宣偉 (SHW) 2003 Q2 法說會逐字稿

After the review of our results, we will open the session to questions, starting with summarizing our company (technical difficulty) performance in the second-quarter 2003 versus second quarter 2002, consolidated net sales increased 1.3 percent to $1.47 billion. This result reflects continuing strength in architectural paint sales, which were partially offset by continuing sluggish domestic industrial and automotive product sales, poor economic conditions in South America and weak year-over-year currency exchange rate (technical difficulty). Gross margins increased to 45.2 percent from 44.9 percent. Pricing did not have a material impact on our gross margins. Increases in raw material costs were more than offset by manufacturing efficiencies and the implementation of a new accounting regulation, which alone, was not significant to gross profit. The new accounting regulations effective this year required us to record certain cash considerations received from vendors as a reduction in cost of goods (technical difficulty), rather than as a reduction in advertising expense, a component of SG&A, as in prior years. SG&A as a percent of sales increased from 32 percent to 32.9 percent. This year-over-year SG&A increase is due primarily to our continued investment in new stores in North America and operations in the Asia-Pacific market by our store segment. It is also due to the reduction in our net pension credit discussed during our year end 2002 conference call and the Italian change I just mentioned.

Interest expense for the quarter was virtually unchanged. Other expense net decreased by $4.5 million due to two primary factors. One is a reduction in (technical difficulty) related to financing and investing activity (technical difficulty) from lower fees relative to last year. The other is currency transaction gains compared to losses last year. A transaction gain results from increases in the value of currency exchange within the quarter. This differs from translation gains or losses that result from changes in currency values between year-over-year comparable period. Income before taxes was flat for the quarter at $173.4 million. These operating results (technical difficulty) negative impact of a 6.8 million reduction in the net pension credit for the quarter associated with the company's defined benefit pension plan. Net income increased $2.6 million to 110.1 million from 107.5 million in the second quarter of 2002. Diluted net income per common share for the quarter was 75 cents per share, compared to 70 cents in 2002.

In reviewing our performance by segment for the second quarter 2003 versus second quarter 2002, I will start with our paint stores segment. Sales in our paint stores segment increased 2.4 percent to $933.8 million. This was due primarily to gains in architectural paint sales that were partially offset by weak sales of industrial maintenance coatings, marine coatings and OEM product finishes. Sales of architectural coatings to both painting contractors and do-it-yourself customers showed favorable comparisons year-over-year. Sales of our chemical coatings, or product finishes for OEMs, remains sluggish. We see improvement in some segments, such as wood furniture, while other market segments to which our businesses is weighted, continued to lag. We see little sign of improvement in the metals and plastics segment.

Industrial maintenance and marine (technical difficulty) portions of our business continued to lag during the quarter as manufacturers held off expansion and maintenance programs pending economic recovery. On a regional basis, our Midwestern division led the sales performance, followed by the Eastern division, the Southeastern division and the Southwestern division. Our chemical coatings division again showed a decrease in sales volumes. Comparable store sales increased 1.7 percent. This figure includes sales of industrial maintenance coatings and OEM product finishes, both which had unfavorable comparisons. Operating profit decreased 8/10ths of 1 percent to 122.6 million from 123.6 million. This was due primarily to the reduction in net pension credit and the negative impact on profitability related to lower industrial maintenance and chemical coatings volume. We have continued our new store openings (technical difficulty) as planned. For the second quarter of this year, we opened 8 new stores and closed one. Paint stores ended the quarter with (technical difficulty) 2,658 stores in operation in the U.S., Canada and Mexico. Since the first of this year, we have added a net of 15 new stores, one by acquisition. Also this level is less than last year, when you back out the stores added in 2002 by the acquisition of Flex (indiscernible) paint, the numbers are comparable. Our goal remains at 50 net new stores for the year. Our stores' refresh program is also proceeding as planned with the completion of 149 stores during the quarter. This brings our total to 1,157.

Turning now to the consumer segment for the second of 2003 versus second quarter 2002, sales decreased 1.4 percent to 346 million. A portion of this shortfall was the result of a readjustment of store count by a major retail customer. The balance was caused by a combination of harsh late spring weather in certain regions of the country and continued economic malaise. Stringent inventory control and store inventory adjustments at some retailers related to the slow domestic economy and a shortfall in our cleaning solutions business unit were partially offset by sales increases in aerosols and other paint related products to existing customers. Operating profit for the consumer segment was flat at 66.3 million in the quarter. Tight expense controls held operating profit flat versus last year, despite the negative impact of the reduction in pension credits and the shortfall in sales.

Turning now to our automotive finishes segment. In the second quarter comparisons, sales decreased 1.9 percent to 121.3 million from 123.6 million in the second quarter 2002. The sales decreased in U.S. dollars was due primarily to unfavorable currency exchange rates compared to the same period last year. Excluding the effect of currency exchange fluctuations relative to last year, net sales for this segment increased one-half of one percent for the quarter. The collision repair market in the U.S. has been negatively impacted over the past year by the overall reduction in the number of repairable vehicles. At the same time, sales to OEMs, a relatively small component of our automotive segment business (technical difficulty), continued to be hampered by lackluster new vehicle sales volume. Operating profit for the second quarter of 2003 declined by $2.4 million to 15.3 million dollars. This segment's operating profit was negatively impacted in the quarter and the first six months by lower sales volume, related lower manufacturing absorption and reduction in net pension credit compared to last year.

Regarding our international coatings segment in the second quarter results versus last year, net sales in international coatings segment increased 5.2 percent to $68.8 million in the (technical difficulty) quarter from 65.4 million in the second quarter 2002. Excluding the negative effect of currency exchange fluctuations relative to last year, net sales (technical difficulty) increased 15 percent. The growth of architectural and product finishes sales in South America was restrained by poor economic conditions, while our sales in the UK registered strong gains. This is a result of -- in relation to a weak second quarter last year in the UK due to weather factors. Second quarter operating profit for the segment in U.S. dollars decreased to 600,000 from 3 million a year ago due primarily to the negative impact on gross margins of competitive pricing pressures in Brazil.

I would like to turn now to some highlights concerning our balance sheet. The net of our accounts receivable plus inventories, less payables, was 14.6 percent in sales compared to 15.1 percent of sales last year. Our total debt on June 30, 2003 was 54.7 million, below our debt level at the end of second quarter 2002. Total borrowings to capitalization were 27.5 percent at the end of the quarter versus 30.3 percent at the end of the second quarter 2002. (technical difficulty) any large acquisitions (technical difficulty) approximately 26.5 percent at the end of (technical difficulty) 2003. During the second quarter 2003, the company purchased 975,955 shares of common stock in the open market. This brings the year-to-date total of shares purchased to 3,530,000 shares. We intend to purchase shares of the company's stock for treasury in the open market from time to time. At June 30 2003, we had a remaining authorization to purchase 6.77 million shares. In the second quarter of 2003, in terms of other items, we spent 62 million on capital expenditures. Depreciation expense was 51.5 (ph) million and amortization expense was 5.5 million. For the full year 2003, 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 improvements 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. As you all know, additional financial information is available on our website under sherwin.com, investor relations press releases.

I would like to now give you a brief update on the status of our lead litigation. In our first-quarter conference call, we informed you that the Rhode Island Attorney General declared his intend to retry the case. The court has scheduled the retrial to commence on April 5th, 2004. It is our understanding that the case will proceed in a Phase I, similar to the initial trial of the Phase I question. Judge Silverstein (technical difficulty) for the question to be argued and decided by a jury in Phase I. The two sides were given an opportunity to advance their views of what the questions should be. Further (ph) phasing after the completion of the retrial (technical difficulty) is still being discussed with the court. 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.

Several legal proceedings pending in other jurisdictions had trial dates set (technical difficulty) 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. A personal injury case pending in Mississippi (technical difficulty) scheduled for trial. It was to begin in June of 2003. The judge in this case followed a somewhat common practice of appointing a special master. And a special master is an inexperienced trial lawyer familiar with complex court cases. The judge appointed a special master to review and consider the merits of the pretrial motions filed by both sides. After reviewing these motions, the master wrote a strong recommendation that the defendants' motions be granted and also recommended the case be dismissed. The judge agreed with this opinion and dismissed the case in early June. Plaintiffs have filed for reconsideration. No other case in Mississippi is now expected to go to trial in 2003, although one is still technically scheduled to begin in October. If you recall in our last conference call, we had mentioned there were four cases scheduled for trial in Mississippi, so one has been dismissed on essentially the three others will move out in time.

A public nuisance claim brought by the (technical difficulty) is scheduled for trial in late October of 2003. Pretrial motions to dismiss are being argued in late July. Finally, you may recall the suit filed in Santa Clara County, California, on behalf of a number of California municipalities. Last year, the judge presiding over this case dismissed the public nuisance complaint. Recently, the same judge dismissed the suit in its entirety. As a reminder, 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, none had never been settled, and only one, Rhode Island, has ever come to trial. This completes my review of our results for the second quarter of 2003. Now I would like to turn this session over to Chris Connor, who will make some general comments and highlight our expectations for the third quarter and the full year. After that, we will then open the call to questions. Chris?

Thank you. Good morning, everyone, and thanks again for joining us. At the beginning of this year, we knew that our plans for sales growth and earnings improvement were facing some pretty stiff headwinds. We were facing a prospect of war in Iraq, which was casting further uncertainty over the economy. We could see very few signs of recovery in domestic manufacturing or business investments are the keys to reviving a struggling industrial coatings market. And this swings in defined benefit pension that we shared with you, which essentially called for effectively reduce our pretax income by 24 million, all before we sold our first gallon of paint. These are the realities that we faced during the first half and the second quarter 2003. And despite these challenges, I believe that (technical difficulty) performance, not just in terms of earnings-per-share, but also in our management of working capital, our further streamlining of operations and our progress in building a stronger balance sheet and a stronger company. Better position to take advantage of what we think will be a transition from slow growth to a more robust economy.

As Conway mentioned, we continue to be encouraged by the strength of the paint store segment architectural paint sales, strength that we believe is translating to market share gains. The ongoing weakness in our industrial maintenance, marine coatings and (technical difficulty) businesses, however, continues to partially (technical difficulty) gains (technical difficulty) segment. We had anticipated improvement in these markets during the second quarter. With the quarter now behind us, we are only beginning to notice early signs of a slow recovery in the industrial sector and a slight pickup in marine coating sales as some of our military ships return to the U.S. from duty in the Middle East. We still have a lot of work ahead of us in our product finishes businesses to improve sale and profitability during this period of slow (technical difficulty) manufacturing activity. We think our investments in Asia-Pacific markets are helping position us for the future of this business. Today, we are focused on growing our share of markets where we already have a presence in trying to improve the profitability of our OEM finishes product lines. We're confident that our management team is working hard to accomplish this. We believe the recovery in the industrial, marine and product finishes markets will be slow due to the continued uncertainty about committing to future maintenance and capital expenditures. During these times, we will continue to develop strong customer relationships, invest in our business as we have in the past, and maintain high levels of service. We anticipate that the paint store segment will continue to incur higher operating expenses relating to its ongoing investment in new stores, its investment in the Asia-Pacific market and the reduced pension credit.

As Conway mentioned, the second quarter and year-to-date sales declined in the consumer segment were caused by a combination of ongoing weak economy and harsh weather, both of which affected consumer traffic at many of our retail customers. As these factors began to dissipate and consumer traffic improved in some of our larger retailers, we expect to see sales improvement in this segment. The cost containment efforts implemented over the past two years in the consumer segment helped us to maintain operating profit at essentially the same dollar level in the second quarter this year as last year, even on the lower sales and in spite of the reduction in pension credit in this segment.

As Conway mentioned, sales in our automotive finishes segment continue to be hampered by a soft domestic economic conditions. The trend of insurance companies to reduce the number vehicles that are authorized for repair and the weak foreign currency exchange rates. In our international business, this segment continued to improve in local operations, particularly in the UK, in spite of lingering poor economic conditions throughout most of South American and weak currency exchange rates again that have recently begun to show some signs of improving.

Looking forward, we anticipate that third quarter sales increases will be in the low (technical difficulty) versus last year's third quarter. With sales growth at that level, we expect diluted net income per common share for the third quarter will be in the range of 75 cents to 80 cents per share, compared to 73 cents per share for last year's third quarter. You may recall (technical difficulty) on April 22 of this year that we expected annual sales to increase 2-3.5 percent over 2002 for the full year. However, due to the lingering soft domestic economic conditions and the increasing uncertainty of the timing and strength of the eventual economic recovery, we are reducing our estimate of annual sales improvement to 1.5-3 percent over 2002. However, reflecting our commitment to improve our profitability through cost savings and operating efficiencies, we are maintaining our expectations for diluted net income per common share for the year, again, established on April 22nd of this year. We anticipate our diluted net income per common share for 2003 will be in the range of $2.08 to $2.24 per share compared to $2.04 per share earned last year before the cumulative effect of change in accounting principles. At this time, Conway, John, John, Bob and I would be happy to take your questions.

(Caller Instructions). Chelsea (indiscernible), Merrill Lynch & Co.

Good morning (technical difficulty) in a tough environment. In the second quarter, could you tell us what was the amount of the production of net pension credits total, and if you have it by segment please?

Sure. Let me answer for not only the second quarter, but the first quarter also. For the second quarter, our pension credit was reduced by $6 million in the second quarter and 12 million for the first six months, so it's 6 million for the first quarter. We look at stores, paint stores group, it was just short of $3 million -- 2.968 -- for the three months ending June 30, and for the 6 months, 5.773 million, or $5.8 million. For consumer for the three months ending June 30th, 1.5 million and 3 million for the first six months. Automotive -- 500,000 for the three months ending June 30th and $1 million for the 6 months ending June 30th. International, $808,000, or 800,000 for the second quarter and 1.7 million year-to-date.

Okay, great. And then you maintained the earnings guidance and you discussed the lowering sales forecast. And Chris, you mentioned that cost savings and operating efficiencies were a portion of this. Is there anything else contributing below the operating line, such as tax rate, or any expected share repurchase?

Not since the beginning of the year. We commented on our tax rate. It has dropped from. Last year, our tax rate was 37.5 percent for the year. This year, it's 36.5 percent. But that has been consistent throughout the year. So really what we're just seeing here is that as the sales soften, our team is stiffening their resolve to bring the year in through these operating efficiencies.

Okay. And then with the first quarter sales down and the second quarter sales up 1.3 percent, it looks like sales forecast for the third quarter and the fourth quarter are probably in the 3 percent plus range, which kind of gets you to the midpoint of your sales expectations. Would that be accurate?

That would be accurate.

Okay, great. Thank you very much.

Eric Bosshard, Midwest Research.

Good morning. A couple of things. First of all, in terms of sales momentum, can you talk about how sales moments and behaved through Q2 and as we have gone through the first three weeks of the third quarter?

April was poor, improved in May, and June was very good. And I would say it is only two weeks in July. It's positive, but not as positive as July was. So (technical difficulty) I think we are on track.

Within the momentum in July -- and I know I'm making a big deal out of a couple weeks, but can you talk about consumer versus industrial, if there's sort of a difference, I guess, within the overall momentum, and then within the momentum as we go into Q3, as well as your expectations?

I really would not be able to comment on that, and actually (technical difficulty) let's say on some of the consumer, I think you were talking about consumer segment sales. A lot of times, based on order patterns, when you look at one week versus and other week, that can (technical difficulty) quite a bit. So it is better to look at a more stable, longer multiweek trend. I think the only color I would add to that Eric would be on the industrial side, and we did briefly comment on that, that we are (technical difficulty) perhaps the beginnings of a slight improvement there, and that is encouraging to us.

is that something that took place throughout the quarter that you're seeing improvement? And I know there was a comment about the wood furniture business, but is it somewhat broad-based to where you are seeing positive signs?

Yes, I'd say it's (technical difficulty). We have to put this in (technical difficulty) last three years here, so any slight sign of life is seen (technical difficulty) as a great cause of joy around here. So there's some signs that we may beginning off the mat in this section. Eric, up against weak numbers, it is less negative.

That is positive, I suppose. A couple of the smaller questions. Inventories were up in the quarter I think around 6 percent, which is not huge growth, but it is faster than sales, and the first of time we've seen that in some time. Any particular segments where inventories grew faster than sales and (technical difficulty) rectify itself in the second half of the year?

(technical difficulty) take a look at it with subs (ph), specifically in architectural paint. And I think it would just, again, when you looked at the sales forecast being a little bit stronger in the third and fourth quarter, again, we were just adding -- it was an architectural, there was a white, and we believe that most of that will go through in the third quarter.

Lastly, (technical difficulty) you talked positively about sales momentum international, especially in Europe, yet the profit compare was not real positive here (technical difficulty) in the second quarter. What's Was going on with the profit (technical difficulty) business?

It is almost all related to Brazil. And there is intense pricing competition there and we have undertaken actions to address the margin erosion.

Should we see flat margins, up margins in the second half, or are we going to see this issue continue for a little while?

I think what you're going to see is -- I'd say (indiscernible) have to stabilize before we see the margin increase, so I would say more on the stabilized and consistent basis on the margin.

Great, thank you.

John Roberts, Buckingham Research.

I'm surprised a little bit about the divergence in trends between the consumer segment, which sounded like it would have been down, even adjusting for the store's adjustment at one customer. You contrast that with the Sherwin-owned same store sales of architectural paint, which sounded like that had to be up at least a couple of percentage points. Can you contrast the gap between the two performances?

Part of it, since we are through consumer as you know, we're selling through other retailers. And given they would adjust inventory, so we are on the caboose of this supply (technical difficulty), whereas (technical difficulty) as I mentioned, in terms of the way that sales worked in the quarter, the sales in June were quite good, and that helped the overall results in the quarter. So in terms of going through a different retail supply chain, if that were due to basic market conditions, then we should see that flow through in the third quarter based on reorder.

Secondly, given the poor weather that we had during the quarter, what would you guess the industry growth would have been in the architectural paint market in North America during the quarter? Would it have been roughly flat industry and your gain is reflective of share gain within the market?

That information lags and comes out, so we don't really have a handle on what it was in the quarter. We would have to see -- what other people may report could give some indication of that, but we do not have a good measure right now.

PPG was up I think 3 percent, but they indicated they thought a lot of that was share gains themselves (ph). So my suspicion is you gained some share here as well.

We'll see. Thank you.

Jason Putnam, Credit Suisse First Boston.

Good morning. I guess the first question relates to your raw material costs. I guess first on (technical difficulty) I saw on your last conference call, you had mentioned that you expected oil prices to be in the high 20s, and that's kind of what your forecast assumes. So since we're a little bit above 30 now, how does that kind of factor into your forecast, and how do you see that plan out for the remainder of the year?

Okay. Well, basically, as we all know, raw material costs continue to be impacted by the high cost of crude oil and natural gas. And when we really look at it, the price of crude oil is really settled around a $30 per barrel price. We expect that to moderate to a more sustainable price level as really reflected by the near-term future contracts in the $28 a barrel range. So, essentially (technical difficulty) we're tracking in terms of what our expectations were in the first quarter. I think importantly, natural gas is currently priced around $5.40 a thousand (ph) and we expect pricing in this area to be more volatile. But it will probably remain in the $5-$6 a thousand (ph) range. In terms of other raw material cost, I believe you are aware that the TI 02 (ph) producers announced a 6 cent per pound increase effective February 1. And it would appear that various industry contracts have delayed the implementation of this (technical difficulty) to essentially (technical difficulty) July. We believe a weak coatings market, combined with major customer resistance, will probably mean only a portion of that increase would go through. I think, due to all of these factors (technical difficulty) upward price pressure on raw material to continue. And as we have commented in the past on the industry, what we would view as the industry, an annualized year-over-year raw material price increase would be in the 2-4 percent range. I think -- as you can even see in this quarter, to deal with these increases in the face of a competitive pricing environment for our products, we will continue the optimization of our manufacturing facilities to control cost and also importantly, the development and implementation of alternate lower raw material cost technologies that will enable us to maintain or enhance our product performance. So, given these mix of things, I think we think we should still be able to manage our gross margins going out the rest of this year.

Assuming that raw material prices stay at current levels throughout the remainder of the years, is there any way to quantify how that would affect your earnings or operating income? And if you can't quantify that, maybe on a dollar movement in oil or a $5 movement in oil, how much of an impact that would have?

Well, I think one thing that we shared with you and our financial community presentation, just again, on a total industry basis, if (technical difficulty) the energy (technical difficulty) of crude oil and natural gas, and also those components and process costs -- these are all based on estimates and we look at a general mix of raw materials going into paint. If for any 10 percent increase in that weighted energy mix, the actual raw material cost, everything else being equal, would go up about 1.3 percent. So I think when we see oil, that stabilizes in the 28 barrel a dollar range, as the forward contracts are indicating now and natural gas stays in the $5-$6 per thousand range. I think we will certainly be able to manage through our raw material cost environment. The other point is to add to that, if that increase, the other factor that you have to -- before you determine what affect it will have on the bottom line, is what will happen to selling prices. And if that happens, we'd have to adjust selling prices.

Fair enough. Second question, you spent a lot of time your previous investor meeting talking about China, some of your initiatives there. Can you just give us an update in terms of how that is going and maybe your expectations for the remainder of the year?

Sure, Jason. We're starting to generate some sales over there in our industrial segments. I think as we have commented (technical difficulty) facilities in Don Juan (ph ), which is a blending facility where we were able to stock inventory and service our industrial customers. We have talked about the construction of a plant outside of Shanghai. Our original thoughts were that would be coming onstream towards the end of the third quarter, really fourth quarter this year. SARS just had a bit of an impact on that and slowed down some production on that. We're probably looking at early in the first quarter of next year now. But nevertheless, we have a footprint in the country and we're beginning to relationships with customers and move product. So we're pleased with our performance over there, we have commented on the costs associated with that, and as far as segment on the SG&A line and we think this is going to be a real positive growth avenue for the company in the years to come.

Okay, thank you.

Thank you.

Chuck Cerankosky (ph), McDonald Investments.

Good morning, everyone. Chris, could you give us any insight into the same stores group to talk specifically about architectural sales gains versus what is going on in terms of the decrement (ph) in industrial and product finishes businesses?

I think we've been consistent with that pretty much through the year where we've said that segment is doing fine, both in the professional paint and contractor side, as well as the (technical difficulty). The architectural numbers that we have seen have been up in the mid single digit range, and that has been offset by softness on the industrial sides.

Those are decreases. Would you say they're lower decreases in the 2-3 percent range?

(ph) after years of -- often, a double-digit was not an unusual quarter and we are seeing lower single digit decreases there.

Okay. My usual question, Chris. Can you talk at all (technical difficulty) how it is performing, and (indiscernible) especially how it is fairing up against the Masco (ph) plastic paint pail?

I would be happy to talk about twist and pour. I think if you look at the consumer segment of our company, we were disappointed in our sales results there for the quarter. And so when we dig in underneath there and try and see the impact of twist and pour, I think that we continue to be really pleased with this product. One of the consequences of this launch has been the fact that we have effectively repositioned the price on this higher and we think that will have a positive impact on the brand's image and viability over time. For the most part, that higher retail price has really not had an adverse impact on movement of the brand in the accounts that sold Dutch Boy prior to twist and pour launch, and we have been pleased with the retail sales of Dutch Boy twist and pour, probably with the exception of one account. And in that one account, the price repositioning of Dutch Boy brand really caused us to lose some (indiscernible) and we vacated an important price point there. And we're in the process of addressing that situation and expressed that (indiscernible) will be temporary. If we could back out that one account, again just to give you a little color as to what is happening here, the launch of Twist and Pour sales and the entire Dutch Boy brand are up very strongly and we're very pleased with the performance. We are well into the double-digits and we're confident that those kinds of innovations going forward are going to continue to help drive that brand. So it is doing well relative to its performance at Wal-Mart and again (technical difficulty) I don't think we would be in a position to comment on that.

In looking at your guidance for the third quarter forecasts, do you have any factor in there as sort of a catch up from the weather affect in early second quarter?

No, not really. You don't get those days back. Painters are working from sun up to sundown now and they are just not going to get any more hours in their day. So (technical difficulty) any for that.

Okay, thank you.

(technical difficulty)

Good morning, gentlemen. In the first question there about how much the pension credit was down that whole breakdown went faster than I could write it down, but I wonder if you could just give me what the total number was for how much that credit was down in the second quarter?

It is going to be down 24 million for the year and 6 million for the quarter. Pardon me, 6.8 million for the second quarter, John.

And then I have a question about --.

(MULTIPLE SPEAKERS) It is 6 million for the quarter. I had a typo, sorry.

Then I have a question about dividend policy. There has been a lot of discussion lately about the impact of the new tax law and the more attractiveness of dividend to income as a part of the total equation and (technical difficulty) have already made some pretty substantial increases (technical difficulty). Your payout would appear to have some room for expansion if you liked and I wondered if you could comment on (technical difficulty) if you see things any differently now than you did, say one year ago or what ever?

Sure John, I would be happy to comment on that. First of all for our listeners this morning who may not be familiar with our dividend policy, it is an important part of our relationship with our investors. We do put a big importance on this. This year will be our 24th consecutive year of increasing our dividends to our shareholders if our Board continues to improve our quarterly recommendations. As a policy, we pay out around 30 percent of the previous year's trailing (technical difficulty) and I think that any decisions that significantly change that would have to be a carefully thought out analysis on how we could use cash to best reward our shareholders. It would be something we would take to our Board, it would be something (technical difficulty) do in the February time period. So we are pleased to be a stronger, consistent dividend payer. We expect to be one going forward and time will tell whether or not we amend our policy in any one direction or the other.

Okay, thank you.

Bob (indiscernible), Newbern (ph) & Associates.

Good morning. In June, Conway, we reported that it was a very good month (technical difficulty) perhaps (technical difficulty) catch up on the weather, that the weather finally broke and you had a little bit better foot traffic at the level?

That certainly helps, yes.

I guess one point of confusion that I have is -- you still have strong June and it sounds like a decent start to July, and you're seeing some indications that maybe the industrial business is starting to perk up, albeit off of very low levels. But the question is why, in light of that, would you be reducing your topline guidance for the year?

Our topline guidance was based on a stronger (technical difficulty) and I think it is just part of our conservative nature. We want to see it -- it's looking a little better right now, but it is a little early to count your chickens. We had a stronger recovery going earlier in our forecast.

In terms of that recovery or the sign you're seeing from the industrial side of the business, is it an increase in orders? Is it just more positive comments or feelings from your customers, or it is a combination -- what exactly are you seeing?

In the industrial maintenance area, in terms of talking with our contractors, we're seeing a little more bid activity, so that is what is giving us some encouragement there.

Finally, (technical difficulty) slowed down a little bit in the (technical difficulty) quarter. Is there (technical difficulty) things on the M&A front that maybe you're holding back a little bit on share repurchase, or is it just a timing issue?

It was more of a timing issue. What we ended up doing this year was we bought more in the first quarter than we had in prior year and we just slowed down and we will (technical difficulty) think it is advantageous for us. But for the full-year to date, we feel we're right where we want to be.

Just following up on the M&A front, is there more activity out there that things -- properties that you're looking at?

Yes. We could see (technical difficulty) deal flow pick up in the (technical difficulty) mid January. A lot of them are smaller transactions. We think some other potentially larger transactions are being deferred, but (technical difficulty) more in the pipeline. And we are working on two smaller projects right now, but also evaluating a larger number and we have evaluated some candidates and have declined to proceed.

Thank you very much.

Thank you, Bob.

Carol Ordinez (ph), John Levin (ph) & Company.

This is Rick Lodevic (ph). Sorry, my questions have been answered. Thank you.

Thank you.

John Roberts.

Did reformulation help your raw material cost position at all during the quarter? It was a factor that was specifically cited by PPG, but I didn't hear you talk about it at all.

We are not really reformulating our product to take raw material cost out. We're doing that through more of a technological development. And so it is not just reformulating a product, but it is developing new products.

The new product formulations, are they in general using lower cost materials?

I would say they are more (technical difficulty) proficient in the use of (technical difficulty) materials.

That is a higher solid loading when you say efficient?

It depends on the individual product. Some of them are higher solids, if that is required. We really don't want to get into the details of the specific formulas, but essentially, we can obtain the same product performance with more efficient use (technical difficulty) materials.

Thank you.

(Caller Instructions). Frank (indiscernible).

(technical difficulty)

In terms of the -- you made reference to the customer who was re-jigging (ph) his shelf space. Is that a permanent re-jig out?

No.

So when do you get it back or whatever? (technical difficulty)?

It's incumbent upon our sales team to get in there and develop programs to get that back in the forefront of their merchandising mix. It is not a shelf space adjustment.

okay. So what type of adjustment is it?

It's aisle and endcaps. Basically what we saw (MULTIPLE SPEAKERS) promotions that we had in the first of last year were not repeated this year in favor of a competitor's promotion.

Okay, thanks.

That includes the question-and-answer session. At this time, I would now like to turn the call over to Mr. Conway for additional or closing remarks.

Thank you very much for joining us today. And as you know, Bob Wells and I will be available for any one-on-one questions for the rest of today and tomorrow. And so if any of you have any follow-up questions, we will be happy to respond. Thank you very much for joining us.