price with the significant devaluations we saw in Argentina, Brazil and even a little bit in Mexico. So – and that is built into our full year guidance..

Thank you..

Thank you..

Thank you. The next question is coming from the line of Bob Koort with Goldman Sachs. Please proceed with your questions..

Thank you very much. I wanted to ask you in the Performance Coatings area. You guys acknowledged there was some lag in pricing there, but obviously, you've made up some pretty significant margin improvement.

Can you talk a little bit about how much that came from synergies, how much came from price? And then what there may be still on the horizon from latent price hikes that are still working their way through?.

Bob, we have pricing that has taken effect. We have more pricing that is rolling in. And we're really proud of the team's ability to retain these customers, grow our business while getting the price in. It's a challenging market when you think about what's happening from a raw standpoint. But we think we're really teaming up with the right customers.

We have great relationships with customers that are trying to grow their business, and we're finding opportunities for new business as well. So we have good pricing in, more is rolling in, and good momentum. So the team's doing a terrific job..

What I'd comment, Bob, on the raw material synergies is we haven't broke out synergies by segment. But what I would say is we are still on track for the $140 million to $160 million in synergies for the year. We've booked a little bit more than half of those in the quarter, and those are really broken out between – I'm sorry, in the first half.

And those are really broken out primarily Consumer Performance Coatings, and then you get some in corporate..

Got it. And then one of your bigger buys is TiO2, and it looks like there may be some conclusion and some consolidation in that industry.

I'm wondering, how could that affect you at all? And is there any more desire in your part to engage in some of these longer-term fixed price contracts there?.

Yes. The TiO2 market is kind of in flux right now. You've probably read a lot about the supply-demand balance evolving in Europe. We don't think that, that is going to materially affect the market in North America this year.

We commented in the past that we are going to negotiate raw materials in a way that will benefit our shareholders if that means locking in longer-term agreements to ensure supply and to achieve stable pricing. And that's a benefit to our shareholders. We would do that.

But we're cautious about the timing of these longer-term contracts relative to market pricing when the suppliers are [indiscernible]..

Our teams are very well aware of where we are in the cycle and are adjusting accordingly. So we're going in with our eyes wide open, Bob..

Got it. Thank you..

Thanks, Bob..

Thank you. Our next question is coming from the line of John Roberts with UBS. Please proceed with your question..

Thank you.

In the supplemental slides, since this is the last quarter we're going to get the breakout between Valspar and legacy Sherwin, could you just comment on the consumer performance segment on the different growth rates we see between Valspar and Sherwin contributions there? Is that just the easier comps in the Valspar numbers?.

John, I think that we saw 5% growth on the Valspar on a pro forma basis down. But on the core Sherwin, if you back out the impact of the rev rec, we're still up low single digits. And I'd say that's kind of where we expected to be. Yes, we're going against a softer quarter, but I think the team is going well.

And as we looked at the different segments, of national accounts other than Lowe's, commercial, Europe, all positive. And like we've talked about in the past, we do have headwinds in that retail segment..

But John, to be clear, the teams aren't as concerned with are we selling Thompson's or Cabots. We're just trying to sell. So the line's quickly blurred when we consolidated those teams together and gave them one sales goal. So we're reporting a number that we're not – truly, we're not managing the business that way.

We're reporting a comp number, but we're focused on growing sales. And we're not concerned with which brand the team sells..

Okay. And as a follow-up, now that we're in the third quarter, when we seasonally go into the fourth quarter later this year, should we expect a similar seasonal sales drop to the second half last year? You had Valspar in both third and fourth quarter last year.

But maybe, seasonally, the EBITDA might decline a little bit more sequentially fourth versus third because you're further along in the cost savings, and you had more sequential progress going on last year?.

Yes. I think that’s a typical – I agree with what your first statement John is. That's our typical flow. And I would say, even though with Valspar and the bigger industrial business were less seasonal than we used to be, we still do have a seasonal impact in that third going to fourth quarter..

And also John to add to that, we are going to achieve more year-over-year synergy benefits in the first half than we're going in the second half..

Okay. Thank you..

Thank you. Our next question is coming from the line of Vincent Andrews from Morgan Stanley. Please proceed with your questions..

Thank you very much guys.

Could you just quantify the LIFO charges by segment? And should we be anticipating any further LIFO charges in the third quarter or obviously in the fourth quarter?.

Vincent, we’re not going to call out the individual LIFO charge by segment. It's a function of increasing raw materials. And with the raw costs being up more than what we had thought coming into the quarter, we had to true that up in our second quarter.

So you estimate what the full year LIFO is, you have to take half of it through your first half, and that's what we did. But I don't want to be quantifying what those are by segment. It's all part of the raw material increase, in my mind..

to that point, Vincent, Al's point about the raw material cost increases, that's what drives our thinking about our price to our customers. And as we've talked on numerous occasions, we stay very close to what's happening with the total basket of raw materials.

When we see that basket move, we've historically demonstrated the ability and our effective pricing through our stores and other businesses here to put that pricing in. And no one should question our conviction or our determination to continue to manage those margins. When we see pricing move, we're going to – we move.

And as we have historically approached this, the practice is to communicate the price increase to our customers first and then to the investment community. So we'll be talking to you about our activities likely in the near future..

Okay.

Just as a follow-up, at Lowe's, now that you're the sole paint supplier, has anything changed about the mechanism by which you can sort of adjust prices versus raws in that line of your business?.

Yes. We have a good agreement with Lowe's. We're not going to get into the details of any mechanisms, but suffice it to say, we've got a program that's going to keep us both focused on growing sales and not arguing about price..

Excellent. Thank you very much. Appreciate it..

Thanks, Vincent..

Thank you. The next question is coming from the line of David Begleiter with Deutsche Bank. Please proceed with your questions..

Thank you. John, on Valspar, looked like you did better than you expected in the quarter. I think you were expecting $600 million worth of sales. You did closer to $800 million.

When did that really pick up? And what drove that better-than-expected performance?.

Well, you have to look at our Performance Coatings business up 11%. And as we talked about in the prepared comments, nearly every one of those segments up double digits. So this is a wonderful team that we've inherited with great products, great relationships with customers.

And combined, we're finding that it's an even stronger value proposition to our customers. So the Performance Coatings business is, as I mentioned before, growing well, and we're implementing the price that we need. So we're feeling really good about that and the future. I mean, there's – I think there's really a sustainable growth pattern here.

And then on the consumer architectural side, again, a wonderful leadership team with great products and great relationships with customers that we're trying to really leverage to the fullest. So we're really happy. I've often said how thrilled we are with the Valspar acquisition.

And I know it sounds a bit repetitive, but I'm happier right now with Valspar than ever. And the future is only stronger for us. So we're feeling this has been a terrific move for us..

And John, in that business, amongst packaging, GI, coil and wood, had Valspar lost some share that you are now gaining back? Is it helping to drive some of the heightened sales growth here?.

No, I don't think so. I think we've been open about that they've not been outlook pricing. But I don't think that they've lost share. In fact, I think we'd be hard-pressed to point to any single customer that we've lost. I mean, we've been very successful in retaining customers and the employees. So it's going very well..

Thank you..

Thanks, David..

Thank you. Our next question is coming from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question..

Yes, good morning. Given the raw material backdrop as it stands, at least one of your competitors has pointed to opportunities to reformulate.

Do you see any opportunity at Sherwin to reformulate in terms of pigment contents, resin systems or other inputs?.

Yes, Kevin, we’re formulating for TiO2 efficiency truly has been something that we've been doing for many years. And there are a number of products that are commercially available to help formulators with that. We also have our own proprietary technology that we've developed internally. Our approach to this is very unique.

You have to keep in mind that our customers have very, very high expectations for consistency. When you have the mix of business that we have with a professional painter, close isn't close enough for our customers. So we go through an extensive commercialization process. We've got a number of checks and balances.

So it's in our repertoire of tools that we use, but we're also very cautious in how we approach this to ensure that it, in most cases, ends up with an increased or improved attribute for our customers..

Second question, if I may, on capital deployment. I think you articulated some specific goals for leverage. Just wondering if you could comment on repurchase activity in that context. Looks like you – if my math is correct, you would have purchased 0.25 million shares in the second quarter, down a bit from 1 Q.

What sort of pace might we anticipate the back half?.

Yes, Kevin, you are correct. We did purchase 0.25 million shares, bringing our full year year-to-date total to 850,000 shares at $334 million. I think if you look over the last three years, our option dilution has been approximately one million shares. We're running a little above high net so far year-to-date, but we'll watch that.

We'll continue to look at buying shares opportunistically. But we'll look at the options and adjust from there in the second half..

Thank you so much..

Thanks, Kevin..

The next question is coming from the line of Mike Harrison with Seaport Global Securities. Please proceed with your question..

Hi, good morning..

Good morning, Mike..

Just looking at the Just looking at the consumer business and the differences in the performance between Valspar and Sherwin, did both pieces have the revenue reclassification? Or was it just Sherwin that had that headwind?.

Both had the headwind, and it was split 50-50 roughly..

Okay. And then was wondering if, within that consumer business, you could talk a little bit about what you're seeing in the Valspar China architectural business.

How did that do in the quarter? And are you seeing any reason for caution going forward in China?.

I would say for both Europe and China, the architectural businesses were positive. And we see continued opportunity for profit improvement in both of those regions. We're staying close. We're learning a lot as we go, and we'll be making appropriate investments as we see the opportunity for disciplined growth..

All right. Then last one if I could, is regarding the environmental item this quarter. I feel like in the past, you guys haven't backed those out, but this one seemed a little bigger and maybe more significant.

Can you give us some detail on what that entailed?.

Sure, Mike. Historically, we have backed out significant adjustments to the environmental provision. This is one – as you can expect, the timing and magnitude of some of these adjustments are harder to predict.

So this one in particular relates to one of the large sites that we've been investigating and remediating on an ongoing basis and quite honestly, there's more to come related to that site. It's just – again, it's hard to predict timing and amounts. But as soon as we know it, we adjust the provision, and then we call it out..

All right. Thanks very much..

Thanks, Mike..

Thank you. The next question is coming from the line of Greg Melich with MoffettNathanson. Please proceed with your question..

Thanks. I have a follow-up on sort of looking at the back half and the guidance and how SG&A flows through. So if gross margins are going to be under some pressure just given raws, to get there, it looks like SG&A will still be under some pretty good control. You keep it around where it is, maybe growing 2% year-over-year.

Does that fit with where your guidance and what you're thinking?.

I think, we don’t walk down the P&L in detail. But I think you're going to see leverage on our SG&A. As our volumes continue to grow, you would expect to see our leverage there. We still have more synergies rolling in, in the second half.

So yes, you should expect to see a sequential – like I said, a second half being lower than our first half as a percent..

And Greg, to your point, price rolling in as well..

And the price that we have right now, price/mix coming in at like 2.5%, it sounds like that's still rolling in. So that might move up to sort of like 3% and then plateau into the fourth quarter.

Is that a fair way to think about it?.

Yes, I think we have prices rolling in. It's across the different segments. It doesn't roll in as uniformly as our stores group. So yes, there is still pricing going in..

Got it. And then I had a follow-up, as far as we haven't gotten there yet.

I know it's probably not big for you guys, yet the – with all the tariff talk around the world and different things, particularly China, is there anything that you're bringing in that's material that we should be aware of in terms of what's sourced overseas that could be subject?.

And specifically, we look at the tariff impact on our raw material basket first and foremost. And frankly, at this point, we don't believe the impact of at least the proposed tariffs at this point will impact our raw material basket substantially.

Right now, steel and tin plate is where we're seeing most of the effect, and it's not material to the raw material basket certainly relative to the petrochemical proportion of the basket and TiO2. But as you know, it's an evolving story, and future impacts are not entirely clear. So we're keeping an eye on it..

Great, thanks guys. Good luck..

Thanks, Greg..

Thank you. The next question is coming from the line of Christopher Parkinson with Credit Suisse. Please proceed with your question..

Great, thank you. I understand it's relatively new, but can you give any broader updates on your Americas e-commerce efforts and how you feel this will evolve over time? It seems like you're in the process of building on some sort of foundations to boost pro growth and reduce some costs.

But just how should we think about this across your relative customer groups? And what inning would you characterize this in? Thank you..

So, Chris, I’d say we’re in a very, very early innings of what we consider to be a very exciting opportunity. And the opportunity here to build on existing relationships and leverage the distribution points that we have in our store are really exciting.

And so when you look at the opportunity to capture additional share of wallet and grow customer – or grow our customer base through these platforms of distribution, it – this e-commerce initiative is just a natural, the ability for customers to do business with us 24 hours with the ability to understand their projects.

And we've got a lot of features that we're building into this to increase the loyalty of our customers to our brand and to our stores. And we're in the process of developing more and more features. We're rolling out in different areas, different – testing different areas geographically.

And when it all comes together, we're really believing this can help us in quite a dramatic way. So it's an exciting initiative for us..

And just a quick follow-up.

Can you just talk a little bit more about the recent reductions in some regional housing inventories? Just how should we think about this and – or interpret this on a relative basis versus the home appreciation that we're seeing? Just how – what do you think about these two various drivers and how it should drive revenues in Americas? And then just any quick comment on residential versus commercial labor constraints would also be appreciated.

Thank you..

Yeah, Chris. This is Bob. Let me handle the inventory effect on resales, and then I'll ask John to talk about commercial labor constraints and the like. I mentioned earlier that the slower residential starts and resales are more indicative of supply constraint than weakening demand. That's true both in the new home market and the resale market.

If you saw the June print, inventory was at 4.3-month supply. It is – that's very tight. It's up a little bit from the May print, but it's still really tight relative to what's normal. Home prices jumped 5.2% year-over-year, which is a pretty big move. And we kind of consider it to be a trade-off.

While existing home turnover, which has been relatively weak, drives repaint activity, these – the rising home values and rising equity values among stay-in-place homeowners seems to be driving kind of a historic rate of remodeling activity by stay-in-place homeowners. We think baby boomers are kind of leading that parade.

If you watch the Harvard Joint Center for Housing Studies, leading indicators were remodeling activity for second quarter 2018, reaching an all-time peak at $324.1 billion, which is up more than 7% year-over-year. And they expect that rate to remain above 7% for the foreseeable future even in just -- like into 2019. So it's certainly a mixed bag.

We'd like to see more existing home turnover, but it doesn't appear to be harming the repaint and remodel market. And as John mentioned earlier, 17 of the last 19 quarters, we've seen double-digit growth in residential repaint. So we're not – could that be stronger probably? but we're not complaining..

Yeah. To Bob's point and just in traveling with our team, I do hear from residential repaint customers but more so from new residential, commercial and industrial customers as it relates to labor, making the comment that's pretty commonly heard, which is that they could do more work if they had more labor.

The net effect of that, if there's a positive, is that they are able to get more pricing into the market, and it's likely prolonging the cycle here. But we continue to hear from our customers the issue of labor..

That’s very helpful detail. Thank you..

Thanks, Chris..

Thank you. The next question is coming from the line of Chuck Cerankosky with Northcoast Research. Please proceed with your question..

Good morning, everyone.

Related to the last question with regard to the strength in housing values and interest in remodel activity, how about – how does that affect commercial architectural markets that support increasing household formation?.

I'm not sure I get the question, Chuck.

Do you mean how does that support, like, multifamily development?.

Well, that as well because there's homes for sale but also commercial establishments that might be benefiting from increased household formation in particular areas..

Got you. One of the constraints in addition to labor that we're seeing in the market that's becoming more and more of an issue is the scarcity of buildable land.

It's extremely expensive to develop raw land into buildable land today, which means, to your point; we’re not seeing these communities push out into undeveloped regions of the suburban markets. And hence, there's not as much of the commercial development that springs up around these new communities.

Everything from grocery stores to gas stations, movie theaters, schools, hospitals, et cetera, new land development drives development in those projects. What we are seeing, though, that's kind of an offset is more urban core development. Downtown high-rise development is really strong.

And in fact, our people tell us that the published data around non-residential starts, non-residential square footage is probably understating what they are seeing in the market..

There’s a number of small and medium-size projects that may not be hitting the radar that our people are tracking..

All right. Thank you. Good luck for the rest of the year..

Thank you, Chuck..

Thank you, Chuck..

Thank you. The next question is coming from the line of Mike Sison with KeyBanc Capital Markets. Please proceed with your question..

Hi guys. Nice quarter. I think you mentioned adjusted EBITDA for the first half is $1.4 billion, so to think about that on a margin basis, about 16%.

Do you think that EBITDA margin improves in the second half of the year versus the first half?.

The EBITDA margins should be – yes, the answer is yes. I believe we should see a slightly better EBITDA margin in the second half versus the first half..

Great.

And then if you think about getting to your 2020 goal of like 19% to 21%, you've still got a way to go there, right? So can you maybe remind us of how you ramp that up in 2019 and into 2020 from this year?.

I mean first, you got to start with the demand and the continued above-market demand and sales that we're generating. The price increases that are going in, we'll continue to pursue price increases, working with our customers until we can see some relief in the raw material basket.

We're going to still have incremental synergies next year that you talked about. We earned $60 million in 2017 at the midpoint of $150 million, $210 million, and we have a $320 million run rate synergy number coming out of 2018 that we reaffirmed in May at the investor community presentation, I'm reaffirming today.

So now you look at the – and I would add the Lowe's business that we talked about being accretive going forward from a top-line and bottom-line standpoint. So those are the levers that we're going to continue to push to get to that 2020 goal..

Great. Thank you..

Thanks, Mike..

Thank you. The next question is coming from the line of Steve Byrne with Bank of America Merrill Lynch. Please proceed with your question..

Yes, thank you.

What fraction of your sales in your Paint Stores Group, would you characterize as being from customers that are very loyal, buy a large percentage of their paint from Sherwin stores versus another bucket that spread their purchases around and aren't terribly loyal? How would you characterize that split? And of that doubling of the market growth and over 4% volume in the quarter, how would you allocate that between those two buckets?.

Yeah, Steve. I would say that maybe half, slightly maybe below half would be what we would call those primary or true loyal customers. So we have a terrific opportunity, we think, to grow share of wallet here. We've got quite a bit of runway there and the other pieces through the opportunities with new accounts.

So we're working every one of those angles. Allen.

Yeah, Steve. And I would just add and I think you can see those initiatives paying off in our comp store results in our second quarter being up 6.8%..

And so what do you do for those – that just over a half of your sales are from customers that aren't very loyal, how do you change that and change their purchasing behavior?.

we don't open our stores and hope people come in. We're very aggressive in the pursuit of customers, in trial and having discussions about increasing the value proposition and helping our customers to be more successful in achieving their goals. And we align our people, our products and our services to help our customers reach their goals.

That's how we do it..

Okay. Thank you..

Thank you..

Thanks, Steve..

Thank you. The next question is coming from the line of Dmitry Silversteyn with Longbow Research. Please proceed with your question..

Thanks for keeping the conference here going, so I can ask the question. Just a quick sort of clarification on the Paint Store Group – or I'm sorry, the – not the Paint Store Group, the performance group. It looked like you've closed some branches.

I'm assuming that's part of your kind of a longer-term program to streamline your operations, but I just want to make sure that there's nothing more to it than just the rationalization of sites..

No, there's no structural changes. Well, in fact, we're looking at making investments in areas that allow us to serve our customers better..

Okay, that’s great.

And then on the store additions for The Americas Group, were there any store reductions in Latin America? Or is it just net additions in the U.S.-Canada portion of the business?.

Dmitry, we did have some reductions early in the year, but we're -- we should be on pace for additions..

Okay. I’m talking about this particular quarter. So last quarter, you reduced sales – or reduced the store network by 7, looks like, in Latin America and then increased a little bit in Americas..

Yeah. One store came out of Latin America in the quarter..

So you opened up 19 in the U.S. Okay, that's what I needed to know. And then finally, you've talked about pricing obviously. I don't want to beat a dead horse here.

But given that your raw material inflation is a little bit higher, maybe at the higher end of your original expectations, is there a need to get another round of price increases in your company-owned stores? I understand that the DIY channel is its own animal, but just maybe your company-owned stores or the price increases you got at the end of last year, beginning of this year, even with a little bit higher material inflation, you're thinking you're okay on margin until you get to 2019..

Dmitry, and I made this comment earlier. It's a terrific question, and I'm going to just repeat a portion of this, and then I'll expand on it, which is that our historic practice has always been to talk with our customers first and then the investment community.

And I do really want to be very clear about the comment I made about our conviction and determination to protect our margins. We just do not want to get in front of the conversations with our customers by having a conversation here today first.

So, I’ll just leave it as we are going to protect our margins, and we're going to talk to our customers first. And you can connect the dots from there..

Got you. And then just final question on bookkeeping. The Latin American business, a foreign exchange hit in terms of revenue.

Can you – I mean, you talked about the Americas overall, but in terms of Latin America, how much was foreign exchange a headwind for you in terms of revenue numbers?.

It was almost 12% headwind in the quarter, which was a significant change from the first quarter..

Yeah. Okay, yeah, because last quarter, it wasn’t that a bit, okay, almost 12%. Okay, that’s all I had..

Thanks, Dmitry..

Thank you. Our next question is coming from the line of Justin Speer with Zelman & Associates. Please proceed with your question..

Thank you. Just wanted to go back to the discussion on the intermediate-term revenue growth and the EBITDA margin goals that you guys laid out, the roughly 19% to 21%.

I just want some – maybe some help putting context around the midpoint upside of that band and your confidence – I guess the confidence in achieving the midpoint or the high end of that band at this point.

Did any of the current price cost or currency dynamics change or alter your view of achieving the midpoint or the high end of your intermediate-term objectives as we look out?.

No. I think we’re not ready to say we’re not going to be able to hit that midpoint. I think the pricing actions that we have in and rolling in across some of the other businesses and looking forward, historically, we've been able to catch up on raw material costs, and we take a short-term hit in our margins.

As pricing rolls in and raws roll over along with the other good cost controls and things we do, we're able to expand our operating margins. And we still feel like we are going to be at the midpoint of that range..

Yeah. I think Al's comment in the last call was of reconfirming our position here. We've got work to do, but we clearly see the path, and we're working our plan and expect to be able to reach our goal..

And the Valspar numbers were the big thing or at least relative to our model with regards to the upside on the revenue profile.

Was that like, I guess, a mapping of the synergies coming in maybe sooner than expected? Or is it seasonality? What led to that? And is it going to change potentially the revenue synergy portion of the Valspar synergy targets that you've laid out?.

Are you talking – I just want to make sure we understand the question.

Are you talking about the mapping of the value – or the synergies?.

Well, like for the first two months of the nonorganic piece, the first two months that's not organic was much better. It's like roughly 30-plus better than what you were anticipating. And I know that the underlying core business sounded really good, but at your Analyst Day, you talked of the potential for revenue synergies in this business.

And I'm just curious if it's changing your view of the potential of the combined business as you look out over the intermediate term now you've had it for a year in the portfolio..

I think the revenue synergies that David outlined on PCG at the Investor Day were right on. And every month, we have a management meeting, and we – and every quarter, we review their progress and making those revenue synergies. And as the teams continue to get together, I think more ideas are coming out.

And it's just now prioritizing those to make sure we're putting the resources behind the ones we think will have the most impact. And I'd say we're making good progress there..

Okay. Last question from me, The incremental drag from the accounting change, I don't know if you walked through the impact to all of the segments. I know it was in Consumer Brands.

But what were the impacts to the other segments from the accounting change? And relative to the full year guide that you put out, what kind of drag are you looking for, for the year incrementally from the accounting change?.

It’s predominantly the Consumer Brands Group. There is no material impact to the other groups. And the year-to-date impact that we called out, it most likely will be close to that number..

So, about a point hit to the full year, kind of all else equal, from the accounting change?.

Maybe, a little less than that, but that's in the ballpark..

Thank you very much, guys. I appreciate it..

Thanks, Justin..

Thank you. The next question is coming from the line of Nishu Sood with Deutsche Bank. Please proceed with your question..

Thank you. Wanted to ask first about the increase in the guidance for the acquisition-related costs, $3.40 to $3.50 to the $3.80 to $3.90 range. I think you laid out in the amortization discussion that it's not there. So just wanted to get a sense of what was driving that..

Yes, Nishu. We finalized the acquisition valuation in this quarter, and it resulted in our reversal of tax benefit that impacted EPS $0.29 a share, that was previously recorded in our fourth quarter.

This increased our income taxes, and it was included in transaction and integration costs, as you mentioned, because we wanted to keep the purchase accounting items to incremental D&A only.

So to put that in perspective, the transaction and integration costs impacting PBT for the quarter were $39 million, $0.33 a share, then with the deferred tax adjustment, an additional $0.29. That's how we got to the $0.62 that we reported in the quarter. That $0.29 is what's driving that year-to-date or that full year guidance number up.

Our core integration costs are about the same. So for the year, just to close the loop on that, our transaction and integration costs impacting PBT were approximately $70 million year-to-date or $0.57 a share, plus the $0.29 per share deferred tax adjustment, you get to $0.86 a share.

So we do not expect that $0.29 to repeat, but it does raise the full-year guidance..

Got it. Thanks for that. And going back to strong sales performance in Performance Coatings, I think about 60, 70 bps of that was currency related. Very strong performance there. Wanted to understand that a little bit better. I know the average pricing gains you mentioned were in that 2.5% range.

Was it a bit stronger as there was the catch-up in Performance Coatings? Or if not, the volume mix, like what was particularly strong? Or what led to the acceleration of what was already a difficult comp for last year?.

Well, we touched on this briefly that we're seeing strong volume demand across virtually every product category and nearly every geography. We mentioned that it's led by our packaging business, which is really performing very well, and our general industrial business right behind that.

And I think it's partly a function of the fact that we're maintaining really strong supply relationships, as I said, with the right customers. And they're growing their business, and we're growing our business with them. So we're really focused, as I mentioned, on bringing value to our customers, and we're experiencing the reward as a result of that.

The teams, as I mentioned earlier, from Valspar were very strong. The teams at Sherwin-Williams are, we believe, very strong. And combined, we're even stronger. We're really excited about the momentum that we have here..

Okay. Thank you..

Thanks, Justin..

Thank you. Our next question is coming from the line of Pat Rizzuto with Bloomberg. Please proceed with your question. .

Good day. It’s Pat Rizzuto with Bloomberg environment. Had a question about what of Valspar's product lines that you've acquired. Is it the Valspar valPure can coatings line? And I'm wondering how it's performing, and I'm also wondering how much of the potential can lining market it has acquired..

Well, we’re not going to get into any of the specific shares of any product line, but I will tell you that the packaging business, as we referenced, is the leading performer in a very strong business. So that business is growing. In total, we grew 11%. Packaging is exceeding that growth.

And it's – the performance that we have right now, we expect it only to continue..

Great. Thank you very much..

Thank you, Pat..

Thank you. The next question is coming from the line of Eric Bosshard with Cleveland Research. Please proceed with your question..

Good morning..

Good afternoon. Two things – the low – you commented that the expenses were ahead of what you thought in the quarter.

Is that timing or a change in the amount that's going to be spent to invest in that program?.

It’s just purely timing. The full-year amount has not changed..

Okay. And then secondly, that upside performance drove performance in the second quarter.

I know you don't guide by segment, but is it unreasonable to assume you can sustain similar growth as we work through the back half of the year and into 2019? How should we frame our expectations?.

Yeah, Eric. I would say we would expect that to continue. And what we even talked about on our Performance Coatings Group is that we – at the end of the first quarter call, we thought we'd see sequential margin improvement as the year went on. Clearly, we're ahead of that with our operating margin flat year-over-year now.

So doing – we're ahead of plan, but we do still expect to see sequential improvement in that group..

Okay, that’s helpful. Thank you..

Thanks, Eric..

Thank you. Our next question is coming from the line of Patrick Lambert with Raymond James. Please proceed with your question..

Hi, congratulations for this quarter. Just one remaining, and I think it's basically also answered.

It's just the $0.40 of Lowe's dilution in 2018 is still valid, if I understand correctly?.

Yeah, the $0.40 is still the same..

And could you comment a bit more on 2019 as you see the accretion developing into 2019?.

We’re really not going to comment on the Lowe's program going forward, both from a top line or a bottom line, just in respect for our customer..

Understood. Thanks..

Thank you..

Thank you. Our next question is coming from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question..

Thanks very much. There were two charges in the quarter, the $0.62 in transition and integration costs and the $0.25 in environmental charges.

What was the pretax amount of those two charges combined?.

The environmental was around $32 million. The $0.52, Jeff, is $39 million PBT impact in the quarter, which is $0.33, and then the reversal of the deferred tax adjustment of $0.29, that gets you to the $0.52 in the quarter..

Okay.

And how would you allocate those costs to cost of goods sold or SG&A?.

We would have in cost of – our gross cost of goods sold would have been $17 million. SG&A would have been $22 million. That makes up the $39 million I mentioned. And then the $0.29 is all in the income taxes..

Okay, great. Thank you so much..

Thanks, Jeff..

Thank you. Our next question is coming from the line of Rosemarie Morbelli with Gabelli & Company. Please proceed with your question..

Thank you very much for moving way beyond the 12 o’clock and congratulations on the great quarter. Just looking, going back to the Performance Coatings for a second. Valspar initially had substantially higher margins than Sherwin-Williams.

So is this more or less the benefit from the improvement in margin? Or did you see some improvement on the Sherwin piece as well?.

Yeah, Rosemarie. It’s hard to break them out, because again, they have gone down the path pretty far of integration. But I would say it's the combined business showing the improvement, which tells you both have to be going forward..

Okay.

And then lastly, on the tariff impact on Valspar, and I am referring to wood coatings, which is applied on, let's say, kitchen cabinets, which then come back into the U.S., what are you seeing in that particular area?.

Well, we're staying close to the situation and our customers. It's going to be interesting to see exactly how this plays out. As you know, we've got customers and assets on both sides of the water. And we're working with our customers closely to be responsive to whatever happens from a demand standpoint on their side.

So we're staying close, and we're going to be adjusting accordingly. I think it's a play that's not been called or completely played out yet, and we'll respond accordingly..

Okay, thanks. And if I may, actually, I do have one more regarding the amount of work that you may have already done on the Valspar stores in Australia..

Well, we are bringing some of our best practice or we're using our stores as a platform to share information. There's a number of attributes that we think are successful, that help us our – help us in our success here in North America that we're transferring down there as well as some products. And we're learning a few things from them as well.

So the teams are collaborating very well, and we hope that that'll allow us to continue to drive that business forward as well..

Okay. Thank you very much and good luck..

Thanks, Rosemarie..

Thank you. It appears we have no additional questions at this time. So I'd like to pass the floor back over to Mr. Wells for any additional concluding comments..

Thank you, again, Jessie. As always, I, along with Jim Jaye, our Vice President of IR, will be available over the next few days to handle any additional questions that arise as you digest this morning's call.

If you'd like to be placed in the queue for a follow-up call, please call Kristy Johnson at 216-566-3001 and she will add you to the callback schedule. I also want to point out that since our original posting online this morning, we've added a slide to include adjusted EBITDA by quarter.

So you might want to visit our website again and pull down that revised slide or that new slide. I'd like to thank you all again for joining us today, and thank you for your continued interest in Sherwin-Williams..

Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation, and you may disconnect your lines at this time..