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Sherwin-Williams Co
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Good morning. Thank you for joining The Sherwin-Williams Company's review of Fourth Quarter and Full Year 2017 Results and Expectations for 2018.
With us on today's call are John Morikis, Chairman, President and CEO; Al Mistysyn, Senior Vice President, Finance and 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 Wednesday, February 14, 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, Jesse. Good morning, everyone.
In the interest of time, we’ve provided some balance sheet items and other selected financial information, including a slide deck with a breakdown of our results by our new reportable segments, on our website, sherwin.com, under Investor Relations, January 25 press release.
Beginning with our fourth quarter. Consolidated sales increased $1.2 billion, or 43%, to $3.98 billion. Excluding Valspar revenues, core consolidated sales increased 6.9% in the quarter. For the full year, consolidated sales increased $3.13 billion, or 26.4%, to $14.98 billion. Excluding Valspar, core consolidated sales for the year increased 5.6%.
Consolidated gross profit dollars in the fourth quarter increased $410.2 million, or 29.5%, to $1.8 billion. Gross profit for the year increased $858.5 million, or 14.5%, to $6.78 billion. Consolidated gross margin in the fourth quarter was 45.2% compared to 49.9% in the same period last year. For the year, consolidated gross margin decreased to 45.3% from 50% last year.
Selling, general and administrative expense increased $284.4 million, or 27.4%, to $1.32 billion in the fourth quarter but decreased as a percent of sales to 33.3% from 37.3% in the same quarter last year. For the year, SG&A expense increased $650.9 million, or 15.7%, to $4.79 billion and decreased as a percent of sales to 31.9% from 34.9% in 2016.
Interest expense for the quarter increased $46.1 million to $89.5 million. For the year, interest expense increased $109.4 million to $263.5 million. The increase was entirely due to acquisition-related interest expense.
Consolidated profit before tax in the fourth quarter decreased $19.1 million, or 6.3%, to $284.9 million. For the full year, consolidated profit before tax decreased $67 million, or 4.2%, to $1.53 billion.
Our effective income tax rate on core operations for the quarter and year, excluding a deferred tax liability adjustment, would have been 27.8% and 26.9%, respectively. We expect our effective tax rate for the full year 2018 to be in the low to mid-20s.
Diluted net income per common share for the fourth quarter increased to $9.39 per share from $2.15 last year. The $9.39 EPS includes a onetime benefit of $7 per share from deferred income tax reductions; $0.77 per share in acquisition-related expenses, including inventory step-up and purchase accounting amortization; and income of $0.21 per share, net of incremental interest expense from Valspar operations.
Diluted net income per common share for the full year increased 55.7% to $18.67 per share from $11.99 per share in 2016. The $18.67 includes the onetime tax benefit, $3 per share in acquisition-related expenses, including inventory step-up and purchase accounting amortization; and income of $0.80 per share, net of incremental interest expense from Valspar operations.
We have summarized the fourth quarter and full year earnings per share comparison in a Regulation G reconciliation table at the end of our fourth quarter 2017 press release. Let me take a few minutes to break down our performance by segment.
Sales for The Americas Group in the fourth quarter increased $178.1 million, or 8.9%, to $2.19 billion. For the year, net sales increased $740.2 million, or 8.8%, to $9.12 billion. Sales in the Latin America region, stated in U.S. dollars, increased slightly in the quarter and 4.5% in the year.
Comparable store sales in the U.S., Canada and the Caribbean, that is sales by stores opened more than 12 calendar months, increased 8.2% in the quarter and 6.3% in the year. Regionally, in the fourth quarter, our Canada division led all divisions, followed by Southwestern division, Southeastern division, Eastern division and Midwestern division. Sales and volumes were positive in every division.
Fourth quarter segment profit increased $71.9 million, or 21.5%, to $406 million. For the full year, profit increased $164.1 million, or 10.2%, to $1.77 billion. Segment operating margin for the fourth quarter increased 190 basis points to 18.5% from 16.6% last year. The Americas Group operating margin for full year 2017 increased 30 basis points to 19.4% from 19.1% last year.
Turning now to the Consumer Brands Group. Fourth quarter external net sales increased $269.4 million, or 89.1%, to $571.6 million. For the year, Consumer Brands Group sales increased $627.2 million, or 41.1%, to $2.15 billion. Excluding sales from Valspar, core sales for the group decreased 6.8% in the quarter and decreased 8.4% in the year.
Segment profit for the Consumer Brands Group in the fourth quarter decreased $27.2 million, or 53.6%, to $23.6 million. For the full year, segment profit decreased $75 million, or 25%, to $226 million. Excluding Valspar, core segment profit for the group decreased 29.4% in the quarter and decreased 13% in the year.
Segment profit as a percent of net sales for the quarter decreased to 4.1% from 16.8% last year. For the year, segment operating margin decreased to 10.5% from 19.7% last year. Excluding Valspar, core operating margin for the group decreased 410 basis points in the quarter and decreased 100 basis points in the year to 12.7% and 18.7%, respectively.
For our Performance Coatings Group, fourth quarter net sales in U.S. dollars increased $749.5 million, or 159.9%, to $1.22 billion. Full year sales increased $1.76 billion, or 90.5%, to $3.71 billion. Excluding sales from Valspar, core sales for the group increased 7.6% in the quarter and increased 3% in the year.
Stated in U.S. dollars, Performance Coatings Group segment profit in the fourth quarter increased $53.3 million, or 80.6%, to $119.4 million from $66.1 million last year. For the year, segment profit increased $41.3 million, or 16.1%, to $298.5 million. Excluding Valspar, core segment profit increased 7% in the quarter and decreased 2.6% in the year.
Currency translation rate changes increased segment profit $6.3 million in the quarter and $8.7 million in the year. As a percent of net sales, segment profit decreased to 9.8% in the fourth quarter compared to 14.1% last year.
Operating margin for the year decreased to 8.1% compared to 13.2% in 2016. Excluding Valspar, core operating margin for the group was flat in the quarter and decreased 70 basis points for the year compared to 2016.
That concludes our review of operating results for the fourth quarter and full year 2017, so let me turn the call over to John Morikis, who will make some general comments and highlight our expectations for 2018. John?
Thank you, Bob. Good morning, everyone. Thanks for joining us.
Fourth quarter was a solid finish to our year. Excluding Valspar results, our core consolidated sales grew nearly 7% in the quarter. Consolidated gross margin expanded 10 basis points. SG&A as a percent of sales decreased 110 basis points, and core consolidated operating income improved 19.7%, all compared to fourth quarter 2016.
As expected, the Valspar business added a little more than $1 billion to net sales in the quarter. And while we still have work to do to restore Valspar's profitability, we are making good progress on integration, value capture and pricing to offset raw material inflation. I'll come back to that in a moment.
With all the acquisition-related noise in the full year consolidated results that Bob just walked through, it's difficult to see the underlying performance of the core business. If you back out the impacts from Valspar, consolidated sales for the year increased 5.6% to $12.5 billion. Consolidated gross margin on the core business was 49.2%, 80 basis points below our all-time high of 50% in 2016.
Operating profit improved 6% to $1.92 billion. Profit before tax grew 6.5% to $1.84 billion. EBITDA increased 5.8% to $2.12 billion. And comparable earnings per share increased 11.1% to $14.27 per share. Sales to our U.S. and Canadian stores rebounded very quickly following hurricanes Harvey and Irma, with every customer segment generating positive volumes in the quarter. Contractor business in total accelerated to a high single-digit growth rate in the fourth quarter, aided by a backlog of projects from early i n the year and positive pricing.
Sales to residential repaint contractors grew at a double-digit pace, marking the 15th quarter of double-digit growth in the past 17 quarters. Sales of protective and marine coatings in the U.S. and Canada also grew double digits in the quarter for the first time in many years.
Paint's operating margin on incremental sales in the quarter exceeded 40%, with earnings leverage coming from both gross margin and SG&A. PBT margin for the group rose by more than 200 basis points compared to fourth quarter last year.
The Americas Group opened 40 net new stores in the quarter, bringing our full year store opening total to 100 net new locations and our total store count at year-end to 4,620 stores in The Americas. We remain confident that our next milestone of 5,000 locations in North America alone is realistic, and we intend to add another 100 to 110 stores in The Americas this year.
Our Consumer Brands Group's financial results for the quarter and year fell well short of our expectations, likely due in part to a segment domestic DIY market demand and inventory adjustments by several retail customers.
But this team made impressive progress during the year on rightsizing and aligning sales and marketing teams, integrating two complex brand portfolios and initiating multiple supply chain optimization projects, all while maintaining strong customer relationships and managing operating expenses. All of these efforts have positioned this team well for the year ahead, and our expectations for this group remain high.
Performance Coatings Group also made good progress throughout the year on a wide range of integration and value-capture projects. Sales volumes for the group accelerated in the fourth quarter across both the legacy Sherwin-Williams and Valspar product lines, and operating margins showed modest sequential improvement.
Our efforts to implement price increases, sufficient to offset persistent raw material inflation, continue. And we expect to see noticeable progress on this front in the first half of 2018.
2017 was a strong year in terms of cash generation. Net operating cash for the year was $1.88 billion, an increase of more than $575 million compared to 2016 and greater than 12% of sales. Free cash flow, which we define as net operating cash, less CapEx and dividends, was $1.34 billion compared to $757.5 million last year.
On December 31, the company had $204.2 million of cash on hand that will be utilized to reduce debt and fund operations. During the year, we paid $319 million in cash dividends and retired over $1 billion in debt. The balance sheet reflects preliminary purchase accounting balances and incremental debt of approximately $8.57 billion used to fund the acquisition.
Our capital expenditures for the year totaled $223 million. Depreciation was $285 million, and amortization of intangibles and inventory step-up was $261.7 million. In 2018, we 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 $280 million to $290 million, and amortization will be about $350 million.
We made no open-market purchases of our common stock for Treasury during the quarter and year. However, we do intend to resume opportunistic purchases of company stock in 2018 at a level sufficient to offset dilution from options exercises.
On December 31, we had remaining authorization to acquire 11.65 million shares. Next month, at our Board of Directors meeting, we will recommend a quarterly dividend of $0.86 per share, up from $0.85 last year.
Before I get to our outlook for 2018, I'd like to comment on our progress on the Valspar integration. When we announced the deal back in March of 2016, we estimated annual run rate synergies by the end of year one to be about $106 million. At the close of the third quarter 2017, we raised the target to $160 million.
Our actual full year synergy run rate at the end of 2017 was approximately $230 million, and we are raising our 2018 year-end run rate target to $320 million, up from our prior target of $280 million. In short, we are moving faster on more projects than originally anticipated.
To date, we've completed or approved 497 integration projects, and we've identified another 147 projects that are currently being verified. New opportunities are being added to the list with each passing week.
On SG&A, we've made great progress in organizational design and optimization, including aligning compensation and benefits programs, IT systems and marketing and promotional programs, to name a few. In cost of goods, we've identified opportunities for raw material cost leveling, purchase optimization and reformulation.
Our leveling initiatives are active at every region of the world, and we're off to a good start on many optimization and reformulation projects, including in-house development and production of an acrylic polymer for use in some high-value product line.
In manufacturing and distribution, our focus has been on optimizing our North American architectural manufacturing footprint. Projects are underway in the Mid-Atlantic, Midwest and West Coast regions. Logistics is also an opportunity, and we're benefiting from reduced freight costs by synchronizing distribution routes between Sherwin and Valspar facilities.
Revenue synergies are, perhaps, the greatest long-term opportunity. One example from Performance Coatings Group is the ability to leverage our legacy North American blending facilities to provide color matching on smallbatch production of some key Valspar industrial products, one example being coating for metal extrusion customers.
The ability to run high volume and smallbatch jobs is helping us to expand our share of wallet with existing accounts and attract new ones. We expect to book most of the remaining costs to achieve these synergies in 2018, and we're increasingly confident in our long-term annual run rate range of $385 million to $450 million.
With good sales and volume momentum coming out of the fourth quarter, we anticipate first quarter consolidated net sales will increase a mid to high single-digit percentage compared to the first quarter of 2017.
In addition, we expect incremental sales from Valspar to be approximately $1 billion in the first quarter. Due to the increased uncertainty in forecasting the exact timing of synergies and integration expenses, we've elected to suspend quarterly earnings per share guidance for the foreseeable future.
For the full year 2018, we also expect core net sales to increase a mid to high single-digit percentage compared to full year 2017. In addition, we expect incremental sales from Valspar in the first five months of 2018 to add approximately $1.6 billion to consolidated revenues. But our earnings outlook is tempered somewhat by persistent industry-wide raw material cost inflation, likely to be up in the 4% to 6% range for the industry in 2018, possibly even higher in the first half.
With these factors in mind, we anticipate diluted net income per common share for 2018 will be in the range of $15.35 to $15.85 per share compared to $18.67 per share earned in 2017. As a result of recently announced tax reform, we expect our 2018 effective tax rate to be in the low to mid 20% range. Full year 2018 earnings per share includes, costs related to the acquisition of Valspar totaling approximately $3.45 per share.
Finally, last Monday after the market closed, we announced a leadership change in The Americas Group as Jay Davisson, after a very successful career with our company, including the past seven years serving as the President of The Americas Group, has made the decision to retire from Sherwin-Williams. I want to publicly thank Jay for his service and contribution and wish Jay and his family the very best.
As you've come to expect from our company, we have a very thoughtful and robust succession planning process, and we're blessed with a strong pipeline of leadership talent. To that end, we're announcing Pete Ippolito as our new President of The Americas Group.
Pete, who is a 30-year veteran of Sherwin-Williams, comes to this role well prepared, having successfully served in leadership roles in our industrial business, our architectural business and our global business. Since 2010, he has held the position of President and General Manager of the Midwestern division in The Americas Group.
Pete brings vast experience and intimate knowledge of our business to this role as well as an outstanding track record of developing talent and delivering outstanding financial results. We're excited that Pete take the range of The Americas Group and expect a seamless transition.
Again, I'd like to thank you for joining us this morning, and now we'll be happy to take your questions.
[Operator Instructions] Our first question is coming from the line of Ghansham Panjabi with Baird. Please proceed with your question.
Hi, guys. Good morning.
Good morning, Ghansham.
Morning. First off, on the mid to high single-digit core sales growth for 2018, can you break that down across your operating segments? Clearly, it's led by Paint Stores Group, but what about volume expectations more broadly for consumer and Performance Coatings as well?
Sure, Ghansham. This is Al Mistysyn. I would start by talking about U.S. and Canada stores continue to be the primary driver of our sales growth. And in the past, as we've talked about guidance, we've always talked about that group being in the high end of our guidance. So you expect them to be in the high end of that mid to high single-digits.
As you know, we announced the 3% to 5% price increase effective October 1. And through the first four months of that, we're seeing effectiveness that's similar to what that we've seen in the price increase in December.
From a volume standpoint, I think, across the company, we're going to see low single-digit volumes across each of the groups and, I would say even in consumer. I think we're optimistic about consumer coming off a pretty soft year. We have better comparables.
We have some good momentum in different pieces of our business, and we do expect to turn around there. And then, I think, price should be approximately 2%. And then the last thing would be, FX really has no impact on sales planned.
Ghansham, while we're talking about guidance, I'd like to talk about our EPS guidance also. So the midpoint of our core EPS guidance is an increase of 20% versus - excluding acquisition-related costs versus pro forma full year 2017 results. In 2018, we're seeing incremental raw material inflation. Our interest expense is increasing on the Valspar acquisition debt and on our core Sherwin debt as we've increased our liquidity sources.
We're more than offsetting these headwinds with incremental synergies of $140 million to $160 million expected to come into our P&L, a reduction in the effective tax rate that we talked about on the prepared comments, but we're taking an opportunity here to take a portion of those savings and reinvest them back in our business for future growth.
We'll take the same robust and prudent approach to investments that we do with - through our normal operations, but we do believe it's an opportunity to help accelerate our growth going into the future. And I believe this puts us on a path to achieving the 2020 financial target that we set at the investor community.
Okay, that's helpful. And just a second question, can you just give us more granularity on raw material pricing? Which raw materials are you seeing the most incremental inflation within? I think, last quarter, you pointed towards low to mid single-digit raw material inflation. Now kind of 4 to 6. Just some more granularity on what's driving that? Thanks so much.
Yes, Ghansham. Last year, the story was a little simpler because most of the inflation was behind TiO2. This year, we expect pressure across multiple raw material categories. Crude oil is up 55% to 60% year-over-year. A January spike in propylene pricing due to supply constraints has been in the $0.05 to $0.08 per pound.
We expect additional risk to propylene in February. This takes a little while to work its way through the acrylic chain, but it's already affecting product categories like solvents and packaging. We do also expect continued TiO2 supply constraint, and it's resulted in our first quarter 2018 price announcement or price nomination by all the global producers. Higher year-over-year - high-density poly propylene pricing is already affecting our packaging costs.
And then in the first half, we commented that inflation could be higher in the first half. That's simply due to last year's raw material inflation trajectory. Comparisons were - pricing was lower in the first half, higher in the second. So comparisons get easier as we go through this year, but as we said, we expect average for the year to be in the 4% to 6% range, and it's across a lot of different categories.
Got it. Thank you.
Thank you. The next question is coming from the line of Arun Viswanathan of RBC Capital Markets. Please proceed with your question.
Hi. Thanks guys. Good morning. It's actually Tom for Arun. Just following up on Ghansham's question on raws. Which segments should we see most impacted by the specific raws? And on a net basis for 2018, will raws be a net headwind with your pricing that you're going to put through? Just trying to understand the EPS guidance. It seems like raws is kind of the biggest new factor, perhaps, that maybe some of us weren't putting in our numbers.
Yes, Tom. On the first part, and I'll pass it off to Al after the raw material question, but on the first part, the TiO2 increases that we saw last year affected mostly the architectural paint businesses, which are mostly in The Americas. This year, with more pressure behind the petrochemical side of the basket, it is going to affect the industrial coatings categories as well. And so I would look for raw material pressure across the entire business this year.
And Tom, I would say, as in past cycles of raw material inflation, our gross margin may contract a little on the short term as the price increase still pursue and the effectiveness improves. But in the long – over the long term, we expect our margins to recover. And the guidance that I talked about, the 45% to the 48% long-term gross margin range, I still feel pretty good about that.
The one thing I will remind you, and we've talked about this on the last couple of calls, is Valspar is really one price increase behind. Although we're – we believe, or we should feel confident about the price that's going through right now, as raw material inflation continues, we're going to be chasing that price on the Valspar side.
Yes. I'd add to that, that the – if you look at the core business, to Al's point about the Valspar business, if you look at our core, SW consolidated gross margins, we're only down 80 basis points for the year, and then we're up 10 basis points in the fourth quarter. We wouldn't have been able to do that if we weren't able to achieve the pricing.
So to Al's point, the Valspar pricing initiatives that we've been talking about basically since we closed, we said that was going to take six to nine months. It's actually tracking exactly as we have expected. We're starting – in the fourth quarter, we started to see the pricing move in, and we expect now, as we've changed the calendar first of the year, that more and more of that is going to roll in. So it's actually going exactly as we projected.
Great. And then my follow-up on Paint Store Group. Really strong performance. Just curious if we should expect any kind of tough comps in 2018 on same-store sales. And additionally, if there would be a cadence issue with the labor issues that typically happen in Q2, Q3. Or is this kind of like some new normal happening in U.S. housing in 2018?
Yes. I would start with, Tom, as you pointed out, there is a tough comp in our first quarter. We're up – same-store sales were up 7.5%. But with the momentum we have coming out of the fourth quarter, and the volumes that we’re seeing and the ability that we’re talking to our customers and have a fairly good outlook, we feel confident that we're going to go over the top of that in our first quarter. And that's why we're talking mid-to high single digits, and we fully expect stores to be in the high-end of that range.
Yes, we've been talking about sometime about the initiatives that we've had as far as growing share of wallet with our existing customers as well as opening new accounts, not only to overcome the comps, but also the point that you made a little bit later in your question about labor, making sure that we are filling that pipeline with enough new business to offset that.
For the most part, I would say, I think we commented on this in the last quarter, in some of the metro markets, it's diminished a bit, the restraint on labor. But for the most part, we continue to see the same labor issues continue throughout the market. In fact, I might say that on the residential side, we're starting to see a bit of a backup in projects as labor for that side of the business has also become a bit tighter.
Understood. Thanks. I'll turn it over.
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. I was wondering if you've been seeing any changes in wall-covering trends, either inside or outside of the home, that could affect architectural coating used for home versus historical levels, either positive or negative trends?
No. Steve, not anything to speak of. The wallpaper industry is one that has always cycled. I don't think that right now, we're experiencing much change at all. In fact, I'd say, through the blessing of many of the TV programs and shelter magazines that are out there, we actually like the frequency in which people are repainting.
So we sell wall-covering, if it moves in that direction, we'd benefit from that. But right now, it seems to be more on the paint side, and we enjoy that.
And with respect to the legacy Valspar brands of architectural paint sold in China, are you seeing any potential upside from kind of benefiting from your own experience on selling paint through stores that you could leverage that experience in China?
Yes, that's a great observation, and we are excited about kind of bringing what the call best practices to all of our businesses around the world. Our leader, Ed Lorber, was just in China last week, a terrific leader. We're working on the transfer of that knowledge from our company to that business. We have a lot of those dealers surprisingly as I've gotten to know them, many of them has actually traveled to the U.S. to visit our stores trying to get an understanding of what we do and how they might transfer. So they're very receptive to that.
As I said, many of them spend their own money trying to get here to see it themselves. So we're excited about bringing some of that best practice. We know that what works in the U.S. doesn't necessarily work everywhere, but we also know that what works in the U.S. might work other places. So we're not limited by if it works here, it has to be there. We're going to do what's right for every market.
Thank you.
Thanks Steve.
Thank you. The next question is coming from the line of Christopher Parkinson with Credit Suisse. Please proceed with your question.
Great. Thank you. Can you just break down any key trends within Performance Coatings, specifically whether or not you saw broad-based volume strength and your expectation for general industrial coil? And then also, I think Allen hit on this a little bit, but just any quick, broad comments on pricing strategy on the legacy Val assets within PC and then longer-term potential as it applies to your multi-year margin targets? Thank you.
Thank you, Chris. I'll take the first piece. Allen then maybe you can talk about the pricing. Regarding your question, Chris, about trends and what we're seeing, we are really excited. I mentioned in my earlier remarks about the opportunity to leverage the resources that we have now as a combined business.
So Valspar's business in coil it was very good, very strong, terrific relationships and wonderful technology. We're really, I think, finding the sweet spot as we're working with our customers in our ability to respond quickly with small batch quick turnaround utilizing our facilities that are spread out throughout the world, primarily in the U.S., but we have them around the world.
That gives us an opportunity to take care of their immediate demands just in time as well as continuing to provide them with the technologies that they've gotten to know over the years. Very well received by the customers, and we're excited about the future, being able to leverage that.
And Chris, on the pricing actions, yes, we will chase price in 2018, but we believe the effectiveness that seeing is going to be very good. And the reason part of why we believe that is although paint is a small portion of the cost of a customer's product, but it's an important part of it. Imagine looking at a Caterpillar tractor. The performance of that product is very important. So we believe we're going to get the price, but we're going to be chasing it throughout 2018.
Great. Thank you. And can you also just comment broadly on your expectation for any incremental industry M&A, your potential involvement in 2019 onwards? And any key strategic initiatives you see yourself undertaking in the intermediate to long term in terms of either enhancing or simply broadening out your end market exposure is? Just any broad color would be appreciated. Thank you.
So I'll take the first part on our ability to participate. One, I do believe, or we do believe that the industry will continue to consolidate. And when you look at our debt-to-EBITDA leverage at the end of 2017, we're around 4.1. Our expectation for that leverage at the end of 2018 will be around 3. So I believe that gives us flexibility, particularly in the second half of 2018, to pursue a strategic acquisition and one that fits our portfolio very well.
And as you would expect, we're not waiting for that point in time, Chris, to begin looking. Our teams are constantly revisiting what those opportunities might be. We look at geographic opportunities, we look at technology opportunities. And so to your question about, are we interested in enhancing or broadening our future opportunities through acquisition, the answer is definitely yes.
Thank you for the color.
Thanks, Chris.
Thank you. Our next question is coming from the line of Don Carson with Susquehanna. Please proceed with your question.
Thank you. Question on going back to Paint Stores Group. Are you anticipating another price increase? Or is that second 3% to 5% that you put through on October 1 sufficient in your mind to deal with raws going up? And then if you grow at 8.2% same-store sales growth, 2% was price, does that put you at still growing at twice the market? Or what do you think the overall market is doing and will do in 2018 on U.S. architectural?
So on the first part of that question, Don, on the price increase that we have put in place as of October 1, we currently believe that it's sufficient to cover the raw material costs that we currently see. We monitor that on a monthly basis, and as we see movement, we evaluate whether another price increase is required, and we'll continue to do that throughout the first quarter and the rest of the year.
Yes. And in terms of growth pace relative to the market, Don, first, the tag effective pricing in the fourth quarter was a little north of the 2% that we said for consolidated. That still leaves us with volume growth in the range of what we believe is probably 1.5 times to 2 times the rate of the market. That's the range that we target. I don't think we have enough data yet to say exactly what the market grew in the fourth quarter, but we like the volume movement to our stores.
And our expectations will continue to be that same rate of growth, 1.5 times to 2 times over the market.
Just a follow-up on Consumer Group. Your segment comparison shows that, that was down 6.8% for the year on a year-over-year basis for the quarter. Were there any product line losses at any of your big-box customers that contributed to that? Or was it simply slowdown in DIY and de-stocking by those customers?
No, Don. There wasn't any loss. And I'll remind you, you know from last year, or this past year, as we've been talking about consumer and the weakness in consumer's really coming for many, many points. There's not a one area that we would to. Clearly, a challenging year. I might add, clearly not happy with that performance.
But we also know that the comparisons in the fourth quarter, we're going - and we knew it was going to be a little more difficult, and we had to load in some of the business that went last year. And you're right. We had a lot of customers that were adjusting inventory appropriately so.
As we look forward, though, and Al let mentioned about the opportunity in gallons, we're really excited about the team that we have here and the discipline that they have. We think the combined assets and brands that we have are very strong, and we're having wonderful conversations right now with our customers who are eager to grow. And so we having, we think, meaningful discussions about how we can help them reach their goals.
So as we enter into 2018, it's with a lot of determination. We think we've got some momentum here that will show up here hopefully as the year proceeds and into 2018.
Thank you.
Thank you.
Thank you. Our next question is coming from the line of Vincent Andrews of Morgan Stanley. Please proceed with your question.
Hi. This is Grace Chen on for Vincent. Following up on consumer. Are there any specific strategic initiatives then? You say you're targeting as we head into the spring painting season maybe increased market spend?
Yes, there are a number of initiatives, none of which we really want to lay out. But when we talk about the fact that we've got a little confidence in fields that we have momentum, we are determined.
And we don't think just doing the same thing over and over is going to change things. So yes, a lot of considerations that we have on the table, but as you would expect, we don't want to flush those out publicly here right now.
Okay, that's fair. And then with the U.S. tax reform, the savings you'll see from that, do you have any specific plans in mind for that? Or do you expect it to generally flow through to EPS?
No, just like I opened with my comments on the first question, we absolutely are going to take the opportunity to reinvest a portion of those savings back into our businesses for future growth. And it's - we're looking at opportunities across all of our segments. And as I talked about, we'll go through the processing – robust process that we do with our other investments, but we view this as a real opportunity to accelerate our future growth.
Thank you. That’s very helpful.
Thank you.
Thank you. The next question is coming from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.
Hi. It's Kevin on for Matt. Before I ask, I just want to kind of clarify something quickly. If I'm looking at the slide decks, are the synergy numbers included in the Valspar portion of the segment breakdowns?
The way our synergies are flowing our – it's really in both our core and our core Sherwin and in our Valspar, but they would be embedded in any actual results that we report.
Okay. I was just wondering how they're being attributing, whether on the legacy Sherwin or Valspar basis. But it sounds like it's kind of both. But...
Yes, Kevin, you can imagine, as we consolidate the operations, as we consolidate departments, it's harder and harder to just separate the two between Valspar and the core Sherwin.
Okay. So if I look at slide decks, EBIT year-over-year for legacy Valspar looks it's down about $20 million, or about 15%, inclusive of synergies that are there and backing out any deal-related amortization. Just given the breakout, looks like most of that’s coming from Performance Coatings, and margins look like they’re down about – to about 13% from 17% last year.
So I guess, the question is, where do you expect those margins will be by year-end next year? And how long do you think it would take to kind of restore those mid-high – high teens EBITDA margins that business used to enjoy?
Yes. We have talked about, we're not going to recover the raw material costs that we saw in 2018 and didn't get price for in a one-year window. So it is going to take us a little bit of time to recover those margins back to the way they were.
That being said, we've talked about an increased run rate synergy number, both for the 230 at the end of 2017, and we increased our target run rate synergy for the end of 2018. We're going to recoup some of those that – recoup some of that margin in the increased synergies that we're going to see through the P&L. But if – absent synergies, we're going to be chasing the margin for a little bit of time here.
Okay. And then, I was wondering if you could provide a little context on the breakdown between pricing volume for same-store sales and PSG because if you had – would've been almost two price initiatives specifically on the quarter. I was thinking volumes maybe something like 2%. But you said Protective & Marine was up double digits, and resi repaint, I think, was up about double digits as well. So I'm just kind of wondering where the offsets were on that. Thank you.
I think your volume is going to be a little bit more than half of that 2, and then the rest will be price.
Great. Thanks a lot.
Thank you. The next question is coming from the line of Nishu Sood of Deutsche Bank. Please proceed with your question.
Thank you. I wanted to ask about the kind of rebound from the storm-related disruptions of 3Q. Obviously, two components to that. One is just the sales that couldn't that happen during the disruption happening, And then the rebuild proportion of that as well. What – now that we have a little bit more visibility on how that's likely to shape out, what specifically – if you could give a little bit more specific, did you see in the fourth quarter? And what are, what are you expecting as we see the painting season beginning here?
So if you look at Southwestern division, they were up double digits in the quarter, and Southeastern division was up high single-digits. Now what I'd also point out to is that those sales growth numbers in both of those divisions were strong prior to the storm.
So it's very difficult for us to say how much of that was attributed to the storm. So we were running at a similar rate that we are running at now interrupted by the storm. So to attribute any one area of that to the storm would be very difficult.
The other piece of this is as it came through, we had, I believe, it was nearly 100 stores in the southeast that at one point closed. More in the Southwest as those storms rolled in. While those stores are closed, it's not that we're not selling exterior paint. I mean, we are - our business is closed.
So it was a significant drop. It seems as though it's rebounded back, and we are back to the levels that we were operating on prior to the storm. And as you mentioned, very strong performance. And this is the 15th consecutive quarter of resi repaint sales. And so we're feeling good about the momentum in all our stores.
And just to reiterate John's point, we have seen particular strength in the southern region of the U.S. throughout the year.
Got it. Okay. Thank you. And in terms of your '18 outlook for mid- to high single-digit sales growth, what kind of growth assumption are you using for housing in '18? Are you assuming some acceleration, continuation of the momentum that we've seen in the second half of '17, and also how that would flow through to the repaint side of things?
Yes, Nishu, the - we're basically tracking new orders and backlogs from all the public builders, and we are interpreting them as more or less high single-digits on average. We think that most of the forecast we're seeing for new sales and starts for '18 would be in the mid- to high single-digit range. That seems about right to us. It feels like the builders, the residential builders might be starting to pick up the slack in inventory in the existing home market by building new homes at a little faster pace. So we are expecting a robust market.
I would also point out that we've been commenting for a couple of years about how home value appreciation is driving remodeling activity. We expect 2018 to be a really strong year in North America remodeling as well.
So our outlook is not based just on new construction. Let me add to that, I know you asked about residential, but on non-residential, we're seeing an improving picture, too. 2018 - or 2017 was a positive year in square footage starts following two years of declines, and we're expecting a moderate - a modest acceleration in 2018 in non-residential starts.
Okay. Great, thank you.
You bet. Thank you.
Thank you. Our next question is coming from the line of P.J. Juvekar with Citigroup. Please proceed with your question.
Hi, guys it's Dan Jester on for P.J. Just on Latin America, we haven't really talked about it much on the call today, but it's been tougher a couple of years now. Just wondering, if you go into 2018, is there any signs of optimism that, that business might turn around?
Yes, Dan, we continue to work down there. Our Southern Cone and Indiana region were the strongest performers for us down there. Some of those businesses are up double digits. The area that we're continuing to experience pressure in is Brazil. It's a big part of our business. And while we saw an increase in sales in Brazil, our volumes were still down slightly. So we're continuing - we're not waiting. I've said this time and time again. We're not waiting for the market to get better. We're working hard down there. I think we're gaining progress that, again, some terrific leaders down there that are working really hard, and we're going to keep pushing the ball here.
Okay. And then I just wanted to clarify something that you said on the new store openings. If I remember correctly, I think that you're planning on opening 90 new stores in The Americas this year, and it turned out to be closer to 100. So did you – I guess, first, is that number correct? And then did you pull forward any store openings? And if I look to the 2018 number that you talked about, that 100 to 110, if I go back just a few years ago, something like 140, so is there something specifically you're doing in terms of mix? Or just because of the focuses of the Valspar right now that not open quite as many stores? Thanks.
Hi, Dan, I'll let John comment on the peak openings versus our run rate now. But as clarification, on the guidance that we gave on store openings, the 90 pertained to our U.S., Canada and Caribbean store base. We actually ended up opening 87 in the U.S., Canada and Caribbean. The 101 is all of tag. It's throughout The Americas. So it included all the openings in Latin America.
And regarding the run rate, I would say that we've kind of settled in at this 100 store opening rate. With that requires about 1,400 management trainees from – we recruit from college as we continue to add more districts, more areas. And it's an area that I've spoken with Pete Ippolito. He is an aggressive sales promoter, and he'll want to grow, and we want to support that.
And so you could bet that when Al was talking earlier about our taking some of these funds that are going to be available for the tax program here going forward, that a big piece of this will go into our stores organization. But Pete's a smart investor and wants to grow our business, and we're going to support him. But I think you should see us continuing around that 100 base.
Okay. Thanks guys.
Thanks, Dan.
Thank you. Our next question is coming from the line of Robert Koort with Goldman Sachs. Please proceed with your question.
Great. Thanks for sneaking me in there. Al, I was wondering, you mentioned a little quicker capture of synergies and the costs to achieve those. Can you tell me how you got to a faster run rate specifically? And then what is the 2018 cost to extract those synergies?
Yes, Rob. Bob. The speed that we get is by vetting out the project and really validating the fact that we're going to see those benefits to the P&L. So it is going through each group, Performance Coatings Group and Consumer Brands Group being the largest that are impacted by the acquisition. It's also through corporate. And one of the ways we see the improvements is through system implementations. And as we've been able to turn some systems on as of January 1, we've vetted those savings and gave us the confidence to put them into our run rate and into what we expect in the P&L for 2018.
That's helpful. And then curious, obviously, you guys have the ultimate mousetrap when it comes to contractor markets in the U.S. and how you serve those. As you started looking at the Valspar paint in Europe, in China, in Australia, have you come to any conclusions or confidence that you can sort of achieve the same sort of superior performance in those brands over time that you exhibit through your stores group in the U.S.?
We are continuing to evaluate what aspects of our business would make sense in every market. I think it's important, as I said, not to just assume because it works here that, that it'll work everywhere, nor assume that it works here so it can't work somewhere else.
We're really trying to be very diligent in our research to understand what elements, what products, what technologies. We want to bring everything we can to the market to really differentiate ourselves in that market. By the way, I'm going to steal that. I like that ultimate mousetrap approach, too. We're going to brand our team with that, Bob. Thank you.
You’re welcome.
Thank you. Our next question is coming from the line of Scott Mushkin with Wolfe Research. Please proceed with your question.
Hi, guys. Thanks for taking my question. Just a couple from, I guess, tag answers this call got a little bit. You guys talked about being back in the market maybe for acquisitions. And I'm just wondering if – as you look over the portfolio, kind of what areas do you see some weakness in? And kind of get our minds around kind of what you think strategically?
Yes. And so you'd really want to look at it business-my-business, and that's the way we talk with our general managers to understand. And I mentioned, we look at opportunities to differentiate ourselves in the market, and we think that part of that is having the product, service and availability in the right geographic areas. And we also look, from a technology standpoint, what opportunities there might be.
I'd really rather not get into deeper than that, other than to say that this is an important part, we believe, in the very near future, we're going to spending a lot of cash off, and we want to put to work with our shareholders. We think this is an important element of our go-forward strategy.
Okay, it's actually a pretty good fair remarks, I appreciate it. And then I guess, and maybe I missed it, you guys talked a lot about the expectations for commodities continue to go up. Can you share anything? I didn't think about maybe you guys putting through further price increases. I just want to get comments on that. Is that something that we should be thinking about?
Scott, we did say that we believe the pricing that we have going into a sufficient for the current raw material inflationary environment, but we're monitoring that on a daily basis. And as you can imagine, it is an influx kind of a situation. So as a we see raw materials increasing more than what we think we've gotten in price, we'll talk to our customers, as our past practice has been, and then talk to The Street about what we're doing.
And Scott, just as a reminder, if you – I don't think we're anywhere near this environment, but if you do rewind the clock here and take a look at the time period between 2010 and 2012, we did go out during that period with 6 price increases. And I think what that demonstrates is the discipline that we have. As Al mentioned earlier, during even that period, there's a little bit of compression in the short period while we're looking through that - of those price increases. Then we go out and get it.
And if that should represent anything, as our commitment to making sure we stay firm here, the idea that we have is always adding value to our customers, helping them reach their goals. And we believe that the value proposition that we bring provides us the opportunity to make sure that we capture the price.
Perfect. And then supply issues on TiO2, is that something that you're worried about or not really?
There's a number of reasons for TiO2 supply being tight. And we've got the major global producers of chloride kind of managing their capacity utilization to keep market conditions favorable. We have some shutdowns in production in China.
So we don't necessarily believe its structural, meaning the industry is just chronically - it's structurally under capacity. But we do expect the market to be tight probably through the better part – certainly, the better part of the first half, if not the year.
All right. Perfect. Thanks for taking my questions.
Thank you, Scott.
Thank you. The next question is coming from the line of Scott Rednor with Zelman & Associates. Please proceed with your question.
Hi, good morning, everyone.
Good morning, Scott.
Question for Al. The $0.60 range in the core guidance, it's a little bit larger than in prior years, prior issuance. I was just curious, what's the biggest variable up or down there? Is it purely commodity? Or is there something else that we should consider?
It's more the commodities. And you're going to have some variability in the timing of our synergies. We put a range out on what we expect incremental synergies to be in our P&L, and that's not an exact science on timing. So those will be the two main factors.
Okay, great. And then the cash flow, if we look at cash flow from operations to sales, it was right around 13%, which I think is one of the highest in company history. And it would seem to suggest that, that's ahead of your 2020 guidance, Al. Is anything unusual there? Or are you tracking ahead of that, that out year measure?
I would say, we had a very strong working capital year. Our core Sherwin working capital came in at 10% versus 10.7% last year. That's a bigger year-over-year change than I would expect going forward. So we got a little bit of wind, tailwind on that. So we're not going to change our 2020 outlook just yet, but certainly pleased with the cash generation. You look at it after CapEx, and we're over 11%. So strong performance, and we're going to keep pushing that as we get into 2018.
Great. And then just one last one, was there any FX, and if there was by segment in the quarter on the sales side?
Yes. The overall FX in the quarter, and it's a little tough to look at because you've got Valspar in these numbers as well, but it was about 1% on the consolidated, and it was a tailwind. Nothing to speak of in TAG. Performance Coatings was a low single-digit impact, and then really nothing to speak of in Consumer.
Okay, great. Thank you very much.
Thanks, Scott.
Thank you. The next question is coming from the line of Chuck Cerankosky with Northcoast Research. Please proceed with your question.
Good afternoon, everyone. Al, could you maybe talk a little bit about the changed economics of paying down debt versus buying back stock with the tax reform and what we should think about after maybe the midpoint of this year?
Yes. Chuck, I think, the – certainly, the paying down the debt still is our first priority in the sense that getting our debt-to-EBITDA leverage down so that we have the flexibility to go after the strategic acquisitions that we talked about earlier, I think that's very important to us.
That being said, in 2018, we're going offset dilution from options with buying back shares of our stock. I think as you get towards the second half, and we see what the progression is on our cash flow on our ability to pay down debt and, quite honestly, how our operations are going, we may put us in a position to get debt down a little bit lower and look to acquisitions. So we'll keep driving that debt-to-EBITDA leverage ratio down so we feel comfortable that we have that flexibility.
The third place is stock repo?
That's right.
Thank you very much.
Thank you.
Thank you. The next question is coming from the line of Truman Patterson with Wells Fargo. Please proceed with your question.
Hi, good morning guys.
Good morning Truman.
Quick question. This all pertains to your legacy Sherwin business, kind of excluding Valspar. I'm really looking at Paint Stores Group and consumer. So Paint Stores Group out margin only fell about two percentage points quarter-over-quarter, which is much better than historical, while your consumer fell about 10 percentage points quarter-over-quarter, which is much worse than kind of the historical relationship. Typically, these move a bit more hand in hand due to consumer capturing your global supply chain initiatives, et cetera. Can you maybe walk us through the dichotomy between the two segments and what's occurring there?
Sure. The first thing I would say is volume. As Paint Stores Group drives incremental volume, they get great leverage in that, and you saw that in our fourth quarter leverage on SG&A. As we get into the slower quarters, our SG&A headcount contracts a little bit.
And so as we see that volume growth, we get great leverage on our SG&A. We did not see that same effect in our Consumer Group. The volumes were a little softer, and you're not seeing the leverage.
Yes, that's almost the opposite side that we saw in the consumer side.
Declining line.
Yes.
Okay. And then multi-part question, but it should be pretty short. For the fourth quarter, could you guys break out the charges and the synergies among your various segments as well as kind of gross margin versus SG&A? And then as we look into 2018, similar question is where is the $320 million in synergies broken out, at least on run rate, and then where are the $3.45 and EPS charges, where does that fall in 2018?
Sure, Truman. There was a number of puts and takes in the quarter around our purchase accounting. So if I just speak to the full year total, there was about $91 million of charges for purchase accounting and Cost of goods sold, about $28 million in SG&A and $183 million in amortization.
And if I break that down by the Consumer Brands and Performance Coatings that we included in our release, of the $107 million for Consumer Brands, $49 million was cost of goods, SG&A was $4 million, amortization was $54 million. And for Performance Coatings Group, of the $183 million we reported out, $39 million was cost of goods, $16 million SG&A and $127.8 million in amortization.
So if you look at 2018, the impacts by segment, Consumer Group will be, on the purchase accounting, $340 million purchase accounting group, Consumer Group will be about $102 million hit, small amount, gross profit, most of it being in amortization. And Performance Coatings Group will be about a $240 million hit. The vast majority again in that is the annualization of the amortization. We're really not going to talk about breaking down synergies by segment. And as you can imagine, it just gets all intermingled, and it's tough to do, and we really just don't want to talk about it by segment.
Okay. And if you guys don't mind me sneaking in one more, following up on the prior question, looking at Valspar's legacy Performance Coatings margin falling about 400 bps year-over-year, could you maybe walk us through – now that we're seven months into the integration, I know, previously, you guys had said that pricing would take about nine months to flow through. Could you maybe give us where we are today and the pricing enrollment to your own environment compared to maybe where your expectations whenever you first closed on the deal in the Valspar Performance Coatings?
Sure. As it relates to the Valspar performance, I'd say, we are – firstly, right where we expected to be. These are large customers, many of whom had agreements with the Valspar. And the last thing we wanted to do was go in day one and break previous agreement or almost the implied agreements that they've had in the past.
Our goal is to get the price and retain the customer. And so we're working with our customers and, I think, preceding exactly as we expected. We had some of that rolling in the fourth quarter, and we talked about right from the start that it's going to be six to nine months. So as I said earlier, now as we go into the first quarter here, we expect even more of that to roll in.
As Al mentioned, we're going to be chasing it here a little bit, but we're on it. Our teams are working hard and we are having terrific discussions. And I'd say, for the largest part it's about how the pricing is coming in, not if. And we're working hard to make sure that we're continuing to add value while we're having the discussions. But we're feeling good about our ability to get it.
Okay. Thank you, guys.
Thank you, Truman.
Thank you. The next question is coming from the line of Dmitry Silversteyn with Longbow Research. Please proceed with your question.
Thanks for sticking around to take my calls – my questions, I should say. Just a real quick question. You mentioned in your press release, actually, that you're getting pricing up in the Consumer segment of your business. Can you provide a little bit more detail when the price increase went in and how you look at the DIY market and your pricing ability there in 2018?
Yes, Dmitry. I'd say, it's been rolling in – I really don't want to get into any specifics on that. I would say, as we stated, every one of our businesses is out there. I understand the question, but out of respect for our customers on this side of the business, I would just tell you that it's been rolling in, continues to roll in and will continue to roll in.
Okay. Fair enough. Just a quick question on margins, I mean, I understand all the raw material and volume interactions, but if you just look at kind of how your margins of your businesses have done year-over-year, it's almost counterintuitive to what would with think you're maintaining margins your Paint Stores Group, in your Performance Coatings Group, which margins there will be most impacted by raw materials and slow price increases.
But your Consumer Brands, which historically has been a little bit better than when it came to margins, and as a previous caller mentioned, benefits from the volume of the whole North American piece, saw the biggest year-over-year drop in margins and actually a pretty huge sequential drop in margins as well.
So can you kind of talk about what's allowing you to maintain margins in the face of pretty stiff raw material inflation in your Paint Stores and in your Performance Coatings Groups and why your margins in the DIY segment have collapsed as much as they did?
Yes. I'd say, it's mostly just a timing issue, Dmitry. The issues that when you put a paint program in with many of our customers, we're kind of buying into that program, and we're working with our customers through the paint season. And we start having discussions with them to let them know of what's happening so that we can adjust.
And even on the painting contractor side, we work with our painters, but their projects are typically limited in scope. And so if we're going to work with them as prices increase through a project, that project completes. And then as we move to the next project, our prices are going to reflect the new raw materials. So it's really a timing issue.
On the performance coating side, same thing. We work with many agreements here at - on the Sherwin side. We were ahead of the ball a little bit, so we got in a little bit quicker. On the Valspar side, historically, they've been able to do it. They're a little behind, and we're executing those right now. So I'd answer it really that it comes down to just timing.
Okay. Fair enough. Thanks a lot. Best of luck for the quarter.
Thank you. The next question is coming from the line of Mike Sison with KeyBanc. Please proceed with your question.
Hi, guys. Just a quick one on Valspar. I know you're a little bit behind on raw materials, but what about organic growth? Has the team been able to keep up pace? I mean, industrial markets are kind of humming right now.
Yes, we are.
We are seeing new products and their ability to match growth there?
Sorry if we're interrupting you there, Mike. Yes, we are. We are getting some nice growth on both the core or legacy Sherwin and the Valspar side. And that's - what's really nice is it's across all of our industrial businesses. So there's a nice momentum as we go into 2018. We're feeling really good about.
When you think about what we're going through with the integration, the ability to retain the customers, growing our customer base, retaining our employees on both sides, I mean, we're feeling good about the momentum that we have here.
Okay. And quick follow-up. I love it seems that you've kept the shelf space on both ends there. And the next line you'll be coming up in six months. But what's sort of a strategy or what do you want to show those on the six months to nine months to maintain that share longer-term?
I'm sorry you're asking us what we're going to show lows?
Yes, what sort of that strategy and keeping that shelf space?
Well, Yes, I'll answer it 50,000 feet here. It's to work with our customer to understand what it is that they want and make sure that we're providing that to help them reach our goals. I know you'll understand. We don't want to lay down our strategy here for any customer. But it all comes back to having a very good understanding and responding very well to our customers' needs and helping them reach their goals.
Got it. Thank you.
Thanks, Mike.
Thank you. The next question is coming from the line of Silke Kueck with JP Morgan. Please proceed with your question.
Hi. Good morning. How are you?
Good morning, Silke.
Just some small stuff. Your depreciation for next year is running something like $70 million a quarter, I think. And - but in the fourth quarter of this year, I think your depreciation was like $123 million. Was there like an asset write-down or something that was in that number?
Yes, Silke. We had a number of moving parts in our fourth quarter. We did make a policy change, a threshold change on our capitalization. We took a hit for that in the quarter that will not repeat. And there was also some purchase accounting on the inventory depreciation step-up that we took in the quarter.
So we believe that we've gotten – well, we believe we've gotten the bigger onetime adjustments behind us as we go into next year, into 2018. But we're still – the valuation is still open. We're still reviewing it, and we have till end of May to get that finalized. But I do believe we got most of the one-time adjustments behind us.
Okay. And when you look at your outlook for the consumer business, like in the first quarter and for the year, do you think the consumer business is going to grow at the low end of your sales growth guidance or at the high end or below or above those ranges? Do you have a view?
Well, I would tell you that our expectations are always it's going to be at the high end. Again, you come out of the fourth quarter, it's a smaller quarter. First quarter, virtually the same dynamics. So...
But the bar is pretty – the bar is pretty low, right?
It is, it is. You’re exactly – I'm going to bring it to my next management meeting. So we do have high expectations of how this business performs in the first quarter. How about if I leave it at that?
And secondly, I think you said your incremental synergies on an absolute basis that you expect year-over-year are like $140 million to $160 million. And that also looks conservative because if you ended the year at a run rate of $230 million, that means you're already getting, I don't know, $58 million a quarter. And like somewhere by the end of the fourth quarter, it's going to be like $80 million a quarter if you get to $320 million.
So do you think that the incremental savings in 2018 should be bigger than $140 million or $160 million? It should be more like, I don't know, $180 million or $190 million. Why is the number so conservative? Or do you expect like very low savings in the very beginning of the year and then a lot at the back half or...?
No, Silke. I think what you're seeing is in the run rate synergy, there are projects that were tracking – and I'll use the example, a manufacturing rationalization. So in September of 2017, we announced the rationalization of four manufacturing facilities in the U.S. We won't see the benefit in the P&L of those rationalizations until very late 2018 and more likely in 2019. But that would be in my run rate synergy number.
So I want to – we got to be careful about including the run rate synergy in our P&L. So that's why, in the call, we just tried to break out the – what we think is going to hit our P&L in 2018 versus what we think – as we continue to enter projects throughout 2018, that will go into that $320 million run rate at the end of 2018. Many of those projects won't be realized until the following year. So that's why it's – where the number is.
Okay. Thanks very much.
Thank you, Silke.
Thank you. The next question is coming from the line of Patrick Lambert with Raymond James. Please proceed with your question.
Hi. Good afternoon. Thanks for taking my question. [Indiscernible] Two sets of questions. The first one, coming back to the synergies. Did you actually quantify the run rate in 2017? I think I had 106. But I'm not sure if you put that number out. And if you could also, and I know it's very difficult, the actual run rate exiting '17 in terms of savings, basically, Q4 savings run rate. Not the synergy but the savings actually achieved, that would be very useful to receive the progression? So that's one.
And in terms of cost of synergies, I think you mentioned at the beginning it was about $200 million for overall. But I think if I look at full year '17, you only spent some $18 million. Is that the correct way of seeing it and we should put 220 for next year? So that's for synergy. The second set is on the tax, the cash tax rate. Maybe you want to answer the first part.
On the synergies, the $106 million was a run rate synergy that we talked about that the beginning of the closing of the acquisition. We increased that to $160 million at the end of the third quarter, on our third quarter call. And now we're seeing that we actually have a run rate synergy number of $230 million coming out of 2017.
As far as the run rate and the P&L, what we've realized in the seven months in the P&L is about $60 million. We've talked about $50 million. The actual number is about $60 million.
It's hard to say - to give you, hi, we think we've got $8 million or $10 million a month. That'll change as new projects come online, as systems get implemented and the timing of those get to be hard to predict. That's why I probably - I want to be caution about getting you are run rate coming out of the year knowing that there is variability in the timing going forward. But you would expect, as the year goes on, our run rate in the month would increase as the year goes on.
The other comment you talked about cost to achieve. The $200 million in cost of achieve was really what we're trying to get accomplished through the end of 2018. So from June 1 through the end of 2018, we're trying to get us much as much of the integration and the cost of achieve behind us. In 2017, the actual impact of cost to achieve were about $127 million. And we have in our forecast or our guidance for 2018 another $100 million. So that's where you get $227 million.
Okay. So let me switch to revenue tax rates and the impact of the U.S. reform. It's basically - is it fair to say that it's about four - between four and five percentage points of tax reduction? And if you could comment more on the cash taxes, how you see that? I calculate about $18 million extra free cash from that reform. Is that your assumptions, too?
We're still analyzing the impacts as we go through the interpretations on the effective tax rate. That's why we talked about the '18 guidance, we have low to mid-20s on our effective tax rate. And along with that, there is a benefit that we'll get in our cash taxes, and we're just - we're still, like I said, walking through that. But we would expect to see a benefit our cash related to the lower rates.
Is that - is 80 a good start to them?
80 would be a good start.
Okay. Thank you very much.
Thanks, Patrick.
Thank you. Our next question is coming from the line of John Roberts with UBS. Please proceed with your question.
Thank you. Back on consumer again, we've had this good, optimistic kind of sell-in in the start of the year for the past couple of years and then the inventory reductions by the customers at the back end of the years. Are you expecting that again simply because it's low risk for the sell-in to go well? And again, we will have a few slide at the end of the year whether or not the market was real sluggish again, and we'll pull back on the inventories at the back end?
Well, I would tell you that we are going in with high expectations and, as I mentioned, determination. But your point is a good one, John. We wanted to have better results here as we entered into 2017. I would say the differences that we continue to refine what it is that we do that can help our customers separate themselves.
As I mentioned earlier, it's not just doing the same things, hoping for different results. And that's why I made that point. We are working with our customers with a different approach and different ways that we can help them to grow their business. So I'd be disappointed if we find ourselves in the same situation at the end of the year.
And then back on raw materials. One of your competitors specifically cited the environmentally driven production curtailment in China. Epoxies were singled out. I don't know if you're seeing particular pressure in our packaging coating business because of epoxy. And again, you have a Chinese architectural business. Now I don't know if their raw materials are being affected differently than the rest of the world.
So John, Chinese TIO2 has been up pretty sharply in 2017, and that was as a result of supply curtailments. I don't know so much about epoxies.
There was a spike and then a drop in the pricing. But I'd say that it seems right now, I believe, to be back in line.
Okay. Thank you.
Thanks, John.
It appears we have no further questions at this time. So I'd like to pass the floor back over to Mr. Wells for any additional concluding comments.
Thanks again, Jessie. Let me wrap up today by asking you to save the date of Tuesday, May 22, on your calendars. That's the day we'll host our Annual Financial Community Presentation at the Langham Hotel in Boston. The program will consist of a brief business review by each of our segment leadership teams, followed by a detailed update on our Valspar integration progress.
We'll host our customary Q&A session followed by a reception and lunch. Again, that date is Tuesday, May 22. We'll be sending out invitations and related information and a link to our registration site in late March, so please watch your e-mail.
As always, I'll be available over the next few days to handle any additional questions that arise as you digest this morning's call. If you like to be placed in the queue or for a follow-up call, you can call Kristy Johnson at 216-566-3001 and she will add you to the callback schedule.
I'd like to thank you again for joining us today, and thanks 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.