宣偉 (SHW) 2004 Q4 法說會逐字稿

Good morning. Welcome to the Sherwin-Williams Company year end 2004 earnings results conference call. Today's call is being recorded. At this time for opening remarks I would like to turn the call over to Conway Ivy, Senior Vice President, Corporate Planning and Development. After his remarks Chris Connor Chairman and Chief Executive Officer, Sean Hennessy, Chief Financial Officer, John Ault, Vice President, Corporate Controller and Bob Wells Vice President Corporate Planning and Communications will be available for questions. Please go ahead, sir.

Thank you. This conference call is being Webcast simultaneously in a listen-only mode by V-call via the internet at www.sherwin.com. A archived replay of this Webcast will be available approximately two hours after this conference call concludes. It can be accessed at www.sherwin.com and will be available until Sunday February 13, 2005 at 5 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 security laws with respect to sales, earnings and other matters. Any forward-looking statements speaks only as of the date on which the statement is made and the Company undertakes no obligation to update or revise any forward-looking statement. Pardon me. Whether as a result of new information, future events, or otherwise. A full declaration regarding forward-looking statements is provided in our earnings release transmitted earlier this morning.

After the review of our results we will open this session to questions. In order to allow more time for questions we have provided balance sheet items and other statistical data on our website at sherwin.com under investor relations February 3, press release. First I would like to review consolidated Company performance for the fourth quarter and full year 2004. Pardon me. Sales for the fourth quarter of 2004 were up 16.7 percent to $1.5 billion. For the full year sales grew 13.1 percent to $6.11 billion. Acquisitions increased net sales 10 percent or 128 million in the quarter and 4.1 percent or 222.6 million in the full year. Volume increases for the quarter and full year came primarily from strong architectural paint sales to contractors and improving sales and market conditions in industrial maintenance, product finishes, and international sales in the automotive finishes and international coating segments.

Gross margin in the fourth quarter decreased to 44.3 percent of sales versus 47.4 percent in the fourth quarter of 2003. Approximately 1 percentage point of this 3 percent reduction was due to the impact of the impairment of the customer sales incentive program and also due to product mix. The remaining decrease was due primarily to rapidly rising raw material costs. For the year gross margin declined to 44.2 percent of sales versus 45.4 percent in 2003. Most of this decline was due to rising raw material costs the impairment charge and mix change had a negligible effect on gross margin for the year. SG&A as a percent of sales for the quarter decreased to 36.2 percent, from 37.1 percent primarily due to the strong sales increase. For the 2004 year SG&A decreased to 33.8 percent of sales from 34.8 percent in 2003. Profit before tax in the fourth quarter decreased 9.4 percent to $101 million from 111.5 million in 2003.

For the year profit before tax improved 11 percent to 580.2 million from 522.9 million last year. Interest expense increased by 1.2 million for the year, due to an increase in short-term borrowings that were made to finance acquisitions. Net income in the fourth quarter increased 11.7 million or 16.5 percent to 82.5 million. Diluted net income per common share for the fourth quarter increased by 18.8 percent to $0.57 per share from $0.48 in the fourth quarter 2003. For the year net income increased 18.4 percent to 393.3 million from 332.1 million in 2003. Diluted income per common share for the year increased 20.4 percent to $2.72 per share from $2.26 per share in 2003. Approximately $11.6 million of the increase in net income for the quarter and the year resulted from a reduction in the annual effective tax rate realized in the fourth quarter. Acquisitions added 700,000 in net income to the quarter and 4.7 million to the year.

I would now like to review our performance by segment. In our paint store segment fourth quarter net sales increased 22.8 percent to $1.02 billion. For the year net sales increased 14.6 percent to $3.98 billion from 3.5 billion in 2003. The acquisition of Duron, Incorporated. Added approximately 11 percent to this segment's fourth quarter net sales and 3.5 percent to the full year net sales. Comparable store sales increased 10.9 percent in the fourth quarter and 10.1 percent for the year compared to the prior year. Regionally in the fourth quarter the southeastern division led all divisions followed by eastern division, midwestern division, and southwestern division. In the fourth quarter operating profit for the paint store segment increased 5 percent to 115.3 million. For the year, operating profit increased 19 percent to $480.2 million.

Strong sales volume and expense control in the quarter and throughout the year was partially offset by rapidly rising raw material costs. Paint Stores Group ended the year with 2,983 stores in operation in North America compared to 2688 stores at the end of last year. The acquisition of Duron, Incorporated added 229 stores all in the United States. In addition to Duron we organically opened 71 new stores and closed 5, resulting in a net increase of 66 stores for the year. In 2004, we completed our store refresh program which was a 3-year project to remerchandise and refresh the shopping environment in our stores. Turning now to consumer segment. External net sales in the consumer segment increased 5.2 percent to 261.5 million for the fourth quarter and 9 percent to $1.3 billion for the year versus the same periods last year. Acquisitions increased consumer segment net sales for the quarter by 12.1 percent. This increase was partially offset by 3.9 percent decrease in sales from the impairment of a customer sales incentive program, inventory adjustments at some of our retail customers and the elimination of the paint program with the customer.

For the year acquisitions increased net sales by 7.2 percent and new product programs contributed further to the increase. Operating profit for the fourth quarter decreased 15.9 million or 52.8 percent to 14.2 million from 30.1 million for the same quarter last year. For the year, operating profit was adversely impacted by a charge declined 11.3 million or 5.7 percent to $187.7 million. For the quarter and the year operating profit was adversely impacted by a charge for the impairment of certain assets totaling $9.8 million and by sharply rising raw material cost that could not be fully offset by operating profit from acquisitions and favorable manufacturing absorption.

Turning now to our automotive finishes segment. Net sales increased 15.7 percent to 131.7 million for the fourth quarter and increased 12.6 percent to 514.3 million for the year. Fourth quarter sales benefited from improving domestic sales and the acquisition of a majority interest in an automotive coatings company in China which was completed in April. For the year the sales increase was driven by new product line introductions, improving international sales and the acquisition. Currency exchange fluctuations had a negligible impact on net sales for the quarter and the year.. Operating profit for the segment increased 3.1 percent in the fourth quarter to $15 million and increased 10.8 percent to $58.1 million for the year compared to $52.4 million in 2003. Operating profit for the quarter and the year benefited from higher sales volume, sales of higher margin products and the profit contribution from the foreign acquisition. A combination of these factors more than offset the rapid rise in raw material costs.

There was no significant impact on operating profit in the quarter or the year from the impact of currency exchange fluctuations. In our international coating segment fourth quarter net sales decreased 5.5 percent to 85.5 million from 90.4 million in the fourth quarter last year. Sales for the year grew 11.7 percent to $318.6 million. International segment sales for the fourth quarter and full year benefited from favorable currency exchange. In the fourth quarter of 2003, a Brazilian subsidiary changed their fiscal year to a calendar year basis, adding an additional month sales to the fourth quarter. The net impact of these two factors currency exchange and the additional sales month in 2003 resulted in a sales decline of 8.5 million or 10 percent in the fourth quarter of 2004 relative to the fourth quarter of 2003. For the year, favorable currency exchange more than offset the additional month's sales volume resulting in a net sales increase of $8.4 million or 2.5 percent.

Operating profit for the quarter was $7.6 million compared to 4.8 million in the fourth quarter of last year. Improvement was primarily the result of improved sales volume and expense control. The net impact of currency exchange and the fiscal year change on operating profit in the quarter was slightly negative. Operating profit for the year grew to 18 million from 8.4 million in 2003. This was primarily the result of higher sales volumes, operating efficiencies resulting from manufacturing volume increases. Tight expense control and favorable currency exchange. The change in fiscal year had no significant impact on operating profit for 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. The Company's financial condition remains strong in 2004, giving us continued capacity to invest in our business and service our debt. Net operating cash flow for the year was $546 million. Our working capital ratio which we -- is defined as accounts receivable plus inventories less payables to sales was 13.8 percent in 2004 versus 11 percent for 2003. And this is based on 12 months sales and average working capital. This increase reflects the incremental working capital of Duron and Paint Sundry Brands with a denominator of only four months' sales. Total debt outstanding was 738.3 million at December 31, 2004 versus $513.6 million at the end of last year. Total debt as a percent of total capitalization increased to 30.9 percent in 2004 from 26 percent at the end of 2003. This was a result of our short-term borrowing to help fund the two acquisitions.

Net operating cash flow in 2004 helped provide the funds necessary to support the following items. Capital expenditures of $106.8 million. Cash dividend payments of $96.9 million. Acquisitions of $554.5 million. And treasury stock purchases of 267.4 million during 2004. During 2004 the company purchased 6.6 million shares of its common stock in the open market. Of that amount, 1,450,000 shares were purchased in the fourth quarter of 2004. The purchased authorization remaining at the end of 2004 was 10,423,000 shares. As we intend to purchase shares of the Company stock for treasury in the open market from time to time as we continue to believe our stock is a good investment.

Looking now to 2005. Barring any large acquisitions we expect our total debt to capitalization to be approximately 25 percent at the end of 2005. Capital expenditures for the year will be approximately $150 million. The predominant share of the incremental increase in capital expenditures, you know, over those in 2004 will go towards expanding our manufacturing capacity and this would include the construction of the new emulsion plant in the Western United States. In addition, the increase in capital expenditure reflects the completion of the rollout of automated color matching equipment in our stores, additional point of sale devices and investment in other systems. Depreciation for the 2005 year will be about $120 million versus 109 million in 2004. Amortization will be $23 million versus 16.6 million in 2004. Now that I have 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 Mississippi a suit brought by an adult trainer has been scheduled for trial in June of 2005. The case will be heard in Federal Court. All other cases in Mississippi are in various stages of discovery and motion practice. The Appellate Court in Wisconsin overturned the Circuit Court's dismissal of a public nuisance action brought by the city of Milwaukee against the Moffs Paint Company and NL Industries. Sherwin-Williams acquired the assets of Moffs in 2001. The court determined that there were materially disputed facts in the case that should be heard by a jury. The defendants have requested that the Wisconsin Supreme Court review the ruling of the Appellate Court. On January 14, 2005, an Illinois Appeals Court unanimously upheld the Circuit Courts dismissal of the city of Chicago's public nuisance lawsuits against former manufacturers of lead pigment. The Appellate Court of Illinois First District held that the former lead pigment manufacturers could not be held liable for creating a public nuisance. The city of Chicago has announced that it will further appeal the ruling in this case. In Rhode Island, the date of the retrial of the state's case against former lead pigment manufacturers has been postponed.

A year ago the judge established April 5, 2005 as a target date for the trial to commence. After discussing with both sides the progress of ongoing discovery, the judge determined that an extension of the discovery period is warranted in order to allow both sides additional time to complete the process. The new trial target date is September 2005. Plaintiff's appeals in cases in New Jersey, Wisconsin, and Maryland have been heard by the higher courts and we anticipate decisions could be rendered on those cases -- on these hearings during the first half of 2005. 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 have ever been settled and only one, in Rhode Island has ever come to trial. This completes my review of our results for the fourth quarter and full year 2004. Now, I would like to turn this session over to Chris Connor who will make some general comments and highlight our expectations for 2005. We will then open the call to questions. Chris.

Thanks Conway and good morning everybody. And thanks to all of you for joining us today. By any measure 2004 was a solid year for the Sherwin-Williams Company and our shareholders. We achieved double digit growth in revenue and volume. And we finished the year above $6 billion in sales for the first time in our Company's history. Three of our four operating segments grew their sales and operating profits at double digit rates. Our consolidated net income increased more than 18 percent and earnings per share more than 20 percent to a record $2.72 per share. This last year we generated significant net operating cash, paid record dividends. Repurchased over 6.5 million shares of our stock and finished the year in strong financial condition. Total annual return to our shareholders in 2004, assuming dividend reinvestment was 30.7 percent.

Speaking of dividends, 2004 marked our 26th consecutive year of dividend increases. Yesterday our Board of Directors approved a 20 percent increase in our quarterly dividend from $0.17 per common share to 20.5 cents per common share payable on March 14, 2005. To shareholders of record on February 28, of 2005. This represents the first step towards our 27th consecutive year of increased dividends. In 2004 as we have discussed we also completed two major acquisitions that further expand our distribution platform and strengthen our grand portfolio. In just four months of operation under the Sherwin-Williams umbrella both Duron and Paint Sundry Brands each made meaningful contributions to our sales and earnings growth. We're confident that these two businesses will bring additional value to our Company and shareholders and better position us to continued momentum and significant growth opportunities we see in 2005 and beyond.

In this coming year, in 2005 we will continue to organically expand our store network. We expect to open our 3000th store some time late in the first quarter of this year. For the full year we expect to open in the range of 80 to 90 net new stores. Our earnings performance in '04 was aided by a reduction in our annual income tax rate. This was the result of effective ongoing tax planning. We will continue to act in our shareholders best interest by taking full advantage of all current and future favorable tax legislation within the limits of the law. Clearly our results for the fourth quarter of 2004 were adversely impacted by the rapid rise in raw material costs. During our call last quarter I said we expected annualized year-over-year raw material costs for the industry to increase 5 to 8 percent in '04 and that year-over-year comparisons for the fourth quarter would be up double digits. We also said that these market forces have put pressure on our consolidated gross margin and we anticipate this pressure will continue for the foreseeable future.

In fact, industry pricing for six of the nine basic commodities used to manufacture and package paint rose by more than 10 percent from fourth quarter '03 to fourth quarter '04. Estimates for TIO 2 are in the range of 20 percent. Plastic containers 24 percent. Solvents 34 percent. And steel containers anywhere from 20 to 50 percent increases. Over this period the weighted increase for the industry across all of these basic materials came to about 13 percent. We have been diligent in our efforts to offset raw material increases through manufacturing efficiencies, higher fixed cost absorption, alternative technology and, of course, tight expense control. In this past year, however, the rise in raw material costs have been so dramatic that we were forced to announce price increases across all segments of our Company in the fourth quarter and we are in the process of implementing these increases as we speak. Through the combination of volume growth, ongoing productivity, expense control and prudent pricing actions we expect gross margins to stabilize over the course of 2005.

Looking forward to 2005 we anticipate that first quarter net sales will increase in the low double digits versus the first quarter of 2004. Partially due to the recently completed acquisitions. We estimate that diluted net income per common share in the first quarter will be in the range of $0.48 to $0.53 per share compared to $0.35 per share earned in the first quarter of 2004. A lower effective tax rate in the first quarter of 2005 compared to the rate used in the first quarter of last year as well as the favorable tax relief expected in this quarter will increase diluted net income per common share approximately $0.07 per share for the quarter. Although our tax rate will be down significantly in the first quarter, relative to first quarter last year we expect our annual effective tax rate to be 32 percent for 2005. We also expect that the recently completed acquisitions will be accretive to first quarter earnings. For the full year 2005 we expect net sales will also increase in the low double digit range over 2004.

With annual sales at that level we anticipate diluted net income per common share for 2005 will be in the range of $3 to $3.10 per share compared to the $2.72 per share earned in 2004. The recent acquisitions again will contribute to the full year diluted net income per share. On Tuesday, May 3, we will host our annual financial community presentation at our headquarters in Cleveland, Ohio. The morning program will be followed by a reception in our new center of excellence an interactive archive of Sherwin-Williams 139 year history. Following the reception you will have an opportunity to join our operating level management team for lunch. We'll be sending out invitations and related information in a few weeks and invite all interested parties to save this date again and that's May 3, in Cleveland, Ohio.

Let me close this morning by commenting on two ethics that are fundamentally important to our Company. First is our financial reporting ethic. The primary responsibility for the integrity of our financial reporting rests with management. This includes establishing and maintaining adequate accounting and internal control systems that are designed to provide reasonable assurance of our financial reporting is accurate. As required by Section 404 of the Sarbanes-Oxley act and the Public Company Accounting Oversite Board, our management team has conduct an evaluation of the effectiveness of the Company's internal control over financial reporting and concluded that our controls are effective with no material weaknesses. Our report and its effectiveness will be included in the Company's annual report to shareholders. An independent audit of our assessment by Ernst & Young LLP is substantially complete and the auditors anticipate issuing an unqualified opinion concurring with managements conclusion that in fact our controls are effective. Their report will also be included in the Company's annual report to shareholders.

Second and finally is our work ethic. Recently the company was selected by "Fortune" magazine as one of America's 100 best Companies to work for. This prestigious award is based on a thorough evaluation of our Company in four areas. Credibility. Respect. Fairness. And pride of employees. Two thirds of each Company's evaluation comes from employee responses to an in-depth survey. We are very gratified by the attitude expressed by our employees and honored to be included in this select list of fine companies by Fortune magazine. At this time we would be happy to take your questions.

(OPERATOR INSTRUCTIONS) The first question is from Eric Bosshard of Midwest Research.

Good morning.

Good morning.

A couple things. First of all, in terms of the cost outlook in '05 and the price outlook can you just again give us what your expectation is in terms of what your material cost or the industry costs as the case would be would be up in '05 and what you think you were able to accomplish in pricing in 4Q and what happens with pricing in 2005.

Okay. Eric, I'll take the raw materials first. We expect industry raw material costs -- and this is based on current and announced pricing will be up 10 to 15 percent for the full year 2005 versus, you know, the full year 2004. And, you know, with this there will be tough comparisons in the first and second quarters with some easing in these comparisons in the third quarter and further easing in the fourth quarter.

Eric, when you ask about the price in the fourth quarter, sales grew 16.7 percent in the fourth quarter. We estimate that volume increased in the low double digits for the quarter. Also we had less than 1 percentage point of our sales increase resulting from favorable currency translation. The balance is essentially price. For the year, our sales grew 13.1 percent, volume was up in the low double digits the balance was price. The currency translation was basically negligible for the year.

I guess with the incremental cost in '05, is there an expectation that you can get, an incremental amount of price increase to help margins? And within that at what point would we expect to see some stabilization in the operating margin of the Company?

Including the pricing action in context, during the year 2004 we announced two general price increases. One was early in the year and one was at the beginning of the fourth quarter. These -- these increases ranged from 2 to 6 percent. And then on February 1, we announced another increase across all segments and this increase would range from 4 to 6. percent. And I think based -- based on that and also with all of the other activities that we are taking in terms of efficiency and that we would anticipate our consolidated gross margins for the entire 2005 year will stabilize and will be flat to down slightly from the 2004 annual gross margin of 44.2 percent and given that we would expect our operating margins to improve slightly, you know, for the year.

Okay, great. Secondly to clarify secondly, the first quarter guidance I know there is a tax rate delta but if looks like if you take out the tax rate -- the tax benefit you are talking about effectively $0.41 to $0.46 versus $0.35 which would appear to be a growth rate above what you are talking about for the full year is there something that provides you incremental benefit within the business in the first quarter? My thought process would have been in the first part of what would have potentially been worse because of the stage and then of this February price increase and the difficult raw material cost comparison.

I think, you know, on some of these price increases, you know, because of previous customer commitments our price increases are put into effect over time as these commitments expire. And so, you know, even for right now we would -- we would estimate that approximately 40to 60 percent of the October 2004 price increases have been implemented and so -- so in essence in terms of the February price increase, you know, those increases, you know, will be rolling forward.

And I would add also, Eric that, you know, the guidance is strong on volume and growth and we're still -- we have not annualized these acquisitions yet which we will later in the year so the quarter should be strong.

One last question, if I could. The capacity addition -- the emulsion capacity addition, I don't know that you have added capacity in awhile. What is the thought process there that is driving that decision?

Volume demand to start, that we continue to find ways to add capacity. We add capacity annually in the form of improved productivity pretty much across the footprint. This particular one and the reason that we've talked about it is because of the ramp up in the CapEx number for the year and there will be a new plant in the western half of the United States.

Great, thank you.

Thank you. Our next question will be coming from John Roberts of Buckingham Research. Please state your question.

Good morning, guys.

Good morning, John.

I know you have guys addressing price in the paint store segment. But the paragraph about the consumer segment talks about new products and new customers it doesn't talk about price in the consumer segment and I just can't imagine you adding new customers that would help you offset raw material cost increases.

John, you're right. The comments on pricing that Conway talked about are for all segments of the Company.

And I think in terms of specific segments we are reluctant to talk about our, you know pricing action and those specifically, you know, for competitive reasons.

Secondly, ar there any significant mix effects within the segments? I know there is an overall Company mix effect because consumer is lower margin than paint stores but within each segment with all the raw material costs and price changes are you seeing a shift to lower technical, less sophisticated paints or something as ways people are saving reducing costs?

No. Through 2004 we have not experienced any type of a mix change like that.

Thank you.

Thank you, John.

Thank you. Our next question will be coming from Chuck Cerankosky from Key/McDonald.

Good morning, everyone.

Good morning, Chuck.

Looking at the impairment charge during the fourth quarter, can you give us a little more detail on that? What was due to hard asset write downs. And I think you talked about a promotional program. Was it cash, noncash? Can you elaborate, please.

Chuck, the impairment charge we took in the fourth quarter was partly due to a sales incentive program that we had with one of our customers and the sales pro formas that we were looking at on that program were falling short of the plan and it became clear to us that the incentives would not be achieved and could no longer be deferred and so they were written off in accordance with our impairment criteria. We also in the quarter wrote off -- had impairment charges of some software that we no longer use and other hard assets as well.

What was simply the write-off of software and hard assets?

Well we normally do our review of our assets in the fourth quarter and the software that we no longer use has to be impaired and written down to its realizable value.

I'm thinking of what was the dollar amount of the software and the hard asset write-down?

It was $2.5 million.

Okay. So the bulk of the write offs was due to the incentive program.

Yes, that's correct.

I'm just a little unclear on how -- what you are exactly writing off there. You had -- had you delivered funds to the retailer?

Yes.

Kind of like a sliding allowance John.

Okay. Got you.

I'm the grocery store guy, Chuck. We had put together a program over the expected several year's worth of performance when the performance failed to measure up to our performer level John's done the right thing here by taking the impairment and getting it out.

So the cash had already been expended?

Yes.

Yes.

All right, thank you.

Thank you.

Our next question will be coming from Jeff Zekauskas from J.P. Morgan. Please state your question.

Good morning.

Good morning, Jeff.

A couple of things. Is the clean operating profit comparison consumer, you know, roughly 30 million last year versus 24 million this year adding back the various impairments?

Yes, that's close. Right. And adjusting. Yes.

Okay. Secondly, I think Valspar may have preannounced yesterday and it looks like their earnings got hit by a bus and I was -- but your -- you're really quite optimistic and have very aggressive expectations for 2005. So should we read from that that the acquisition benefits are really very, very large given sort of the raw material price pressures and the delays in implementation of prices and the very difficult comparisons?

I -- I think, one, the acquisitions are contributing. I wouldn't define it as very large in terms of the increase. And I think the -- the other aspects are pricing actions also what we are doing in terms of expense control and other manufacturing efficiencies, you know, relative to the raw material cost. That's what we expect to, you know, stabilize our gross margins for the 2005 year through the expense control we pick up a slight improvement in operating margins and, of course, you know, with the sales improvement not only, you know, in -- you know, overall this helps -- helps us absorb that so that -- that's why, you know, we are confident in terms of the expectations we have given.

I guess lastly you talked about a $0.04 accretive benefit from the acquisitions. So $0.04 is 9 million pretax on roughly $200 million in sales. So is that just really a reflection of your financing costs or is that really a reflection of steps that you have taken to make the new operations more efficient?

I would say it really is -- really a function of timing. I think when we were discussing the Duron acquisition it really came down to the timing of the year and you know that is -- when you take a look at the fourth quarter in that stores area the margins at that time are the lowest. But when you take a look at it, that's, I think it had more to do with timing, Jeff.

And they are -- they are some expenses that we -- we are choosing to expense items related to the acquisition that were not only following in the four month period of 2004 but would continue in 2005 and, you know, this -- this was a choice in terms of, you know, maximizing our cash flow.

Okay. Thank you very much.

Thank you, Jeff.

Our next question is coming from Armando Lopez with Morgan Stanley. Please state your question.

Hi, good morning, everyone.

Good morning.

A couple of quick questions. First, could you maybe talk a little bit about the -- you made a couple of acquisitions last year. How you're thinking about the use of capital going into 2005. Maybe prioritize like buybacks versus acquisitions.

Sure, Armando. We have talked about all those items and we've never really quite prioritized them in any one fashion. We think first and foremost paying dividends back to our shareholders is important. Our policy is to pay 30 percent of trailing earnings hence the 20 percent jump in the dividend half going forward. Cash will be used to continue to buy back our stock opportunistically as we have shown consistently over the last five years or so. We will use cash to make acquisitions provided that they meet our return target for our shareholders. Conway mentioned that we expect our debt to come down from 30 to 25 percent. And CapEx to be up a little bit at 150. So we have got lots of ideas to do with our cash next year and it's pretty much consistent with the activities.

Okay. Great. And then in the release you guys talked about on the consumer segment I think the loss of a customer. Is that the same customer that you guys were talking about last quarter?

Yes.

Yes.

Okay. All right. And then just one last one. Can you just give us a sense in terms of growth in the consumer business you talked about new products. Like how much of your sales are you expecting from new product introductions here?

We have never defined that Armando and shared that. I think here we are talking about some of the packing innovations in our Dutch Boy brand and the Dutch Boy brand has continued to perform solidly for us in this segment.

And then just one last one. With respect to the Paint Sundries Brands, the -- have you guys started shipping the like pretty brushes and stuff to the Sherwin-Williams stores yet?

Just this week. Rollout in February.

And was there a lot of incremental expense incurred in the fourth quarter getting ready for this shipment?

Yes.

Care to quantify it?

No.

Okay. Well, thank you very much.

Okay, thank you.

Our next question will be coming from Frank Dunau of Adage Capital. Please state your question.

Hi, Frank.

How are you guys doing?

Great.

I guess this sort of leaves this quarter versus some of the people who do the same thing for you at least sort of justifies or gives credence to your decision many years ago to be able to control your own channel. But then on the -- if you go to the consumer segment do you ever feel like every time you think you're trying to get something else happen and what is the actual long-term strategic place for the consumer segment?

Well, Frank, as you know, we are committed to this segment and have made a number of strides here over the last several years. This a reminder. We like to talk about the 55,000 places that sell paint in the United States. Through our controlled model 3,000 of those are ours. That leaves 52,000 of their opportunities and these brands and programs we have are compelling and it is our intention to be there and to continue to support and grow them. I think what we are seeing as you mentioned that we feel like Synthesis. First of all, we'd have to know who the hell that is. More importantly is that this is the life we have chosen and there will be puts and takes over time here and as we commented to Armando on the previous question about our lost customer, it has been several years since we lost a customer. Those things happen. New ones come on board. And our long-term commitment to this business is solid.

Okay, thanks.

Our next question from Barbara Allen of Avondale Partners. Please state your question.

Thank you.

Good morning, Barbara.

Could you help me a little bit. The administrative costs for the full year rose 16.9 percent what charges are included in there? Because when you talk about the charges and so forth they all seem to be included in the consumer segment so I'm a little puzzled.

When you take a look at that and John and I will answer this. We have interest expense in there we have environmental charges in there and the advent for corporation.

And some of the overall benefits that the Company provides to its employees and stock based compensation type of expenses are also in that administrative segment and those were up during the year.

What kind of growth are you expecting in '05 in that area?

We really have never broken that out, Barbara.

Okay.

Yes. The only thing that I would just tell you that is that prior to this year the stock compensation that John was talking about was the restricted stock. We do expect next year that in the third and fourth quarter we will begin to expense stock options and that will be about $0.03, $0.02 $0.03 during the third or fourth quarter.

And that is reflected in the expectations that we have given you for the year.

And also just because of the debt our debt is up, our interest expense will be up next next year.

Okay. Is it $0.02 or $0.03 a quarter or for the second half?

For the second half.

For the year but it will show up in the third and the fourth quarters?

Yes.

Thank you very much.

Thank you.

Our next question will be coming from Chuck Cerankosky with Key/McDonald. Please state your question.

Chris, Synthesis was was a rather obscure tailback for the buckeyes. I assume the pricing issues, Conway, is your, you know, the cost metric you've shared with us in the past, is it still valid given the rapid movement in a lot of these raw material price increases?

The guidance on raw materials '05, Chuck? Yes. I'm looking at , look at '05 and in the past I think it was a feature of last. year's conference but you had that cost matrix is how--.

Yes. You know, I think you plug in some of the numbers that, you know, Chris shared with you in his comments I think that matrix would show essentially year-over-year if it would be -- would be up, you know, 13 percent.

But if the matrix is the cost -- the selling price.

Right.

And I think, you know, one other factor, you know, that matrix is, you know, driven basically on -- on oil and natural gas pricing and on TIO 2 you could use that matrix, you know, that is running separately.

Right.

And then I think another factor beyond that that is influencing this pricing is the capacity in the supplier's plants that's made supply tight and so in some areas and so that -- that's enabled, you know, further pricing pressure there. So kind of a combination of those three factors. I think you could use that model and then, you know, make some variations according to those factors.

Now, did you guys say with regard to the price increase at your stores implemented last October that only 40 to 50 percent of that is in place?

Correct.

That is what we would estimate. Yes.

Okay. Now, that the point are you seeing -- are the retailers selling your paint seeing the push for paint price increases from some of your competitors? Even the retailers you don't supply?

Right now we really would rather not comment on what the retailers are doing.

We are pushing price increases, you know, for our retail customers but in terms of their pricing strategy to their consumers, you know, I -- you know, don't think we should comment on that.

Or what they are receiving from other product suppliers, Chuck, we don't know that.

Yes.

Okay. I thank you.

Thank you.

Once again, ladies and gentlemen if you have a question that's star, 1 on your telephone keypad. Pause for a moment to receive any last questions. We have a question from Barbara Allen of Avondale Partners. Please state your question.

Thank you. First I want to congratulate you on your comp store sales. Nobody's mentioned it but that's terrific, that 10.9 percent. My data you're outperforming both Lowe's and Home Depot all year long on that. How much of that is coming from the improvement in industrial maintenance and product finishes sales that you have been talking about or can you just give us color on what is happening in those areas?

That is helped by that. And we had very good sales improvements, you know, our just to kind of give you a flavor in the fourth quarter, you know, our architectural coating sales remained strong in dollars and gallons. In Industrial maintenance and our product finishes or chemical coatings were also up in dollars and gallons. Industrial maintenance and our product finishes or chemical coatings were also up in dollars and gallons. I think in terms of the comparison both of those other items were supporting our comp sales growth.

On the product finishes, can you give us any idea what areas in particular? Are we talking about wood product finishes or are we talking about office furniture or anything specific.

We don't ever really break it down into a performance by each of those focused customer segments. But I'll tell you that where many of them were lagging in the past, rally across all of the segments that we play in were up this year, Barbara, and responding nicely to the improved economy.

Thank you very much.

When others tell us that the economy is slow or that at least in the U.S. manufacturing sector you know we have seen strength in our customer base.

And that would be CapEx spending by them to paint and upgrade and all that sort of stuff.

In product finishes that would be production of durable goods.

Thank you very much.

Thank you, Barbara. You know, one other thing since you all have not asked but I think as you all would try and look at, you know, modeling your 2005 results and given that we would expect our tax rates to be down in the first quarter, Sean will give you by quarter what we would expect our tax rates to be next year and I think this will hopefully help you in terms of loading this into your models and looking at what we would be doing by quarter. Sean?

If you take a look at our effective tax rate for the first quarter we'll be in the 24 to 25 percent range. In the second quarter we'll be 34 to 35 and that would bring our year-to-date in line to 32 so I believe that the third quarter will be 32. Fourth quarter will be 32. For the year we'll be at 32. As compared to 2004 where in the first quarter we were at 35 percent second quarter 35 percent. Third quarter 35 percent and 18 percent in the fourth quarter. So, the 10, 11 percent improvement we get in the first quarter. We're also going to go back almost 14 percent in the fourth quarter.

Thank you.

We have another question from Armando Lopez with Morgan Stanley. Please state your question.

Yes, hi. The tax question was the question that I had but actually I have another one. In terms of your formulation is there much flexibility or do you have flexibility between pure acrylics and vinyl acrylics?

We -- first of all in this type of environment where there is a margin squeeze on raw material costs, we do not want to do anything that would adversely impact the quality of our product and I think in terms of shifts between and formulations assumed you have maintained the quality of our product we really don't want to, you know, comment on that specifically.

Okay. Thank you.

Gentlemen, there are no further questions in queue at this time.

Okay. Well, you know, everyone thank you very much for joining us on this call and I think as many of you know, Bob Wells and myself will be available to receive your individual calls if you have any follow-up questions or clarifications you would like to receive and so we would, you know, look forward to talking with you and again, you know, we will invite you all to our May 3, financial community presentation here in Cleveland and we will be sending out the information on that in 2 or 3 weeks. Thank you all very much.

Ladies and gentlemen, this concludes today's program. You may disconnect your phones now.