Good morning. Thank you for joining The Sherwin-Williams Company's review of 4th quarter and full year 2017 results and expectations for 2018. With us on today's call are John G. Morikis, Chairman, President, and CEO; Allen J. Mistysyn, Senior Vice President, Finance, and CFO; Jane M. Cronin, Senior Vice President, Corporate Controller; and Robert J. 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 P.M. 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, 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 qu estions. 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 25th 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 fourth 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-twenties. 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 one-time 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 one-time tax benefit, $3.00 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 open 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. 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 % of sales decreased 110 basis points. 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. 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. Comparable earnings per share increased 11.1% to $14.27 per share.
Sales through our U.S. and Canadian stores rebounded very quickly following Hurricanes Harvey and Irma, with every customer segment generating positive volumes in a quarter. Contractor business in total accelerated to a high single-digit growth rate in the fourth quarter, aided by a backlog of projects from earlier in 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 & Marine Coatings in the U.S. and Canada also grew double digits in the quarter for the first time in many years. TAG'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 a 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 100-110 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 stagnant domestic DIY market demand and inventory adjustments by several retail customers. This team made impressive progress during the year on right-sizing 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 31st, 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-$290 million, and amortization will be at about $350 million. We made no open market purchases of our common stock for treasury during the quarter and year. We do intend to resume opportunistic purchases of company stock in 2018 at a level sufficient to offset dilution from options exercises. On December 31st, 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 2016, we estimated annual run rate synergies by the end of year one to be about $106 million. At the close of 3rd 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. 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 in every region of the world.
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-volume product lines. 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 and small batch production of some key Valspar industrial products, one example being coating for metal extrusion customers. The ability to run high volume and small batch 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-$415 million.
With good sales and volume momentum coming out of the 4th quarter, we anticipate 1st quarter consolidated net sales will increase a mid to high single-digit % compared to the 1st quarter of 2017. In addition, we expect incremental sales from Valspar to be approximately $1 billion in the 1st 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 % 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. Our earnings outlook is tempered somewhat by persistent industry-wide raw material cost inflation, likely to be up in the 4%-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-$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. 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 Peter J. 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 to have Pete take the reins of The Americas Group and expect a seamless transition. Again, I'd like to thank you for joining us this morning. Now we'll be happy to take your questions.
Thank you. At this time, we will be conducting the question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is coming from the line of Ghansham Panjabi with Baird. Please proceed with your question.
Hey, guys. Good morning.
Morning, Ghansham Panjabi.
You know, morning, Bob. First off, on the mid to high single-digit core sales growth for 2018, can you break that down across your operating segments? You know, clearly it's led by Paint Stores Group, what about volume expectations more broadly for Consumer and Performance Coatings as well?
Sure, Ghansham Panjabi. This is Allen J. Mistysyn. I would start by talking about U.S. and Canada stores will continue to be the primary driver of our sales growth. In the past, as we've talked about guidance, we've always talked about that group being in the high end of our guidance. You expect them to be in the high end of that mid-to-high single digits. As you know, we announced a 3%-5% price increase effective October first, and through the first four months of that, we're seeing the effectiveness that's similar to what we've seen in the price increase in December. From a volume standpoint, I think across the company, we're gonna see low single-digit volumes across each of the groups.
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 a turnaround there. I think price should be approximately 2%. The last thing would be FX really has no impact on sales planned. Ghansham Panjabi, while we're talking about guidance, I'd like to talk about our EPS guidance also. The midpoint of our core EPS guidance is an increase of 20%, excluding acquisition-related costs versus a 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-$160 million expected to come into our P&L. A reduction in the effective tax rate that we talked about on the, on the prepared comments. We're taking an opportunity here to take a portion of those savings and reinvest them back into 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.
I believe this puts us on the path to achieving the 2020 financial targets that we set at the investor community.
Okay, that's helpful. Just a second question. You know, can you just give us some more granularity on raw material pricing? Which raw material 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%-6%. Just some more granularity on what's driving that. Thanks so much.
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. You know, crude oil is up 55%-60% year-over-year. A January spike in propylene pricing due to supply constraints has been in the $0.05-$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 constraints, and it's resulted in a 1st quarter 2018 price announcement or price nomination by all the global producers. Higher year-over-year high-density poly, polypropylene pricing is already affecting our packaging costs.
You know, 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. Comparisons get easier as we go through this year. You know, as we said, we expect average for the year to be in the 4%-6% range, and it's across a lot of different categories.
Got it. Thank you.
Yeah.
Thank you. The next question is coming from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.
Hey, thanks, guys. Good morning. It's actually Tom for Arun. Just following up on Ghansham Panjabi's question on raws. You know, which segments should we see most impacted by these specific raws? On a net basis for 2018, will raws be a net headwind, you know, with your pricing that you're gonna 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.
Yeah, Tom. On the first part, and I'll pass it off to Al after the raw material question. 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. I would look for raw material pressure across the entire business this year.
Tom, I would say as in past cycles of raw material inflation, you know, our gross margin may contract a little in the short- term as the price increase filters through and the effectiveness improves. But over the long- term, we expect our margins to recover. The guidance that I talked about, the 45% to 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 we should feel confident about the price that's going through right now, as raw material inflation continues, we're gonna be chasing that price on the Valspar side.
Yeah. I'd add to that, 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 they were up 10 basis points in the fourth quarter. We wouldn't been able to do that if we weren't able to achieve the pricing. To Al's point, the Valspar pricing initiatives that we've been talking about basically since we closed. We said it was going to take six to nine months. It's actually tracking exactly as we have expect. We're starting in the fourth quarter. We started to see the pricing move in. We expect now as we've changed the calendar first of the year, that more and more of that's going to roll in.
It's actually going exactly as we projected.
Oh, great. My follow-up on Paint Store Group. You know, really strong performance. Just curious if, you know, 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, you know, Q2, Q3, or is this kind of like just a new normal happening in U.S. housing in 2018?
I would start with, Tom, as you pointed out, there is a tough comp in our first quarter.
Same store sales were up 7.5%. You know, with the momentum we have coming out of the fourth quarter and the volumes that we're seeing and, you know, the ability that we're talking to our customers and have a fairly good outlook, we feel confident that we're gonna go over the top of that in our first quarter. 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.
Yeah. We've been talking for some time as well 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, and 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. For the most part, we've continued 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.
Anytime.
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 use per home versus historical levels, either positive or negative trends.
No, Steve, not anything to speak of. You know, 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, you know, 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. We sell wall covering. If it moves in that direction, you know, we'd benefit from that. Right now it seems to be more on the paint side, and we enjoy that.
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. We are excited about kind of bringing what we call best practices to all of our businesses around the world. Our leader, Aaron M. Erter, was just in China last week. 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 had actually traveled to the U.S. to visit our stores, trying to get an understanding of what we do and how they might transfer it. They're very receptive to that. As I said, many of them spent their own money trying to get here to see it themselves. We're excited about bringing some of that best practice.
We know that what works in the U.S. doesn't necessarily work everywhere. We also know that what works in the U.S. might work other places. We're not limited by if it works here, it has to be there. We're gonna 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? Then also, I think Al 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, Al, and 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. Valspar's business in coil 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 here 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, we're excited about the future, you know, being able to leverage that.
Chris, on the pricing actions, we will chase price in 2018. We believe the effectiveness that we're seeing is gonna be very good. The reason part of why we believe that is although paint's a small portion of the cost of a customer's product, but it's an important part of it. You know, you imagine looking at a Caterpillar tractor, you know, the performance of that product is very important. We believe we're gonna get the price, but we're gonna be chasing it throughout 2018.
Great. Thank you. Can you also just comment broadly on your expectation for any incremental industry M and 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? Just any broad color would be appreciated. Thank you.
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. When you look at our Debt-to-EBITDA leverage at the end of 2017, we're around 4.1. Our expectations for Debt-to-EBITDA leverage at the end of 2018 will be around three. 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.
As you would expect, we're not waiting for that point in time for us to begin looking. Our teams are constantly revisiting what those opportunities might be. We look at geographic opportunities, we look at technology opportunities. 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 does that second 3%-5% that you put through on October 1st sufficient in your mind to deal with raw materials going up? Then, you know, if you grew at 8.2% same store sales growth, you know, 2% was price, does that put you at still growing at twice the market? What do you think the overall market is doing and will do in 2018 on U.S. Architectural?
On the first part of that question, Don, on the price increase that we have put in place as of October first, 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.
Yeah. 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 to two 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. We like the volume movement through our stores.
Our expectations will continue to be that same rate of growth, one and a half to two times over market.
Just to follow up on Consumer Group, you know, 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? Was it simply a slowdown in DIY and destocking by those customers?
No, Don, there wasn't any loss. You know, I remind you, as you know from last year, or this past year, as we've been talking about, consumer and the weakness in consumers really coming from many points. There's not one area that we would point to. Clearly a challenging year. I might add, you know, clearly not happy with that performance. We also know that we knew it was going to be a little more difficult, and we had to load in some business that went last year. You're right, we had a lot of customers that were adjusting inventory appropriately so.
As we look forward, though, Al 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, we're having wonderful conversations right now with our customers who are eager to grow. We're having, we think, meaningful discussions about how we can help them reach their goals. 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 into 2018.
Thank you.
Thank you.
Thank you. Our next question is coming from the line of Vincent Andrews with 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'd say you're targeting as we head into the spring painting season, maybe increased marketing spend?
Yes, there are a number of initiatives, none of which we really want to lay out. You know, when we talk about the fact that we've got a little confidence and feel as though we have momentum, you know, we are determined. We don't think just doing the same thing over and over is going to change things. Yes, there are a lot of considerations that we have on the table, but as you would expect, we don't wanna flush those out publicly here right now.
Okay. That's fair. 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. Like I opened with my comments on the first question, we absolutely are gonna take the opportunity to reinvest a portion of those savings back into our businesses for future growth. We're looking at opportunities across all of our segments. As I talked about, we'll go through the 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 is very helpful.
Thank you.
Thanks, Grace.
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 wanted 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 breakouts?
The way our synergies are flowing are, 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 were being attributed, whether on the legacy Sherwin or Valspar basis. It sounds like it's kind of both.
Yeah. Kevin, you can imagine it. 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. If I look at, you know, if I look at the slide decks, EBIT year-over-year for legacy Valspar looks like it's down about $20 million or about 15%, you know, inclusive of synergies if they're there and backing out any deal-related amortization. Just Given the breakouts, it looks like most of that's coming from Performance Coatings and margins look like they're down to about 13% from 17% last year. I guess the question is, you know, where do you expect those margins will be by year-end next year? How long do you think it will take to kind of restore those, you know, mid-high teen or say call it high teens EBITDA margins that, you know, that business used to enjoy?
Yeah, it, you know, we have talked about we're not going to recover the raw material costs that we saw in 2018 and didn't get priced for in a one-year window. It is going to take us a little bit of time to recover those margins back to the way they were. That being said, you know, 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, you know, recoup some of those, we'll recoup some of that margin in the increased synergies that we're going to see through the P&L.
If it, absent synergies, we're gonna be chasing the margin for a little bit of time here.
Okay. I was wondering if you could provide a little context on the breakdown between price and volume for same-store sales in PSG, 'cause if you had, would've been almost two price initiatives specifically on the quarter, I was thinking volumes may be something like 2%, but you said Protective & Marine was up double digits and resi repaint, I think, was up about double digits as well. I'm just kinda wondering where the offsets were on that. Thank you.
Yeah. I think your volume is gonna be a little bit more than half of that 8.2%, and then the rest will be price.
Great. Thanks, Matt.
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 about the kind of rebound from the storm-related disruptions of 3Q. You know, obviously two components to that. One is just the, you know, sales that couldn't happen during the disruption happening, and then the rebuild proportion of that as well. Now that we have a little bit more visibility on how that's likely to shape out, what specifically, if you could get a little more specific, did you see in the fourth quarter? What are you expecting as we see the painting season beginning here?
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, too, is that those sales growth numbers in both of those divisions were strong prior to the storm. You know, it's very difficult for us to say how much of that was attributed to the storm. We were running at a similar rate that we are running at now, interrupted by the storm. You know, to attribute any one area of that to the storm would be very difficult. The other piece of this is that, you know, as it came through, we had, you know, I believe it was nearly 100 stores in the Southeast at one point closed.
Yeah.
More in the Southwest as those storms rolled in. You know, while those stores are closed, it's not that we're not selling exterior paint. I mean, our business is closed. It was a significant drop. It seems as though it's rebounded back, and we're back to the levels that we were operating on prior to the storm. As you mentioned, very strong performance. I mean, this is the fifteenth consecutive quarter of res repaint sales. You know, we're feeling good about the momentum in all our stores.
Just to reiterate John's point, we have seen a particular strength in the southern region of the U.S. throughout the year.
Got it. Okay. Thank you. In terms of your 2018 outlook for mid-to-high single-digit sales growth, what kind of growth assumption are you using for housing in 2018? Are you assuming some acceleration, you know, continuation of the momentum that we've seen in the second half of 2017, and also, you know, how that would flow through to the, you know, the repaint side of things?
Nishu, we're basically tracking, you know, new orders and backlogs from all the public builders, and we're, you know, 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 2018 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. We are expecting a robust market. I would also point out that, you know, we've been commenting for two years about how home value appreciation is driving remodeling activity.
We expect 2018 to be a really strong year in North American remodeling as well. 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, we're expecting 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.
Hey guys, it's Dan Jester on for PJ. You know, just on Latin America, we haven't really talked about it much on the call today, but, you know, it's been tough for a couple years now. Just wondering if you go into 2018, is there any signs of optimism that business may turn around?
Yeah, Dan, we continue to work hard down there. Our Southern Cone and Andean 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. 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. Got, again, some terrific leaders down there that are working really hard, and we're gonna keep pushing the ball here.
Okay. I just wanted to clarify something that you said on the new store openings. If I remember correctly, I think that you were planning on opening 90 new stores in the Americas this year, and it turned out to be closer to 100. I guess first, is that number correct? You know, did you pull forward any store openings? If I look to the 2018 number that you talked about, that 100 to 110. If I go back just a few years ago, it was something like 140. Is there something specifically doing in terms of mix, or is it because all the focus is with Valspar right now that, you know, it's not opening quite as many stores? Thanks.
Dan, I'll let John comment on the, on the, you know, the peak openings versus our run rate now. As clarification on the, 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 includes openings in Latin America.
Regarding the run rate, I would say that we've kind of settled in at this 100 store opening rate. With that, it requires about 1,400 management trainees. We recruit from college as we continue to add more districts, more areas. This is an area that I've spoken with Peter J. Ippolito. He is an aggressive sales promoter, and he'll want to grow. We wanna support that. So you could bet that when Allen J. Mistysyn was talking earlier about our taking some of these funds that are gonna be available through the tax program here going forward, a big piece of this will go into our stores organization.
Pete's a smart investor and wants to grow our business, and we're going to support him. I think you should see it.
Great. Thanks, guys.
continue around that 100 pace.
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?
Yeah. Bob, the speed that we get is by vetting out the projects and really validating the fact that we're gonna see those benefits through the P&L. It is going through each group, Performance Coatings Group and Consumer Brands Group being the largest that are impacted by the acquisition, and also through corporate. You know, one of the ways we see the improvements is through system implementations. As we've been able to turn some systems on as of January first, we 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. I'm 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 Paint 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 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 gonna steal that. I like that ultimate mousetrap approach to. We're gonna 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.
Hey, guys. Thanks for taking my questions. Just a couple, I guess, TAG ends here since the call's gone a little bit. You guys talked about being back in the market maybe for acquisitions, I was just wondering as we look over your portfolio, kind of what areas do you see some weakness in and kind of get our minds around kind of what you're thinking strategically?
Yeah. You really wanna look at it business by business, and that's the way we talk with our general managers to understand. I mentioned, you know, 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. We also look from a technology standpoint, what opportunities there might be. I'd really rather not get any deeper than that other than to say that it's an important part. We believe, you know, in the very near future, we're gonna be spending a lot of cash off that we wanna put to work for our shareholders. We think this is an important element of our go-forward strategy.
Okay. That's actually a pretty good framework, so I appreciate it. I guess on, maybe I missed it, you guys talked a lot about the expectations for commodities to continue to go up. Didn't hear anything. I didn't think about maybe you guys putting through further price increases, I just wanted to get comments on that. Is that something that we should be thinking about?
Scott, I, you know, we did say that, you know, we believe the pricing that we have going in is sufficient for the current raw material inflationary environment. We're monitoring that on a daily basis. As you can imagine, it is an influx kind of situation. As 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, talk to the street about what we're doing.
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. 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 working through those price increases, then we go out and get it. If, you know, if that should represent anything, is 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. Then supply issues on TiO2, is that something that you're worried about or not really?
You know, the, there's a number of reasons for TiO2 supply being tight. 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. We don't necessarily believe it's structural, meaning the industry is just chronically, you know, is structurally under capacity. 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.
Hey, 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 or 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?
You know, it's more the commodities and, you know, you're gonna have some variability in the timing of our synergies. You know, we put a range out of what we expect incremental synergies to be in our P&L, and, you know, that's not an exact science on timing. Those would be the two main factors.
Okay. Great. The cash flow, if we look at cash flow from operations to sales, was right around 13%, which I think is one of the highest in company history. It would seem to suggest that that's ahead of your 2020 guidance, Al. Anything unusual there, or are you tracking ahead of that out year measure?
You know, 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. We got a little bit of wind tailwind on that. We're not gonna change our 2020 outlook just yet, but certainly pleased with the cash generation. You look at it after CapEx, we're over 11%. Strong performance, we're gonna keep pushing that as we get into 2018.
Great. Then just one last one. Was there any FX, and if there was, by segment in the quarter on the sales line?
Yeah. The overall FX in the quarter, it's a little tough to look at because you 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, 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 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?
Yeah. Chuck Cerankosky, I think certainly the paying down the debt still is our first priority in the sense that getting our Debt-to-EBITDA leverage down 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, you know, we're going to offset dilution from options with buying back shares of our stock. You know, 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, you know, we may put us in a position to get debt down a little bit lower and look to acquisition.
you know, 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.
Thanks for talking to Chuck Cerankosky.
Thank you. The next question is coming from the line of Truman Patterson with Wells Fargo. Please proceed with your question.
Hey, good morning, guys.
Morning, Truman.
Hi, Truman.
Hey, quick question. This all pertains to your legacy Sherwin business, kinda excluding Valspar. I'm really looking at Paint Stores Group and Consumer. Paint Stores Group, the op margin only fell about 2 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, you know, kinda the historical relationship. Typically, these move a bit more hand in hand, you know, due to Consumer capturing your, you know, global supply chain initiatives, et cetera. Could you maybe walk us through the dichotomy between the two segments and what's occurring there?
Sure. You know, the first thing I would say is volume. You know, as Paint Stores Group drives incremental volume, they get great leverage in that. 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. 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. You know, the volumes were a little softer, you're not seeing the leverage.
Yeah. In fact, it was almost the opposite side that we saw in the consumer side.
Declining volume.
Yeah.
Okay. Okay. 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 kinda gross margin versus SG&A? As we look into 2018, similar question, just where are the $320 million in synergies broken out, at least on, you know, a run rate? Where are the $3.45 in EPS charges, where does that fall in 2018?
Sure, Truman. I think there was a number of puts and takes in the quarter around our purchase accounting. If I just speak to the full -year totals, 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. 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. 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.
If you look at 2018, you know, the impacts by segment, Consumer Brands Group will be on the purchase accounting, $340 million purchase accounting. Consumer Brands Group will be about a $102 million hit, small amount in gross profit, most of it being in amortization. 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 gonna talk about breaking down synergies by segment. You know, as you can imagine, it just gets all intermingled, and it's tough to do, and we really just don't wanna talk about it by segment.
Okay. Okay. If you guys don't mind me sneaking in one more. Following up on a prior question, looking at Valspar's legacy Performance Coatings margin falling about, you know, 400 bps year- over- year. Could you maybe walk us through? Now that we're, you know, seven months into the integration, I know previously you guys had said that pricing would take, you know, about nine months to flow through. Could you maybe give us where we are today in the pricing and raw material environment, compared to maybe where your expectations were whenever you first closed on the deal?
yeah, Truman,
In terms of Valspar Performance Coatings.
Sure. As it relates to Valspar Performance, I'd say we're virtually right where we expected to be. These are, you know, large customers, many of whom had agreements with Valspar. The last thing we wanted to do was go in day one and break previous agreement or, you know, almost the implied agreements that they've had in the past. Our goal is to get the price and retain the customer. We're working with our customers and I think proceeding exactly as we expected. We had some of that roll in in the fourth quarter, and we talked about, you know, right from the start that it was gonna be six to nine months.
As I said earlier, you know, now as we go into the first quarter here, we expect even more of that to roll in. As Al mentioned, we're gonna be chasing it here a little bit, but, you know, we're on it. I mean, our teams are working hard and we're having terrific discussions. I'd say for the largest part, it's about how the pricing is coming in, not if. We're working hard to make sure that we're continuing to add value while we're having these discussions, but we're feeling good about our ability to get it. Okay. Thank you, guys.
Thanks, 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?
Yeah, Dmitry, I'd say it's been rolling in. I really don't wanna get into any specifics on that, you know. I would say that as we stated, every one of our businesses are out there. I understand the question, 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 one would think. You're maintaining margins in your Paint Stores Group, in your Performance Coatings Group, which, you know, margins there should probably be most impacted by raw materials and slow price increases.
Your Consumer Brands, which, you know, historically has been a little bit better when it came to margins, and as a previous caller, you know, 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. 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 Group, and why your margins in the DIY segment have collapsed as much as they did?
Yeah. I'd say it's mostly just a timing issue, Dmitry. The issues that, you know, when you put a paint program in with many of our customers, you know, we're kind of buying into that program, and we're working with our customers through the paint season. You know, we start having discussions with them to let them know of what's happening so that we can adjust. You know, even on the painting contractor side, we work with our painters. You know, their projects are typically limited in scope. 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. It's really a timing issue.
On the performance coating side, the same thing. You know, we work with many agreements here at Sherwin. 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, you know, historically, they've been able to do it. They're a little behind, and we're up, we're executing those right now. I'd answer it really that it comes down to just timing.
Okay. Fair enough. Thanks a lot. That's all the questions I have.
Thanks, Dmitry.
Thank you. The next question is coming from the line of Michael Sison with KeyBank. Please proceed with your question.
Hey, guys. Just a quick one on Valspar. I know you're a little bit behind on raw materials, what about organic growth? Has the team been able to keep up pace? I mean, industrial markets are kinda humming right now.
Yeah.
Are you seeing your new products and their ability to match growth there?
Sorry for interrupting you there, Mike. Yes, we are.
Oh, no.
We are getting some nice growth on both the core or legacy Sherwin and the Valspar side. What's really nice is it's across all of our industrial businesses. There's some nice momentum as we go into 2018. We're feeling really good about, you know. You think about what we're going through with the integration, you know, the ability to retain the customers. We're growing our customer base, retaining our employees on both sides. I mean, we're really feeling good about the momentum that we have here.
Great. One quick follow-up. You know, at Lowe's it seems that you've kept the shelf space on both ends there. You know, the next line review will be coming up in 6 months. What's sort of the strategy or what do you want to show Lowe's on the next six to nine months to maintain that share longer- term?
I'm sorry, are you asking us what we're going to show Lowe's?
Yeah. What, you know, what's sort of the strategy in keeping that shelf space?
Well, yeah, I'll answer it at 50,000 feet here. It's to work with our customer to understand, you know, 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. I mean, we don't wanna lay down our strategy here for any customer. You know, 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.
All right.
Thanks, Mike.
Thank you. The next question is coming from the line of Silke Kueck with JPMorgan. Please proceed with your question.
Hi, good morning. How are you?
Morning, Silke.
Just some small stuff. Your depreciation for next year is running something like, $70 million a quarter, I think. In the fourth quarter 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. There was also some purchase accounting on the inventory depreciation step-up that we took in the quarter. We believe that we've gotten, well, we believe we've gotten the bigger one-time adjustments behind us as we go into next year, into 2018. The valuation is still open. We're still reviewing it, and we will have till.
End of May to get that finalized. I do believe we got most of the one-time adjustments behind us.
Okay. 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 gonna grow at the low end of your sales growth guidance, or at the high end or below above those ranges? Do you have a view?
I would tell you that our expectations are always that it's going to be on the high end. You come out of the fourth quarter to smaller quarter, first quarter, you know, virtually the same dynamic.
The bar is pretty low, right?
It is. It is. You're exactly. I'm gonna bring you 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?
Secondly, I think you said your incremental synergies on absolute basis that you expect year-over-year are, you know, like $140 million-$160 million. That also looks conservative because if you ended the year at a run rate of $230 million, that means, you know, you're already getting, I don't know, $58 million a quarter. Like somewhere by the end of the fourth quarter, it's gonna be at like $80 million a quarter if you get to $320 million. You think that your incremental savings in 2018 should be bigger than, you know, $140 million or $160 million. Like, it should be more like, I don't know, like, $180 million or $190 million. Why is the number so conservative?
Do you expect, like, very low savings in the very beginning of the year and then a lot in the back half or?
No, Silke. I think what you're seeing is in the run rate synergy, there are projects that we're tracking, and I'll use the example of manufacturing rationalization. In September 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. That would be in my run rate synergy number. I wanna, you know, we gotta be careful about including the run rate synergy in our P&L. That's why in the call, we just try to break out what we think is gonna hit our P&L in 2018 versus what we think as we continue to enter projects throughout 2018.
That'll go into that $320 million run rate at the end of 2018. Well, many of those projects won't be realized until the following year. That's why it's where the number is.
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.
Good afternoon. Thanks for taking my question. It's only 1 hour and 30 minutes. Wow. two sets of questions. The first one, coming back to the synergies. Did you actually quantify the run rate, 2017? I think I had 106, but I'm not sure if I should put that number out. That's the first question. If you could also, I know it's very difficult, the actual run rate exiting 2017 in terms of savings, basically the Q4 savings run rate. Not the synergy, but the savings actually achieved. That would be very useful to see the progression. That's one.
In terms of cost of synergies, I think you mentioned at the beginning it was about $200 million for overall program. I think if I look at the full- year 2017, you'd only spent some $80 million. Is that the correct way of seeing it? We should put $220 for next year. So that's for the synergy. The second set is on the tax, the cash tax rate. Maybe you wanna answer the first part.
On the synergies. The $106 million was a run rate synergy that we talked about at the closing of the acquisition. We increased that to $160 million at the end of the third quarter on our third quarter call. Now we're saying that we actually have a run rate synergy number of $230 million coming out of 2017. You know, as far as the run rate in the P&L, you know, 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, hey, we think we've got $8 million or $10 million a month.
You know, that'll change as new projects come online, as systems get implemented.
The timing of those get to be hard to predict. That's why I wanna be cautious about giving you a run rate coming out of the year, knowing that there's a variability in the timing going forward. You would expect as the year goes on, our run rate in the month would increase as the year goes on.
Got it.
You talked about cost to achieve. The $200 million in cost to achieve was really what we're trying to get accomplished through the end of 2018. From June 1st through the end of 2018, we're trying to get as much of the integration and cost to 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. That's where you get $227 million.
Okay. Maybe I'll switch to the tax rate and the impact of the U.S. reform. Is that fair to say that it's between four and five percentage points of tax reduction? If you could comment more on the cash taxes, how you see that. I calculate about $80 million extra free cash from that reform. Is that your assumptions too?
The, you know, we're still analyzing the impacts and as we go through the interpretations on the effective tax rate.
Right.
That's why we talked about the 18 guidance. We have low to mid 20s.
on our effective tax rate. You know, along with that, you know, there is a benefit that we'll get in our cash taxes and we're still, like I said, walking through that. We would expect to see a benefit in our cash related to the lower rates.
Is 80 a good start to move with that or?
80 would be a good start.
Okie dokie. 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'll have to just find out 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?
I would tell you that we are going in with high expectations and as I mentioned, determination. You know, your point is a good one, John. We've wanted to have better results here as we entered into 2017. I'd say the difference is that, you know, 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. That's why I made that point. We are working with our customers with a different approach and in different ways that we can help them to grow their business. I'd be disappointed if we find ourselves in the same situation at the end of the year.
Back on raw materials. One of your competitors specifically cited the environmentally driven production curtailments in China. Epoxies were singled out. I don't know if you're seeing, you know, particular pressure in your packaging coating business because of epoxy. 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.
Well, John, Chinese TiO2 has been up pretty sharply in 2017, and that was as a result of supply curtailment. I don't know so much about epoxy.
Yeah. Well, there was a spike and then a drop.
Right.
in the pricing. I'd say that it seems right now, I believe, to be back in line.
Okay. Thank you.
Thanks, John.
Thank you. It appears there are no further questions at this time. I'd like to pass the floor back over to Mr. Wells for any additional concluding comments.
Thanks again, Jesse. Let me wrap up today by asking you to save the date of Tuesday, May 22nd 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 customer Q&A session, followed by a reception and lunch. Again, that day is Tuesday, May 22nd. We'll be sending out invitations and related information and a link to our registration site in late March. Please watch your email. 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'd like to be placed in the queue or for a follow-up call, you can call Christy Johnson at 216-566-3001, and she'll 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.