宣偉 (SHW) 2007 Q1 法說會逐字稿

Thank you for joining the Sherwin-Williams Company review of first quarter 2007 results and expectations for the second quarter and full year. With us on today's call are Chris Connor, Chairman and CEO; Sean Hennessy, Senior VP-Finance and CFO; John Alt, Vice President and Corporate Controller; and Bob Wells, Vice President of Corporate Communications. 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 at www.sherwin.com beginning approximately two hours after this conference call concludes and will be available until Tuesday May 8, 2007 at 5:00 p.m. Eastern time.

This conference call will include certain forward-looking statements as defined under the 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 statement 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 early this morning. After the review of first quarter results, we will open the session to questions. I will now turn the call over to Bob Wells.

Thanks, Joe. Good morning, everyone. In order to allow more time for questions, we've provided balance sheet items and other statistical data on our website at www.Sherwin.com under investor relations first quarter press release.

Summarizing overall company performance for first quarter 2007 versus first quarter 2006, consolidated net sales were $1.76 billion down 7/10ths of a percent. Consolidated gross profit dollars increased 2.6% or $20 million for the quarter to $791.4 million. Gross margin increased 150 basis points to 45.1% of sales from 43.6% in the first quarter last year. Selling, general, and administrative expenses increased to 35.2% of sales in the first quarter this year from 33.8% last year due primarily to our investment in new stores and certain administrative costs.

Interest expense net of interest and investment income was flat for the quarter compared to first quarter last year. Consolidated profit before taxes in the quarter increased 1.6 million dollars or 1% over last year's first quarter. This year, our tax rate in the first quarter was 31.6% compared to 29.8% in the first quarter of '06. For the full year 2007 we expect our effective tax rate will be slightly higher than our 2006 rate of 31%. Consolidated net income decreased by $1.8 million to $111.8 million from $113.7 million in the first quarter of 2006. Net income as a percent of sales was flat at 6.4%. Diluted net income per common share for the quarter increased $0.01 or 1.2% to $0.083 per share.

Looking at our results by operating segment. Sales for our paint stores group in the first quarter 2007 were down 0.5% at $1.05 billion. Comparable store sales, sales by stores open more than 12 calendar months declined 2.4%. Flat sales growth for the segment was the result of soft demand for architectural paint in the do it yourself and new residential market segments. Regionally in the first quarter 2007, our Eastern division led the sales performance followed by southwestern division, midwestern division and southeastern division. Three of the four divisions achieved positive sales results in the quarter. Segment profit for the group increased 8% or $9.1 million to $122.4 million for the quarter. Segment margin increased to 11.6% from 10.7% due primarily to tight expense control and gross margins recovering to a more normalized rate.

In the consumer group for the first quarter 2007, sales decreased 8.7% to $301.2 million. The decline was due primarily to soft DIY demand at most of the segment's retail customers and the final period in the elimination of a portion of a paint program with a large retail customer. Segment profit for the consumer group decreased 1.1% in the quarter to $56.1 million. Segment profit is a percent of external sales improved to 18.6% from 17.2% in the same period last year due primarily to tight spending controls and better factory utilization.

Turning to our global group for the first quarter 2007, sales in U.S. dollars increased 5.7% to $402.2 million. Sales in local currencies increased 4.8% in the same period. This sales increase reflects growth across all geographies and product lines. Segment profits for the global group increased 9% to $35.4 million for the quarter. This improvement was mostly attributable to increased sales, operating efficiencies related to increased volume, and expense control. Currency exchange had a negligible impact on segment profit.

I would now like to comment briefly on some of our balance sheet items. Our total debt on March 31, 2007 was $1.03 billion, including total short-term borrowings of $726.8 million. This is down from $1.21 billion at first quarter end last year. Our cash balance at March 31, 2007 was $299.8 million compared to $494.3 million in 2006. Total borrowings to capitalization were 35.2% at the end of the quarter versus 39.7% at the end of the first quarter 2006. Long-term debt to capitalization was 13.9% at the end of the first quarter this year compared to 21.7% last year.

In the first quarter 2007, the Company purchased 3.35 million shares of its common stock in the open market. At March 31, 2007, the Company had remaining authorization to purchase 9.5 million shares of its common stock, and we expect to continue from time to time our opportunistic purchases of company stock for treasury since we continue to believe our stock is a good value.

In first quarter 2007, we spent $38.5 million on capital expenditures. Depreciation expense was $32.2 million and amortization expense was $5.4 million. For full-year 2007, capital expenditures will be approximately $180 million. A significant share of capital expenditures will go toward investing in new stores and additional plant capacity with continued spending to upgrade our manufacturing facilities and replace other equipment as necessary. Depreciation will be about $130 million versus $123 million in 2006. Amortization will be about $20 million versus $23 million in 2006.

I'd like to now give you a brief update on the status of our lead pigment litigation. In February, the judge in Rhode Island denied the Defendant's motions asking the Court to enter a judgment in the Defendant's favor or order a new trial. On March 16, the Defendants filed a notice of appeal to the Rhode Island Supreme Court. As part of his ruling on the Defendant's motions, the judge ordered both parties to submit candidates for a court-appointed special master to oversee the process of determining an abatement remedy and advise the judge. Recommendations were submitted to the Court on Monday, April 16. Along with their recommendation, the Defendants filed a motion to stay the abatement phase of the trial pending a review of the case by the Rhode Island Supreme Court.

In Ohio, a total of 11 cities have filed lawsuits against former manufacturers of lead pigment since the fall of last year. One of these municipal suits was subsequently withdrawn. In early April, the Attorney General of Ohio sued ten former manufacturers of lead pigment on behalf of the State of Ohio. Along with the lawsuit, the Ohio A.G. filed a motion to stay the suit until the Ohio Supreme Court determines whether Ohio Senate Bill 117, a Bill clarifying Ohio's product liability law will become law. The rationale for this motion to stay is unclear.

In California, the Superior Court judge in Santa Clara county ruled that government Plaintiffs cannot enter into contingency fee agreements with outside lawyers to prosecute public nuisance lawsuits. Most Plaintiffs in the Santa Clara county case are represented by outside contingency fee lawyers. The Court gave Plaintiffs 30 days to provide the court with a fee arrangement consistent with this order. In St. Louis, oral arguments in the Plaintiff's appeal of the lower court's dismissal of the city's lawsuit were heard by the Missouri Supreme Court. Finally, in Wisconsin, Sherwin-Williams has been severed from the City of Milwaukee's public nuisance lawsuit and complaints against the Company will be held in abeyance until claims against the other Defendant are fully litigated. That concludes my review of our results for first quarter 2007. I'll turn the call over to Chris Connor who will make some general comments and highlight our expectations for the remainder of the year. Chris.

Thanks, Bob. Good morning, everyone. Thanks for joining us today. What a difference a year makes. Last year at this time, the home building industry was in the late stages of a very robust growth cycle. Homeowners who might have been taking advantage of low interest rates were investing heavily in home improvement projects. The commercial and industrial construction and maintenance markets were very healthy and we were reporting one of the strongest sales and profit quarters in our company's 104-year history.

Today while the commercial and industrial markets remain strong for us, residential construction and sales of existing homes have stalled. The well publicized decline in these two important markets have had a meaningful impact on industry, architectural paint volume, particularly among painting contractors who specialize in new residential construction as well as the do it yourself homeowners. Obviously by our results we're not immune to these sharp dropoffs in demands that we've seen primarily in these two market segments over the past year nor do we expect to be immune going forward.

I do believe the soft market conditions we currently face help to illustrate two pretty important things about how we run our company. First, the diversified portfolio of businesses that make up this company and the way that we manage those businesses enables us to continue to achieve improved financial results in the face of challenging market conditions in some segments. As Bob mentioned, I think, three of our four paint stores divisions achieved positive sales growth in the first quarter. This was largely a result of solid growth in our industrial maintenance and commercial architectural businesses offsetting a sharp decline in sales to residential builders and DIY customers. Only in the Sunbelt markets of our southeastern division where new residential construction accounts for a larger share of the architectural paint market were declines in home building too large to overcome during the quarter.

Our global group businesses continues to achieve solid growth, offsetting declines in our consumer group sales resulting from a weak DIY market demand pretty much across the country. In spite of these soft market conditions, segment profit margins improved across the board due to the diligent efforts of all of our businesses to control expenses, maximize productivity, and implement the necessary price increases. Our working capital ratio came in at 13.1% for the quarter compared at 13.7% for the first quarter of 2006.

I think the second thing this quarter illustrates about our company is our commitment to continue to invest in the business during difficult times and to do the right things today to ensure our continued growth in the future. We will continue to invest significant capital over the course of 2007 to improve our productivity and expand our control distribution.

During the first quarter, our paint stores group opened 17 net new stores. Our global group opened ten. At this pace, we remain on track to open approximately 100 net new stores in our paint stores group for this year as well as 70 new stores, OEM coating service centers, and automotive branches in our global group throughout the remainder of the year. These new stores require knowledgeable, well trained people to run them. In the fist quarter, the Company hired more than 140 new management trainees and set them on the path toward store management.

Acquisitions will also continue to play an important role in our growth. During the past month, we announced definitive agreements to purchase M.A. Bruder, a Philadelphia-based company with 132 paint stores serving the Eastern seaboard and select markets in the Midwest. In an addition, we announced the acquisition of Nitco Paints, a leading manufacturer and distributor of exterior specialty paints and coatings headquartered in Mumbai, India. These acquisitions will improve our service to professional painting contractors, home builders, and DIY customers in regions of the U.S. as well as provide access to the dynamic growing Indian paint market. Our continued investment in new stores, new people, new businesses, and new plants and equipment demonstrate our confidence in the strength and potential of this company despite the current downturn in the residential markets.

Over the balance of the year, we anticipate a long, slow recovery in the new residential and DIY markets that will continue to restrain our sales growth. Our outlook for the second quarter 2007 is for sales to be up in the low single digits over last year's second quarter. With sales at this level, we expect diluted net income per common share to be in the range of $1.37 to $1.45 per share compared to $1.33 per share for the second quarter of last year. For the full year of 2007 we expect sales to increase in the low single digits over 2006. This range is lower than our previous guidance due to our anticipation of a longer recovery cycle in the residential market segments than we had initially anticipated. With annual sales at that level, we are reaffirming our guidance that our diluted net income per common share for the year will remain in the range of $4.55 to $4.65 per share compared to $4.19 per share last year.

Finally, yesterday our Board of Directors declared a regular quarterly dividend of $0.315 per share continuing our long standing track record of paying out 30% of prior year's earnings per share. Again, thanks to all of you for joining us this morning, and now we'll open the floor for questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question is from Jeff Zekauskas with JPMorgan.

Good morning, Jeff.

When you analyze your gross margin improvement of roughly a percentage point and a half, how would you divide that into price, mix, and raw materials?

Jeff, what we see is that raw materials were relatively flat compared to last year, so between pricing mix because of the price increases we implemented throughout '05 and '06, that we've seen the annualization of, I would say it was all price and mix.

Second question, maybe this is really for Chris. Is what we've heard is that the sort of big box retailers are not building inventories and coatings in the way that they normally have over the past few years. We were wondering if your experience was the same? When you watch the behavior of your customers, how are they approaching the painting season this year?

I think, Jeff, you're speaking specifically to the seasonal build that would typically occur at this time?

Yes.

I think the comment we've made for the quarter was that our consumer group experienced soft sales performance and that's where we would obviously see the impact of that. I think these customers have continued to do a very good job of managing inventory. We have talked repeatedly on these calls about inventory adjustments as these retailers have done a better job with their systems. Our expectations are that they are appropriately buying the inventory they need to prepare for the coming season. I don't think there's any difference in the way they're approaching it this year than they have in years past.

So when you talk about low single digit sales growth in the second quarter, does that mean that you're expecting some kind of upturn in consumer in order to get to that kind of number or is stores going to get you there? What are the mechanics of how you might get there given that things were pretty weak in consumer this quarter.

I think the important thing to remember is that our first quarter last year was really a incredibly strong quarter. Our stores comped at 18% plus for the quarter. These comparisons get more favorable as we go forward. Plus we see a softening in terms of how steep this decline is in some of the markets we're serving. The way we get to the guidance for the second quarter is that we think our stores will be up in the low to mid range. Our global group will continue to be up in the mid to high range. And we expect that our consumer group will continue to be down slightly. So we're certainly not building that second quarter on a turn around in our consumer group.

And then lastly, in terms of being severed from the public nuisance case in Milwaukee, was Mott's paint also severed or just Sherwin-Williams.

Actually, Jeff, just for convenience we said Sherwin-Williams. The Defendant is Mott's paint.

So they were severed?

They were severed, correct.

Thank you very much.

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

Good morning, everyone.

Hey, Chuck.

In looking at the full year, Chris, do you see any countervailing economic trend against housing? Anything to be optimistic about in the macro sense?

We've commented for our particular business model that the commercial construction markets remain strong. The industrial maintenance and protective coatings opportunities also are healthy for us. The anecdotal evidence we have from our larger commercial painting contractor that service these businesses are all -- they have strong work schedules ahead of them. We think those will counterbalance the softness in the residential side.

Do you anticipate any new product activity that for seasonal reasons will also be a factor in the last three quarters of the year or especially the second half?

Our performance this year has continued to be as it has in the past introduced a number of new products. Most of those have been brought to market, Chuck. They'll play a role but nothing dramatic to change the kinds of guidance we've given.

Could you give us an update, Chris, on where you are at with on the M.A. Bruder acquisition in terms of the regulatory approval and anything else?

Chuck this is Sean. Basically, M.A.B. we filed for FTC approval on the HartScott. We are going through that process. They have not asked for a second request. We're still going through it. I would say that that's about as much as I can comment. Just to remind you it took us right around four months to get that FTC approval for the [Durren] acquisition. We're optimistic it's not going to be -- that we're going to beat that time frame.

Then finally, Sean, is this a good time to be making acquisitions with the housing market impacting perhaps some of your smaller competitors?

Yes. I think when you take a look at where we get synergies on these acquisitions and so forth, we feel that actually a lot of these synergies are long term and we can get some short-term wins when it comes to the admin side of it. We think now is a pretty good time.

Thank you.

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

Good morning, everybody. A quicky, how much did you pay for the stock?

We each paid $69 and I believe $0.27 was our average.

Bob mentioned something about favorable production costs. I just wondering you show that your transfer of sales from consumer to the paint stores were down, volume was down, sort of generally. It would seem like you would have -- and your inventories are down, so it would seem like you ran your facilities less full--.

Yes.

-- than you did a year ago. What was the effect of running less full on your results? And where would that have shown up?

When you sit there and take a look at number one it's running on low in a normal rate you would see that our costs of conversion would have gone up. When you take a look, you pointed out fantastic, Saul, that our inventory is down. I think that the plants operational people did a great job of reacting to the demand. Our production was down in the first quarter. They were able to actually not have a negative conversion cost compared to last year. We feel pretty good about what the operations are able to do. As you know when you turn inventory, the inventory that Costco's on the balance sheet. We didn't put an extra debit on the balance sheet, we feel pretty good.

Even your depreciation was up, even with your fixed costs being spread over fewer gallons, where was the offset? Was it the raw materials? Was it the--?

Direct labor.

Direct labor?

Yes.

That was -- okay. And then finally, your administrative costs that rose from 40 million to $50 million, could you give us some color on what drove that increase and how we should think about that as we go through the year particularly when you get to the fourth quarter when your admin costs in the fourth quarter last year were something like 78 or $80 million.

Right. I think when you take a look at our admin costs as you said, we went from 40 to $50 million. If you really take a look at it, the biggest chunk of that was $5 million, about half of it was for employee benefits. That allocated up to the operating segment, and the biggest piece of that was the $2.7 million in stock-based compensation. Because of the cost of stock option, expensing stock options, and so forth, for the full year, we believe that will be in the range of 7, $7.5 million just for the stock.

So over and above a year ago?

Yes. Over and above a year ago. So last year, our admin was right around 230. When you take out the stock for the year, the incremental stock expense, we believe that this will grow for the full year, right around inflationary. That's that we've got it forecasted.

Let me make sure I understand. The 230 that you had last year for the full year, which included stock option expense, right?

Yes.

Of -- how much was the stock option expense last year?

29.488 million.

So you had 200 million in admin ex the stock option, the 200 million should go up by 3%, right, rate of inflation, 3, 4%?

Yes.

That gets you 208 and the 29 million stock should go up to about 36 million.

Yes.

So that means the grand total would go up to 244 from 230 but we already got ten of it in the first quarter.

Exactly.

So we should see a much lower rate of admin increase and maybe by the fourth quarter even a decrease.

Yes.

Very good. Finally, in the consumer division, was the volume decline -- was the sales decline all volume or was if really maybe down 10% or 11% in volume with a plus 2, 3% in price?

The volume in consumer group was up slightly higher than the decrease in sales. We did have--.

Lay that one on me again.

The volume decrease in consumer was slightly greater than the decrease in sales.

Maybe 2 percentage points?

Yes.

Directionally that's correct.

Great. Thank you very much, guys.

Thank you. The next question is from John Roberts with Buckingham Research. Please state your question.

Good morning, guys. I just want to check again on Jeff's earlier question. There's no inventory effects in the paint store segment because there's no inventory between you and your customers in that segment?

That's correct.

Right. Hope Saul's question there, the way you didn't have the unabsorbed overhead in the consumer segment because inventories came down between your transfers between consumer and your paint stores was you laid people off? Is that what you meant by direct?

No. I think that the first quarter is usually a very large inventory build for us. So even though our inventory's down from a year ago, it's higher than it was in December. The first quarter we usually build inventory very strong to prepare for the season. So we usually had -- we'd have a lot of overtime. So our inventory was higher than it was in December.

So you avoided the overtime and the extra--?

Yes.

You wold have normally -- and had in a good season normally?

Yes.

Then lastly, the paint market's normally driven by refinish coatings. That's why you did okay during the last housing decline back in the late '80s and early '90s. Should that hold up well, the refinish market and drive the total market, would there be restocking or is this a level, kind of that the industry could stay at through the rest of the season without restocking even if refinish stayed strong or refinish picked up again?

I'm not sure I got all of that.

A permanent stepdown you think that occurred in inventory activity here?

In terms of our sales to our retailing or through our own stores?

Both. The levels your consumer customers maintain in inventory and your levels in the paint stores. Can you run at this level now even in refinished sales come back to where they were a few months ago, a quarter ago?

Yes. I think we've commented on our retailing partners good work here in managing their businesses to make their inventory turn more efficiently et cetera. I think they're at levels that they can run at. I think right now, the sales performance will move with demand from the consumer much more than they are going to move by any inventory adjustments up or down.

Thank you.

Our next question is from Eric Bosshard with Cleveland Research.

A couple things. First of all, in terms of sales, can you give us a sense of units relative to price in the quarter and on any basis you want on an absolute basis or relative basis? I'm just trying to get a sense of what the difference was between the two either in total or--?

I think you heard Larry answer Saul on the consumer side. On the store side what we've done over the last few years is really discuss comp stores. When you look at comp stores, our comp stores were down 2.4% in the first quarter. And volume was down slightly more than that.

Related to that then in terms of the pricing experience across the business then, I guess I'd focus more specifically on stores, what was the realized price benefit in 1Q relative to 4Q and where do you think that goes from here?

Versus 4Q, it was up slightly, but really that was what I would call a material impact.

You would say that you realize similar price in 1Q as you did 4Q?

Yes.

And in terms of where we go from here in an environment where units have slowed the way they have as a result of housing, does pricing stay the same, get better, get worse, what experience are you seeing from your sales guys in the field?

We have announced the pricing actions that we're going to take for the year already, Eric. In the first quarter our stores did go out with a modest price increase as we acknowledged in the last call. Most of that pricing is in. I think you're accurate in saying that in this environment, with volume softness in the marketplace it's highly unlikely there's going to be a lot of pricing from here on in.

Okay.

But, Eric, if you're asking in the future our margin at that 45.1 rate, when you look at the full-year forecast, we believe that which is getting close back to our 2004, 2005 gross margin, we would expect that we would be within that range for the year for the Company.

Within the range that you posted--?

For the first quarter. And we can maintain that.

And I guess that's my last question, which is I mean, the first quarter gross margin performance is tremendous considering the fact that revenue comparison's probably the weakest we're going to post in 1Q of the year, you're going to post to 1Q of the year. I guess if volumes get better, is it just that you have to hire people back and put more expense back in the business. Is that the reason why the markets wouldn't have upside in what is probably going to be less worse revenue quarters going forward?

Yes, and I think that's many events that occur back to what you just said. As we build more inventory, as our direct labor goes up, different volumes and so forth will control it, but I think that in the long term we felt that we needed to recover our margin into that 2004, 2005 range. And I think we're there. I think if you really take a look at it, last year our margin came in, in the first quarter 43.6 and for the full year we came in at 43.7. So I think it's a pretty good curve for us. Because taking the expenses versus the sales.

Thank you.

The next question is from Scott Scher with Clovis Capital. Please state your question.

A couple questions. You talked about the comp store sales being down about 2.4% in Q1. For your revenue guidance for the year, can you just remind us what you're assuming for comp store sales for the rest of the year?

Yes. The guidance we're given, Scott, is that our storage group performance will be in the low to mid at that level our comps would probably get back to flat to slightly up.

Yes. Then you called out, you said that of your four regions, three of the four were up, one was down, and the one that was down, I think you said the Southeast was pretty much down due to the fact that you had the higher percentage of its revenues going to new home building. Can you give us a sense of in the biggest region how much of the sales go to new home building and in the least just kind of general guidance?

We have never disclosed that, Scott. The Southeastern part of the United States given the Sunbelt and Florida and the Carolinas, et cetera where we've seen so much home building, just a higher percentage of it. We have commented on the industry's numbers that when you look at architectural paint usage and our company will be very close to this that approximately 75 to 85% of all of the coatings are used to maintain and redecorate existing structures. New construction would then make up the remainder of that 15 to 25%. The vast majority of that new construction is residential. Commercial plays a small role of new construction in that. So the Southeastern part of our country is skewed a little bit more towards new residential construction, but again, we want to remind you that the full 75 to 85% of non new construction is typical for our industry and for our company as well.

Then with regards to that new construction component, two more questions, new construction component, what assumption are you making on new housing starts?

Well, we're following the same data that you probably all see from the National Association of Home Builders, which continues to suggest that the first half of this year will see double digit declines in starts. That moderates a little bit in the second half where they are still down, but in the mid to single digit range. Not until 2008 are they forecasting perhaps some uptick in builds. We see it down the rest of the year.

Then last question if I may, the very wet weather that we've been enjoying here in New York, how much has that been hurting you? It's obviously the entire Eastern region of this country. I can't imagine there's not much painting going on in the month of April. Has April started off sluggish, as one would assume, given the weather conditions?

April has started off per the guidance that we've giving for the quarter so it's consistent with that low sales performance. We very rarely comment on weather on these calls, Scott. Occasionally if a hurricane or something really catastrophic hits we discuss it. But our track record historically has been that we're going to have spring storms and bad weather in various parts of the country, and we've always said that a solid week in July and August makes up for a bad month in February. So this is not historically the real busy time of the paint season. Certainly a bad week of weather impacts the Company but it would be our expectation to make that up. And not to comment on that as part of any sales shortfall.

All right. Thank you.

The next question have from Ivy Zelman with Credit Suisse.

Hey, guys, good morning. I think Chris and Sean if you guys remember, we had a meeting, we talked about raw material price recovery and realized you guys were still playing catch up. I know you had put a price increase through. Are you caught up now because your comment, Chris, that it might be difficult to push price in a sluggish environment and therefore want to know where you are relative to what your hopes and expectations were.

I think where we are is that margins 45% for the quarter which to Sean's point is substantially better than the 43% and change we ran last year. Not quite all the way back up to the levels that we ran the Company in '04 and '05. Our expectations are that with the pricing we have in place, the actions that have taken place and will continue that we'll be able to maintain that 45% range for the rest of the year.

Okay. On the other point you made on the last question on housing starts, if we were to use a little bit of a more negative outcome for '07 and potentially '08, assuming more of a decline than you're currently using in the NAHB forecast what would be the impact to your expectations and what's the delta? So for example, instead of being down single digits in the back half of the year and maybe for the first half of the year it's down 25, 30% and it happens to be down just as much in the second half. Would that change your outlook? Looks as if you're, despite having pretty much gone below on 2Q and lowering sales guidance you're maintaining your full year guidance. I'm trying to understand on the expectation for that stabilization to improvement. What would that do to your earnings outlook theoretically?

I think the comment that I did to answer Scott's question was to repeat the NAHB data. I think the guidance that we've given takes that into effect as well as perhaps a more conservative output--.

No, I followed that one. I'm saying theoretically, if you wanted to assume the--.

So if housing starts were down double digits.

Let's say housing starts for 2007 are down 30% annual, what would that do to your forecast?

I don't have that number off the top of my head, Ivy. Obviously it would have our top line revenue softer than what we've already indicated.

Right, but the rule of thumb had always been that you guys weren't selling a lot to new construction and relative to your expectations, I think you would say you admittedly, a little bit surprised by the impact in the consumer business give that repair and remodels affected--.

We have said that we sell a lot to them, but in putting in in perspective that new construction component of the total demand for architectural coating is somewhere in the mid high teens as a percent of the total volume. So take a factor, if it's 20% of the industry's volume so if it's down by a more aggressive level, 20% of the total demand for our products would be impacted by that.

What do you think's happening in the consumer business? Why is the DIY, because people even if they are not selling their existing home, typically, you always said they fix it up. What do you think is really going on with the consumer today to see the weakness that's away from new construction, and what are your expectations for that segment of the business? Improvement from here and if so why?

That's a tougher answer because there's not as much data, obviously, and the consumer has over the years shown a propensity to continue to decorate. We don't think anything's fundamentally changed there. We think our expectations are for the year we've given guidance that we expect the consumer group will be down slightly. And don't really see anything in the horizon that's going to change that.

I know, but why would you only be looking for a slight decline given the weakness you're seeing in the Q you just reported? I guess my thought would be with, obviously home prices under pressure and home equity extraction falling significantly, wouldn't you be more bearish on that segment of the market given what you are seeing today? Why do you think it's going to get better to only slightly down?

I think when we look historically, Ivy, over these past cycles that we've been through in this, despite those tough economic trends, we have seen that people's desire to maintain their most important assets and continue to decorate to take advantage of the opportunity that painting provides to change their environment perhaps when they can't afford to add an addition or move to a new home has helped drive this category. So again we're in a cycle that we've seen previously. It's certainly steeper on the housing start declines, but on the resale and consumer segment, nothing has us panicking here that that's not going to be somewhere in that range.

Great. Thanks, guys.

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

Hi. Good morning again. How did your industrial maintenance coatings business do this quarter?

Did very well. It was up.

I think PPG said that their business was down 15% in the quarter. How did you do it?

I think that when you look at the infra structure of the Company, of the country and some of the projects we're on, we were up. I'll be honest with you, I did not read PPGs results that close to see what they were saying about the industrial maintenance. So I'm not sure what they were saying.

Okay. Second thing is in terms of your share repurchase intentions.

Yes?

Do you think you'll make your way through a fair amount of your remaining authorization this year?

No. We have right around 9.5, approximately 9.5 million. I do not see the majority of that being used this year in '07.

And then lastly, just I guess to go back to Ivy's question about why DIY demand has been down so much. Do you think it's possible that the professional contractor just buys much more from, I don't know, Home Depot and Lowe's than everyone thought they did? And that maybe the DIY market has been overestimated in its size? Do you think that's possible or do you think that's unlikely?

I don't think that's likely.

Thank you very much.

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

Hey, Sean, I want to go back to that administrative question I asked earlier.

Okay. I got to pull it back out. I put it away. Okay.

You're up $10 million in the quarter. You said that $5 million was due to employee benefits including $2.7 million of stock options. What was the other $5 million? And thinking about what you said about the full year, why did we get such a big chunk of it in the fist quarter? I'm still scratching my head on this one.

When you take a look at it, just by the -- when we hand out stock options, and so forth, just think about 7 million, 2.7 of which, so almost 40% of the increase in the stock option expenses in the first quarter versus the remainder of the year.

I'm with you on the 2.7 out of the 10.

Right. And then the -- when you take a look at the rest of -- we also had -- when we have a couple other benefit payments that we do in the first quarter for the [Granner Trust] and some other issues that we have for benefits that are not repeated in the remainder of the year as well as--.

That was another couple million bucks.

Right. So then you sit there and it's just increased admin spending. Just timing and some expenses that we're doing in the admin side that went in the first quarter that we don't see repeating the remainder of the year.

Okay. Then in your P&l, but in your earnings release, just an administrative question here, does the other income expense, and then you have an other income net, do they go into the admin category or do they get charged back to some of the segments or credited back to some of the segments? Let's start with the other income expenses was $780,000 income.

Saul, for the most part, both of those categories end up in the administrative segment. There may be certain amounts that get allocated to the operating segments but primarily it's the administrative segment.

Got you. Super. Thank you very much.

There are no further questions in the queue. I'd like to turn the call back to management for closing comments.

Great. Thanks. Let me conclude by reminding everyone that the Company's annual financial community presentation is scheduled for May 22, at our headquarters in Cleveland, Ohio. If you have not RSVP'd but would like to attend, please give me a call. We'll get you on the list. As always, we appreciate you joining us this morning. Mike Conway and I will be around this afternoon to answer any additional questions that come up.. Thanks for your interest in Sherwin-Williams.

Ladies and gentlemen, thank you for your participation.