宣偉 (SHW) 2003 Q4 法說會逐字稿

Please stand by we’re about to begin. Good morning and welcome to the Sherwin-Williams Company's 2003 year-end earnings results conference call. Today’s call is being recorded. At this time, for opening remarks, I would like to turn the call over to Conway Ivy, Senior Vice President, Corporate Planning and Development. After his remarks, Chris Connor, Chairman and Chief Executive Officer; Sean Hennessy, Chief Financial Officer; John Ault, Vice President and Corporate Controller; and Bob Wells, Vice President, Corporate Planning and Communication will be available for questions. Please go ahead sir.

Thank you, good morning everyone. Thank you for joining us today for our review of the fourth quarter and full-year 2003 results and our expectations for the 2004. This -- as you know, this conference call is being webcast simultaneously in listen-only mode by Vcall via the internet at www.sherwin.com. An archived replay of this webcast will be available approximately 2 hours after this conference call concludes. It can be accessed at www.sherwin.com and will be available until Sunday, February 15, 2004 at 5:00 p.m. Eastern Time.

Before proceeding, I would like to remind you that 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 undue reliance on any forward-looking statement. Forward-looking statements are necessarily subject to risks, uncertainties, and other factors, many of which are outside the control of the company and these 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 statement that speaks only as of the date on which such 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. After the review of our results, we will open this session to questions.

First I would like to review consolidated company performance for the fourth quarter and full year 2003. Sales for the fourth quarter of 2003 were up 11.1% to $1.28b. For the full year, sales grew 4.3% to $5.41b. Sales for the quarter and full year were aided by strong domestic architectural paint sales and growing momentum in the do-it-yourself market. During the first three quarters of the year, sales to the commercial architectural, industrial maintenance, and product finishes market remained soft. However, all three of these markets showed some improvement during the final quarter of 2003.

In our Automotive segment, a year-over-year decline in sales to the domestic automotive refinish market and the negative impact of currency fluctuations was more offset by increased sales of automotive finishes outside the U.S. Internationally, the weak economic conditions in most of South America and unfavorable currency exchange rates that existed in the first half of the year improved during the second half. Gross margin in the fourth quarter was relatively flat at 47.4% of sales versus 47.5 % in the fourth quarter of 2002. Gross margins were adversely impacted by a plant start-up expenses and product mix in the Chemical Coatings division. For the year, gross margin increased 45.4% of sales versus 45.1% in 2002. Gross profit grew by $117m over 2002, this year-over-year improvement in gross margins resulted primarily from manufacturing volume gains and the other operational efficiencies.

Selling, general, and administrative expense as a percent of sales for the quarter decreased to 37.1% from 38.1% and this was primarily due to the strong sales increase. For the 2003 year, SG&A increased to 34.8% of sales from 34.4% in 2002, this increase was primarily due to continuing investments by our Paint Store segment in new stores, investments in the Asia-Pacific market, and a reduction in the net pension credit. Profit before tax in the fourth quarter increased $26.7 % to $111.5m from $88.1m in 2002. For the year, profit before tax improved 5.2% to $522.9m on a full year sales increase of 4.3%.

Operating income as a percent to sales was 9.7% versus 9.6% last year. Interest expense decreased by $1.7m for the year due to lower debt levels in interest rate. Net income in the fourth quarter increased 24.1% to $70.8m. The impact of these improvements on diluted net income for common share for the quarter is an increase of 26.3% to $0.48 per share from $0.38 per share in the fourth quarter of 2002.

For the year, income before cumulative effect of the change in accounting principle increased $21.4m or 6.9% to $332.1m. Income before the cumulative effect of the change in accounting principle was negatively impacted by a reduction in the net pension credit of $13.3m or $20.9m before income tax. For the year, diluted income per common share before the cumulative effect of the change in accounting principle increased 10.8% to $2.26 per share, up from $2.04 per share in 2002.

As a reminder, during the first quarter of 2002, we recorded an after-tax transitional impairment charge of a $183.1m or a $1.21 per share. Net income after the cumulative effect of the change in accounting principle for 2002 was a $127.6m or $0.84 per common share.

Now, I would like to review our performance by segment. In our Paint Store segment fourth quarter net sales increased 9.7% to $829.8m. For the year, net sales increased 5.1% to $3.5b from $3.3b in 2002. For the quarter sales growth for our stores was driven primarily by higher volume, architectural paint sales to both professional and DIY customers and by the strengthening industrial maintenance and product finishes sales. For the year, strong architectural paint sales were partially offset by weakness in the industrial maintenance and product finishes categories during the first three quarters. Comparable store sales increased 8.6% in the fourth quarter and 4.4% for the year, compared to prior year. Regionally, in the fourth quarter, the Southeastern division led all divisions followed by Eastern division, Southwestern division, and the Midwestern division. Operating profit for the Paint Stores segment in the fourth quarter increased 15.7% to $109.8m. For the year, operating profit increased 1.2% to $403.4m. Operating profit for the year was adversely affected by a reduction in the net pension credit, continuing increases in healthcare cost, the segment's investments in the Asia-Pacific market, and new store openings. A sharp rise in utility cost earlier in the year also impacted gross margin for the segment. The Paint Stores Group ended the year with 2,688 stores in operation compared to 2,643 stores at the end of last year. For the year, we opened 51 new stores and closed 6, resulting in a net increase of 45 stores, and none of these additions were by acquisition. Last year we began our store refresh program, a 3-year project to remerchandise and refresh the shopping environment in our stores. This year we completed a total of 495 stores keeping us on pace to finish the project by year-end 2004.

I'd like now to turn to the Consumer Segment. External net sales in the Consumer Segment increased 6.2% to $248.6m for the fourth quarter and increased 1% to $1.2b for the year versus the same period last year. Consumer Segment sales for the quarter and throughout the year has benefited from the improving DIY market resulting in stronger architectural paint sales at some of the segment's largest retailers and increased sales of aerosol and woodcare products. Operating profit increased to $30.1m for the quarter. For the year, operating profit grew 3.3% to $199m. These operating profit improvements resulted primarily from higher sales volumes, manufacturing efficiencies related to increased volume, and tight expense control. These factors more than offset a reduction in the net pension credit.

Turning now to our Automotive Finishes Segment, net sales increase 8.6% to $113.9m for the fourth quarter and increased 6/10 of 1% to $456.7m for the year. Fourth quarter sales benefited from favorable currency exchange and from a change in consolidated Brazilian subsidiary's fiscal year to a calendar basis - this added an additional month of sales to the quarter. Sales for the year were negatively impacted by currency fluctuations. The impact of currency fluctuations and the change in the fiscal year increased net sales $5.3m for the quarter and decreased net sales $1.8m for the year. For the quarter and year, sales improvement in the segment's international operating units were partially offset by domestic sales declines. Operating profit for the segment increased 20.5% in the fourth quarter to $14.6m; that decreased 3.8% for the year to $52.4m from $54.5m in 2002. There was no significant impact on operating profit in the quarter or the year from the fiscal year change or the impact of currency exchange fluctuations. The improvement in operating profit during the quarter resulted primarily from stronger foreign sales that were partially offset by unfavorable domestic manufacturing and distribution absorption. Operating profit for the full year declined as a result of low sales volume, unfavorable manufacturing absorption and a reduction in the net pension credit.

Now turning to our International Coatings Segment. Fourth quarter net sales increased 52.8% to $90.4m from $59.2m in the fourth quarter last year. Sales for the year grew by $41m or 16.8% to $285.3m. Fourth quarter sales for the segment also benefited from favorable currency exchange and from a change in the Brazilian subsidiary's fiscal year to calendar year basis. Currency fluctuations had a negative impact on sales for the year. The impact of currency fluctuations and the change in fiscal year resulted in an increase in net sales of $22.5m for the quarter and $9.7m for the year. Operating profit for the quarter was $4.8m compared to $100,000 in the fourth quarter of last year. As a reminder, to help you make an appropriate comparison, operating profit last year included a $3.2m charge resulting from the annual impairment review of good will and indefinite lived intangible assets. The fiscal year change and the impact of currency exchange fluctuations increased fourth quarter 2003 operating profit by $1m. Operating Profit in the fourth quarter was also aided by stabilizing economic conditions in South America and improving currency exchange rates related to dollar denominated raw materials.

For the full year, the International Segment realized an operating profit of $8.4m compared to an operating loss of $5.6m in 2002. Results in 2002 included impairment charges totaling $11.9m in accordance with SFAS 142 and 144. The change in fiscal year and currency fluctuations had no significant impact on the segment's full year 2003 operating profit. The impact of changing fiscal years of certain foreign subsidiaries to a calendar year basis more than offset the effect of unfavorable currency exchange fluctuations for the year, increasing consolidated net sales for the full year 2003 by $8.4m. The change in fiscal years and favorable currency exchange fluctuations increased consolidated net sales of the fourth quarter of 2003 to 28.5m in the segment.

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, Investor Relations, press releases. Our Company's financial condition continued to improve in 2003. We ended the year with $302.8m in cash and cash equivalents, an increase of a $138.8m over year-end 2002. Our current ratio increased to 1.49 at December 31, 2003 from 1.39 at the end of 2002. Total debt outstanding was $513.6m at December 31, 2003 versus $521.7m at the end of last year. Total debt as a percentage of total capitalization improved to 26% in 2003 from 28% at the end of 2002. For the third year in the row, the Company's net operating cash flow exceeded $550m and this was aided by improved profitability and stringent working capital control. Our working capital ratio, which we define as accounts receivable plus inventories less payables to sales, was 11% of sales in 2003 versus 11.5% of sales in 2002. This ratio is based on 12-month sales and average working capital.

A significant factor in our working capital improvement was a reduction in inventory days to 77 days in 2003 from 83 days in 2002. Net operating cash flow for 2003 was $558.9m compared to $558.9m in 2002. The net operating cash flow in 2003 provided the funds necessary to support the following items: capital expenditures of $116.5m, debt reductions of $8.1m, cash dividend payments of $90.7m, acquisitions of $48.4m and treasury stock purchases of 238.1m all during 2003. During 2003, the company purchased 7,977,000 shares of its common stock in the open market. Of that amount, 2,977,000 shares were purchased in the fourth quarter of 2003. The purchased authorization remaining at the end of 2003 was 17m shares. We intend to purchase shares of the company stock for treasury in the open market from time to time as we believe our stock is a good investment.

Looking now to 2004, barring any large acquisitions, we expect our total debt-to-capitalization to be approximately 24% at the end of 2004. Capital expenditures for the year will be approximately $130m. The predominant share of these capital expenditures will continue to grow towards expanding our store network, plant productivity improvements, and distribution infrastructure.

Depreciation will be about $108m versus $104.8m in 2003. Amortization will be $12.4m versus $11.8m in 2003. Now that I've reviewed our segment performance and commented on the balance sheet items, I would like to now give you a brief update on the status of our lead litigation. In our third quarter conference call, we informed you that the court in Rhode Island has scheduled the re-trial to commence on April 5th 2004. It is our understanding that the re-trial will proceed in a similar fashion to the initial trial. Phase I of the trial will again be directed to the sole issue of whether lead paint in buildings is a public nuisance. Suit filed in Mississippi on behalf of the adult painters was originally scheduled for trial in February of 2004. In late January, the judge ruled to postpone the start of this case and no new trial date has been set. Two other adult painter cases in Mississippi have been scheduled for trial in June and October of 2004. During the summer and early fall of 2003, three more public nuisance cases were dismissed. These were the City of Milwaukee, Santa Clara County, California and the City of Chicago. These cases are currently on appeal. A case pending in the state of New Jersey was dismissed in 2003 and this case is also on appeal. The cases in Saint Louis, New York City, and Rhode Island are still pending. In Saint Louis, the defendants have filed a motion to dismiss, but the judge has not made a ruling on that as of this time. As a reminder to-date, we’ve had less than a 100 lead litigation cases filed since 1987, excluding the most recent cases over 85% have been dismissed. None have ever been settled. Only one Rhode Island has ever come to trial. This now completes my review of our results for the fourth quarter and full year 2003. Now, I would like to turn the session over to Chris Connor, who will make some general comments and highlight our expectations for 2004. We will then open the call to questions. Chris.

Thank you Conway. Good morning everybody and thanks for joining us. Fourth quarter of 2003 was one of the strongest quarters for our company in the past 5 years, both in terms of sales growth and profit improvement. And on the strength of this closing quarter, we finished the year with diluted net income for common share of $2.26, $0.02 above the range that we estimated at the end of the third quarter. In addition, our balance sheet continues to strengthen during the year and we generated significant cash from operations. It was particularly gratifying to us that we were able to reduce our inventory days again while maintaining service level to support this significant sales increase. I’ll have to say that we were pleased with the results for this quarter in the year and we are also encouraged by the sales momentum that we've seen carry over into January of 2004. Demand for architectural products has hold up well and the commercial and industrial segments of our business have shown some recent improvement, but we continue to believe that the recovery in the U.S. industrial sector will develop slowly and we've planned according.

Let me comment briefly on the few areas we believe will be key to our success in the coming year. The first is our companywide focus on driving strong sales growth. In our Paint Store segment for example, we must continue to generate solid comp store growth, while increasing our rate in new store opening. The 45 net new stores we added in 2003 fell short of our expectations for the year. Our plan in 2004, calls for the addition of more then 60 net new stores that we are committed to achieving this plan. New product and packaging innovations, like Krylon Fusion and our Dutch Boy Twist & Pour container that contributed significantly to our top-line growth over the past year. We will continue to challenge our marketing and technical organizations to develop and commercialize new products in less time and challenge our sales organizations to use these products to gain market penetration and sell new customers.

Our Chemical Coatings divisions started to begin full scale production in Shanghai in the first quarter of this year. This new China plant will give us the capacity and cost structure to compete for a larger share of this fast growing industrial market in the coming years. In every segment of our company, we believe we have significant opportunities to accelerate revenue growth. And now the key to our success will be our proactive pursuit of acquisition opportunities that complement our business model. ceded by expanding our store network, or providing entry to new markets or acquiring new technology and strong brand to bolster our controlled distribution platform. We have significant opportunities to broaden our geographic reach, increase our store penetration in markets we currently serve, and grow our volumes in every store we operate today. Acquisitions will play a role in unlocking these opportunities.

Finally, we’ll continue to focus on initiatives that enhance our earnings performance. Along with stronger sales growth, the reductions in manufacturing and administrative costs, and the improvements in working capital management we achieved in ’03 contributed significantly to our operating profit improvement for the year, in spite of $21m reduction in net pension credit. The success of our operational excellence programs over the past 2 years gives us confidence that we’ll see further improvements in operating efficiency and productivity in 2004 and beyond.

Looking forward to next year, we anticipate annual sales growth in the mid-single digits over last year. With sales in that range, we expect diluted net income per share for the year in the range of $2.45 to $2.55 per share, compared to $2.26 per share in 2003. We anticipate that first quarter sales for ‘04 will increase in the mid to high single-digit over last year’s level. With this level of sales, we anticipate diluted net income for common share for the first quarter of 2004 to be in the range of $0.26 to $0.30 per share compared to $0.21 per share in this first quarter of 2003. 2003 also marked the 25th consecutive year of dividend increases for the Sherwin-Williams Company. Yesterday our Board of Directors approved an increase in our quarterly dividend from $0.155 per common share to $0.17 per common share payable on March 15 of 2004 to shareholders of record on February 23 2004. This marks the first step towards our 26th consecutive year of increased dividends.

One final note, on Tuesday April 13, we will host our Annual Financial Community Presentation in the Boardroom of the New York Stock Exchange. The morning program and luncheon will be followed by an afternoon bus tour of three Sherwin-Williams Paint Stores in the greater New York metropolitan area. We hope you'll take advantage of this opportunity to join us to meet with our operating level management and maybe even do a little paint shopping in the afternoon. We'll be sending out invitations and related information in a few weeks. At this time finally Sean, John, Bob and I will be happy to take your questions.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the "*" key followed by the digit "1" 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 "*" "1" on your touchtone telephone to ask a question.

Our first question will come from Michael Perber (ph.) of Progress Capital (ph.).

I have two questions the first question, Chris can you talk a little about the industrial business in terms of how that came back in the quarter? I don't know if you break out separately comps for that versus the rest of the retail operation. And what you are seeing out for the first couple of quarters of '04 in that division? Thank you, and then I have a follow-up.

Michael, we do not break out our comps that way, but I can comment that our Industrial Coatings Segment in the fourth quarter did show pretty sizeable improvement over previous quarters. We have been talking about flat to slightly down; in the quarter we were in the mid-single digit improvement both in revenue and gallons on that. We made the comment that we're cautious about going forward. We think a lot of industrial business has been lost permanently as manufacturing jobs have left our country, so we are a little reluctant to forecast that going forward.

Okay, and then in terms of your investment -- sorry is that Conway?

Yes, go ahead.

Okay, sorry -- your investment in Asia, can you quantify that please for '03 how much of that cost you and how much will be in '04?

Well we haven't broken it out, but the capital investment is less than $10m and part of the drag is on the expense side, because we've put in an infrastructure and then we are not actually producing and shipping product.

How much was the drag on the expense side?

We haven't broken that out, but it did -- part of that impact that you would see on gross margins for the quarter was due to that drag on the expense side of that plan.

And then the last question is, looking at '04 your operating cash flows stay similar to the somewhere or greater than the $550m you did for '03?

Right now, we've projected that little short of the $550m only due to really our working capital. As Chris commented, we were able to drop our -- reduce our inventory days from 98 to 90 days, and we're just not going to see that same kind of drop in cash generation from the working capital.

Okay, great. Thank you. I'll get back to you.

Thank you.

And our next question will come form Jason Putman of Credit Suisse First Boston.

Hi, good morning and congratulations on the quarter.

Thank you, Jason.

First, can you break out the differences from the accounting adjustments in the International and the Auto divisions? I wanted to see either the sales impact or the percentage wise?

Hi either 13 months Jason.

Yes.

Yes if you -- we verbalize that I believe in the release, but if you take a look at the Automotive in the fourth quarter, it was a little over $5-5.3m. So, our sales increase in the Automotive Segment was [86] and it was 3.5 went to two factors and with the currency as well as the 13th month. International -- I don’t have that between those [inaudible] was $22.5m and that takes it down to 17% for international in the fourth quarter.

Great. Okay, next question, you mentioned last quarter the Pratt & Lambert gain at Ace. I think that was supposed to rollout beginning in the late first quarter. I just kind of wanted an update on that.

Sure. I’ll be happy to comment on that. As we talked about this program, it is a dealer program. It's essentially a license to hunt we now have to go out and convert all the individual Ace dealers, and I can tell you that it's progressing as planned. But we do think the ramp up will be slow, but acceptance of the line by some of their strongest and largest franchisees change has been very encouraging and we're quite pleased with the program.

I think there is, you know, a little bit over 5,000 independent Ace stores. I mean what is the reason, what sort of goal are you targeting is this 2,000 stores, 1,000 stores, is there any sort of reasonable expectations to put on this at this point?

Again, we'd just culminate that we think the ramp up will be slow. We've not [inaudible] numbers on it, Jason.

Okay, fine. And then, I think you've already kind of hesitated this one, but obviously the net working capital performance continue to be very strong. But as you look forward - 11% as a percent of sales on net working capital, do you think that's kind of where it's going to bottom out or are there still more opportunities for improvement or just being conservative?

No, I think that -- if you would have asked this last year, we felt that our receivables had the different [inaudible] of our DSO versus our what I'll call our for sector DSO, we put zero -- past due was very close and I think that when you saw the inventory, we simply we had a room in inventory. We do not believe that we have that kind of room in inventories going into this year. So, I will not say -- we are always going to try and give an improvement on our assets, we are looking for productivity, but I don't believe we'll have that kind of productivity jump in the future.

Okay, thanks again.

Thanks, Jason.

Moving now to John Roberts of Buckingham Research.

Good morning guys.

Good morning.

Congratulation on good quarter. It seemed like the recovery in the industrial and commercial sector was one of the biggest drivers in the Paint Store improvement, but I would have expected the Midwest to show up much higher in the ranking of regions, if that were the case. Is there anything there that, you know, may not be consistent?

Well, let me comment on that. While industrial played a role because it was positive again for us, the driver in the segment was architectural coatings, which were much stronger than the industrial gains. And I think that we were pleased with our Midwestern division performance as this was offset by really strong performance in the Southeast and others as Conway mentioned.

Okay. And then secondly -- in the automotive segment, I hadn't really thought much about the international card of the Automotive Refinish business. What percent of Automotive total is international? Is it a -- it was big enough obviously to offset some sluggishness in the domestic market.

Well, it’s -- we haven’t broken that out, but it’s still a relatively a small percentage. It’s obviously less than half, but I think given the growth elements that we had there, that was pretty arable to offset slight declines in the domestic market.

Is the international largely Brazil?

Mexico, Brazil, Chile and we have our operations in Italy.

Thank you.

Thank you.

Once again it is time for one to ask a question. We’ll go next to Barbara Allen of Natexis Bleichroeder company name, I am sorry.

Thank you.

Hi, Barbara.

Hi. Excellent job as usual. I was very interested in the strong comp store sales for the fourth quarter in the Paint Segment. How far of that do we have to go to find an 8.6%? Do you remember off the top of your head Conway?

1996.

96. But that was primarily driven as you say by architectural coatings, pros and DIY?

Correct.

Is there if -- I am sorry.

In 1996 it was 10%, so we still have room to go.

Okay. We’ll take this one though; it's awfully good. The -- I was wondering if you have any way to measure explicitly improvements in your paint store sales to DIY given the refresh program and how many stores have you refreshed in total so far?

Yes we can give you that information.

Yeah the total since the inception of the program is 1,335 --

Okay.

Stores. Its difficult -- to measure how much the store refresh would have impact because of also other changes we also made to track the DIY customer, you know, and yeah, as we mentioned with the color palette and other aspects. So, you know, though we seen a pickup in traffic you know, we are not sure that could all be attributed to the store refresh program.

Okay. Thank you.

Thank you.

Our next question will come from Chip Rooney (ph.) of [inaudible].

Hi thanks a lot. You dropped out a little bit, at least, on [wire] line when you were beginning to talk about the litigation I think I caught the very first part of when you were talking about Rhode Island and then I just caught on when you said the adult painter case from Mississippi trial date was not going to be in February. Could you quickly review the Rhode Island and could you talk about the adult painter cases and anything else in February and just, will you do that for me please?

Yes in Rhode Island you know, the re-trial is on just a first phase on the -- whether the lead paint is a public nuisance. That would commence on April 5th and in terms of what the procedures would be on any subsequent phases, you know, those are still being considered by the court. The case that I mentioned in Mississippi, the one that was scheduled to trial in February of this year, you know, we mentioned in late January the judge ruled to postpone the start of that case and the judge has not set a new trial date as yet. The only other two cases that are scheduled at this point of time will be the two other adult painter cases in Mississippi, one scheduled for June and one is scheduled for October. The other comments were really referring to cases that have been dismissed by the trial court, you know --

Actually, I think I heard all that I am pretty sure. It was on the line.

Right.

I appreciate that. Will you, also talk about the raw material outlook not only for TiO2, but for you know all your raw material inputs and energy costs? And how would -- you know, is all that -- you know, what's in your core guidance relating to those?

Yes, you know, I think first of all, you know, we would only comment on what we believe to be industry trends and as all of us know the energy cost, obviously increase in the fourth quarter of 2003 you know the crude oil going into $33-$36 a barrel range and natural gas running up to between 560-650m BTUs, the impact of this has driven cost up in some of the basic raw materials that we use, polyethylene which is used in plastic pales, monomers that are used in latex binders for paint, and then hydrocarbon and oxygenated solvents. We think that these costs will remain high through the first half of 2004, but would weaken late in the second quarter of 2004 and this is just based on you know some of our people looking at the signals in the oil future markets. Outside of basic energy cost, titanium dioxide producers have announced a $0.06 per pound increase affective to the major customers on January 1, 2004. However, given the current TiO2 supply demand scenario we will basically have to wait and see what will happen in the coming months to see you know whether the industry you know would accept the increase. You know have ongoing programs where we continue to develop cost technology and they are optimizing our manufacturing capabilities. However, looking at the industry and based, we would think on a annualized year-over-year basis raw-material cost would increase between 3 and 5% and in 2004 and we believe, you know, in this range we will be able to, you know, manage those increases through slight, you know, selling price increases and productivity improvements.

Great so that’s what then is the range you've given us the earnings per share?

Yes, we were expecting industry raw material cost to increase between 3 and 5%.

That's great. Is there any feedback you can share with us on customer acceptance for the Twist & Pour container?

Yes. Twist & Pour container continues to exceed our expectations and now accounts for about half of Dutch Boy sales, which is strong growing portion of that brands volume. We've commented in our earlier question about 8 Hardware and the launch of the Pratt & Lambert program in the Twist & Pour container and as we've also commented previously, we have it in our own stores now and a couple of high-end retail lines and it is doing well and gaining volume there.

Do you think it is driving sales or helping you gain share?

Yes.

Alright, thanks a lot.

Thank you.

Our next question will come from Chuck Cerankosky of McDonald Investments.

Good morning everyone.

Good morning.

Can you hear me.

Yes.

Good morning Chuck.

Two things, can you talk about the set up for the Chinese plant, last year you were exporting some U.S. new product to the Asian customers that you are going to line that down this year, set up a new plant, is that going end up you think at a positive swing on expenses, and even be profitable this year?

We do have a positive swing on expenses and positive swing on gross margin of those product sales. I think we are projecting this out, operation will be positive this year.

Okay. Chris, please comment on the general pricing outlook for products across your reported segments. Obviously, you could more easily increase prices in the stores?

I think that's pretty much consistent with the way we run the business for last several years, Chuck, as Conway mentioned the way that will mitigate any raw material price increase or cost increases will be through improved productivity as well as very selective price increases. Often times in introduction of new product allows us to get at that a little bit and we’ll have a little more ability in our store side and in our consumer segment to get price increases.

Do you think your larger retailer customers or your dealer customers are going to accept price increases?

No.

Thank you.

Our next question will come from Jeff Zekauskas of J.P. Morgan.

Hi, Good morning.

Good morning, Jeff.

Just have -- I guess three questions. The first is, if you don’t lose the lead trial in Rhode Island, can it be retried? Second question, is propylene costs have gone up very, very rapidly or are going up very rapidly till right now pushing up the price of acrylic resins. In your experience with the Paint and Coatings industry, is it easy for sellers of acrylic resins to quickly get some price release, given that it’s a little bit late in the paint season already? And then the third question is, a conceptual one and that is why is it in general that your stores business always grows materially faster than your consumer business?

First of all, I’ll start out and comment on the lead -- on your question on the Rhode Island trial as I understood, if we don’t lose can it be retried, was that your question?

Be tried for a third time?

I don't know.

It will only [inaudible] in the room Jeff, but my guess is that they can try and reconfigure it.

Are you saying like if it ends up into Hungary or something like that?

Right if it ends up in Hungary, is, you know, the lead worry in Rhode Island done.

Well I would think it becomes a political question for the people of Rhode Island.

So in theory they may be able to do it and you know, it depends on whether the people who are advocating this will want to do it again?

Right we have to wait and see what happens with this trial, what kind of decision we get, and that’s really to speculate at the comment I thing, on the propelling [inaudible]?

On the acrylic resin cost I think, those are always things are, you know, we’re balancing off and though we have, you know, significant outside suppliers we also have internal supply also of our own resin production. So I think, you know, that becomes a, you know, basic purchasing decision. I think in terms of seasonality you referred to usually, you know, the inventory levels in our industry peak in May, so I think from this point until the middle of may there is still a uptick on purchases just due to the seasonality and it would be after May then it would taper off.

And Jeff I think to your point about our stores business growing faster than consumer, and certainly in recent times for the last several years that’s been true, although not always true. Recently what we have experienced is the power of a controlled distribution platform where we control that store count and we can add stores and drive that. On the consumer side, we have literally hundreds, thousands of retailing partners over there and we can’t always control that -- Kmart being a great example of a good customer of ours that has close to 600 stores now and impact that volumes. So we can’t control that side of it; on the stores we can. Therefore we get typically a better lift there.

So, your read on why stores does better is not -- the way you argue it is -- it's not because in the sense you serve the professional contractor but it has to do with as opposed to having a DIY slams but with your distribution in general?

I think it's a lot of those things rolled together and the comment about the store count is just one factor of that. We have shared with the investment community that the professional side of the architectural market is growing faster then the DIY side, and that's our strength. So clearly the fact that we will focus on that is helping the stores business too and other point and there were several others.

Okay, thank you very much.

Thank you, Jeff.

And we will take a follow-up question from Eric Bosshard of Midwest Research.

Good morning.

Good morning, Eric.

Two things. First of all, in terms of revenue momentum into the first quarter Chris can you give us any further color on segments of the business that are strengthening or how they are behaving as we go into 2004?

Sure, Eric, I can break-down kind of our expectations a little bit as we said we were going to be up in the mid-to-high single digits for the quarter. Our Stores Group will [inaudible] that, mid to high single digits, consumers having a strong quarter, also mid to high single. We think automotive will be in the low single digits and international probably push through the double-digit performance.

Within consumer -- this is a business that had 3 or 4 not real strong years and now we've had a couple of good quarters in a row -- that sounds it's going to continue into 1Q. A portion of that of comparisons [inaudible] comparisons for couple of years. What change is this allowing in the consumer business to put up, be improved to now sustained improved numbers that we are seeing?

I think when you looked at where we were struggling 2, 3 years ago in this segment, we were experiencing a really consolidating home center market. And we talked about large players like B&Q, [Haccinture Ernst], Homebase in the west coast, these were strong customers of the segment that closed their doors. We’ve seen a much more stable environment over the last several years with exception of the K-Mart stores we’ve commented on. Secondly, I would say that the innovation and technology and new product development that’s happened there across that segment whether it’s the Fusion, Krylon Aerosol product we have shared with you, the Twist & Pour packaging, our Minwax and Thompson's brands continue to do well. So those are contributing to better quarter comps right now.

And then lastly it looks like 2004 will be another strong free cash flow year. You know, in each of the past 3 years now you've got back an average of $175m of stock or 3 or 4% of the shares outstanding. Is there any reason strategically you would pay it any differently I guess especially as the Company now moves towards such a low net debt position.

I think what we have commented on our use of free cash is that, you know, we are interested in making acquisitions that fit our criteria both in terms of business as well the financial returns to shareholders and failing opportunities there and we will be opportunistic in our stock. So that will be our consistent policy going forward.

And with the fixed nature in the term of our long-term debt, you know, there would be very, very little to come out there, so primarily those two uses.

And last question, you commented about a shortfall in store opens in '03 and an increase in '04. Is '04 making up for what you didn’t get done in '03 or is there a consideration here to modestly accelerate the store opening pace going forward?

No, we are not trying to make up -- I mean that is the pace that we are at beyond. I think what we've tried to communicate overtime is that the eye on the price we have is to be at least 3,000 stores during the decade and we just keep marching towards that. So 45 is a little light, 60 is more in line with where we ought to be and that should be a pretty stable run rate going forward.

Okay, thank you.

Thank you.

We'll take another follow-up question from John Roberts of Buckingham Research.

Thanks. Do you have any impressions [Jed] of what the industry growth rate was during the quarter or at least whether it accelerated in terms of overall sales? I have the impression at least from may be PPG's calls earlier that it's a little bit better, but if the industry didn't have this kind of accelerations?

We haven't seen any industry information. Yes, they had to lag a little bit in terms of gallon growth etcetera. Like here we have heard some nice reports from a couple of the public companies, but my guess is that it is probably little softer than what you are hearing from these large companies.

And so it's less softer than you would have even more outperformed, you would have picked up more share than maybe what you are perceiving?

Well, no better when we see [inaudible] add some.

If you were picking up shares, would you speculate that it be more on shift from DIY to professional contractor, may be accelerating a little bit and driving people more into specialty stores? Or would the share gain more likely be coming from smaller specialty store chain that are out there? You know more in trying competition?

Stores, segment of the company we are gaining share, where would it be coming from?

Right.

It’ll be coming from anybody that competes against that segment, other paint store operators --

Probably other paint store operators, but those are professional business and the DIY business, we are showing good gains.

Okay. Thank you.

Thank you.

Okay. We’ll take another follow-up from Barbara Allen at Natexis Bleichroeder.

Thank you. I’ll try to be fast.

That’s okay.

Conway has there been any new lead cases filed?

No.

So, the last one filed was a year and a half ago?

Fourth quarter of ’02.

Okay. Chris, have the professional contractors stepped up their purchases of rigs? Can you tell yes or are they still making due with what they’ve got?

Barbara, I’d say as [rig] equipment was a strong force in the fourth quarter. I don't have the specific number, but we had a good quarter in the fourth quarter.

Oh, well that’s encouraging.

Yeah.

And in adding stores this year -- is the difference between ‘04 and ‘03 that acquisition prices were too high in ‘03 and you are seeing better opportunities or is it just you were busy with other things or what was going on?

Are you talking about adding net new stores?

Yeah.

No, I don’t think the acquisition price was any different as Conway mentioned in his opening comments we hope to explores last year which is really a high water mark for us so that took our net number from in the 50 down to 45 as we commented. You know, timing of real estate impact us from [carrier] and frankly when we will come in through the first quarter and first half of the year and seeing from most offices out there, we tend to tighten our belt to run here and just look for our cost containment. We may have slowed down or push here a little bit, which brought that number in a little [light] then we would have expected so.

That’s understandable. Thank you very much.

Thank you

And our final question will come from Michael Perber (ph.) of Progress Capital (ph.).

Thanks guys. Chris, could you just pose for me in terms on priority on acquisition, is that your priority to use the cash flow before share repurchase but within acquisitions could you breakout what would be the priority? Will it be talking acquisitions, [inaudible] would be international, would it be Asia, would it be a larger acquisition, could you just walk us what your priorities would be?

We commented in the past that we’re instead in looking for acquisition candidates that would strengthen our controlled distribution platform. So there are a number of opportunities for us to add regional paint change that fit us well. Our most two recent acquisitions in that regard would have been Mautz Paint Company in Madison, Wisconsin with 20 to 30 store chain and the Flex Bon Paint Company in Fort Myers, Florida, also with 20 to 30 store chain. That’s a really good example of the type of regional paint chain operators that set our model well. In addition, we’ve looked for technology that we can also take to this platform. We need some examples of that, was a company called General Polymers that we bought that provided high-end industrial floor coatings that we could sell to our industrial manufacturing base as well as the marine coatings operation we bought. We've also taken through that store. So we did strengthening and expanding the platform through store acquisitions or the technology that we sell through those, are two really great examples of acquisitions that look good to us. And then finally we will also commented that there are select international segments that would interest us as well. Fairly, the Asia-Pacific market, as you mentioned, is growing fast. We are seeing our customers, particularly our industrial customers set up staff over there and it's likely that we will look for [inaudible] needs to follow them around the world.

Thank you.

Thank you.

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

Okay. Well, thank you all very much for joining us and as Chris mentioned in his comments, we will be sending out a, you know, invitation to our Financial Community Presentation and we very much hope that you all will be able to join us where we can -- in New York, where we can talk in more detail about, you know, all of these segments. For today, if you any of you have any follow-up questions, feel free to call myself and Bob Wells and we will be happy to, you know, answer any questions you may have and thank you again for joining us.

And that concludes today's conference call. Thank you everyone for your participation. You may now disconnect.