宣偉 (SHW) 2002 Q4 法說會逐字稿

Good morning and welcome to the Sherwin Williams Company year-end 2002 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 Hennessey, Chief Financial Officer, John Ault, Vice President and Corporate Controller and Bob Wells, Vice President, Corporate Planning and Communications will be available for questions. Please go ahead, sir.

Yes, good morning everybody. Thank you for joining us today for our review of the fourth quarter and full year 2002 results, and our expectations for 2003.

This conference call is being transmitted live in a listen-only mode, by CCBN, via the Internet at www.sherwin.com. An archive 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 Thursday, February 13th, 2003, at 5:00 p.m. Eastern Time.

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. As the operator indicated, after the review of our results, we will open this session to questions.

First, I would like to review the consolidated company performance for the fourth quarter and full year 2002. Sales for the fourth quarter of 2002 were up 2% to $1.16b. For the full year, sales grew 2.3% to $5.18b. Sales for the quarter in full year were 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 products, in conjunction with weak currency exchange rates in South America, partially offset these sales gains.

Gross margin in the fourth quarter improved to 47.5% of sales versus 46% in the fourth quarter of 2001. For the year, gross margin increased to 45.1% of sales, versus 43.8% in 2001. Gross profit grew by $119m over 2001. Half of our gross profit improvement resulted from higher sales volume. The balance came from favorable product mix, improved plant overhead absorption and cost reduction. Moderating raw material costs helped earlier in the year, but are now increasing on a year-over-year basis.

SG&A dollars in the fourth quarter were higher by $20.1m versus the fourth quarter of 2001. SG&A as a percent of sales for the quarter, increased from 37.1% to 38.1%, primarily due to impairment charges and the sluggish sales in our industrial segments. For the 2002 year, SG&A increased $54.7m to $1.78b versus $1.73b in 2001. As a percent of sales, SG&A increased to 34.4% in 2002 from 34.1% in 2001. This increase was primarily due to investments by our paint store segment in new stores, and new color palettes, and increased administrative expenditures and information technology, hardware and software licenses.

Operating income in the fourth quarter increased 8.2% to $108.6m from $100.4m in 2001. For the year, operating income improved 13.1% to $554.1m or 10.7% of sales, from $489.8m or 9.7% of sales last year. Interest expense decreased $14.2m for the year, due to lower debt levels and interest rates. Net income in the fourth quarter increased 25.6% to $57.1m and diluted net income for common share increased to 38 cents from 29 cents. For the year, income before the accumulative effect of a change in accounting principle, increased $47.5m or 18.1% to $310.7m. Higher gross profit and reduced interest expense combined for $133.1m in income improvement, which was partially offset by our SG&A increase. For the year, diluted income per common share, before the cumulative effect of the change in accounting principle, increased to $2.04 per share from $1.68 per share in 2001. Excluding after tax amortization expense of $24.1m in 2001, diluted income per common share would have been $1.83.

In accordance with SFAS #142, goodwill and other intangible assets, during the first quarter of 2002 we recorded an after tax transitional impairment charge of $183.1m or $1.21 per share in the quarter. This reflected a reduction in fair value of certain acquired trademarks and businesses. This was related principally to international acquisitions and the acquisition of Thompson Minwax. Due to the cumulative effect of the change in accounting principle of $1.20 per share for the year, net of income taxes, diluted net income per common share for 2002 was 84 cents per share.

Now I would like to review our performance by segment. In our paint store segment, fourth quarter net sales increased 3.4% to $756.2m. For the year, net sales increased 3.7% to $3.3b from $3.2b. For the quarter and year, 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 and product finishing categories. Comparable store sales increased 1.8% in the fourth quarter, and 1.9% for the year, compared to the prior year.

Regionally in the fourth quarter, our Midwestern division led all divisions, followed by the southeastern division, southwestern division, and the eastern division. This is in terms of sales. Operating profit for the paint store segment in the fourth quarter increased 2.9% to $94.9m. For the year, operating profit increased 2.7% to $398.5m. In both the quarter and the year, the positive impact of higher sales volume and improved margins, were partially offset by increased SG&A expenses associated with new store openings and maintaining high store service levels, including technical support for product finishes customers.

The paint store segment ended 2002 with 2,643 stores in operation, compared to 2,573 stores in operation in the prior year. In 2002 the store segment added 70 net new stores, of which 24 were from the Flexbond paint acquisition in Florida. We are on track to reach our goal of 3,000 stores by the end of this decade. We expect to add approximately 70 net new stores in 2003.

Turning now to the consumer segment, external net sales in the consumer segment increased 3.6% to $234.2m for the quarter, and 3.2% to $1.2b for the year, versus the same periods last year. Consumer segment sales throughout the year have increasingly benefited from the improving DIY market. This, combined with aggressive promotion of many new and existing paint, aerosol and wood care products, more than overcame the adverse effects of a sluggish domestic economy, unfavorable comparisons in our cleaning solutions group, relative to last year, and declining orders from a major retail customer.

Operating profit in the fourth quarter was $22.9m versus $3.9m in the fourth quarter of 2001. For the year, operating profit increased 73.8% to $192.5m versus $110.8m last year. This operating profit improvement resulted primarily from higher sales volumes, improved overhead absorption due to architectural paint volume gains, and reduced manufacturing and administrative expense. Moderating raw material cost contributed to profit improvement earlier in the year, but increased on a year-over-year basis in the fourth quarter.

Turning now to our automotive finishes segment, net sales decreased 3.4% to $104.8m for the fourth quarter, and 2.2% to $453.8m for the year. Net sales for this segment were adversely impacted by weakness in collision repair market and unfavorable currency exchange rates relative to last year. Excluding the effects of currency exchange fluctuations, net sales for the automotive finishes segment would have improved 3.5% in the fourth quarter and 1.2% for the year. Operating profit was essentially flat in the fourth quarter at $12.1m, but increased 6.3% for the year to $54.5m from $51.2m in 2001. This segment's operating profit came under some pressure in the fourth quarter, due to an increase in raw material cost. However, for the full year, this segment benefited from positive raw material cost comparisons earlier in the year, lower manufacturing cost, and administrative expense control. These were partially offset by the currency rate fluctuations I previously referred to.

Turning now to our international coding segment, net sales decreased 9.9% to $59.2m in the quarter, and decreased 8.8% to $244.2m for the year. Sales decreases in U.S. dollars were due to unfavorable currency exchange rates. Excluding the effects of currency exchange fluctuations in 2002, relative to 2001, net sales for the segment increased 28.1% for the quarter and 3.3% for the year. Strong volume gains in the fourth quarter signaled that some stability might be returning to the South American market. Operating profit in U.S. dollars in the quarter was $147,000 compared to a loss of $434,000 in the fourth quarter of 2001. For the year the segment realized an operating loss of $5.6m compared to an operating profit of $4.8m in 2001.

Results for the fourth quarter 2002 include a $3.2m impairment charge in accordance with FAS #142. In addition to the fourth quarter impairment charge, the segment incurred a charge of $8.7m in the first quarter of 2002 for the impairment of long-lived assets in accordance with FAS #144. Combined, these impairment charges totaled $11.9m, were taken against the segment's operating profit in 2002.

I would now like to comment briefly on our balance sheet items. You will find more balance sheet information on our Website under Sherwin.com/investorrelations/pressreleases. Our company's financial condition continued to improve in 2002. We ended the year with $164m in cash and cash equivalents, an increase of $45.2m over the end of 2001. Our current ratio increased to 1.39 at December 31 2002, from 1.32 at the end of 2001. Total debt declined to $521.7m at December 31 2002, from $615.4m at the end of last year. Total debt, as a percentage of total capitalization, improved to 28% in 2002 from 29.3% at the end of 2001. This improvement was accomplished in spite of the impact on capitalization of the $183.1m after tax charge for the cumulative effect of change in accounting principle in 2002.

For the second year in a row, the company's net operating cash flow exceeded $550m, aided by improved profitability and stringent working capital control. Our working capital ratio, accounts receivable plus inventories, less payables to sales, was 11.5% in 2002 versus 13.8% for 2001. Net operating cash flow for 2002 was $558.9m compared to $561.6m in 2001. The net operating cash flow provided the funds necessary to support the following items; the investment of $126.5m in long term assets, debt reductions of $95.3m, cash dividend payments of $91m, acquisitions of $26.6m and treasury stock purchases of $190.3m during 2002.

During 2002 our company purchased 6.7m shares of its common stock in the open market. Of that 1,507,800 shares were purchased in the fourth quarter of 2002. The purchase authorization remaining at the end of 2002 was 10.3m shares. We intend to purchase shares of the company's stock for treasury in the open market from time to time, as we believe our stock is a good investment.

Looking now to 2003, barring any large acquisitions, we expect our total debt to capitalization to be approximately 26.5% at the end of 2003. Capital expenditures for the year will be approximately $130m. The predominant share of these capital expenditures will continue to go toward expanding our store network, plant productivity improvements, and maintenance and distribution infrastructure. Depreciation will be about $108m versus $103.7m in 2002. Amortization will be $11.9m versus $12m in 2002.

Now that I've reviewed our segment performance and commented on our balance sheet items, I would like to now give you a brief update on the status of lead litigation. In turning first to the Rhode Island litigation, as you all know, during September 2002 a jury trial commenced in the first phase of the action brought by the state of Rhode Island against the Sherwin-Williams Company and other defendants. The sole issue before the court in this first phase, was whether lead pigment in paint constitutes a public nuisance under Rhode Island law. This first phase did not consider the issues of liability or damages, if any, related to the public nuisance claims.

In October 2002 the court declared a mistrial, as a jury was unable to reach a unanimous decision. The jury was split four to two in favor of the defendants. At this point, the future and timing of the Rhode Island case is unclear. Both sides have filed motions and presented arguments for the judge to direct verdicts in their favor. Judge Silverstein has not ruled on these motions. Attorney General Whitehouse, who filed the suit, did not stand for reelection last fall. We do not know the specific intentions of the recently elected new Attorney General of Rhode Island toward this case. The Rhode Island case was the first legal proceeding against the company to go to trial, related to the company's lead pigment litigation, which has been ongoing since 1987.

Additional legal proceedings pending in other jurisdictions have been scheduled for trial during 2003. It has been our policy in these calls to keep you informed of the status of any lead suits pending against the company that have been set for trial. During our third quarter 2002 conference call, we reported two cases filed in Wisconsin, which had been scheduled for trial, one was in June and the other in October of 2003. Since that time, the judge has dismissed in its entirety, the case scheduled for June. The four cases in Mississippi are still scheduled for trial in the spring and summer of 2003. In the case of a recently dismissed case in New Jersey, the plaintiffs have announced their intent to appeal, but we do not believe they've filed their appeal as of this time.

As a reminder, to date we have had less than 100 lead litigation cases filed since 1987. Excluding the most recent cases, over 85% have been dismissed. None have ever been settled, and only one, Rhode Island, has ever come to trial. So this completes my review of our results for the fourth quarter and the full year 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 2003, before opening this session to questions. Chris.

Thanks Conway, and good morning everybody. Again, thanks for joining us. You know, given the challenging operating environment we faced last year, we're pleased with our earnings results for both the quarter and the year. Our diluted income per share, at 38 cents for the quarter and $2.04 for the year, represents increases at 15% and 11.5% respectively over 2001. On a comp basis, operating income improved 8.3% in the fourth quarter and 13.1% for the year. We achieved this on net sales increases of 2% for the quarter, and 2.3% for the year.

And I would like to take a moment to comment on the progress we made last year in three areas. First, as Conway commented, during 2002 we maintained strong sales momentum in our architectural coatings business. Our stores group stayed focused on the task of serving the professional user markets, and our sales to contractors grew nicely, particularly in the residential and property management markets.

We're also encouraged by the robust do-it-yourself, or DIY sales performances from both our stores group and the consumer division. The increase in DIY traffic in our stores, we think, is evidence of the enthusiastic acceptance of our new color palettes and the enhanced store environment achieved through our store refresh program. The introduction of our new Dutch Boy twist and pour plastic container in 2002 has made Dutch Boy the most widely distributed paint brand in America, and generated strong double-digit comp skew sales increases in many outlets that carried the brand prior to the change in packaging. Throughout the year, this combination of strong wholesale architectural business and strong DIY sales has helped to offset the continued softness we're seeing in our commercial and industrial markets.

Secondly, we continue to benefit as a company from our focus on improved working capital management. During 2002, we reduced our receivable days to 52, down from 56 days in 2001, and trimmed inventory levels by six days, while continuing to maintain high service levels. These improvements contributed $81m to cash from operations over the year. That's $81m on top of $192m in working capital improvements reported last year.

Finally, our operational excellence initiative that we shared with you had begun to bear fruit in 2002. The reductions in manufacturing costs and administrative expenses achieved during the year in our consumer, automotive and international segments helped reduce working capital and accounted for much of the lift in profit we achieved relative to sales growth. With more employees slated for Six-Sigma Certification in the years to come, and the volume of operational excellence projects increasing, we believe that we can continue to add further improvements in operating efficiency in 2003 and beyond.

As Conway commented, we'd like to give you a forward look to 2003 and we anticipate modest growth in the domestic economy and continued challenging business conditions. Our plan calls for annual sales growth in the range of 3% to 5% over 2002. With sales in that range, we expect diluted net income per share for the year in the range of $2.17 to $2.29 per share, compared with the $2.04 per share in 2002, before the accounting changes.

First quarter sales for '03 will increase approximately 2.5% to 4.5% over last year's level. With this level of sales we anticipate diluted net income per common share for the first quarter to be in the range of 24 to 27 cents per share, compared to 23 cents per share in the first quarter of 2002, once again, before the accounting change.

On a final note, 2002 marked the 23rd consecutive year of dividend increases for the Sherwin Williams Company. Yesterday, our Board of Directors approved an increase in our quarterly dividend from 15 cents per common share, to 15.5 cents per common share, payable on March 10th, 2003, to shareholders of record on February 24th, 2003.

Now, all of us would be happy to take your questions.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us, and we'll take as many questions as time permits.

Once again, please press star-one if you have a question. And, we'll pause for just a moment.

And we'll take our first question from Jason Putman, of Credit Suisse First Boston.

Hi, good morning.

Good morning, Jason. How are you?

Good, my first question is really on the revenue side. It looks like the quarter came in a little bit below what your third quarter guidance was. Can you just go over, perhaps, the trends throughout the quarter, and maybe where it came up a little bit short?

Yeah, I think, Jason, you're correct that the third quarter was a stronger quarter for us than the fourth quarter. And I think that we just saw, across all segments, the economy softening a little bit. Clearly, in the areas that we've been giving you guidance on, the industrial sector, where we hoped to see some lift there, that continued to be a soft quarter for us in manufacturing and product finishes. And, Architectural continued to stay strong for the quarter. So, probably it was just on the industrial side that we missed a little bit.

And, trend wise throughout the quarter, did you see any sort of change in trends? Maybe going a little bit into 2003, what have you seen so far?

Well, in terms of in the quarter, on a comparison basis, December was a stronger month, followed by October and then November was sluggish. And so, as you know the sales in the quarter would be weighted toward, of course, October, November and then December.

But it was the sluggishness in November where some of the slowdown occurred, but we've seen that pick up in December. And, I think in terms of the first quarter, we've given you our expectations and that reflects what we see at this point in time.

OK, and just quickly on some of the lead litigation, a couple of the cases you mentioned before Mississippi, I believe the one in Milwaukee is a public nuisance cases. But are any of the four cases in Mississippi public nuisance cases?

No.

OK, and then, a couple of housekeeping questions, really; the share count, do you know what the number was at the end of the year?

148,434,000.

And then lastly, the tax rate for the quarter came in a little bit below what I was looking for. Is 38% still the right tax rate going forward? Or has that changed?

No, I would use 36.5% for 2003.

OK, so that-your guidance assumes a 36.5% tax rate?

Yes.

OK, that's all for me. Thanks, guys.

Thank you, Jason.

And our next question comes from Eric Bosshard, of Midwest Research.

Good morning. I have a couple of things. Raw material costs, can you talk a little bit about what the basket looks like for the industry now? And, maybe give us a little bit of a timeline on what it was in the first half of '02, second half of '02, and then what you expect, as we go through '03?

Well I think, as you know, in terms of comparisons, they were favorable in the first half. But as we could see with the oil prices firming in that, on a year-over-year basis, they were not as favorable coming in, particularly into the fourth quarter.

And for the year, obviously with the events in the Middle East, we see the price of oil is obviously going up. And, that is putting pressure on our raw material costs. And because of that, we expect this pressure to continue. And also, separate from crude oil and natural gas prices, TI-02 suppliers have announced a 6-cent per pound price increase effective February 1st, 2003.

Latex manufacturers have also announced increases, along with a number of solvent and [inaudible] suppliers. Of course, the solvent prices moved more in line with the price of oil. However, with the caveat given the present uncertain geopolitical environment in that, basically, in the levels that we see in the market price of oil and natural gas, we would expect industry wide raw material prices in 2003 to be between 2% and 4%.

Secondly Chris, you've had three good quarters in a row in the consumer segment, which that's a streak you haven't had put in place in a long time. Talk a little bit about what you see driving that, and if we can expect this business to continue to post such revenue gains through '03?

There are two pieces that are driving the consumer segment's results, Eric. Number one, on the topside revenue, certainly the twist and pour container in Dutch Boy's, tripling their doors that they can be purchased in, it’s been a look for that organization. And yes, we think we can see that continuing.

As you recall, we didn't get that into the program until into the third quarter and now, as we've sold through a lot of--or the retailers have been selling a lot of the old metal cans on the shelf, we're really not at the height of the paint season yet. So, we're cautiously optimistic that that program still has some legs and some lift for us going into next year, particularly as we head into the second quarter and get into the paint season.

I think the other thing that's been helping that group has been the impact of the architectural volume gains that the company's experiencing in stores as well. And as you know, the consumer segment is the manufacturing distribution arm servicing our stores group.

And Conway made the comment about the absorption that we've gotten at those factories, through strong architectural paint gains. And I think while our store sales numbers are a little bit soft, compared to our history with them from what we'd expect, the architectural performance in that group was very, very solid this year. That's helping consumer. And I would expect that to continue into 2003 as well.

Great, and then lastly, in terms of cash flow in '03, it looks like you still have a good amount of free cash that you'll generate in '03. The repurchase activity in '02, do you repeat that in '03?

I think we've said that our repurchase activity has been consistent over the last couple of years. Nothing's changed. We'll continue to buy it opportunistically from time to time, when we think it's at a good price and we think it's at a great price right now.

Great, thanks.

We'll hear next from Andrew Cash, of UBS Warburg.

Hi Chris. Just following up on that comment about the share repurchase, you increased the dividend about 3%. I'm just kind of curious. I mean your growth rate is faster than that, I would think, at least historically it has been with respect to the future. Are you trying to maybe buy back a few percentage of your shares outstanding, increase the dividend a few percent, and end up with a rate of underlying growth that's returned to shareholders, you know, about 6% or 7%?

I think that, just to give some thinking on the dividend decision, we've had a policy of paying out 30% of trailing earnings in a dividend. That's 16.5 cents, or 62 cents for the year, will put us right at that 30% number. So that's how we get to that particular number.

Last year, we paid out a lot higher a percent because we had a little bit of a tough year but a great cash year. We want to continue to reward our investors with a continued dividends. So, the dividend growth, year-over-year this year is a little less than it might have been had we not historically given a bump to it in 2001, if that makes sense to you.

Yeah, and just two other questions. If you could update us a little bit more on the innovative package, the square plastic package, is that-you know, how big is that? Could you give us some idea of the size of that? And then finally, I had a question on international. It looks like you guys are working some magic down in South America. Could you give us a little more information as to how you're able to increase your profits, year-over-year at a time when your sales dropped so dramatically?

OK, let me comment on the package and then I'll ask Sean to maybe comment on South America for us. You know, I think on the package, Andy, we've continued to give guidance that we're pleased with it. We tripled the doors where Dutch Boy can be purchased. Where it goes from there, I think we've also indicated that there are other brands of the company and we'd like to see that package move into, and specifically the Sherwin Williams brand, sold through our own stores. And we're working towards being able to do that later this year.

So, I think that you'll continue to see us highlighting the significant advantages of that, consumers get it and appreciate it. And, as we commented in the notes, some of the retailers that were Dutch Boy retailers prior to it and now with the new package, have seen some real significant listed shelves. So, the impact is going to be there. This Dutch Boy brand, we have to keep in mind, is just a portion of this consumer division's business. And that consumer division is just a portion of the consumer segment. So, we're very pleased with its performance, given all that, and continue to expect to do well.

Commenting on South America a little bit on how we've been able to get their profit performance with those low sales things, Sean, if you could take them through some of the things we've been doing down there?

Yes. First of all, on the sales for the year on international, just for your own-if you negate the effects of the currency exchange rate, our net sales for the segment would've increased 28% for the quarter, and 3.3% for the year. So, in the local currencies we do have sales gains.

What they've been able to do, quite honestly, is really to get the selling price increase in, and actually we have a higher margin there this year than we did last year. So, when you take a look at our gross margin, our selling price we've been able to get the raw material increases that they've been experiencing, plus the exchange rate fluctuation hits, and our gross margin actually is higher. So, that's really been the magic.

And then, with the exchange rate, our SG&A is actually down, as a percent of sales then, in gross dollars.

I think the other thing too, Andy, it's been the team's effort down there on the cost side of the business. This was not a surprise going into this year. We knew Argentina was going to devalue and we give great credit to our guys down there. They have a real cash mentality about running this business. We haven't had to put cash down in there to keep it afloat. They've done a really phenomenal job of getting costs out of these operations.

And actually, we had flow through in Argentina for the year.

OK. Well thanks for the update; very good showing.

Thanks.

Our next question comes from [Rick Laddick], of [John A. Levan] and Company.

What percentage of your costs of goods sold is petrol related chemicals?

We would estimate approximately 30% of our total cost of goods sold would be influenced by petrochemical pricing. This would not necessarily be directly influenced because part of that 30% involves chemical intermediates, which though petrochemical pricing will influence the feed stocks going in there, there are also other factors that affect pricing on chemical intermediates.

So, we would estimate roughly 30% of our cost of good sold would be influenced by petrochemical pricing.

And, I'm just trying to get a sense for the numbers going forward. I think oil, on a year-over-year basis today, crude oil is up 50%. So, you used some hedging techniques o be able to keep your costs from inflating at a huge rate? Or, how do you manage that?

No, we don't use hedging on raw materials. I think, given the size of the company, we have leverage with raw material suppliers and we have choices there. I think, even with 50% increases in crude oil prices, you know, as Conway said it takes a while for that to work its way through the derivative market. The guidance we're giving for the year on 2% to 4% cost increase for the industry is where, I think, we'll see the business shake out.

And I might also add that our competitors, as well, are faced with the same cost pressures. So, the issue, in terms of if there is a margin squeeze caused by this, it's basically a timing issue relative to when everyone in the industry would increase prices to overcome that. But usually, in times of very significant raw material price increases, most of these would work through the industry in six to nine months, based on my estimate.

Another quick question I had is, I mean you characterize your business as a challenging environment. It seems like half of your business has been very challenging, the industrial, but the other half, you've got housing turnover at all time highs and car sales at all time highs. So, I mean, when you look at the business I mean how can you assess sort of the probability of doing well next year? I mean housing starts and housing turnover could collapse. Auto sales could go down a lot, so, you could theoretically benefit from an industrial rebound, but on the flip side be really hurt if sort of those trends are--.

I think the things that give us confidence going forward is that first of all, the company is blessed with a wide platform of coatings type customers that we sell to. And, you've just gone through that rigmarole, where housing was strong and the consumer was strong, but the industrial and the new construction were weak. So, in any given environment, those things flip back and forth.

I think the other thing that we look at too Rick, is that the market share position that the company enjoys, and it's always been our intention that given the strength and the brains that we have, and the talent of the organization, that we can continue to find ways to grow this company, and that will be our plan going forward.

Thank you very much, I appreciate it.

Our next question comes from Larry Horan, of Parker/Hunter.

Hi. A question on the tax rate, your tax rate fell considerably relative to the first three quarters, in the fourth quarter. You basically are now saying that the tax rate's going to be down about 100 basis points for 2003 versus 2002. Could you kind of walk through what creates that?

Really when you take a look at what happened at the end of this year, if you'll take a look at the state tax, where we took the reduction in our effective rate was in the state taxes. We had a ruling in Massachusetts that upheld our SWMSI/DMSI, and what we do is we take our trademarks and put them in there to save on state taxes. So what you have is, that ruling allowed us to have a lower tax rate. When you take a look at next year, we have a change in the federal, dealing with COLI and some COLI situations. So that's the reason why we have the lower effective tax rate next year, 36.5.

You said COLI?

Yes.

Can you define that? I'm not familiar with that.

Company owned life insurance.

Oh, OK. Now I understand what you're talking about. OK, thanks a lot.

Our next question comes from Robert Goldberg of New Vernon Associates.

I'll just ask a couple of questions about just the balance sheet and the cash flow. You guys have done just a fantastic job of working capital. Can you talk about the outlook there for '03, whether there's any more to drive out, any more cash to be gained from working capital reductions?

Well we're still working on a few projects, as Chris talked about, operational excellence and so forth. We still see some areas where we believe that we have some opportunities, but we are not, we do not foresee the dramatic decreases that we've had in the last two years. Right now we're planning that we may actually, working capital will be flat as a percent of sales, or actually just improving possibly a tenth as a percent of sales.

OK, and on the balance sheet, you've taken the net debt to total capital down about five points in '02 from I think 26 to 21. That's a great situation, and in this environment. I'm just wondering your philosophy about the appropriate leverage that you should maintain, and whether there are opportunities that the balance sheet provides for you?

I think the balance sheet provides a lot of opportunities for our company. It's an incredibly strong balance sheet at the moment. The obvious question is acquisitions and what we can be doing there. We just have not seen the type of properly priced opportunities for us, and in lieu of that, we're using cash to continue to bring our debt down, buy back stock, and that's basically what we've been using it for.

I think Bob, significant, almost all of our debt now is really, is long term, and the next you could say traunch, that would come due, would be roughly $200m in 2007, and the rest of it goes out to 2027, 2097.

So we should expect just to see cash build for the time being, is that what you're saying?

Yes.

Great. Thank you.

Our next question comes from Chuck Cerankosky of McDonald Investments.

Good morning everyone.

Good morning Chuck.

A couple of questions, you touched on it a little bit Conway, but I'd like to see if you could describe what the price increase environment might be for your products, given the raw material costs pressures, and then Chris, can you give us some idea what the actual retail sell through is for Twist & Pour in the venues that are now selling it, especially the initial read at Wal-Mart? Then a comment on what's happening to your Kmart volume, and where it might go as customers shop at stores to replace the ones that Kmart's shutting down.

Chuck, essentially in 2002 our pricing was essentially flat and even though overall our volume was higher than our total sales, that was partly due to product mix and obviously we've been able to improve because of the cost reductions and efficiencies. I think right now, I think we may need a small amount of price increases in 2003, but we need to wait and see how the raw material situation rolls out the rest of this year.

I think also your point, Chuck, about what's the environment for that, as you know our pricing ability at our stores organization is much stronger than our ability to get prices with our other major retailers. So I think that time will tell, but we're going into this year maintaining an opinion that we're going to be able to keep our margins moving in the right directions and price, perhaps, will have to play a role in that.

Going on to your question regarding the Twist & Pour and the sell through, and if we can comment on that. I think, as you know, we don't comment on any one individual customer's performance, but overall we have been pleased with it. We've given you some guidance that is where Dutch Boy was on the shelf and then we replaced it with the new Twist & Pour container, we've seen double-digit sales gain there, and every retailer that currently has the program is very positive on it, and excited about its opportunities. We are just coming through December and January, which are the two softest paint-selling months of the year, so this perhaps isn't a good time to be looking at it. We'll be very excited as the weather warms up, and the paint season really gets rolling, to see the impact of it.

Regarding Kmart, as you know they've announced their intention to close another 316 stores; that will bring them to 1,500 still in the chain. They continue to be a good account of ours, and where those customers will go from those 316 stores I think is depending on where they are. We're pleased to see Kmart continuing to deal with their issues and try to strengthen that company, and doing all we can to help them.

Thank you.

Our next question comes from [Frank Dunall] of [Additch Capital].

I've got a couple of questions. I know you don't like to talk about individual customers, but is Sears becoming a better paint seller lately? Have you stabilized whatever was going on there a couple of years ago?

Yes.

And I just missed what Conway said. Conway can you tell us what the deprecation number for this year's going to be again?

$108m for 2003.

OK, that's it, thanks.

We'll go now to Richard Diamond of [Inwood Capital Partners].

Yes, just a follow up on debt to cap levels. What is your, is there a target percentage we should use going forward? And is there any thought to increasing stock buy backs to reflect the value that Sherwin stock price represents?

Well we would expect our total debt to capitalization next year to be about 26.5%, but as I mentioned, we have a significant portion of our debt is long term, and I think Chris--.

I think we're very comfortable at those levels Richard; we don't have a target that we want to be at. I think in Conway's comments he made the point that barring any major acquisitions, that's where we'll end up. If we found an acquisition that fit our model, we have significant ability, with this balance sheet, to go out and get it. And, we would not be opposed to letting the debt go higher for an appropriate acquisition.

Again on the stock, we also have not set any particular goals there. We have 10 million shares authorization outstanding. The last two years we bought back in excess of 6 million shares each of those years, and that's been pretty much our trend. Again, barring any different outlooks in the market, you should probably look for us to continue in that vein.

Thank you very much.

Moving now to Jeffrey Zekauskas of J.P. Morgan.

Hi, good morning.

Good morning Jeff.

A couple of things. Administrative costs went from I guess $28m to $42m, what was behind that?

Well in terms of, obviously--.

What you spent on that was more.

Environmental, insurance costs and other administrative costs, when you break that out.

The second thing is, I noticed that for the year, depreciation went from, I guess, $109m to $103m. Net plant was about flat. Like, what lead to that?

Part of it might be due to the impairment charge on some assets in South America. As well as, we divested our graphic arts and some portion of the CSG. So, the depreciation of those assets went away.

OK. Do you think you're being, I guess just to follow up on a question of another caller, in terms of raw material price inflation. I mean doesn't two to four sound light for the current conditions that are out there?

Well we're obviously looking at the price of oil being in the low 30s so you know that's factored in our thinking. We would obviously have to re-look at that if because of geopolitical events there was a big spike in the price of oil. But that's basically what we see right now.

Let me just rephrase it.

That's for the industry now.

No, I understand, for the industry. Is it the case that in getting your average raw material inflation forecast for '03 you assume that oil prices come way back down in the second half, or do you assume that oil and natural gas stay where they are now?

We're basically assuming, because of all the uncertainty, I think the only thing we can assume is that they stay where they are right now, and it would not be a good idea for us to plan on any decreases in this area.

I guess lastly, are there more opportunities at Depot, now that they seem to be struggling a little bit? In terms of Sherwin-Williams being able to do more business with them?

Well our position with Home Depot has been consistent Jeff, they're a great customer of our company and we enjoy a very solid business with them with our Minwax brand. We have lots of opportunities, we continue to maintain a relationship there, and we'll see what happens.

OK, thanks very much.

Thank you Jeff.

And our next question will come from Jeff Castle of AIC Limited.

Hi fellows. Just a couple of questions, I guess following up from the last question. Are you making any sort of real efforts to get into the home center segment? I mean you think of your consumer distribution base being a bit more weighted to the maybe the old fashioned retailers. What emphasis are you putting on the home centers?

I don't know that we'd call Wal-Mart an old fashioned retailer. We do have strength in the discount channel with Kmart and Wal-Mart and the mass merchant with Sears. Minnard's, which is the number three home center chain in the United States has a very, very solid program with Dutch Boy and a number of other brands that we sell. To your point, Home Depot and Lowe's currently do not carry architectural product lines from us, but we continue to have ongoing relationships there, as well as conversations regarding their business.

And just another question, follow up a little bit on the environmental, there's some fairly big increases here, eight versus five. What is that cost related to?

It's really related to just timing on various different projects. I don't think it's on any particular one project that I know of.

Jeff, it's a number of different sites that we do remediation at. Some of our manufacturing sites, old manufacturing sites that we have to clean up in accordance with state regulations, and those costs just, that's going over time.

Right. OK, thanks a lot.

Thank you.

And our final question will come from Barbara Allen of Natexis Bleichroeder.

Hi. If you're having trouble hearing me, I'm in Ireland, so it may be delayed getting across. But I was intrigued by one comment in the text, where you said sales of industrial maintenance and product finishes were slightly positive. I assume that's versus '01, and am I correct, this is the first time in seven quarters? And thirdly, what kinds of product finishes?

One, in terms of our product finishes, I'm not sure of the seven quarters, but it's been a long time. In the fourth quarter it was slightly positive and I think the strengths in those sectors have been in terms of wood finishes in that, and I think in terms of some of the other areas, those are flattening and not declining as much. Then with the wood finishes area, that's giving us part of a pickup. I think also in the case of industrial maintenance, where maintenance has been deferred by a lot of manufacturers for some time, we can just see spotty expenditures occurring in this area. A lot of bridge refurbishment and that is going on with the department of transportation. So that's where we're seeing some strength.

Well that's encouraging, thank you.

Thank you.

And there are no further questions at this time. I'll turn the conference back over to our host, for any additional or closing remarks.

OK, well thank you all for joining us today. Bob Wells and I will be available the rest of the day to take questions. I also want to mention to you, as many of you know, we have in the spring we have here in Cleveland, presentations made by our operating management to the financial community. We are scheduling that event for April 8 this year, and I would expect probably this next week we would be sending out invitations. If there's some of you who do not receive an invitation, or who are not on our mailing list, if you would also, if you're interested in attending, please give us a call.

Again, we thank you very much for your participation this year, on this call, and Bob Wells and I look forward to answering any follow up questions that you have. Thank you.

And that concludes today's conference call. Thank you everyone for your participation, and have a great day.