宣偉 (SHW) 2003 Q1 法說會逐字稿

All lines will be muted during the broadcast. After the presentation, we will begin the question-and-answer period. If you would like to ask a question during this period, says please press star 1 on your touchtone phone. Your questions will be answered in the order received. Should any participant need assistance, please disconnect and reconnect. Mr. Ivy, please begin.

Thank you, good morning, everybody and thank you for joining us today for the review [INAUDIBLE] and three results and our expectations for the rest of the year. Joining me today is Christopher Connor, our Chairman and Chief Executive Officer, Sean Hennessy, our Chief Financial Officer, and John Ault, our Vice President and Controller and Bob Wells our Vice President of Corporate Planning and Communications. This conference call is being transmitted live in listen-only mode by CCBN via the internet at www.SHERWIN.com. An archival 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, May 1, 2003 at 5:00 p.m. eastern time.

Before proceeding, I would like to remind that you during this conference call, we will make certain forward-looking statements as defined under the U.S. federal securities laws with respect to sales, earnings, and other matters. These forward-looking statements are based upon management's current expectations, estimates, assumptions and beliefs concerning future events and conditions. Listeners are cautioned not to place undo reliance on any forward-looking statement. Forward-looking statements are necessarily subject to risk, uncertainty and other factors, many of which have are outside of the control of the company and could cause actual results to differ materially from such statements and from the company's historical results and experience. 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. Any forward-looking statements speaks only as of the date on which statement is made and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Now, having done that, we will, after the review of our results, we will open the session to questions.

Starting with summarizing our company's overall performance for the first quarter of 2003 versus first quarter of 2002, our net sales decreased 1/10 of 1% to $1 billion, 148 million. This result was impacted by continuing weakness in the domestic industrial sector, harsh weather, and changes in buying patterns of some retail customers, and weak currency exchange rates. Gross margin improved to 43.7% of sales from 42.8%. Excluding a charge of $9 million to cost-of-goods sold in the first quarter of 2002 for the impairment of long-lived assets, gross profit for the first quarter 2003 was essentially flat with last year in dollars and as a percent of sales. So, in general, in administrative spending for the quarter increased 18.3 million to 440.5 million from 422.2 million in the first quarter of 2002. SG&A as a% of sales increased to 38.4% from 36.7%. This increase was primarily due to an increase in pension expense, investments by our paint store segment to maintain a high level of customer service, and increased investments in the Asia-Pacific market.

As we reported last quarter, our defined benefit pension plan is currently over funded by approximately $260 million. However, over the past two years, the actual returns earned on planned assets have fallen short of our assumed rate of long-term return of 8 1/2%. Therefore, we anticipate that our net consolidated pension expense for the full year 2003 will be a charge to operations of approximately $1 million. And this compares with a credit of $23 million that we received in 2002. For the first quarter, pension expense increased 6.4 million, 4 1/2 million of which is reflected in our SG&A expense. Our interest expense for the quarter decreased by $600,000 and other expense net increased by $300,000. The resolution of certain outstanding tax issues reduced our effective income tax rate for the quarter to 36.5% from 38% in the first quarter 2002. Income for the quarter declined $4 million or 11.5% to 30.8 million from 34.8 million in the first quarter of 2002 before the accumulative effective change and accounting principle.

The decrease in income was due primarily to an increase in SG&A expense on flat sales. Diluted net income for common share for the quarter was 21 cents per share, compared to 23 cents per share before the accounting changes in 2002. As you may recall in the first quarter of 2002, the company recorded an after-tax transitional impairment charge of $183.1 million, or $1.21 per share. As a accumulative effective the change in accounting principle for indefinite lived intangible assets and goodwill. And now, I would like to review our performance by segment. Sales in our paint store segment increased 2.9% to $716.3 million from $695.9 million in the first quarter of 2002. This was due primarily to strong architectural sales that were partially offset by weak sales of industrial maintenance products and OEM product finishes. Regionally, our southeastern division led the sales performance followed by midwestern division, southwestern division, and eastern division. Comparable store sales or sales by stores open for more than 12 months were flat with the first quarter last year.

Comp store sales growth was adversely impacted by negative comparisons in industrial maintenance and OEM product finishes sales. Paint store segment operating profit declined $10.1 million to $29.9 million. This was primarily due to the cost of maintaining superior customer service, incremental expenses associated with new and acquired stores, increased pension expense of $3 1/2 million, increased utility cost of $2 million and a $1.7 million increase in bad debt expense. In spite of this increase in bad debt expense, the bad debt expense for the company still represents only about 8/10 of 1% of credit sales. Although domestic market conditions remain challenging, we continue to open new stores. For the first quarter of this year, we opened nine new stores and closed one. Paint stores ended the quarter with 2,651 stores in operation in the U.S., Canada, and Mexico. I will now go to the consumer segment results for the first quarter 2003.

External net sales decreased by 4.5% to 266.2 million, from 278.8 million in the first quarter of 2002. Sales in the first quarter were impacted by a variety of factors, primarily related to slow economic growth and unusually harsh weather. Operating profit for the segment decreased 4.1 million to 39.1 million from 43.2 million in the first quarter of 2002. The decrease in operating profit was due primarily to lower sales volume and related manufacturing absorption and increased pension expense of 1.8 million compared to last year. Turning now to our automotive finishes segment, first quarter net sales decreased 4.6% to 106.4 million from 111.6 million in the first quarter of 2002. The collision repair market in the United States has been negatively impacted over the past year by an overall reduction in the number of repairable vehicles. While slowly recovering the automotive market has curtailed sales to original equipment manufacturers.

However, the first quarter sales shortfall by our automotive finishes segment was due primarily to unfavorable currency rates, excluding the effects of currency exchange fluctuations relative to last year, net sales for this segment were up slightly for the quarter. First quarter operating profit for the automotive segment was 10.1 million. This was 1.3 million below first quarter 2002 results. As with our consumer segment, operating profit for automotive finishes segment was negatively impacted by lower sales volume and the related manufacturing absorption and increased pension expense compared to last year. Turning now to our international coating segment results for first quarter 2003 versus first quarter 2002. If we exclude the effects of currency exchange fluctuations relative to last year, net sales for the segment increased 9.5% for the quarter. In U.S. dollars, net sales decreased by 3.6 million to 57.8 million compared to 61.4 million in the first quarter of 2002.

The segment reported in operating loss of $300,000 compared to a loss of $8 1/2 million a year ago. Excluding a first quarter 2002 charge of $9 million to operating profit from the recorded impairment of long-lived assets, first quarter 2003 operating profit declined by $800,000. The reduction in operating profit from last year excluding the impairment charge was due primarily to significant currency rate fluctuations that adversely effected gross margins as a result of purchasing many required raw materials on a U.S. dollar denominated basis. I would now like to comment briefly on our balance sheet items. You will find more balance sheet information on our website under www.SHERWIN.com, investor relations press releases. We have continued to manage our receivables, inventories and payables as well. The net of our accounts receivable plus inventories less payables was 13.2% of sales compared to 15.5% of sales last year.

Our total debt on March 31, 2003, was $116.5 million below our debt level at the end of the first quarter 2002. Total borrowings to capitalization were 32.6% at the end of the quarter versus 33.6% at the end of the first quarter 2002. Barring any large acquisitions, we expect our total debt-to-capitalization to be approximately 26 1/2% at the end of 2003. During the first quarter of 2003, the company purchased 2,550,000 shares of its common stock in the open market. We intend to purchase shares of the company's stock for treasury in the open market from time to time. At March 31, 2003, we had a remaining authorization from our board of directors to purchase 7,750,000 shares. In the first quarter of 2003, in terms of other items, we spent 33 million on capital expenditures, depreciation expense was 25.4 million, and amortization expense was 2.8 million.

For the full year 2003, we expect our capital expenditures will be approximately $130 million. The predominant share of these capital expenditures will continue to go toward expanding our store network, plant productivity improvement, and maintenance and distribution infrastructure. Depreciation will be about $108 million versus 103.7 million in 2002. Amortization will be 11.9 million versus 12 million in 2002. Now, I would like to give you a brief update on the status of our lead litigation. Recently in Rhode Island, Attorney General Lynch declared his intent to retry the case, however, at this time it's unclear exactly in what form or when this retrial will occur. As a reminder, 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 had trial dates set for 2003. It's 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.

Four cases in Mississippi still have trial dates during the summer and fall of 2003. A public nuisance claim brought by the city of Milwaukee is scheduled for trial in late October of 2003. If you recall during our fourth quarter year-end 2002 conference call, we reported that one of the two cases filed in Wisconsin had been dismissed. 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. Only one, that's Rhode Island, has ever come to trial. This now completes my review of our results for the first quarter of 2003. Now I would like to turn the session over to Chris Connor who will make some general comments and highlight our expectations for the second quarter in full year. We will then open the call to questions.

Thanks, Conway, and good morning, everybody. Thank you for joining us today. I think I can best describe this as a good news/bad news quarter. As evidence by the result that Conway reviewed for you. On the positive side, we continue to be encouraged by the strength of our architectural paint sales through our store segment. The investments we made in new products and color systems, adding new stores and sales territory, and upgrading our existing stores continue to pay off in the form of strong sales increases to both professional painters and the do-it-yourself consumers. In 2002, we believe our paint store segment gained share in most segments of the architectural market.

And I'd say that based on the strength of our sales to these customers in the first quarter of '03, we think it's likely this trend is continuing. We also see some good news in the first quarter results of our international coating segment, though it might be a little less obvious to you. If you back out the negative effects of currency exchange fluctuations, sales on local currencies grew by almost 10%, 9 1/2% to be exact, during the quarter, and that was fueled by strong volume gains in that part of the world. This continues a trend that began in the second half of last year, and our sales momentum in these markets is clearly growing, and we believe this growth translates to market share gains there as well. This positions us well as economic and currency stability returns to these markets. A growing strength of our balance sheet is another bright spot for our company in the tough economic environment we face in the first quarter, we were once again able to improve our current ratio by reducing accounts receivable and controlling inventory growth.

At March 31st, total borrowings were 15.8% lower than a years ago. Even though we had invested nearly twice as much capital and acquired nearly 50% more shares of our own stock on the open market during the first quarter of this year, compared to last year. We also increased our first quarter dividend for the 24th consecutive year. Unfortunately, it's not difficult to spot the bad news in our results either. Our diluted earnings per share of 21 cents per share versus 23 per share before the economy changed last year is disappointing. These results were adversely impacted by three overriding factors. First, the continued weakness of the industrial maintenance in OEM product finishes market created a drag on sales during the quarter. Slow economic growth has had a dampening effect on manufacturing in industrial maintenance activity for the past two years now. Second, the combination of a weak economy, the war in Iraq and unusually harsh winter weather across much of the United States caused the slowdown in retail sales and effected reorder patterns in some of our large retail customers.

This combined with a significant number of store closures by one major account, adversely impacted sales volumes across all of our consumer segment brands and product lines. As these factors begin to dissipate, we expect to see year-over-year improvement in the sales performance of this segment. And finally on the cost side, soft sales volume kept us from achieving the level of manufacturing absorption we anticipated during the quarter. Our increased pension expense and high utility cost, bad debt expense and investment in the Asia-Pacific market by our paint store segment combined to add over $10 million to SG&A expense and cost-to-goods for the quarter. We expect these increases in pension and utility expenses will be offset by productivity and sales gains throughout the remainder of 2003. In spite of the current weak operating environment, we expect to continue to invest capital in our business and manage working capital and to increase market share. We anticipate operating cash flow improvements for the year sufficient to support our continuing growth plans.

Over the balance of the year, we anticipate a long, slow recovery in the industrial and OEM markets that will continue to restrain our sales growth and make profit improvement challenging. Our outlook for the second quarter of 2003 is for sales to be flat to up slightly. With sales at this level, we expect diluted net income per common share to be in the range of 73 cents to 78 cents per share compared to 70 cents per share for the second quarter last year. For the full year, we expect sales to increase by 2 to 3 1/2% over 2002. This range is lower than our previous estimates, due to lingering, soft economic conditions and the increasing uncertainty as to the timing and strength of an eventual economic recovery. Based on this reverse in the sales range, we have reduced our expectations for diluted net income for common share for the year to a range of $2.08 to $2.24 per share, compared to $2.04 per share last year before the accounting changed. This concludes my opening remarks, and now Conway, Sean, John, Bob and I will be happy to take your questions.

If you would like to ask a question at this time, simply press star 1 on your touch-tone phone. Your questions will be answered in the order received. Your first question comes from Eric Bosshard from Midwest Research.

Hi, Eric.

Good morning. A couple of things. First of all, Chris was in the sales guidance you're giving a flat first half implies a strong second half on the sales line. What is new in the second half or why have the confidence in the sales recovery taken place in the second half of the year?

Okay, I think basically what we're seeing, Eric, is that the first quarter we had winter again, which we hadn't experienced the last three years and we've seen that impact pretty much across all segments, predominantly in the consumer segment. Our stores see that as well, too. We had a number of stores that were closed predominantly up and down the eastern seaboard as the storms went through. When we've had some good weather, we've seen some nice pick up. I think the kind of sales expectations that we've given in the beginning of the year we're expecting to continue in the third and fourth quarters, that will get us to the numbers we have given.

But you said, just to make sure I understood you right, you said the second quarter sales expectation is now flat as well?

We said it would be flat to up slightly. I think in those ranges, we would expect our stores to be up in the mid-single digits. Consumer would be flat to up slightly. International we suspect to still be down slightly given the conditions that they're facing, as well as automotive down slightly.

All right. Second question, working capital. You have taken an enormous amount of money out of working capital the last three years and continue to do so this quarter. The progress has been impressive. Is there further opportunity and then I guess behind that question is, how have you accomplished what you have accomplished in the area of working capital.

Eric, we feel pretty good about what we have been able to accomplish over the last few years. We take a look at receivables, our days are down. Our inventory, our days are down also. I think that we have taken a look on the receivable side, account by account and taken a look at how - what causes people not to pay as quickly as we would like them to. On the inventory side, we have worked very hard taking a look at the movement of inventory skew by skew and we have installed some systems. We have installed an order-management system that improved the pricing accuracy of our invoices, we installed a inventory management system that really helped us with the management of our production - all the way from production to the finished goods. And also taken a look at what we have done on the raw material side. We have been able to reduce the amount of raw materials that we have been able to -- that we need at our plants. When you take a look at payables, our payable days are flat compared to last year. But we continue to work on that, and those are the things we continue to do, we feel very good about our operations and the people running our operations and we feel that, as you continue to take more, have a better and better result, there is less improvement that you will be able to make, and I think that today we're basically, if you take a look at what we have been able to do, I would say that as time goes on, I would say that we'll raise our working capital as a percent as of sales.

And then last question, you have given us a couple of updates on earnings in the last 45 days, yet today you chose to lower the full-year earnings arrange. Anything change in the last 30 or 45 days within the momentum of the business that has resulted in you taking a different position to that?

Actually, what we have taken a look at, if you take a look at the last time we put a release out with an April 8th date in the Financial Community versus today, just re-evaluating the economic recovery after the war and so forth. And I think that really has not been a - just trying to see what kind of forecasting, what kind of reaction from the war.

And, Eric, I might mention when -- because we were going to talk about the quarter in the Financial Community presentation on the 8th of April, that's the reason why we had to do that release, and then in our normal cycle we got all of our forecast from our divisions after that point, and then to Sean's point, this is when we could see the ongoing effects of the economy, and that was the reason for the change from April 8 to today.

Great. Thank you.

Thank you.

Your next question comes from Jeff Zekauskas with JP Morgan.

Hi, Jeff, how are you?

fine. I guess the place to start is was there a mix or price change in the stores business in the quarter and if there was, what was it?

I think the mix change that we have been seeing there has been in favor of architectural products and the reduction of the industrials and that's been ongoing.

I guess I'm puzzled as to why your operating income was down so much, given that your sales were up and in the various factors that you cited, the pension expense, the utilities, the bad debt. I mean all of that can be - might have been neutralized by the incremental volumes that you have got. That is the operating numbers are sort of sharply down. Can you clarify a little bit more.

Well, Jeff, I think the one thing in terms of the comparisons in our chemical coatings, our product-finishes area and also in the industrial maintenance business, that has been a real drag on our store segments results, and I think where we have a drag and -- in favorable comparisons on the sales sides for the SG&A, associated, also with those pieces of the business, that creates part of the drag.

Right.

Also, our smallest quarter so when you take a look at the utilities and the pension being a flat expense across the quarter, but really, the utilities and the bad debt had a greater impact wen it came to the percent of sales because the sales are smaller.

I'm - second question is in the sales decrease and consumer, can you break that up into what happened in Wood, consumer and diversified brands or was there any variance in the performance of those three areas?

Jeff, as you know we do not break that out but to give you some kind of a flavor with the weather as you know the Wood Group, with certain seasonal items there, those are influenced by spring sales and where that would be delayed but it was almost - we feel due to - a lot due to weather because we could see the sales particularly in February and March were adversely impacted by that, and I think, as Chris mentioned, the other major factor was in a major account the reduction in their number if stores and that impacted our sales comparisons.

I guess lastly in - as far as lead litigation goes, when you said that the attorney general in Rhode Island would continue to I guess proceed, is that new information or is that from when the gentleman was elected sometime last year?

I think he made a public comment probably maybe four, I'm guessing, maybe four weeks ago.

Actually the office made it, he didn't.

Yes, his office made a public comment about four weeks ago. So that's updated on that basis and so we're just waiting to see how he would want to proceed.

Okay. Thank you very much.

Thank you.

Your next question comes from Joseph Shroka from Merrill Lynch.

Hi, Joe

Hey, good morning, everyone. is there a percentage breakout that you can give us in the auto, roughly on what is repair versus OEM and what is international versus domestic?

Well the -- our international business in automotive is really essentially vehicle refinish and so you could say roughly 80 to 85% of those segments sales are vehicle refinish, the remainder would be related to OE sales to tier one manufacturers. In that 85% a portion of that is directly related to collision repair and that's where we're seeing some of these adverse impacts of repairable automobiles and -- but we have not broken out the international portion of those sales but it would certainly be less than half of the vehicle refinished sales.

awesome. Okay. Because it seems look a 4% swing due to currency seems like a lot in that segment.

Yes and that's correct.

Okay, and then what should your tax rate be or what would you anticipate it's going to be for the last three quarters of the year versus the benefit on the first quarter?

Our tax rate for the year will be 36 1/2% and we reflected that in the first quarter and that will be the same for the second, third, and fourth quarter.

And that should be consistent in '04 as well?

In '04, we're not ready to comment on the tax rate in '04, but when we do, we'll let you know.

Fair enough your answering all my questions today. I'll pass it to the next guy.

Thank you, Jeff.

Again, if you would like to ask a question at this time, simply press star 1 on your touch-tone phone. Your next question comes from Jeff Zekauskas.

Can you talk about advertising expenditures in the quarter. Were they up or down and by how much and what do you expect for the year given the ad expenditures were down 6% last yar?

I think, Jeff, the first quarter for us is always our lightest advertising quarter.

Right.

We're just getting into the pay season, so I don't have that information at my fingertips here, but my guess is that it would be very marginal one way or the other just simply because we don't spend a lot. I can tell you that, for example,in our stores business where we might start to advertise in the quarter, if we're seeing some favorable weather, this particular year we did, in fact, delay a campaign that might have run in March, we pushed it later in the year given the weather that we were seeing, so when I do dig that information out if you would like, you can call back and Conway or Bob will get it to you. For the year we would expect that advertising as a percent of sales would be fairly consistent as it has been over the last couple of years, continued strong support in both our store segment and our leading brands and then in the consumer segment, so it should increase slightly as sales increase slightly.

Okay. I guess lastly, there was a phrase that you used in your press release about expenses to maintain superior customer service in -- [ Indiscernible ] What is that?

I think what we're trying to comment on there is that typically when retail sales fluctuate up and down, you have the ability to go in and take out service expenses, the easiest thing to get your hands on and you can get it out the quickest. It's certainly given the harshness that we saw in this winter weather, that would have been an easy thing for us to do. But, when you're running stores with just five, six people in a store.

Right.

We made the decision not to cut service out, not to take people that we have trained and educated or -- going to be necessary to get us through the selling season, so we didn't cut services is basically what we're saying.

Right.

Continued training programs, continued recruiting college graduates, all the things that have been key to our strategy of success in that segment kept going forward.

And given that it's the first quarter and we're a seasonal business going into the second and third quarter, that's another reason for the decision.

One of the things that you highlighted in your annual report were the twist-and-pour containers and I was wondering, can you just provide some kind of quantification of the benefits of that to Sherwin-Williams, net of cans of paint you would have sold. I mean it's hard to get one's arms around how significant an event this is.

Well, I think that's partially by design. That we don't get in there and give it to you to the -- every single gallon of that product line. What we have commented on --

any gallon. [ Laughter ]

We have commented on the strength of the consumer segment after years of declining sales that last year we had a -- an improving performance there.

Uh-huh.

We have commented on the number of outlets that are now stocking, carrying Dutch Boy . That number's tripled over the course of the last several quarters since that program has gone in, and where we have seen this product on shelf, the performance has been strong. We're satisfied with it, our customers are happy, and if the weather comes back, we would expect that will help that segment get improved sales.

Jeff, unfortunately if the consumer segment results would have been a lot worse if we didn't have the twist-and-pour container.

So a lot worse means -

That would have been, in the first quarter, the comparisons would have been more negative.

Okay, thank you very much.

I think one other final comment, Jeff, just to give you a sense of how we feel about the twist-and-pour is the announcement that we have made about rolling that container out in the Sherwin-Williams brand through our own stores later this year. We're very convinced this has a outstanding package and has real benefits to the consumer.

Thank you very much.

Thank you, Jeff.

Your next question comes from Barbara Allen from Natexis Bleichroeder.

Good morning, you all.

Good morning, Barbara.

Can you explain to me, not being a car buff, what this stuff about insurance trends. Are you telling me that more cars are being totaled or is it we're not having as many wrecks? What is going on?

Well actually I think with the winter weather, we had more wrecks in the winter. What is happening, particularly with air bags, when the air bags are deployed that increases the cost of repair of the automobile and this ends up resulting in having more cars totaled by the insurance company that are not repaired. I think, too, the other factor is that we see with a lot of these 0% financings by the automotive OEs, that also is driving a decision point when someone has a serious accident in terms of the choices they would make in terms of repairing a vehicle or getting a new one.

The air bag deployment increases the cost of repair, is that correct?

Correct. Yeah, that could be as much as, I would need to get these figures, but what I have heard is that could be as much as $1,000, or that or more to put that back into place and so on the margin when you add $1,000 to the incremental repair, depending if it's an older car, that becomes a very important on the margin and economic consideration, and then you can look, okay, I can go ahead and this car would be totalled and I can get 0% financing on buying a new one. I might as well upgrade.

Yeah.

So that's kind of the factor that we see happening.

Oh, that makes sense. I had asked this question at the investor meeting and I wondered if you had seen any evidence of what do the sales look like in the markets where weather has abated or was not an issue?

They have improved and as I mentioned our southeastern and southwestern divisions were certainly showing improvement and where we could see, really, the weakness in our company was in the eastern division and as you know, that's where a lot of the ice storms --

right.

And the - in the case of stores, we -- our architectural coatings and stores, we could see that business come back in the last half of March, and actually in some areas, it came back quite strongly, but in terms of the impact over on the consumer segment, we think that's what might have influenced the order patterns and delayed the reordering of material. We know on one major retailer that was one of the impacts that harmed our comparisons to last year.

So it's possible that we have actually delayed the outdoor painting season by a month or two months in many retailers.

Yes.

So that could -- you could actually get a compensation effect as we move through the summer.

Yes. You know, I think we're seeing the stores have recovered and it's question in terms of what will happen in the do-it-yourself market over on the on the consumer side.

The last question I have is that we have had, as you noted, something the better part of two years of declines in industrial maintenance and chemical coatings and product finishes. All of that stuff going kind of to the nonRES customer. Why was this quarter apparently so much worse than the previous two years? I would have thought that the comparisons were actually getting easier by now.

I don't think it was any worse than in previous years, Barbara, it's just a continuing decline.

So it's still weakening.

We still have year-over-year declines in this segment.

Okay.

And for just -- well, we know the industrial condition of the markets here in the U.S. It's interesting like an industrial maintenance we -- people are -- industries are deferring maintenance and we keep on expecting that they can't defer it much more.

Uh-huh.

You know, we have a sizable business in that segment in tank linings, but the tank lining business has kind of all dried up because of the Iraqi war. All of the tanks here are full of oil, so nobody wants to take them out of service in order to repaint them. So that could be, I'm speculating, but that could be as the situation clarifies there, then the refineries might have more confidence in terms of taking tanks out of service for repainting, but it's just generally really been a sluggish market.

And last question about raw materials cost and energy-related cost, I think you mentioned the TIO-2 price increase proposed? Or -- .

Yes Just to maybe give you a background on the TIO-2, the suppliers, TIO-2 suppliers, announced a 6 cent-per-pound price increase that was effective February 1 of this year and, as many of you all know, it's typical for accounts to have 90-day price protection, so any of these affects on the industry would probably be if the price increase goes through, would occur in May, and and later. However we're not sure given the demand structure in the in the marketplace of whether that is going to stick or not.

Are the raw materials costs, anything happening there in energy-related.

Yes, I think, as many of you know, the crude oil peaked at about $38 a barrel, and because of that hydrocarbon solvent pricing increased in the fourth quarter of last year in the first quarter this year. Now, as we know crude oil pricing now is in the range of $30 a barrel so they're somewhat downward pressure on solvent pricing as you know, all of that solvent pricing fluctuates up and down with crude oil prices.

Yeah.

I might mention another important energy component in raw materials is natural gas and, last fall that put upward pressure on oxygenated solvents but we're thinking that the natural gas will settle in between $4.20 to $5 a thousand in a million BTU range, so that should be fairly stable. Our outlook, again, for raw material prices for the industry is still for the year, year-over-year, is still in the 2 to 4% range.

Thank you very much.

Thank you, Barbara.

Your next question comes from Jeff Castle from AIC Limited.

Hi, Jeff.

Hi, folks, just wanted to ask a question about the bad debt expense, which I guess was up this quarter. Could you talk a little bit about the trend in bad debt and then perhaps also talk about any changes you have made in credit policy if you made any at all, and then maybe if there is any competitive changes from the point of view of granting credit to paint contractors. I know I was in Home Depot recently and I saw big signs about asking for credit. So any comments you have on that credit market and trends there in competition. Thanks.

When we take a look at our credit and what we have seen in the last year, year and a half is - some painting contractors are having - are going past due and when you take a look at that, we've worked very hard to keep our credit in line and so forth and as Conway mentioned before, our bad-debt expense is still below 1% of chart sales and when you take a look at it, so when you look at the bad debt for this quarter, it was up. It was up a percent of sale, or a 10th of a percent of sale so for the company, and in the storage group, it was up a little bit higher than that. But when you take a look at our credit policies, are credit policies have not changed. We're still maintaining our -- the same credit policies as we have in the past. We have noticed other competitors are granting credit. Some of these contractors were going a little longer than we would in the past just because it's taking them a little longer to get paid from the general contractor. Our credit policies haven't changed and we really don't see any reason to change. I'm trying to think of the other question.

Well, one another thing Sean was giving soft to that, historically, if we look over at least the 23 years in our company that I have looked at this, our bad debt as a percent of credit sales is never exceeded 1%, and it's been a relatively stable figure. It might go down to a low of a .35% and then in more troubled times, it would get up to .7 or .8%, but as a total company, it's been very stable within that range and this is even with some very significant bankruptcies in our customer base that we experienced several years ago. We have been able to manage this and so because of that, we really haven't seen a need to change our credit policies.

And I believe one other question was has there been a change in granting credit to painters or -- and the answer is no. I believe we have not seen anything at all, but we have think better trying to do certain things with credit but no major policy change.

I guess just following up on that, it seems to me to be a relatively good time to be a professional painter from the point of view of the construction market, and it seems odd that this is a market where there seems to be some financial stress on those painters at the moment. Do you think there is any structural change in your customer base? Is there an oversupply of painters or what might be causing that?

I think you have to look at the breadth of the type of painting contractors you have out there. There are segments of the architectural market to your point that it's a good time to be a professional painter, certainly in new-home construction over the last several years has been strong. Painters are focused on that segment and they're typically busy. But we also have painters that tend to focus more on new commercial construction, hospitality work.

maintenance.

industrial maintenance -- [ Overlapping Speakers ] where we have seen some of the bad-debt issues. There are other segments under stress.

Okay, thanks a lot.

Thank you, Jeff.

You have two more questions in queue.

Okay.

The first is from Allen Cohen from First Analysis Corporation.

Hi, Allen.

This is actually Ray Kramer for Allen. All my questions have been answered so, - .

Okay, thank you. Ray.

Your next question comes from Chuck Cerankosky

Good morning, gentlemen.

Good morning, Chuck, are you row -- how are you?

Doing all right. A couple of questions, first, it might be oversimplified but I want to clarify. For the most part, the economy is influencing your industrial and OEM business and the weather is influencing your architectural business, is that a good way to look at it?

in the first quarter, yes.

Okay, how would you and one is transitory with the weather hopefully leading to better times in the architectural section. How would you weight those two in terms of effecting the first quarter versus your original expectation?

I think our original expectation going in was that the industrial part of the economy would continue to be soft. That didn't surprise us. The weather had a big impact on us.

Okay, thank you.

Yes, thank you, Chuck.

Actually, you have one additional question, again from Jeff Zekauskas.

Yes.

Can some of the public databases, there are - assume there's a record of acquisition in a non-open market transaction of large amounts of Sherwin-Williams shares by management. Can you sort of clarify what these things are?

Can you repeat it, Jeff, I'm not sure I understand the question.

In other words if you go to the Yahoo! insider transaction page it will say, Chris Connor acquired 110,000 shares on 2/5/03 in the non-open market transaction. What I was wondering was what is that?

I think those are management incentive compensation packages that we explained in our annual report. They're granted every other year. They're based on performance against a peer group and that's been a consistent biannual incentive package that our company's used for the last 20 years.

Okay, so in other words something has vested at this time, is that why it shows -- no they have been granted at this time.

No, they have been granted at this time. They vest in four years based on a performance against a peer group.

They're granted but not vested.

correct.

Thank you very much.

And, you know, the vesting is depends on certain performance parameters based on after-tax return on equity relative to a peer group.

Okay. All right.

Uh-huh.

Thank you, Jeff.

Gentlemen, there are no more questions in queue.

Okay, well, we thank everybody for joining us today and if anybody has any additional questions you know, Bob Wells and I will be, we're always available. We'll be happy to answer any additional questions that you have and so, thank you very much for joining us.