宣偉 (SHW) 2002 Q3 法說會逐字稿

Good morning and welcome to the Sherwin-Williams Company's third quarter earnings results conference call. Today's call is being recorded. At this time for opening remarks, I would like to turn the call over to Conway Ivy, Senior Vice President, Corporate Planning and Development. After his remarks, Chris Connor, Chairman and Chief Executive Officer; Sean Hennessy, Chief Financial Officer; John Ault, Vice President, Corporate Control; and Bob Wells, Vice President, Corporate Planning and Communications, will be available for questions. Please go ahead, sir.

Thank you, Laurie. Good morning, everyone and thank you for joining us today for our review of the third quarter 2002 results and our expectations for the year. This conference call is being transmitted live in listen-only mode by CCBN, via the Internet at www.Sherwin.com. An archived replay of this broadcast will be available approximately one hour after this conference call concludes. It can be accessed at www.Sherwin.com and will be available until Tuesday, October 29th, at 5:00 p.m.

Before proceeding, I would like to remind you that during this conference call we will make forward-looking statements with respect to sales, earnings, and other matters. These forward-looking statements are based upon management's expectations and beliefs concerning future events. Forward-looking statements are necessarily subject to risk, uncertainty, and other factors, many of which are outside the control of the company. This could cause actual results to differ materially from such statements. A discussion of these risks, uncertainties, and other factors are described from time to time in the company's reports filed with the Securities and Exchange Commission. The company assumes no obligation to update the information presented in this conference call, which information speaks as of today only.

After the review of our third-quarter results, we will open this session to questions. In order to allow more time for questions, we have provided balance sheet items and other statistical data on our web site, www.Sherwin.com, under Investor Relations, Third Quarter Press Release.

Going to our results now, I would like to summarize our company's overall performance for third quarter 2002, versus third quarter 2001. Net sales increased 4.4 percent to $1.43 billion. This result was favorably impacted by strong domestic architectural paint sales, growing momentum in the DIY market, and aggressive promotion of our new color offerings. However, continuing sluggish sales in commercial, architectural, industrial maintenance, product finishes, and automotive product sales, along with poor economic conditions in South America and weak currency exchange rates partially offset these sales gains. Gross margins increased 45.2 percent from 44 percent. We received the benefit from manufacturing volume gains and moderating raw material costs relative to third quarter last year. Pricing did not significantly affect our gross margins, as most of our sales gain was volume related. Selling, general, and administrative expenses as a percent to sales decreased from 32.4 percent in 2001 to 32 percent this year. This was due to the control of these expenses and the improved sales. Interest expense decreased $3.7 million, due to reduced debt levels of almost 175 million and lower interest rates relative to third quarter 2001. Other expense net decreased by 1.1 million, primarily due to a reduction in expense of financing and investing activities. All of this resulted in net income increasing 21 million to 111.3 million from 90.3 million in the third quarter of 2001. As I had mentioned, this increase was due primarily to improve sales volume, reduced manufacturing cost and expense control.

Diluted net income per common share for the quarter was $0.73 per share, compared to $0.58 in 2001. Excluding amortization expense of intangible assets and good will in 2001 in order to be comparable with 2002, diluted net income per common share would have been $0.62 per share for the third quarter of 2001, relative to the $0.73 earned this quarter. I will now turn our review to looking at our performance for the third quarter 2002 versus third quarter 2001. Sales for our paint store segment and third quarter 2002 increased 5.9 percent to $938.3 million. Comparable store sales grew 3.8 percent. Sales growth for our stores was driven primarily by higher volume architectural paint sales to both professional and DIY customers. This strength in architectural paint sales more than offset continued weakness in the industrial maintenance in product finishes categories. Our chemical coatings business continues to show unfavorable sales in comparison to last year that had a diminishing rate.

Our sales to the wood finishing market were up for the quarter but sales to most plastic and metal finishes remained down, a reflection of market conditions in these segments. Although in September we saw improved stability in some markets, we're not ready to conclude that this market has bottomed out. Sales of industrial maintenance products were also sluggish as we continue to see many manufacturers defer maintenance projects pending an upturn in the economy. In September, we saw some spotty improvement but do not believe it is signaling a change in the market at this time.

Regionally, in the third quarter 2002, our Midwestern division led the sales performance followed by southeastern division, eastern division, and southwestern division. The operating profit for the store segment increased 7.7 percent to $140 million in the third quarter 2002. This was due to higher sales volume and improved gross margins resulting from product sales mix and raw material cost comparisons, both favorable to last year's third quarter. Partially offsetting this improvement in operating profit was an increase in selling general and administrative expenses primarily associated with new store openings and maintaining high service levels in our stores.

The paint stores group ended the quarter with 2,624 stores in operation compared to 2,524 stores at the end of the third quarter last year. During the third quarter 2002, we added 13 net new stores. Year-to-date through September 2002, we added 51 net new stores; 27 of these were from organic growth and 24 were by acquisition. Per calendar year 2002, the paint stores group remains on track to add approximately 70 net new stores. Also during the quarter we refreshed 264 stores. Year-to-date, we have refreshed 613 stores on pace to complete our entire chain by year-end 2004.

Turning now to the consumer segment for the third quarter 2002, sales increased 4.9 percent to 314.3 million. Sales for the consumer segment continued to benefit from a steadily improving DIY market and from aggressive promotion emitting new and existing paint, aerosol, and wood care products. But our sales improvement in this segment was partially offset by unfavorable comparisons in our cleaning solutions group relative to last year. This group has been restructured to better serve our Cello distributor business by our withdrawal from the consumer liquid fill business.

Operating profit for the consumer segment increased in the quarter to 60.2 million from 32.8 million last year. The operating profit improvements resulted primarily from higher sales volumes, improved overhead absorption due to architectural paint volume gains, reduced manufacturing expense from plant closures, moderating raw material cost, and administrative expense reductions.

Going now to our automotive finishes segment in the third quarter, sales decreased 1.3 percent to 113.8 million in U.S. dollars. Improved vehicle refinish sales in the quarter compared to the two previous quarters of this year were not enough to offset unfavorable currency exchange rates and price competition. Excluding the effects of currency exchange rate fluctuations relative to last year, net sales for the automotive finishes segment would have improved 9/10 of 1 percent in the quarter. Operating profit for the quarter in this segment of $13.2 million was essentially flat versus last year. This segment's operating profit was negatively impacted by raw material cost increases late in the quarter and currency rate fluctuations.

Going now to our international coating segment in the third quarter. This was once again adversely impacted by unfavorable currency exchange rates, primarily in Brazil. Third quarter net sales in U.S. dollars were down 9.1 percent to 58.3 million. Local economic weakness was indicated by a decline in unit volume in this segment of 2 percent. Operating profit in U.S. dollars fell to a loss of $300,000. This was essentially flat compared to a year ago in the quarter. Operating profit continues to be pressured by currency rate fluctuations, price competition, and margin erosion caused by a market shift to lower price products and higher U.S. dollar denominated raw material cost.

Now I would like to comment briefly on our balance sheet and cash-related items. Inventory levels have been further reduced below last year, while maintaining service levels to support an improving sales trend. Our working capital ratio, which is accounts receivable plus inventories less payables to sales, came in below last year. This year's ratio was 13.7 percent of sales versus 16.3 percent of sales for the third quarter of 2001. In the third quarter 2002, we spent $36.1 million on capital expenditures, pardon me, depreciation expense was $26 million and amortization expense was $3.4 million. For the year 2002 we expect to spend $130 million on capital expenditures, $115 million on depreciation, and $11 million on amortization. The alliance share of these capital expenditures continue to go towards expanding our store network and improving our plant capacity in maintenance and distribution infrastructure. Total debt to capitalization was 28.1 percent at the end of the third quarter 2002. We expect total debt to capitalization to decrease to approximately 27 percent by the end of 2002. In the third quarter of 2002 the company purchased 1,950,000 shares of its common stock in the open market. Through September, we have purchased 5,192,200 shares for treasury versus 5,542,700 shares last year. At September 30th the company had authorization to purchase 11,807,800 shares of its common stock. We, of course, expect to continue from time to time our opportunistic purchases of company stock for treasury since we continue to believe our stock is a good value.

I would like now to give you a brief update on the status of our lead litigation and primarily Rhode Island. It is expected that closing arguments will be made tomorrow, Wednesday October 23rd in terms of the first phase of the Rhode Island trial and Judge Silverstein will also charge the jury that same day. Since this will be a jury deliberation no one knows when the jury will render a verdict. So we cannot estimate when that would be. To remind you, the jury will only determine whether lead in paint is a public nuisance under Rhode Island law. This first phase of the trial will not determine responsibility or liability, if any. These factors are left to additional phases of the trial, which still need to be fully developed by the court. Because of the status of the Rhode Island case, we will not be able to offer further comments until the jury renders its verdict.

It's also been our policy in these calls to keep you informed of the status of any lead suits pending against the company that had been set for trial. In terms of giving you an update on this, two cases filed in Wisconsin have been scheduled for trial, one in June and one in October of 2003. Four cases in Mississippi are scheduled for trial in the spring and summer of 2003. Though these cases are scheduled for trial, they may be ultimately dismissed as a result of discovery and various motions the defendants may make concerning the aspects of the specific case.

You know, as an example, you may recall in our first quarter conference call I mentioned the Spring Branch Independent School District case down in Texas. I mentioned that that was scheduled for trial September 3, 2002. As a result, a ruling on motions, Sherwin-Williams was dismissed by the plaintiffs from the case and is no longer part of the case.

To date, we have had less than 100 lead litigation cases filed since 1987. Excluding the most recent cases, over 85 percent have been dismissed and none have been settled. The active cases are in discovery and these six cases that I mentioned are the only ones currently scheduled for trial. The Rhode Island case is the first for us that has come to trial. And, obviously, we will continue to vigorously defend ourselves as we expect to be fully vindicated.

This completes my review of our results for the third quarter of 2002. Now I would like to turn this session over to Chris Connor, who will make some general comments and highlight our expectations for 2002 for the remaining of the year. And after that time we will open the session to questions. Chris.

Thank you, Conway, and good morning everybody. Thanks for joining us this morning. We're pleased that based on our sales gain of 4.4 percent for the quarter, our profit, after adding back amortization of goodwill and intangibles to 2001 that will give you an apples-to-apples comparison, increased by more than 15 percent.

Each of our segments are fighting hard for sales in this slow growth market. As Conway mentioned, especially in the industrial maintenance and product finishes categories. But all of our segments have been successful at controlling costs and improving operating margins to generate improved profit and we expect this strong profit performance to continue.

Another encouraging trend we saw in the third quarter was strong growth in our do-it-yourself business in both the stores group and our consumer division. Although our stores remained firmly focused on the professional user markets, which continued to do well by the way, strong DIY sales growth for the quarter, combined with healthy wholesale architectural business, helped to offset continuing softness in these industrial markets. Investments by our stores segment over the course of this year, the launch of our new color systems that we shared with you, our store refresh initiative and increased advertising spending have all contributed to the growth of this do-it-yourself business.

In our consumer segment, strong sales of aerosol paints and wood care products, specifically stains, varnishes and water sealers, combined with our growing culture of operational excellence, help to drive sales for this segment up almost five percent and profit up more than 80 percent versus last year's depressed level.

The introduction of our new Dutch Boy Twist & Pour container late in the second quarter is beginning to produce positive results for this brand. Since July of this year, many leading retailers have taken the Twist & Pour program resulting in a threefold increase in the number of doors through which the Dutch Boy brand is sold. Anecdotally, many of these chains are reporting great initial movement of Twist & Pour off their shelves. One major retailer that we talk with, who carried Dutch Boy prior to the launch, reported a strong double-digit POS increase in the month of August versus last year. And another chain new to the Dutch Boy brand hired an independent research firm to conduct exit interviews of Twist & Pour customers, and we were pleased to find out that a significant portion of those customers reported they switched paint outlets to get this new, improved package. Time will tell, but we're encouraged by the progress we made to date with the new package, and we're optimistic about the future of the program.

Before I close this discussion of our third quarter results and turn the call over for questions, I would like to comment on the manner in which we report our results. With so much attention currently being given to accounting integrity, as many of you know, we have always strived at Sherwin-Williams to fairly and accurately present our financial results. For this reason, we were gratified to be recognized by "Money Magazine" in the investing section in their October issue as one of the "Top 10 Companies in America for Quality of Earnings."

Our outlook for the fourth quarter of 2002 is for sales to grow in the range of 2.5 to 3.5 percent and diluted that income per share of $0.34 to $0.40. This confirms our September 27th revised estimate of $2 to $2.06 per share for the full year before the effects of our first quarter impairment charge.

Planning for our 2003 operating year is currently in progress, and we will be prepared to provide you with earnings guidance for next year during our year-end 2002 conference call. At this time, Conway, Sean, John, Bob, and I will be happy to take your questions.

Thank you, gentlemen. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key, followed by the digit one on your touch-tone telephone. Again, to ask a question, please press star one. We will take as many questions as time permits, and we will take your question in the order that you signal at. Our first question comes from [Eric Boshir].

Good morning.

Good morning.

Two things. First of all, the improvement in comp sales in the store segment during the quarter was stark relative to what we saw in the first half. Can you talk about what drove that in the third quarter? And it sounds like, I guess, you're expecting similar momentum in the fourth quarter. Can you give us a little more color on that?

Eric, as I think we shared with you the do-it-yourself portion of our comp store numbers were great, and the wholesale architectural portion of that was strong as well. I think you've heard us break our wholesale business down into what we call a pot and brush painter or a residential repaint painter. Those segments have continued to be very strong for the company and have only been offset by the industrial businesses that we've commented on this morning.

What changed--because I think you commented in the first half you had a similar trend on the DIY side in the propane side is the other half of the business--and I know it's not half of the business--but the industrial chemical, that side that gets reported up through that segment, did that get less worse in 3Q?

Yeah, I think it's stabilizing a little bit on those segments that we said that were struggling in the first half, and the DIY and the wholesale architectural parts that we've talked about have been pretty strong throughout the course of the year.

Okay. And the momentum during 3Q within comps and the store segment, comparable trend through the quarter, getting better, getting worse as you move through the quarter and into 4Q?

Basically, July was kind of on average. August was below average and September was above average. But that's not unusual in a quarter because you basically should smooth things out over a quarter. And I think, you know, for only two weeks going into October, we certainly see the trends continuing that would support, you know, our expectations for the remainder of the year.

Okay. And last question, in terms of the gross margin performance, you commented on a favorable price-cost environment, although it seems that pricing may be a little more competitive this year and cost trends, which started out the year very favorably, may be getting tougher. Can you just comment on the trends you see in that area now, and as we head through 4Q and into 2003?

Yes. I think, you know, as we reflected, our sales increase was really not essentially due to pricing, and though we do have favorable raw material comparisons going through the third quarter, this is starting to change. And we would see some overall for the industry. As you know, we only comment on raw material costs for the industry. We would expect raw material costs for the industry to be up in the 2 to 3.5 percent range for this year, year over year. But particularly with oil prices moving up in the $28 to $30 range, we started to see some raw materials that moved directly with oil prices like toluene, xylene, and some acetone, which is more a capacity issue. That started to increase in September and as we mentioned, that impacted prior to our automotive business. It's also from a cost side on TiO2 that's kind of interesting. Again commenting from an industry perspective, a TiO2 price increase was announced on July 1st, of $0.06 a pound but this has been now delayed due to a lower than forecasted market demand. And so the producers have now modified this July 1st announcement and they're basically calling for a $0.03 per pound increase on, you know, October 1st, and a $0.03 per pound increase on January 1, 2003. So our view is that the first $0.03 per pound increase has become effective, and we'll just have to see what happens on the next one.

Great, thank you.

Thank you.

And Timothy [Bergman] has our next question.

Good morning, it's actually become pretty rare to give accolades these days so you guys should be proud of your operating out performance in 3Q.

Thank you.

Conway, could you give a little more clarity on your raw material comment and specifically what I'm asking for is can you talk about sequentially how if you were to create a raw material cost index, how it increased in 3Q if at all, but more importantly how you see 4Q versus 3Q?

Well, I don't have the sequential numbers in front of me, but we would see the increases relative to fourth quarter last year to increase and we would see that, you know, going into next year, again, from an industry point of view of 3.5 percent. I think the other aspect, you know, which I haven't already commented on, but, you know, latex polymers are an important, you know, raw material ingredient and particularly if crude oil prices remain, you know, above the $28 a barrel, we think this will start impacting the, you know, downstream derivative market. Price of metal cans and drums continues to move up, you know, due to the steel tariffs. So we see the raw material outlook changing, you know, right now as we would roll through, but not in a very dramatic case that we feel that would put any significant margin pressure on us as long as, you know, we're able to get some minor price increases and we'll continue to improve our productivity.

And separately given this early success of the Twist & Pour program, strategically how are you thinking about rolling the Dutch Boy Twist & Pour out to other stores? And probably more importantly is there also in the bigger picture the likelihood that you're also going to do the Twist & Pour packaging in other brands including the Sherwin-Williams brand in your stores?

Well, Tim, we've had the opportunity to show the Twist & Pour Dutch Boy program to just about all the leading retailers and as we've shared with you the doors have tripled where we were able to sell the brand so it's been well received. And we would continue to expect opportunities going forward, as well as using the package and other brands of the company. And we haven't given any guidance yet on when that will happen, but I think as we get our plants up to handling the volume that we've generated with this and are comfortable with that, you'll see it moving into other brands.

As is completely ruled out, would it be a fair assessment that a one-gallon sale, to make it very simple a one-gallon sale, of Dutch Boy with the Twist & Pour versus traditional can, you probably have a little more pricing power over time?

Well, I think that'll be determined by how our competitors respond.

Okay.

Right now I think the package does command a premium.

And then the final question, obviously you've been pretty happy with the new color palettes program, worst case scenario have you at least internally thought about a contingency plan if the Martha Stewart issue gets ugly, or so to speak, how you might handle that?

I think on the color palette program for our stores specifically it's been a two-prong program. One was the introduction of our new color palette that hadn't been updated in 10 to 12 years and that's really the palette that drives the majority of our volume through these stores, whether it's architects and designers or contractors and do-it-yourselfers. Our Martha Stewart program continues to be a strong program. It's a specific designer-type palette. DIY consumers still find it a relevant and helpful in their decorating. And again, we'll just have to watch that process and time will tell.

Thanks so much.

Thank you, Tim.

We will now hear from Chuck [Sarencoski].

Hi, Chuck.

Good morning, gentlemen. A question about working capital, you guys are doing an outstanding job in that area, and can you talk about some of the things that you just gotten better at to make that happen, even as the business is improving. And, Chris, can you give us a feel for, or just your opinion on what you'll be able to do with price increases next year, especially with some raw material cost pressure seeming like it's going to be a factor. And then, what were some of the beneficial elements of your sales mix that helped the gross margin improve in the paint store segment in the quarter?

That's all you want to know? I'll have Sean start first, Chuck, and give you some comments on our working capital.

Chuck, on the working capital, we are very pleased on how the results have occurred. I'll start off in AR, accounts receivable. If you take a look at our accounts receivable days have gone down. And I think that you've heard Chris and others talk about operational excellence and it's not just in the plants it's also in how we've installed a new order management system with our prior customers.

Our pricing accuracy has jumped forward and we've gone through and taken a look at what all the causes that caused our receivables to be delayed. And number one was pricing and our pricing accuracy or and I'll say errors have dropped dramatically. And we feel very good about that. In fact, our price inaccuracies, I'll say, have dropped to less than 3/10 of 1 percent of invoices, which we feel are pretty--and we're still trying to improve that. So AR, I think we've really it's again systems in going through that operational excellence. I think on the inventory it's also for Y2K we did install new software systems for our inventory processes and logistics and it's doing very well. The finance (phonetic) scheduling as well as the plant scheduling, where paint is made, the system is allowing us to make a lot more decisions where inventory is made and so forth. And at the same time, we've been able to keep our payables up, so I think we've made improvements in all three areas. So again, I think our payables are in a good situation. So that's really systems and operational excellence is how we've been able to get our working capital.

I would just briefly comment that while we've made great strides the last two year, we don't think we are there yet, Chuck, and there are still opportunities for us to stay focused there.

Turning to your pricing question for next year. Will we be increasing our selling prices to offset some of the raw material costs? And I think right now it's just a little too soon to tell. We need to see, as we typically would here, through the fourth quarter, what's going to happen to the market, how some competitors might respond. Our focus on operational excellence, first of all, helps us try to take costs out before we would go to our customers with a price increase, so we'll just have to wait and see what happens in the marketplace where they haven't given any guidance as of yet as of what we are going to do on pricing and your final questions on sales mix through the stores. Again, we've commented on DIY, that's a higher margin ticket for us, we've seen that increase with a percentage of our revenue and new products that we've talked about through the course of the year also, help a little bit on that side too. So the mix has been favorable to the operating income for our stores.

Thanks a lot.

Thanks, Chuck.

Our next question comes from Bob Goldberg.

Good Morning. I was wondering, Conway, about the new cases that you said are going to trial or scheduled for trial, I should say, next year in Wisconsin and Mississippi. Are there any of them public nuisance claims or can you give us a little bit more highlight on what the general nature of the claims are?

I think the ones in Wisconsin cover mostly personal injury cases. That's one in Wisconsin and the other one is the City of Milwaukee case and I think, like a lot of the city cases, there they are looking for abatement.

In the case of Mississippi, they involve adult painters who are claiming exposure to the product. I don't think nuisance is present in any of these claims. And just to expand on another case that was filed, but of course not scheduled for trial, the City of Chicago filed suit against us just in the early part of September and that case is going through the normal process of motions in that particular case that is basically on the basis of public nuisance, essentially public nuisance and they don't have the other claims. Based on my knowledge, which I think is fairly accurate is any of these cases scheduled for trial do not involve nuisance claims.

The City of Chicago is the only claim other than Rhode Island that is based on public nuisance?

No, I think some of the other recent cases also involve the nuisance theory but I don't have an actual tally. As for example, as you know the Santa Clara County case, out in California, had a public nuisance portion of that. That was dismissed by the court in that, but I think that, there are not a whole lot of them that would be public nuisance but I don't know the exact number.

My other question was just on the automotive refinish. I was wondering if you would expand upon your comment about the price competition that you're seeing in that market. Given that raw material costs are going up, it's a little bit disturbing. What kind of competitive activity are you seeing there?

Well, a lot of that particular deals with international area, where there is some elements there. As you know, in the OE side of the business and with the automobile manufacturers wanting to continue to move their cost structure down, that is impacting there. We believe the overall vehicle refinish market is down slightly and so, as you would expect, you generally have a lot of the producers competing for share. But I think, as you know, in that business technology product quality performance going through the body shop remains the primary factors on which a sale is made.

Thanks very much, Conway.

Thank you.

Okay, we will now hear from Jeff [Zagoskis].

Hi. Good morning.

Good morning, Jeff. How are you?

I'm good. I got a couple of questions on the consumer segment. I think over the past four years, the third quarter is normally sequentially down by somewhere between 200 and 300 basis points, or even more versus the second quarter, and this year, it's up a little bit. So I guess my question is, is there sort of a permanent change in profitability there now--that is an upward change?

Jeff, no. This is Sean Hennessy. When you take a look at what happened, I know what you're talking about. Usually our margin in the second quarter is higher than the third, but with the higher production of the Dutch Boy Twist & Pour with some of the architectural strengths, we produced more in the third quarter, which allowed us to enjoy those types of results. I would not say, you know, if next year, probably the Twist & Pour overall four months, not just, but we said, we had very good volume gain through our factories in the third quarter because of that. And again, as you probably will see, the fourth quarter of the margin will go down in the consumer group, but I would not consider that a long-term strategic shift.

Well, your sales are down sequentially, actually. I mean I don't see why it would be production related.

Well, we also have to realize--

Stores as to profits, storage buy, what we call a storage volume over there, Jeff.

Right. If you still netted out your sales are down sequentially even with stores volume.

I think what Sean's commenting on is just the way we built inventory this year and when we can keep our plants running at a higher production schedule it flows profit to that segment and there was more paint being made in the third quarter of this year when we had last year.

And also, Jeff, our aerosol business certainly improved this year versus last year.

Well, maybe if I can try it a different way.

Okay.

You gave sort of a laundry list of why your profitability improved. There was overhead reduction. There were raw material costs. There's less SG&A. Now there's the Twist & Pour. Can you kind of give us sort of an idea of which are the more important factors and how much more important they are in terms of the change in profitability?

No. You know, I think as we indicated, productivity factors and the volume related as you can see with the strong architectural sales in stores, you know, obviously, those sales are up more than the average. And the growth in store sales is being constrained by industrial maintenance and chemical coating. So we were getting very strong volume gains there, which has helped in terms of manufacturing absorption in our paint plants, which is showing up in the consumer segment, so really the absorption from the volume gain relative to last year has a major impact.

We're also helped by the favorable raw material cost comparisons versus third quarter last year. As we've indicated, we think, you know, that will change as we move forward from here. And very importantly, I think as you know in the fourth quarter we took $11.2 million and plant closing costs. And we have closed some plants and so on the comparisons we're getting the benefit of that as we go through the third quarter. So in terms of breaking it out in terms of a percentage of which ones contribute we wouldn't want to do that, but those would be the most important ones.

Okay, thank you very much.

Thank you, Jeff.

Richard Diamond has our next question.

Yes, I'm trying to determine what your earnings are at core ex-litigation, you know, hoping one day that we may, you know, optimistically reach a litigation or a lesser litigation environment. Can you indicate in the last month, what litigation expenses were for the quarter?

Richard, what we've had is a policy not to comment or break out our litigation expenses, but in terms of helping you in this regard, that we've been involved in this litigation since 1987. We've had a structure in place to deal with that, so in terms of year over year comparisons and quarterly comparisons, you know, the litigation expense is not that significant in our overall results. We, like you, would like to see it all eventually go away, but right at this time, it's not adversely impacting our comparisons.

Is it fair to say that, you know, should the Rhode Island litigation unfortunately continue for some unforeseen reasons, would it be possible to model based on the same statement you just made to me?

Well, again, I think we don't really want to comment now or even going forward unless it became material of what our litigation expenses are. You know, we think that that is important confidential information because we are involved in litigation. But you know, and we don't anticipate this, but should it become material in the future, then we would make the appropriate disclosure, at that time and put it into context.

Last question, and unfortunately also litigation related. Could you just update us on the status of the auto paint antitrust litigation?

Yes. As you may know, in January of 2001, the Sherwin-Williams Company received a subpoena from the Department of Justice, which was basically an information request. And we are not aware of any allegations against us, and we have been cooperating with the Department of Justice. This matter has been before a grand jury for quite some time now. And of course, you know those proceedings are secret, so we don't know what's going on there. But it's been, you know, essentially well over a year or a year and a half. The grand jury has not reached a conclusion on this. And I guess even with all of the information requests and that, we are still not aware of any allegations of misconduct, directed against the Sherwin-Williams Company.

Thank you very much.

Thank you, Richard.

[Jeff Castle] has our next question.

Hi. Congratulations on the good quarter.

Thank you.

I just have a couple of questions. First, it sounds like the Dutch Boy new can is working quite well. Chris, can you comment on how competitors are responding and, you know, maybe some indication of how long you expect to hold that lead, or if you think that competitors will copy fairly quickly? And then the second question, just a bit more in general, the results out of Latin America and international weren't particularly good. If you could just comment on what you are doing down there and if anything is changing in the next year.

Regarding the Twist & Pour container, we've not seen any response at shelf and that's where we would have an opportunity to get a feel for what our competition is up to. So to the best of our knowledge, the Dutch Boy package remains the only package right now in the marketplace, and we're continuing to go forward based on that premise.

Commenting on Latin America, it's just been a rough couple of years down there for us. We take some solace out of the fact that we're seeing market share gains in these countries, and our teams down there have really buckled down and gotten cost out of their operation. We've been able to keep cash from going down there and having the businesses operate on their own internally generated cash, and that's basically the format that we've been focusing on. Let's see if we can't use this opportunity to gain market share. Let's keep the cash out of the countries, and see if we can't strengthen ourselves for when the rebound comes.

Mr. [Castle], do you have anything further?

No. Thanks a lot.

Yeah. Thank you.

And our final question for today will come from Andrew Cash.

Hi, Andy.

Hi. Just to follow on the Latin American with another question. So it sounds like you're getting cash out of Latin America? You're increasing your cash flow from Latin America, is that right?

Well, we're not increasing our cash flow out in South America, but, yes, we have received cash from South America. We are cash positive in each country, including Argentina. We have not had to send any cash down to Argentina, which is really the hardest part. Brazil, with the exchange rate jumping close to four, we still have been cash positive there, as well as in Chile. No. But we have received cash out of South America in total but not as much as in prior years.

And, Andy, I might want to mention, one thing that I see in South America that's very interesting to me. All of us are following Argentina. I know you all as well. And they're having a depression, you know, worse than our 1932 depression here in the United States. I find it encouraging that people are still buying paint, and that we are still making sales there and particularly when, you know, 30 percent of the economy is on a barter economy. So it's encouraging to me in even extremely adverse economic conditions people will still choose to paint. But that's a slim, positive comment.

I'm amazed by it. I wonder if you could just give us a little statistics--I mean I'm assuming you're getting paid in, you know, currency and you're not getting paid in crops or anything are you?

That's correct.

We're still taking cash.

Okay. So your accounts receivable, are they about the same as last year or--

Actually, we were also just assessing United States and other parts of the countries. Our DSO is down in Argentina.

Amazing. How about Brazil?

Brazil, the DSO has remained flat.

Okay. All right, the real question I have was back to Jeff [Zagoskis's] question. The 600 basis point improvement and margin in the consumer segment is absolutely, you know, knocking the ball out of the park. Just to remind me, are you transferring, you know, paint to consumer from the paint segment at cost?

Andy, what we do there is we pass, you know, all the cost through to the paint store segment, other than the absorption cost from plant overhead. So in terms of what we would pick up in manufacturing absorption due to gallons being sold through the store segment, that accrues to the benefit for the consumer plants.

The consumer, the internal margin that consumer receives is tremendously lower than--and it's really designed to basically cover their expenses and that's about it.

And let me ask just one other question--well, two other questions about the consumer, if I may. One is, if you did a price index on the consumer segment--I don't know, you've got mix in there too, but are you getting some price increases, or is it a mix issue in addition to, you know, the accounting?

If you take a look at the--not--we do not have any material price increase if you really take a look at it. Dutch Boy has helped us a little bit. But besides that pricing has not been a help for us.

And what about mix?

Well, mix with the Dutch Boy also.

Okay. And my final question, I promise, is on again the fourth quarter, since you've given guidance overall, the 600 basis point improvement in margin consumer, would it be fair to add 600 basis points to the margin you had in the fourth quarter of a year ago to arrive at a rough estimate for the fourth quarter in consumer?

No. We've taken a look at it and we do not believe our margin in the fourth quarter in consumer segment will actually even have an increase. But, you know, there's also--we have to take--it's hard to answer this question right now because we are taking our inventory to the fourth quarter and we have a lot of--we'll take a look at the inventories and we'll see what happens with our final LIFO expense and so forth. But with possible LIFO change from last year and so forth, no we do not see 600 basis points for a margin increase in consumer.

And the volume loading going through the plants, obviously, with the fourth quarter being a smaller quarter, the volume loading would be less and of course, you know, that would counteract the absorption pickup we were getting in third quarter.

Okay, and I just wanted to let you guys know that that Sherwin Williams paint I used on my house this spring is staying on and looking very sharp.

Well that's great to hear.

Thanks a lot.

Thank you, Andy.

We do have one final question from Harry [Mortner].

Yes.

Good morning, everybody.

Good morning, Harry.

I had a couple of quick questions for you. First of all, would you comment, please, on your thinking for planning on pension? Have there or will there be any changes in the current year and also, obviously, for next year? And then I have another question as well.

Okay. Well, let me just--I actually prepared a comment about this that I wanted to talk about. And that is our pension fund is over-funded. And when you take a look at it, we'll not make a contribution to our fund. Our expected long-term rate of return on assets is 8.5 percent and has been. We did not meet 8.5 percent in 2001, nor will we meet 8.5 percent in 2002, which has created a shortfall that'll have to be amortized. And when you take a look at it, we're going over the factors; we're looking at whether we should reduce that long-term return on assets. There's a good chance we will reduce it. How much? We have not made our final decision. But if you take a look at it, if you look at it in net, year over year, depending on, because of the shortfall and the amortization and so forth, the change in the results of our pension credit could be between $12 and $17 million next year.

Pre-tax?

Pre-tax.

12 and 17 million you said?

Right. And, again, that's a forecast because we're looking at what we have to forecast what we think is going to happen and it changes everyday, as you know.

Any other changes that you might need to make as far as pension is concerned?

No. We've looked at the other factors. Last year we made some adjustments.

Okay, so you're good there. It's only going to be on the 8.5 percent that you're really thinking. The other question I had was related to the balance sheet and the debt outstanding, which has come down quite dramatically in the last couple of years. You're down to about 500 million on the long-term side and I was wondering, you know, if we look into 2003, for instance, and your free cash flow generation more or less replicates what we'd seen in the last couple of years. Maybe working capital doesn't contribute quite to the extent that it has previously, but after dividends you still generate some free cash. Where can you go with the debt? Have you pretty much taken it down as far as you will take it? And if so, what's the alternative in terms of free cash? Maybe you could just elaborate on that, please?

Well, when you take a look at it, we're always watching our debt. As you know, we have some bonds that mature in 2007, we have some bonds that mature in 2027, and we have some bonds that mature in 2097. So when you take a look at those--

You going to be around for that long?

I hope so. But I don't think so.

I hope so.

In spirit, he'll be here.

I'd love to write that check. But if you take a look at it with our debt, with the interest rates that are on those bonds today and what the competing interest rates the returns that people are looking at, you know, we've looked at the premiums and if they came open we'd evaluate whether we want to buy them or not. Unless someone decides to take a low premium on what they're asking for us today I don't see our debts going down.

So with that, Harry, probably the--for use of, or the use free cash then will revert to the other things that we've talked about, which is purchasing our stock on the open market we think it's a tremendous value at these levels, as well as remaining inquisitive in our consolidating industry. And while there haven't been a lot of deal flows this year, we will continue to be aggressive in those two areas.

Can I just ask you, on the share repurchase side of the equation; you've been in the market pretty consistently. It hasn't really done a lot in terms of changing the price of the stock I suppose one way or the other. I guess you could argue that if maybe it would have a negative effect. And not to say that it's not a useful way of using your cash, but have you given any consideration to, and no pun intended, at Dutch tender here?

Well, you know, Harry, I think when we visit with all of your colleagues I think there is kind of a discount in the stock because of concern over the lead litigation, primarily Rhode Island. And so I think that might have counteracted some of the benefits that you would speak of. Also, in this whole period while we've been buying stock the market as a whole, there's been an adjustment in multiples. And so you could say it's possibly, in the overall lead litigation context, this is also with our improved operations and that, has stabilized the price of our stock in terms of, as you all know better than I, have been some very dramatic climbs and declines and other issues.

Okay, but what about a Dutch tender?

At this point in time, Harry, we're not considering that. We, as stated, will be active in the market with the remaining with the 11 million shares that we have.

Okay, great. Thanks a lot. Congratulations on the quarter. Appreciate it.

Yeah, thank you, Harry.

You bet.

And, Mr. Ivy, we have no further questions. I will now turn the call back to you for any closing or additional comments.

Okay, well we appreciated all of you joining us and for the questions. And, obviously, any of you have any additional questions, Bob Wells and myself will be here to take calls and speak with you individually. And, obviously, even if you go beyond today, any of you have any questions please feel free to call Bob or myself at any time. And thanks again for joining us.

Thank you, everyone. That does conclude today's conference. We thank you for your participation. You may now disconnect you lines.