宣偉 (SHW) 2007 Q3 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of the third quarter 2007 financial results and expectations for the fourth quarter and full year. With us on today's call are Chris Connor, Chairman and CEO. Shaun Hennessy, Senior VP, Finance and CFO, John Ault, Vice President and Corporate Controller, and Bob Wells, Vice President Corporate Communications. The Company has provided information regarding the third quarter and first nine months financial results. Business segments sales and profits, balance sheet items and selected statistical data on their web site, www.sherwin.com under investor relations third quarter press release. Please access this to supplement comments made on this call.

This conference call will include certain forward-looking statements as defined under U.S. federal security laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made and the company undertakes no obligation to update or revise any forward looking statements with future events or otherwise. A further declaration regarding forward-looking statement is provided in the company's release transmitted earlier this morning. This call is being webcast simultaneously in listen-only mode via internet at www.sherwin.com. An archive 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 Friday November 9th, 2007 at 5:00 p.m. Eastern time. After the company's opening remarks we will open this session to questions. I will now turn the call over to Bob, Wells.

Thank you, Joe. I'll begin by summarizing overall company performance for 2007 versus third quarter 2006. Consolidated net sales increased 3.8%, $2.2 billion. Primarily due to acquisitions, strong domestic paint sales to the commercial and industrial paint markets and strong international paint sale. During the third quarter acquisitions, which combined with Bruder and Sons and Nitco Paint inquired earlier this year increased third quarter consolidated sales by 2%. Consolidated gross profit increased by 52.6 million for the quarter to $988.4 million and gross margin increased 80 basis points to 45% of sales. Selling, general, and administrative expenses decreased slightly to 30.5% of sales in the quarter from 30.7% last year, due primarily to tight spending controls. For the quarter, interest expense, net of interest and investment income was 15.2 million compared to $10.3 million last year due primarily to an increase in debt during the quarter. Consolidated profit before taxes for the third quarter increased $17.6 million or 6.4% to $294.3 million. This improvement was achieved despite a net increase of $13 million in net interest expense and other general and other expense net from higher environmental provisions and currency-related losses that were partially offset by increased gains on the sale of assets during the quarter.

Our tax rate for the quarter was 31.9% compared to 35.3% in the third quarter of '06. We expect our effective tax rate for the full year to be slightly higher than our year-to-date 2007 rate of 32.4%. Consolidated net income for the quarter increased by $21.2 million or 11.9% to $200.4 million. Net income as a percent of sales improved to 9.1% in the third quarter this year, from 8.5% last year, due primarily to improved operations. Diluted net income per common share for the quarter increased 19.2% to $1.55 per share, compared to $1.30 per share in the third quarter 2006. Acquisitions reduced diluted net income per common share for the quarter, by $0.02 cents per share. Looking at our results by operating segment. Sales for our paint stores group increased 3.9% to $1.4 billion in third quarter 2007. Comparable store sales, that is sales by stores opened more than 12 calendar months, were essentially flat in the quarter, compared to third quarter last year. During the quarter, paint stores have completed the acquisition of Columbia Paint and Coatings, a 41 chain of specialty paint stores, in Spokane, Washington. The acquisition combined with M. A. Bruder , acquired earlier in the year increased paint sales by 2.7% in the quarter.

In addition to the growth from acquisitions, we saw some improvement in domestic architectural paint sales, to do-it-yourself customers and residential repaint contractors and continued strong commercial and industrial maintenance product sales. Regionally in the third quarter, our Midwestern division led the sales performance followed by Eastern, Southwestern and Southeastern. All four divisions achieved stronger sales results in the quarter compared to a year ago. Segment profit for the group increased 9.6% to $248.4 million for the quarter. Operating margin increased to 17.7% from 16.8% last year due primarily to tight expense control and gross margins recovering to a more normalized rate. In the consumer group for the third quarter 2007, sales declined $5.5 million, a reduction of 1.6 %, to $349.4 million. This was due primarily to continued soft DIY -wide demand at most of the group's retail customers. During the quarter, consumer group completed the acquisition of VHT, a line of high temperature coatings and premium aerosol products. This acquisition had no affect on segment sales or profits in the quarter.

Consumer segment profits increased $3.9 million or 6.4% to $64.1 million in the quarter. Segment profits as a percent of net external sales, increased to 18.4% from 17% in the quarter last year, primarily due to tight spending control and improved manufacturing direct conversion cost. Turning to our global group for the third quarter '07. Net sales in U.S. dollars increased $32.9 million or 8% to $444.9 million. Stated in local currency, sales grew by 4.5% in the quarter, due primarily to architectural and automotive paint volume gains in South America and improved product finishes sales in most markets.

The second quarter acquisition of Nitco paints and third quarter acquisitions of Napco, a protective coatings company based in Mexico, and Centuries Industriales, a paint company in Uruguay increased global segments net sales in U.S. dollars by 1.6% in the quarter. Segment profit for the global group increased $5.3 million or 12.4% to $48 million in the quarter. Segment profit as a percent of net sales improved to 10.8% from 10.4% last year. This improvement was mostly attributable to increased sales, improving operating efficiencies related to additional manufacturing volume, and expense control.

I'd now like to comment briefly on some of our balance sheet items. Our total debt on September 30th, 2007, was $960.7 million. Short-term borrowing increased $380.6 million to $656.4 million compared to third quarter last year. Total borrowings to capitalization were 34.2% at the end of the quarter versus 27.5% at the end of third quarter 2006. Long-term debt to capitalization was 14.2% at the end of the third quarter this year compared to 19.7% last year.

Our cash balance at September 30, 2007, was $21.2 million compared to $400.4 million in 2006. Over the past year, we have used this cash and the increase in short-term borrowings to return $200 million in long-term debt, fund acquisitions, purchase treasury stock and provide seasonal working capital. During the third quarter the company acquired $5.55 million shares of its common stock on the open market. In the third quarter 2007, we spent $33.9 million on capital expenditures, depreciation expense $35.5 and amortization was $6 million. For the year 2007 capital expenditures will be approximately $160 million below our earlier estimate of approximately $180 million. A significant share of these capital expenditures will go toward investing in new stores, additional plant capacity and continued spending to upgrade our manufacturing facilities and replace plant and store equipment as necessary. Depreciation will be about $130 million for the year versus $123 million in 2006. And amortization will be $24 million versus $23 million in 2006. I'll conclude this review with a brief update on the status of our led litigation.

In Rhode Island, the defendants appeal to the Rhode Island Supreme Court is progressing slowly. The transcript of the lower court trial was delivered to the Supreme Court, and a scheduling conference should take place in the near future to determine when briefs will be filed and when oral arguments will be heard. In the abatement proceeding, the lower court judge has elected to interview potential candidates for the position of Special Master. We expect these interviews to occur in the coming weeks.

In Ohio, all of the remaining lawsuits are now active, and motions to dismiss have been filed. You might recall from our second quarter comments, that three of the eight remaining Ohio municipal suits had been stayed along with the attorney general's suit pending the state's Supreme Court ruling on Senate Bill 117, a bill designed to clarify Ohio's product liable law. The Supreme Court upheld the validity of Senate Bill 117, but gave opponents of the bill until November 1, to gather the signatures needed to put a re-call referendum on the 2008 ballot. The stay in the city of Columbus, Attorney General suit, has been lifted, and that case will begin moving forward. A motion to dismiss will be the first issue to face the court.

In Wisconsin, the Thomas case, a single. suit brought on behalf of a minor child has been brought to trial. The plaintiff has concluded its case and the defendants have just begun putting their on. The trial is expected to conclude in early November.

That concludes my review of the quarter so I'll turn the call over to Chris Connor, who will make some general comments and highlight our expectations for the

Thanks, Bob. Good morning, everybody. Thanks for joining us today. The third quarter of '07 was a solid quarter for the Sherwin-Williams Company in many ways. We generated record sales, earnings and cash flow for the quarter. We completed four important acquisitions as Bob mentioned. We continued to expand our controlled distribution platform domestically as well as abroad, and we purchased $5.5 million of other stock. The shares we reported for the quarter up 12% and 19% respectfully. This morning, however, I want to take a few minutes to highlight the profit performance of our operating segments during the quarter, because I think this clearly demonstrates the underlying strength of our business model and the earnings power of our company. Combined segment profit for our three reportable segments increased by almost $31 million more than 9%. And the sales improvement of 3.8%. Details from acquisitions slightly diluted earnings 2% of our total 3.8% increase in consolidated sales. Clearly our operating segments are hitting their stride in terms of managing expenses and maximizing our profit flow through.

All three segments posted strong operating margin increases for the quarter, and we recovered an additional 80 basis points of consolidated gross margin. We still anticipate our consolidated gross margin for the year will be up more than 100 basis points over last year. Importantly, the hard work our operating segments have done to improve our profitability has come at the same time that we've continued to invest in strengthening our capacity for future growth. During the third quarter, our paint store segment opened 29 net new stores and added 41 new stores through the acquisition of Columbia Paint and Coatings. During the first nine months of 2007, paint stores group opened 59 net new stores and acquired 172 for a total increase in store count of 231 stores. Our commitment to control distribution extends beyond North America. Our global group also opened seven new stores and branches during the quarter. And that brings the total year-to-date 26 new facilities. We continue to make progress in our management of working capital as well from the third quarter, although our working capital ratio, accounts receivable, plus inventories, less payables, for 12 month sales, increased to 14.4% for the quarter compared to 13.1% for the third quarter of 2006.

The acquisitions of M. A. Bruder, Columbia Paints, Nitco Paints, Napco and Centuries, amounted to this increase. To date we've generated $563.6 million for operations compared to $537 million for the same period last year. An increase of more than $26 million in that operating cash. As I mentioned at the beginning of my remarks, one of the ways we've been using our cash is to purchase our stock on the open market. Year-to-date we've purchased over $10 million shares. On September 30, 2007, we had remaining authorization to purchase approximately $2.6 million shares of the Company stock. On Friday, October 19, the Board of Directors, cancelled this remaining authorization, and approved a new share repurchase authorization for 30 million shares. This action by the Board prepares management to maintain our consistent, long-standing practice of being an opportunistic buyer of our stock on the open market in the years to come. Also at this meeting, our board declared a regularly, quarterly dividend of 31.5 cents per share compared to $0.25 last year continuing once again our long-standing record of paying out 30% of prior year's earnings per share and marking our 29th consecutive year of increased dividends. Looking ahead, we expect our consolidated net sales for the fourth quarter to increase 5 % to 6% over the fourth quarter of 2006. For the full year 2007, we expect sales to increase in the low single digits over 2006. Based on that level of annual sales growth, we have raised our expectations for diluted net income for common share for the year to a range $4.70 to $4.75 cents per share compared to $4.19 cents per share last year. This change in our outlook for the year is a reflex of both the strength of our results in the first nine months and our confidence that we are well positioned to manage through the challenges that lie ahead in the fourth quarter and beyond. Planning for 2008 is currently in progress, and we will be prepared to provide you with sales and earnings expectations for next year during our year end 2007 conference call. Again, I'd like to thank all of you for joining us this morning, and now we'd be happy to open the lines for your questions.

Thank you. We will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question is from Armando Lopez, with Morgan Stanley. Please go ahead with your question.

A couple of quick questions. First on the Cap Ex coming in lower than expected. Could you maybe just talk a little bit more about what the variance around that is? And then second, in terms of the full year -- the full year guidance of $4.70 to $4.75, seems like it would imply 80 to 85 cents for fourth quarter, which would suggest a slowdown in the margin acceleration from the second and third quarter. If you could just talk a little bit about that.

Why don't I ask Sean Hennessy to comment on our Cap Ex number? Sean.

When you take a look at Cap Ex, Armando, we had a few projects we were planning and land purchases that we've pushed out and on capacity and that's really the main reason why our Cap Ex is going to be a little lower this year.

Okay. So will that show up, then, next year? Is it just like postponing it a year?

Yes, I think, watch the volume as we take a look at those things, eventually they will spend that money, but we don't think -- you know, we didn't want to spend the money before we really needed to.

Okay.

And on the margin compression, I guess I don't -- 80 to 85, we're saying $4.70 to $4.75 cents per share I think when you take a look at a lot of different things that are moving around in that quarter, I think our segments will be a little cop pressed in one or two of the segments. But I think for the full year we're going to show nice margin improvement in the three segments.

Okay. And then just one last one.

In terms of the 30 million authorization for the buyback.

Yes.

Is there a timeframe that you're expecting to work through?

No, I don't think so. As we said, this is consistent with our practice. Two years ago we received $20 million authorization from the board, two years before that, $20 million authorization. So this is just part of our normal policy to use excess cash to be opportunistic in the market.

Thanks a lot. Nice quarter, guys.

Thanks Armando.

Thank you. The next question is from P. J. Juvekar, With CitiGroup. Please state your question.

Hi, this in Anthony standing in for P. J.

Good morning, Anthony.

Good morning. After looking at results from Valspar and PPGX, we've had a lot about residential weakness creeping into commercial construction and industrial order books, could you comment on any deterioration or softness you're seeing on industrial end markets?

Sure, be happy to. Our commercial and industrial activity held up well in the third quarter, fairly consistent with the same buying levels that we've seen throughout the calendar year 2007. Kind of a sales and earnings guidance we've given for the fourth quarter assumes that same kind of market performance going into the fourth quarter. We would comment that for the industry, in calendar year 2006, these commercial industrial markets were growing more robustly perhaps in the double digit range. They have slowed down in '07. The industry forecasting, perhaps, even a little slower in '08. We continue to believe this will be a positive segment for our company and we expect to make progress here.

Great. Great. And just following up, when you look at the industrial end markets, if you look at auto or marine, are there subsegments where you're seeing particularly strength or particular weakness? Or is it --

Yes. Anthony, I think that probably the strongest segments we're seeing is in industrial maintenance coatings. Not any particular end user segment but in general the protective finishes for steel and concrete have been very strong.

Okay. Great. Thanks, guys.

Thank you. The next question is from Eric Bosshard with Cleveland Research Company. Please state your question.

Good morning.

Good morning, Eric.

Two questions. First of all, from a bigger picture perspective, when you came into the year you talked about relative to the beginning of the year you're going to end up earning $0.10 or $0.15 more on sales $0.04 or $0.05 cents lower than what you planned coming into the year. Can you just explain how you're making more money with weaker sales?

Yes, Eric. I think part of the process processes we go through here with the management teams are to react to the markets we face. If you look at our SG&A expense particularly we're really proud of the job our team has done to get that in line to see a lot of this slowing come ahead of time and pulled in. And the margin performance has also been strong for the company. Within the gross margin performance, which you've done a good job on all year, is there anything you highlight you've been able to accomplish within that year to create that upside? Well, the two inputs to gross margin, both played a role here. First, pricing, and our ability through our controlled distribution platform to get the necessary pricing over time has been indicated. Over the last several years I think our team did a nice job there this year. The raw material cost we think for the industry is going to be up again this year, year over year. We would comment on our team's job in managing through that as best as possible. So on both sides of that, we've been able to make some progress this year.

Second question on the raw material issue. Clearly what we've seen in oil in the last 30 or 60 days, the world is changing. Can you comment about what your expectation is in terms of the industry's raw material cost growth this year and sort of how you're thinking about positioning the business in light of that as we move towards 2008?

Yes. I think the raw material input for calendar '07 and the third quarter we saw continued to go up probably another 1 to 2% for the industry. And I think we're moving our guidance up a little bit. We had talked about it being in the low single digits, maybe flat to up 2, 3%. It's our opinion now that the industry would see around 2% to 4% raw material cost increase for this calendar year. '08, it's a little early for us yet, Eric, to give guidance. We're pulling all those numbers together and we'll be happy to comment on that on our first quarter call.

And then just last, you commented earlier about commercial. Can you talk about the momentum of the business, September, October. You indicated a commercial may be a little slower. But are you seeing things get better, get worse, stay the same? Can you give us a little sense on it?

Guidance given for the quarter in the sales of the mid single digit range, which will be slightly better than what we've been able to do this year. It's been built pretty much the way that our years come together, stars group performing in the mid single digits, global a little bit higher and our consumer segment flatish. The role that the commercial and industrial accounts are playing in that store's business particularly have been consistent. So I would say there's really no significant change in the direction of what we're seeing from our revenue.

That's great. Thank you.

The next question is from Chuck Cerankosky with FTN Midwest Securities. Please state your question. I'm sorry, the question is from Peter Thompson.

with Coho Partners. Please state your question. I'm sorry; I just had one quick one, Chris, if possible. Can you say how much you spent on the $5.5 million shares you bought?

Sure, Sean has that for you..

Average was $67. We spent approximately $360 million.

Can I just ask you one strategic question on the Global Group, can you comment on where you're thinking that's going over like three to five years?

Yes, I think the Global Group will continue to be a strong driver for us. We have given guidance that we expect it to grow at a high single digit, low double digit over the foreseeable timeframe that you're referencing. As you know, our strongest presence is in Latin America, and we've continued to add to that position with some of these smaller acquisitions we've commented on. And the company has shown an appetite, to perhaps expand in some more of the growth markets with recent activities in China and India.

Is auto still being a good market?

Our automotive business continues to focus on the after-market and they are a significant part of that global group. They represent about a third of those segments, revenue and profits.

Great. Thanks so much.

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

Good afternoon or good morning, everyone. Chris, one for you, before one for Sean, looking at trends they seem to be better in the stores in the quarter than the consumer group. Any particular reason for that?

Not particularly. Our retailing partners from our consumer group pretty much across the board were feeling some weakness out the door. I think that's been borne out by their comments and calls and releases. Our store's business continues to focus on the high-end DIY customer, and we are able to make some marginal improvements there.

So it sounds like it might be a consumer segmentation here, quality versus price. Yes.

I don't know that I'd go that far. These are particularly from our store standpoint, it's not a big segment of what happens there. We just had a good quarter.

Okay. Sean, if we're looking at the 2 cents that acquisitions cost earnings in the third quarter, how would you break that down? Is that operating losses or financing costs offsetting profits from the acquired companies?

I would say 100% operating. As we've come through, we haven't completed our synergies. Some of the expenses we've had during the integration, but I would say it's 100% operations.

When do you think that will flip into the positive?

I think second quarter, probably around second quarter of next year.

So it will be more or less a slight drag until then?

Yes.

All right. Thank you, great quarter.

Thanks, Chuck.

Thank you. The next question is from Jeff Zekauskas with JP Morgan.

Hi, good morning.

Morning, Jeff.

This quarter your sales grew about 30.8% and you're talking about 5 % to 6% sales growth in the fourth quarter. Where is the acceleration coming? Where is the extra 2 % points of growth coming from and why?

I think as we commented at the beginning of the year, Jeff, we knew if the year went on we'd have a little bit easier comparable. That's playing somewhat of a role here given the fourth quarter we had last year. Beyond that, I think that the strength that we've seen in the -- particularly the Paint Stores Group and Global Group continues to give us confidence that we're going to get these numbers.

How much was your gallonage up this quarter or for the year excluding acquisitions?

For the store's group, which is the best place for us to comment on gallons, we were negative low single digits in the quarter on gallons. That's been fairly consistent for the year. Consumer, with negative sales would have been a little bit more backwards in gallon performance in Global Group at a mid single digit gallon volume improvement.

As first Rhode Island goes, so if it turns out that Rhode Island determines Sherwin-Williams' share of abatement cost is, I don't know, $800 million, are we going to see an $800 million cash outflow at a point in time? Or is that not the way to look at it?

That's way too early to make an assumption regarding look at it?

I mean, assuming that that were the number, is that the way it would affect Sherwin-Williams' funds flow statement that way or would it not?

Well, the other issue that's unknown to us at this time, Jeff, is what is the timing mechanism of what an abatement order might look like in the future. So if that were spread over a ten-year period or a five-year period, if other parties were brought into it. I just think it's way too speculative at this point to comment on that.

You know, lastly in terms of raw materials, you spoke about the industry being up 2% to 4%. It looked like TIO 2 prices were down, acrylics were probably down in the first half as well. Do you think raw materials are not really moving up that fast? Or how do you get 2 % to 4% increase?

Jeff, maybe you would like to accept the position as our Chief Raw Materials Procurement Agent, if you see a price like that. That's terrific. There's a lot of different components that go into the basket of raws. We've seen a lot of pressure on the oil derivatives, packaging costs, demand for natural gas and energy components, wherever that factors through has created some input. So all in, this is the trend we've been seeing all year. As we've gone into the fourth quarter with oil up over into the mid and high 80s and bumping against 90, this is what we think is going to happen.

Thank you very much.

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

Good morning, guys. Good morning, Saul. A lot of companies are complaining about distribution costs and high fuel costs. How big a deal is that as you ship this heavy material all over the country?

Well, Saul, a couple of things. It has negatively affected us and it has increased our cost of goods sold. We've put it through and you can see what happened to our margin. Also, the last couple of years we've hedged our gasoline purchases for our fleet. And those hedges have really helped us in the last -- in the first three quarters of this year.

Is this going to be a problem going forward as your hedges roll over?

No, because we've layered them. We have layers and we have some that go out timing wise very well for us.

Okay, great. How much did you spend for acquisitions in the third quarter?

We spent $99 million in the third quarter, makes us $248 million year-to-date.

How do these businesses lose money. You know, I mean, when you don't have to amortize any goodwill, you must have paid some enormous multiple of IBIDA for them to be diluted. I'm trying to figure out how you actually have dilution on an acquisition these days.

I think, Saul, when you sit there and take a look at taking care of the customer first, I think that both -- one of -- one major acquisition we did this year was, I'd say, tight on SG&A at the store level and taking care of it. Just with timing, putting in some SG&A and so forth. But in the long run, it will be creative in the first full year we have it.

Sean, I can't help but ask about the administrative cost line.

We'd be disappointed if you didn't.

Saul, I'll tell you right now, if you will take a look at it, if you take a look at the line for the quarter we're at $66 million versus $53, which is up about $53 million. Really, let me tell you three factors that caused that to be a little higher than last year. We had a $12.5 million environmental provision we took in the quarter. So that was in that. Our interest expense was up about $4.7 million. That's a little over $17 million. We also sold an asset. We sold the third jet that we have, and we had a $6 million gain. So when you put those three together, between the interest and the environmental and the jet, it's about $11 million hit.

You had another $5 million gain. Did you have an $11 million gain on assets.

Right. $5 million was in the store's operating segment of there was a piece of property from one of the acquisitions we've done a few years ago. So that other gain was in the store's operating segment.

Oh, that wasn't down in other income?

No, it wasn't?

It was in the stores. That side and the margin of the stores to some degree.

That helped the margin in the stores, yes.

Okay. And as we look to the fourth quarter, do we see administrative flattening out?

Yes, I think you're going to see flattening out year-to-date. When you take a look at the $31 million, I know last year-to-date, I told you about benefits costing $41 million and environmental and interest expense. For the full year we do see that flattening out --

For the fourth quarter, not the full year?

Yes, the fourth quarter.

Also last year in the fourth quarter you had only a 22% tax rate. You also had a $16 million legal expense settlement, which I assume won't reappear. But the tax rate, is this part of the reason even this year you are looking for 33% tax rate, last year a 22% tax rate. Is that an issue in the lower rate of earnings per share growth.

Yes. If you take a look at it for the full year and this quarter, as Bob mentioned, our tax rate was in the 31% versus 35%. In the first quarter it flipped the other way. For the full year we feel it will be marginally higher than last year. You're right, in the fourth quarter we're going to have to go over that 22% tax rate.

Was the $16 million legal expense that you had last year, was that fully taxed? I mean, you got a tax benefit or that and a half not fully but on the majority of it, yes.

Not fully, but on the majority of it, yes.

Okay. And I guess, Chris, you say in the stores relative down 6% of comp store sales, it was like down 2 .5% in volume, which would comply up 1.9% in price, something like that.

Directly that's close .

Thank you, guys.

Next is Gregg Goodnight with UBS.

I don't think the revenue impact at the acquisitions was part of the operating losses Sean was commenting on. Our expectations are that these stores will start to perform closer to our levels in every way. It takes you two to three years to get up around that run rate. How much of a gap is there now?

We wouldn't comment on that.

Okay. Next question. What's next on the M & A front? Is that going to be it for a while or do you have more things planned?

Of course we have more things planned. Time will tell whether we're successful with any of them.

So I shouldn't necessarily assume M & A is going to minimal and that cash would be used exclusively for share buyback, then?

I think you can expect us for the remainder of the year as well as into '08 and beyond to use cash consistent with the way we have been. When we can find creative acquisitions kind of in the size range we're doing, we're going to make them.

Okay. Thanks, guys.

Thanks.

The next question is from Tim [Isap] with Bear, Stearns. Please state your question.

Hi, good afternoon. Thanks for the call.

Hi, Tim.

Hi. I was wondering on the lawsuit or the trial in Wisconsin that you mentioned that will probably be finished by November, is that -- can you just give us a little bit more background on what the potential outcomes on that will be and sort of the down sides now? In other words, if you lost, is it a punitive damage situation? Is it a class action status? You know, what would you need to appeal?

Tim, I can't comment perspectively on what the damages might be. The suit is a personal injury lawsuit. It is a minor child who allegedly was affected by ingesting lead paint when he was a young child and Wisconsin has a somewhat unique interpretation by their Supreme Court pertaining to risk contribution theory of liability, which is why this suit was brought in Wisconsin. And it is a minor child who allegedly was affected by ingesting lead paint when he was a young child and Wisconsin has a somewhat unique interpretation by. It is a lone plaintiff, and a pretty straightforward suit in terms of personal injury complaint.

Are they alleging a certain amount or is it kind of just -- is there like a dollar amount they are putting on it at this point?

I don't believe there is. The plaintiff I have has already made a recovery against the property owner.

They are trying to go for more is what you're saying?

Yes.

Okay. Thank you very much. Congratulations on your quarter.

(OPERATOR INSTRUCTIONS) Next question is from Robert [Felice] with Gabelli & Company. Please state your question.

Hi, guys. Most of my questions have been answered just a couple of quick ones. First if I look at the operating midsoutherners for the first three quarters, really the highest level you see in probably the last five, six, seven years. So just a couple of questions around that. I guess firstly, how much of the improvement this year would you attribute to I guess operating efficiencies, cost controls versus pricing above and beyond raw material cost inflation?

I would tell you -- were you completed? I wanted to jump in there to answer, but hopefully you completed your question. When you sit there and take a look at our P&L, if you go right down to P&L, our margin is up 45% versus 44% year-to-date. The margin expansion we've had compared to last year is really first and foremost that margin. Secondly, as Chris mentioned earlier when Eric had that question, our SG&A is only up 0.4% . We've had two straight quarters with SG&A as percent of sales went down. When you think about the amount of new stores and acquisitions and so forth. So that's really goes back to your efficiencies. And I think that for this year, margin is probably 60%, the efficiency is 40%. If you look at the long-term and say, okay, let's look over to five, six, seven years, our gross margin, that 45 % year-to-date is back toward the high end of where we were four years ago. I'd say 90% of what the margin expansion has really been

So would you say that despite what could potentially be an uptake in raw materials heading to the fourth quarter and 2008, that you'd be able to at least sustain current margins? Also, as you look out over the next three or five years, what do you see as the ceiling for the margins?

Yes. I think if you look at the short-term, and if we were to have a raw material increase in calendar year '08, if we were able to maintain margins, our history, Robert, would indicate that perhaps for a quarter or two or longer, depending on the severity of the increase, we see margin pressure. But over a period of time we're able to get pricing in the market and recover those margins. And over a longer historical period, what we've done, as we've gone through each of these cycles, as we've come out of it, we've gotten back to our previous high watermark and then actually been able to make a little progress beyond that. Kind of the way we think about running the company as we go forward is we would expect over time, with operating efficiencies and continued hard work that we can keep driving these margins perhaps 10 to 20 basis points a year. There is no upward limit that we've ever established on what we can accomplish here.

Okay. So as I look to '08, perhaps some pressure, a little bit of pressure if raws tick up further. Hopefully you'll make that up as you go along.

To you and all the listeners, when we next get together on the fourth quarter and full year conference call, which will be in the first quarter of '08, we'll give you all that thinking in terms of what we expect to happen to raws and how we'll manage to get through that.

And I guess lastly, you've done a great job in the last three quarters controlling SG&A and bringing you down as a percent of sales. Is this sustainable? As we look forward, do you think you can maintain this level?

Yes. I think it's one of the hall marks of the Company. When you think about it, a significant portion of our SG&A resides in our store organization, with 3,200 stores. So the ability to manage that, to flex it when necessary, and, again, historically if you look back over periods, this has just been something the company has developed a habit and discipline in doing. So our expectations going forward is that we will be in that range. It may go backwards 10 to 20 basis points over a given period. Over time we expect to be in that period or slightly better.

Okay. Thanks for the help.

Thank you.

The next question is from Saul Ludwig with KeyBanc. Please state your question. Just a follow-up on this, the environmental costs which were so much in the third quarter. As we look to fourth quarter, I don't know, even internally how you guys budget that number, but you've got to think about it, I guess, and make a shot. Last year you had $6 million in environmental cost the in the fourth quarter.

The year before you had $12.5 million. How should we think about the fourth quarter recognizing that it may be a mushy number?

I think it will be lower than last year.

Okay. Okay. Thank you very much.

I'm sorry, there are no questions in queue. I'd like to turn it back over to management for closing comments.

Thank you, Joe. I will be available all afternoon to answer any follow-up questions you have. I look forward to taking your calls. And as always, we appreciate you joining us in this morning's call and thank you for your interest in Sherwin-Williams.

Ladies and gentlemen, this concludes today's teleconference.