宣偉 (SHW) 2006 Q4 法說會逐字稿

Good morning. Thank you for joining the The Sherwin-Williams Company's review of fourth quarter and full year 2006 results and expectations for 2007. With us on today's call are Chris Connor, Chairman and CEO, Sean Hennessy, Senior Vice President of Finance and CFO, John Ault, Vice President and Corporate Controller, and Bob Wells, Vice President Corporate Communications. [OPERATOR INSTRUCTIONS].

This conference call will include certain forward-looking statements as defined under U.S. Federal Securities laws with respect to sales, earnings and other matters. Any forward-looking statements speak only as of the date on which such statement is made and the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the Company's earnings release transmitted earlier this morning. After the review of our fourth quarter and full-year results we will open this session to questions. I will now turn the call over to Bob Wells.

Thanks, Joe. In order to allow more time for questions, we have provided balance sheet item and other statistical data on our website, www.sherwin.com, under Investor Relations Fourth Quarter Press Release.

Summarizing overall company performance for the fourth quarter and full-year 2006, consolidated sales for the fourth quarter were up 4.9% to $1.79 billion. For the full year, sales grew $619 million, or 8.6%, to $7.81 billion, due primarily to strong paint sales by the Global Group and comp store sales increases in the Paint Stores Group. Gross margin in the fourth quarter decreased to 43.0% of sales from 43.4% in the fourth quarter of 2005. Consolidated gross margin for the quarter was negatively impacted by a $16 million charge to resolve litigation related to our Global Group business. The effect of this charge on fourth quarter gross margin was 1% of net sales.

For the year, gross margin increased 43.7% of sales, compared to 42.8% in 2005. The litigation expense reduced full year gross margin by 0.3% of net sales. Selling, general and administrative expenses increased as a percent of sales in the fourth quarter to 34.8%, from 34.4% in the same quarter last year. For the full year 2006, SG&A expense decreased to 32.2% of sales from 32.4% in 2005, primarily due to the strong sales increase and prudent expense management. Interest expense for the quarter increased by $4.6 million to $16.5 million, due to an increase in short-term borrowings. However, the increase in interest expense was more than offset by an increase of $5.3 million in income from investments made to maintain maximum financial flexibility. For the year, interest expense increased $17.6 million, and income from investments increased $20 million.

Our effective income tax rate for the fourth quarter 2006 decreased to 22.0% from 31.7% in the fourth quarter of 2005. For the year, our effective tax rate was 31.0% compared to 29.2% in 2005. Consolidated net income for the quarter increased by $23.5 million or 33 -- I'm sorry, 31.3% to $98.7 million from $75.1 million in the fourth quarter of 2005. For the year, net income increased $112.8 million or 24.3%. Net income as a percent of sales improved to 5.5% in the fourth quarter this year from 4.4% in the fourth quarter last year, and 7.4% in 2006 from 6.4% in 2005. Diluted net income per common share for the fourth quarter 2006 was $0.73 per share compared to $0.54 per share in the fourth quarter 2005. For the year, diluted net income per common share increased 27.7% to $4.19 per share, from $3.28 per share in 2005.

Now, I'd like to review our performance by segment. Sales for our paint stores group in the fourth quarter 2006 increased 5.2% to $1.1 billion. For the year, net sales increased 11.3% to $4.84 billion, due primarily to strong domestic architectural paint sales to contractors in the first half of 2006 that softened slightly in the third and fourth quarters, and improved industrial maintenance product sales. For the year, paint gallon volume increases in our stores group accounted for slightly more than one half of the total increase in sales. The balance of the sales increase resulted from a combination of price increases and product mix improvement. Comparable store sales increased 3% in the fourth quarter and 9.1% for the year. Regionally in the fourth quarter, our southwestern division led all divisions followed by our eastern division, southeastern division, and Midwestern division.

Segment operating profit for the paint stores group increased 22.2% to $162.7 million for the quarter, and 26.5% to $719.9 million for the year. Segment operating profit margin for the fourth quarter increased to 14.6% from 12.6% last year. Profit margin for the full year 2006 improved to 14.9% from 13.1% in 2005. Margin improvements were due primarily to increased paint sales volume, effective SG&A expense control, and higher selling prices on paint and non-paint product lines.

Turning now to the consumer group. External net sales in the consumer group decreased $11.7 million or 4% to $278.4 million for the fourth quarter, and $27 million or 1.9% to $1.36 billion for the year compared to the same period last year. The sales declines were due primarily to sluggish do-it-yourself sales and the elimination of a portion of a paint program with a large retail customer. Segment operating profits for the fourth quarter increased $21.4 million to $21 million. Recall that the consumer group reported a loss in the fourth quarter 2005, resulting from a $22 million goodwill impairment charge due to the anticipated reduction in business with a major retail customer. For the year, consumer group operating profit increased $43.1 million or 25.2% to $214.2 million.

For our Global Group, net sales in the fourth quarter increased $41 million or 11.4%, to $401.8 million. Sales for the year increased $153.7 million, or 10.7%, to $1.59 billion. Sales in local currency grew by 10.1% in the quarter and 8.2% in the year, due primarily to volume growth from all operations worldwide, and selling price increases. Global Group's segment operating profit in the fourth quarter decreased $11 million, or 34.2% to $21.2 million. This decrease was due to a $16 million charge incurred during the quarter to resolve a federal class action lawsuit alleging antitrust violations. Although the company has done nothing illegal or improper, this settlement avoids both the high cost to defend a suit of this nature, and the risk of an adverse jury verdict, no matter how remote. Segment operating profit for the full year increased $28.4 million or 27.9% to $130.4 million. This improvement was mostly attributable to increased sales, operating efficiencies related to increased volume, and expense control. Currency exchange had no significant impact on the segment operating profit.

I would now like to comment briefly on our balance sheet item. You will find more balance sheet information on our Website under Sherwin.com investor relations press releases. Our total debt on December 31, 2006 was $885.5 million, including short-term borrowings of approximately $370 million, and a current portion of long-term debt of approximately $224 million. Total debt as a percent of total capitalization increased to 30.9% in 2006, from 26.4% at the end of 2005. Our cash balance at year-end 2006 was $469.2 million, compared to $36 million in 2005. In the fourth quarter 2006, the Company purchased 2.65 million shares of our common stock in the open market, bringing the total shares purchased in 2006 to 5.6 million shares. At December 31, 2006, the Company had remaining authorization to purchase approximately 12.8 million shares of its common stock.

Capital expenditures were $65.6 million in the fourth quarter, and $209.9 million for the year compared to $143.1 million in 2005. CapEx spending exceeded plan in 2006 due primarily to increased investment in manufacturing capacity. Depreciation expense was $32.3 million in the quarter, and $123.1 million for the year. And amortization expense was $6 million in the quarter and $22.9 million for the year.

Looking now to 2007, capital expenditures for the year will be back down in the more traditional range of approximately 170 to $185 million. Depreciation will be about $128 million, and amortization about $23 million. I would now like to give you a brief update on the status of our lead litigation. As a reminder, in late August the judge in Rhode Island heard arguments from the defendants' motion asking the Court to enter a judgment in the defendants' favor or failing that, to order a new trial. To date, the judge has not indicated when he will render his decision. Should these motions be denied, defendants intend to appeal the case to the Rhode Island Supreme Court.

On our third quarter call we informed you of lawsuits filed by three cities in Ohio, East Cleveland, Akron, and Toledo, against eight former manufacturers of lead pigment, including Sherwin-Williams. Since that time, four more cities have filed similar lawsuits, Columbus, Cincinnati, Canton, and Lancaster, and Akron has withdrawn its lawsuit. The defendants have filed motions to dismiss these suits. In anticipation of these lawsuits in Ohio, Sherwin-Williams took action to file a lawsuit in federal court naming cities of eAst Cleveland, Toledo, Columbus and John Doe cities as defendants. This suit was filed to protect the rights and interests of our shareholders by precluding plaintiffs' efforts to violate our First Amendment rights, our right to due process and to prevent the inappropriate use of of the city's police powers by private contingency fee law firms. The cities of Cincinnati, Canton, and Lancaster have been or will be named as additional defendants in this federal lawsuit.

In St. Louis, the plaintiffs' appeal of the dismissal of the City's case has been referred by the appeals court to the Missouri Supreme Court for review, this review will include the issue of market share liability. Plaintiffs in California are requesting permission to file a fourth amended complaint to name several additional cities as plaintiffs. This concludes my review of our results for fourth quarter and full-year 2006. So I'll turn the call over to Chris Connor, who will make some general comments and highlight our expectations for 2007. Chris?

Thanks, Bob and good morning everybody. Thanks to all of you for joining us today. Looking back on 2006, I think there's two prominent themes that stand out. The first is the continuing strength of our operating results for the year. Consolidated net sales grew at a respectable 8.6% to $7.8 billion this last year, consolidated net income increased more than 24%, and earnings per share more than 27% to a record $4.19 per share.

The high quality of these results are even more apparent when you break them down by our operating segments. Two of our three segments generated double-digit sales growth and all three of our segments achieved operating profit increases greater than 25% for the year. We're pleased with this performance, particularly in light of the difficult comparisons we face from 2005 and the significant market headwinds that emerged during the year of 2006. Growth in our sales, in our net income and our earnings per share are all very important indicators of the performance and vitality of the Company.

I'd like to take a few minutes to highlight some of the numbers behind these numbers because I think they help to further illustrate the underlying strength of our business. For example, EBITDA, earnings before interest, taxes, depreciation and amortization, increased by $200 million or 23.5% to well over $1 billion in 2006. This strong improvement is a reflection of our success and flowing through incremental sales from our paint source group and our Global Group. We often comment on our working capital management because we feel it's a reliable indicator of our operating efficiency and our productivity. Our working capital ratio defined as accounts payable -- I'm sorry, accounts receivable plus inventories less accounts payable to sales, improved to 11.7% in 2006, from 12.5% in 2005.

The significant improvements this year, primarily in inventory and payables are further evidence of the successful integration of the two major acquisitions we completed at the end of 2004. Going forward, we expect working capital to continue to improve as a percent of sales. However, the rate of improvement is likely to moderate as we approach our optimum range of around 11%. As a result of our strong profit performance and effective management of working capital, net operating cash for the year increased to $805 million, just over 10% of sales, from $717 million in 2005. We will continue to prudently invest the Company's cash to create value for our shareholders next year and beyond. For example, we'll continue to invest in growing our capacity and expanding our distribution. During the third quarter of 2006 we began paint production in our new state-of-the-art plant in Fearnley, Nevada. This new facility significantly increases our capacity to serve the growing markets in the western half of the United States.

In 2006, our Paint Stores Group opened 120 new stores and closed 3, resulting in a net increase of 117 stores. At year-end we had 3,046 stores in North America, compared to 2,929 at the end of 2005. This year we will continue to aggressively pursue our goal of 3% annual growth instore count opening in the range of 100-plus net new stores. We're equally committed to returning a portion of the cash we generate to shareholders through treasury stock purchases and cash dividends. Bob already commented on our share repurchase activity last year bringing in 2.65 million shares in the quarter and a total of 5.6 million shares for the year. Going forward, we expect to continue our opportunistic purchases of Company stock for treasury from time to time.

2006 marked our 28th consecutive year of dividend increases, a string we intend to continue. At our next meeting of the Board of Directors, I will recommend a continuation of our policy of paying out 30% of prior-year's net income in the form of a cash dividend. This would result in a quarterly dividend of $0.315 per share, or $1.26 per share for the year, an increase of 26% over the $1 per share dividend paid out in 2006.

The second theme that I think emerged as 2006 progressed was a slowdown in the momentum of our business over the course of the year. Sales for the first half of 2006 grew by more than 11%, and the last six months sales growth slowed to about half that rate. During our third quarter conference call, I commented on two areas of relative weakness we were seeing in the market. Namely, new residential construction, which primarily affects our Paint Stores Group and the do-it-yourself market, which was a drag on the consumer group as well as the stores group. I believe these two trends have driven down the overall growth in our market to a more normalized and sustainable range. Keep in mind that over the past 10 years U.S. coatings industry volume has grown at an average annual rate of less than 1.5% and architectural paint broken out by itself has only grown about 2.5% per year.

As we look forward to 2007, we'll be facing some tough comparisons in the first half, and particularly in the first quarter. In spite of this fact, we're confident that we can sustain our strong operating momentum and earnings leverage. We anticipate that first quarter net sales will increase in percentage terms in the low to mid single digits versus the first quarter of 2006. We estimate diluted net income per common share in the first quarter will be in the range of $0.80 to $0.85 per share, compared to $0.82 per share earned in the first quarter of 2006. This guidance anticipates a higher effective tax rate in the first quarter of '07 compared to the first quarter of '06, that will reduce diluted net income per common share by approximately $0.04 per share.

For the full year 2007, we expect net sales will increase in the mid single digits over 2006. With the annual sales at that level, we estimate diluted net income per common share for 2007 will be in the range of $4.55 to $4.65 per share compared to $4.19 per share earned in 2006. For the full year 2007, we expect the annual effective tax rate to be slightly higher than the annual rate recognized in 2006. Let me close my comments this morning by asking all of you to save the date of Tuesday, May 22nd on your calendars. This is the day we'll host our annual financial community presentation at our headquarters location here in Cleveland, Ohio. The morning program will be followed by a reception and lunch, we'll have an opportunity to meet with all of our operating level management. We'll be sending out formal invitations and related information in a few weeks. At this time, we'd be happy to take your questions.

Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Jeff Zekauskas with JPMorgan. Please state your question.

Good morning, this is Silke Kueck for Jeff. How are you?

Hi, Silke.

Couple of questions. Can you break out the volume and price impact on sales growth, particularly for the stores business?

Yes. When you take a look at the fourth quarter, almost just below half of the sales increase is unit volume. And for the year about half is gallon and half is price.

I assume that the very good margin improvement in the stores business in part also has to do with the pricing power that you had in 2006. Going forward, are those margins sustainable?

Yes. When we take a look at the '07 forecast, what we have is, we believe as a Company, our gross margin will be higher than it was this year.

How about your operating margin, particularly if I look at the operating margin of the stores business?

We believe that -- yes, we think it's sustainable.

The -- can you explain why your tax rate in the first quarter should be higher and also for the year?

Last year for the year we were at 31%. We think we'll be a couple percent higher than that. Last year in the first quarter our -- we believe it will be right around 33%. It really just comes down to timing of some discrete items.

And then --

And we were at 29.2 in the first quarter last year.

You expect to go to 33%?

Yes.

Okay. The-- if I look at the outlook for 2007 and the mid single-digit sales growth, does that include any -- given the EPS growth versus the sales growth, I'm assuming there's no further -- you don't expect further price increases in 2007?

Well, our teams are out there right now, Silke, implementing the pricing activities that we'll need for the year, we have announced some pricing in some of our segments. That's consistent with the way we've run the company for a long period of time. And those actions are factored into the guidance that we're giving.

So that means that the -- your sales growth guidance does include some price benefit.

There will be some pricing in that number, correct.

Thanks very much, I'll get back into queue.

Thank you. Our next question comes from Eric Bosshard with Cleveland Research Company. Please state your question.

Good morning.

Hi, Eric.

Chris, can you talk first of all about the momentum of the business, the comps slowed in 4Q, a lot of moving parts but the momentum part of the business you see now and how you feel about the momentum of the business, I guess I'm mostly talking about stores, and what you thought what is relatively optimistic guidance versus a lot of your peers for '07.

We've been commenting the last several years now, as we have been enjoying these strong comp double-digit gains in our stores business, that was not sustainable, and that the market would return to a more normalized rate, particularly as some of the more powerful pricing components ebb, we're seeing that. We're comfortable operating in that range, continuing to open stores, gain share, et cetera. Some of the momentum swings we're seeing would be in the DIY business, which has had a softening in the quarter. We saw that in our stores segment as well as in our consumer segment. Interestingly with all the noise regarding new residential construction, as we break out some of those segments, we saw actual growth in the quarter there. But it is slowing and moderating, I think the guidance that we're giving for the year is consistent with a what we expect to happen in 2007.

Great. Secondly, the -- you talked about the long-term goal of store growth of 3%, yet the number looked like it was 4% in '06, and international store growth looks like it's around 10%. Can you just talk about if you've reevaluated at all the growth strategy in terms of stores in the domestic as well as the international?

We had a terrific year in domestic store growth our teams about a great job of really ramping up. Our long-term goal was to be at 3%, there will be years when we exceed that slightly. There may be years where we miss it slightly. Negotiating commercial real estate is as much an art form as science, we happened to have a lot of things fall correctly and get them all in. I think the important thing is that you can count on us to sustain that 3% model and that should be an increasing number year-over-year on average as we go out. International's a different story. We believe that this control distribution model can play there and because we're coming from a smaller base, slightly less than 500 stores in that group, we think cank grow a little faster. So we really haven't set a target for that but kind of pace we were on last year looks sustainable to us going out for several years.

And then lastly, can you talk about what the raw material situation ended up for 2006 and what you're expectation is for the raw material delta '07 versus '06?

I don't know if I have the '06 final kind of number. I know western given guidance in bringing our industry expectation down, I think the last guidance we gave was 6 to 8%, does that sound right, Sean?

Yes.

So it was close to that, it may have moderated even a little less. Our guidance for this year, Eric, we expect for the industry raw materials will be in the flat to perhaps 3% increase range.

Great. Thanks.

The next question is from Chuck Cerankosky with FTN Midwest. Please proceed with your question.

Good morning. Can you address the pricing again, I'm not sure, I think the first questioner was the one who asked about pricing. Were you just talking about the Stores group or the entire company? But can you give us, what the year-over-year price increase was for the three segments, paint stores, consumer and global?

In the past what we've done is really only commented on the comp stores. This team I did comment on the Paint Stores Group in total. When you take a look at the increase of Paint Stores Group, right around 11.3, just about -- right around half and half was price and volume in fourth quarter, almost half was volume and the rest was price. That's really all we have commented on in the past. And the reason why is because when you start getting into consumer with the pretty brushes and some of the other things, it's hard to break out gallon volume versus sales, if you know what I mean.

All right. Got you. And then if we're looking at 2007 now, what kind of year-over-year comparisons should we be aware of other than the first quarter of last year was obviously an easy comparison, you had a lot of price kicking in, and if I recall some abnormal weather. Any other year-over-year things of a seasonal or cyclical nature we should be thinking about at this time?

No, I don't think so. We said the first quarter would be a tougher one, we're coming off a terrific first quarter last year, great comp performance. We had some raw material pressure in the first quarter which will impact earnings slightly, beyond those two things we've commented on, there shouldn't be any additional variances or market conditions that we're concerned about.

Last question, Chris, I was specifically thinking about this warmer weather that -- warmer winter than normal we've had, did that get any construction projects pushed into the fourth quarter or started in the fourth quarter that might have been started in 2007, anything of that nature going on due to the weather?

You'd have a hard time explaining to people who spent five days living in the Denver Airport about the warmer winter, certainly here in our home state, it's been milder, but throughout the western states, and even in the southwestern states, I think it snowed in Phoenix yesterday, so this is a time of year when weather comes and goes all over the place, it hasn't had any material effect on the business.

Thanks a lot, great quarter, great year.

Thanks.

Thank you. The next question is from Armando Lopez with Morgan Stanley. Please state your question.

Hi, a couple of quick questions. First, Chris, as you think about the business and the slowdown in like the third quarter and the fourth quarter, I mean, in the expectations as you go into 2007, how are you thinking about that? Are you expecting a rate of deceleration -- the slowdown to accelerate, decelerate, stabilize?

Well, you're asking us to get our crystal ball out here which we've done with some guidance here for the year --

Right.

Our expectations are that we have seen the market return to a more normalized rate where volumes should be growing in that 1.5% for the industry. Our expectations are that we can continue to gain share in this market with our strategy and to continue to open stores and I think that we're -- I don't know that we're at the run rate coming through this deceleration yet that we're going to be at but our guidance for the 2007 year probably looks a lot more historically like we've seen over the last decade as opposed to the last two or three years.

Okay. Then on the raw material front, oil has come down quite a bit. It was my understanding you do most of your purchasing earlier on in the year? Is that the case?

Well, we purchase as we need these materials. And we're building inventory in the first half so we would be front-half loaded, that's correct.

Okay. And then as it relates to just as you're thinking about capital or uses of capital going forward, could you maybe just talk a little bit about how you're thinking about acquisitions versus buybacks here?

Well, we've always been careful with our shareholders' money and expected to generate a return significantly above our cost of capital. As we find acquisitions that fit our strategic model that can do that, we'll be acquisitive. And failing that, I think we've shown an appetite to return cash to our shareholders by buying our stock.

Okay. And then just one last one, on the globals group, the store growth was pretty strong this quarter. And you had commented that you'll expect a somewhat faster growth out of that segment from a store perspective. Is this like a run rate we should think about from a store growth perspective?

Yes, I think the rate that they ran at last year we would expect theming to out for a couple more years. Remember we've got three different types of stores in that group, we've got our automotive branches, both domestically and outside the United States, we have our chemical coatings, our product finishes branches, both in the United States, and then our international paint stores. And all three of those businesses are doing well, they have strong growth opportunities, and significant opportunities outside the United States. That's where we're seeing a lot of these stores being opened.

Okay. Great. Thanks a lot, guys.

The next question is from Saul Ludwig with KeyBanc. Please state your question.

Good morning, guys. Was the litigation related to auto refinish?

Yes.

Okay. I think it's very interesting if we look in your stores group how much of your dollar sales came down to pre-tax earnings, and in the first quarter you had basically 20%, in the second quarter 25% of your sales growth came down to earnings, in the third quarter was 41%, and then in the fourth quarter was 53%. So an amazing amount of incremental profit for each incremental dollar of sales. Could you talk about -- that's sort of enormous, 53% incremental profit contribution. How should we think about that going through '07 because it was very, very impressive during '06?

You're absolutely right, Saul. They had a great year. They drove their operating margin up 1.8%. I think that when you look at the efficiencies they've gained in their SG&A and to go from 13.1 to 14.9 was very impressive. I think the fourth quarter they were able to really flow through quite a bit. I think that we don't really look at it on a quarter-to-quarter basis when you're dealing with this type of an analysis. We've looked at that operating margin on a long-term basis of what we thought that they could get to, and I think that, in the future at 14.9 you're not going to see another 1.8% increase going from 13.1 to 14.9. I think long-term basis, if we can get that to go up a tenth or two-tenths a year, I think that would be pretty good from a basis of 14.9.

Did that improvement of 13.8 to 14.9, did that come about through gross margin or through SG&A to sales improvement?

I would tell you it was both. The SG&A and the volume and really looking at the return that they received on their net assets employed was an improvement as well as their -- and their capital. So it was all three. It was a nice balance sheet year for stores, good SG&A year and a good gross margin year.

Two other questions. In the consumer sector, something happened there that was sort of not so good. In other words, you add back the last year's special item and then it would appear that your results were basically flat, yet throughout the first three quarters of the year you were showing very, very good improvement in your consumer profitability and I would say in the fourth quarter it was sort of flat, X you add back last year's charge. What's going on there with profitability? Are we kind of looking for a flattish type comp going forward?

Yes, and I think there you have to realize consumer group is probably more affected on a quarter-by-quarter basis on the production and the amount of gallons that they do produce. And as you have noticed, our working capital came in 11.7. They did a real nice job not producing, preproducing just to hit a number. Again, there you take a look at the PBT went from 12.3 up to 15.7. When you look at the 15.7, it's sort of the same kind of a conversation we had with stores, I think that again we're looking at a tenth, two-tenths improvement there from this them also.

In the fourth quarter, the PBT if you add it back, last year's special charge declined.

Yes, it declined by approximately $1 million, a little less than a million dollars. But.

Margin would have been down more.

Yes, I think basically if you take a look at the production gallons, and so the variances and so forth, but I think we did that for the long term. If we wanted -- we were managing the whole business, not just the P&L. So they produced a lot of product in the first three quarters that allowed them to have a lot more flow through, but for the year, which we expected that we would have that type of situation on their P&L.

Finally, could you comment about this other expense with $78 million versus 55, and actually environmental costs were down $5 million. What drove that up by 25, maybe $30 million? Sort of a positive swing in the environmental cost?

If you really look at that admin cost, we were up $24 million for the quarter, up 44 for the year. If you really take a look at it, this was the first year that we've expensed all stock options. When you look at it, the stock option expense was $9 million in the quarter, 21 for the year. Tremendously larger in the fourth quarter versus 25% of the $21 million. So really the biggest hit in all of that was stock options.

Okay. You explained $9 million of the $25 million increase. In the quarter. What else was there? We're talking a huge amount of additional expense, it's not nits and nats.

The other big piece, if you take a look at it, about $14 million for the year, $12 million for the quarter, was really benefit costs and other compensation incentives. When you take a look at the -- this other incentive compensation that we really don't allocate to the segments, and then the rest of the 9 million for the year was normal increase.

How should we think about this other expense level as we think about or as you thought about it as part of your guidance for next year? Where is this $230 million administrative cost number should we think about that landing?

I would say that it's going to grow at a very low percentage.

Like under 5%?

Yes, inflationary levels.

Got you. Thank you very much, guys.

Our next question is from Ivy Zelman with Credit Suisse. Please state your question.

Thanks, good morning, congratulations on the quarter and your year. Understanding you're expecting to raise prices again and assuming it's still on the catch-up basis, can you give us first question some quantification of what that could be and currently what you're anticipating? And secondly looking at the success you've had in overall leveraging the top line which has been, as you said, pretty strong for the year with SG&A improvements, if you anticipate a slowing sales environment, would you anticipate that you will see some pressure on the margins as the sales are no longer as beneficial to that leverage?

On the pricing Ivy, historically, as we've gotten those pricing announcements into the market, we've shared with you the size and scope of them, and we're really in the midst of this one right now. Let me comment while we are out asking for pricing in most of our businesses in the first quarter, we haven't really locked in on those ranges yet. They will be significantly less than they have been over the last several years, the raw materials. You're right, we are catching up, we do have a little headwind. It will be our intention to price our products to continue to maintain or slightly improve markets as we always have. In terms of the margin pressure, I thought you were going more towards SG&A. Again, with 3,000-plus paint stores and the majority of our SG&A in those facilities we have terrific ability to flex up and down. We'll continue to bring the same kind of diligence and management to that area in an attempt to continue our margins consistent, or Sean has commented frequently on these questions to improve them by a tenth to two-tenths.

With respect to the pricing, you are factoring in, though, the realization of those price increases for the 2007 guidance.

Yes.

And then just lastly, Chris, with respect to your success with Duron, maybe you can talk about that acquisition in terms of what the margins look like today on Duron if you don't want to say exactly, but just maybe the before and after and maybe your integration success and talk a little bit about how well it's gone and then with that in mind, other acquisition opportunities, there's been a lot of discussion that you guys with all your free cash flow could go private. I know we've talked about it, just kind of your thoughts if anything's changed on that front?

The Duron acquisition continues to be a real strong one for the Company, Ivy, it's a tribute to the management team and employees who have joined our family here. They're doing a great job. We have shared with you some of the broader corporate ratios like getting working capital back down into the mid 11% range, seeing the gross margin percentages improve, and basically three years in now, or 2.5 years in, we're seeing all those ratios starting to approach the historic run rate of our stores group. So the acquisition and the integration is right on schedule, perhaps slightly ahead. We've been very pleased. We've closed very, very few of these stores and they continue to add a lot. We are obviously interested in acquisitions just like that. We'll continue to stay aggressive in that domain. And then to the second half of your question, there's no further change in our thinking regarding remaining a publicly listed company.

Great. Thanks a lot, Chris.

[OPERATOR INSTRUCTIONS]. The next question is from Jeff Zekauskas with JPMorgan.

A quick follow-up. Can you just generally highlight what went particularly well in the fourth quarter, and that is when we looked at PPG results, I think their architectural volume were down 2% and industrial coatings were down 3%. Can you just go through what went particularly well, whether you gained share anyplace?

I think it's clear we've been gaining share for some time, Silke, when you look at the industry results versus the numbers we've been putting up. I think it would just without commenting on PPG specifically, I would just point to our strategy, that the strength of our control distribution platform and focusing on the segments that we're involved with has been a good one for our shareholders and we're just focussed on relentless execution and generating improved results from that format.

Were there any areas that were particularly strong if you had to sort of pick apart, residential versus commercial?

I think we've commented both in the written release that the industrial maintenance markets for us were strong in the quarter, those are our industrial coating segments. We've mentioned the softness in our DIY business, but the rest of our wholesale business, the various breakouts of painting contractors that are focussed on specific markets, all of them improved in the quarter and continue to be the strength of the company.

And then lastly, what are the projects included in the CapEx guidance and what is the maintenance CapEx?

When we take a look at it, maintenance CapEx is going to be right around 65 -- 60 to 65% and 35 to 40% will be capacity increases.

Where will this capacity come on, are these just expansion or something brand-new?

Well stores of course, new stores, but also just capacity increases at the plants that we have today. We keep putting increased capacity levels in the current footprint.

Okay. Thank you very much.

Gentlemen, there are no further questions at this time.

Okay. Thanks, Joe. We'd like to thank you all again for joining us this morning. We appreciate your interest in the Sherwin-Williams company and we look forward to hosting you in Cleveland on May 22 this summer. As always I will be available this afternoon to answer any follow-up questions.

This concludes today's conference. Thank you for your participation.