宣偉 (SHW) 2007 Q4 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of Fourth Quarter and Full Year 2007 results and expectations for 2008. 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 Corporate Controller and Bob Wells, Vice President Corporate Communications.

This conference call is being webcast simultaneously in listen-only mode by Vcall via the internet at www.sherwin.con. An archived replay of this webcast will be available at www.sherwin.con beginning approximately two hours after this conference call ends and will be available until Friday February 15th, 2008 at 5:00 p.m. eastern.

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 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 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 and 2008 expectations, we will open the session to questions.

I will now turn the conference over to Bob Wells.

Thanks, Diego. Good morning everybody.

In order to allow more time for questions, we have provided balance sheet items 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 2007, consolidated sales for the fourth quarter were up 3.3% to $1.85 billion. For the full year, sales grew $195.5 million or 2.5% to $8.01 billion due to strong sales by our global group and acquisitions. Acquisitions completed during the year increased consolidated net sales $52.5 million or 2.9% in the quarter and $110.6 million or 1.4% in the year. Favorable currency translation rates increased consolidated net sales $23.0 million or 1.3% in the fourth quarter and $53.7 million or 7/10 of a percent in the year. Consolidated gross margin in the fourth quarter increased to 44.9% of sales from 43.0% in the fourth quarter of 2006.

For the year, gross margin increased to 44.9% of sales compared to 43.7% in 2006. Gross margin in the quarter and the year benefitted from higher selling prices, mix improvement, stabilizing raw material costs and improved operating efficiencies. Selling, general and administrative expense decreased as a percent of sales in the fourth quarter to 34.7% from 34.8% in the same quarter last year.

For the full year 2007, SG&A expense increased to 32.4% of sales from 32.2% in 2006. Tight expense management across all operating divisions could not fully offset. An increase in SG&A from acquisitions and the effect of a slow down in sales growth on SG&A percentage for the year.

In the fourth quarter, the company took a goodwill impairment charge of $15.2 million or approximately $0.08 per share in anticipation of reduction in performance of certain foreign and domestic acquisitions. Interest expense for the quarter increased by $2.7 million to $19.2 million due to an increase in short-term borrowings. Interest and net investment income declined by $35.3 million in the quarter.

For the year, interest expense increased $4.5 million and interest and net investment income decreased $10.5 million. The decline in interest and net investment income in the quarter and the year reflect our use of cash and short-term investments to continue to invest in our business. Our effective income tax rate for the fourth quarter 2007 increased to 33.7% from 22% in the fourth quarter of 2006. For the year, our effective tax rate was 32.6% compared to 31% in 2006. Consolidated net income for the quarter increased by $2.1 million or 2.2% to $100.8 million from $98.7 million in the fourth quarter of 2006.

For the year, net income increased $39.5 million or 6.9%. Net income as a percent of sales decreased to 5.4% in the fourth quarter this year from 5.5% in the fourth quarter last year. This decline was due to the year-over-year increase in our fourth quarter income tax rate.

For the year, net income as a percent of sales increased to 7.7% in 2007 from 7.4% in 2006. Diluted net income per common share for the fourth quarter 2007 was $0.80 per share including $0.08 per share impairment charge. Compared to $0.73 per share in fourth quarter 2006.

For the full year, diluted net income per common share increased 12.2% to $4.70 per share from $4.19 per share in 2006. Breaking down our performance by segment. Sales for our paint stores group in fourth quarter 2007 increased 2.3% to $1.14 billion. For the year, net sales increased 2.3% to $4.96 billion.

Increased paint sales to commercial contractors and improved industrial maintenance product sales in the quarter and the year were more than offset by soft architectural paint sales to new residential painting contractors, and DIY customers and weak sales in non-paint categories. The acquisition of M.A. Bruder and Columbia paint increased net sales for the group 3.7% in the quarter and 1.9% for the year. Comparable store sales decreased 2.5% in the quarter and 1.1% for the year.

Regionally in the fourth quarter, midwest division led all divisions followed by southwest division and eastern division. Now, southeastern division finished in fourth place. Three of the four paint stores divisions grew their business before acquisitions in the fourth quarter and the full year. Segment operating profit for the paint stores group decreased 3.2% to $157.6 million in the fourth quarter and increased 6.5% to $766.5 million for the year. The timing of the acquisitions reduced segment operating profit by 7.4% in the quarter and 2.2% for the year. Segment operating profit margin for the fourth quarter decreased to 13.8% from 14.6% last year due to the acquisitions. Profit margin for the full year 2007 improved to 15.5% from 14.9% in 2006. Margin improvements for the year were due primarily to effective SG&A expense control and higher selling prices that more than offset the drag from acquisitions.

Turning now to the consumer group. External net sales in the customer group decreased $14 million or 5% to $264.3 million for the fourth quarter and $52.6 million or 3.9% to $1.31 billion for the year compared to the same period last year. The sales declines were due primarily to sluggish do-it-yourself demand. Segment operating profit for the fourth quarter, including a good will impairment charge of $4.2 million increased $400,000 or 1.8% to $21.3 million. Segment operating profit for the year rose $9.9 million or 4.6% to $224.2 million. As a percent of net sales, consumer groups operating profit increased to 8.1% from 7.5% for the quarter and 17.1% from 15.7% for the year.

For our Global Group, net sales in the fourth quarter increased $47.9 million or 11.9% to $449.8 million. Sales for the year increased $138 million or 8.7% to $1.73 billion. Sales in local currency grew by 6.1% in the quarter and 5.3% in the year due primarily to volume growth, selling price increases and acquisitions. Global Group segment operating profit in the fourth quarter increased $7.2 million or 34.1% to $28.4 million. Segment operating profit for the full year increased $30 million or 23.2% to $160.7 million. Stated in local currency, segment profit increased 20.5% and 18.5% for the fourth quarter and full year respectively. Global Group profit for the quarter and year were negatively impacted by a fourth quarter pretax charge of $11 million for goodwill impairment.

For the quarter and the year, global segment operating profit benefitted from strong sales increases, improved operating efficiencies and expense control that were partially offset by acquisitions.

I'd now like to comment briefly on our balance sheet items. You'll find more balance sheet information on our website under www.sherwin.com/investor relations/press releases. Our total debt on December 31, 2007 was $965.4 million including short-term borrowings of $657.1 million. Total debt as a percentage of total capitalization increased to 35.4% in 2007 from 30.6% at the end of 2006. Our cash balance at year-end 2007 was $27.3 million compared to $469.4 million in 2006. Our working capital ratio defined as accounts receivable, plus inventories, less accounts payable to sales, increased to 12.7% in 2007 from 11.7% in 2006. This increase reflects the partial year impact of the timing of acquisitions completed during the year, plus the affect of foreign currency translation.

Going forward, we expect working capital to decline as a percent of sales as we more fully integrate the acquired businesses. Capital expenditures were $48.7 million in the fourth quarter and $165.9 million for the year compared to $209.9 million in 2006. Depreciation expense was $38 million in the quarter and $139 million for the year. And amortization expense was $7.2 million in the quarter and $24.5 million for the year.

In 2008, we anticipate capital expenditures for the year will be in the range of 175 to $200 million. Depreciation will be about $145 million and amortization will be about $27 million.

I'll conclude this review with a brief update on the status of our led litigation. In our appeal before the Rhode Island Supreme Court, a schedule of proceedings has been set by the court. Opening briefs are due at the end of January, response briefs are due in March and reply briefs are due in April. Oral arguments are scheduled to be held in mid-May. In the ongoing abatement proceedings in Superior Court, the judge appointed two co-examiners, formerly referred to as Special Masters, to assist the court in evaluating issues related to the abatement process. Their powers and responsibilities were outlined in an order of the court in June 2007.

In Ohio, opponents of Senate Bill 117, a bill that clarifies Ohio's product liability law, failed to gather the signatures needed to put a recall referendum on the 2008 ballot. On December 12, 2007, the Lucas county court of common pleas, granted the defendant's motion to dismiss the suit brought by the city of Toledo. In its ruling, the court stated that the plaintiff must establish a causal connection between the defendant's actions and the plaintiff's injuries. And that public nuisance actions brought in Ohio were intended to be aggregated by the Ohio product liability act. The city of Toledo has not appealed this decision. Of the 11 municipal public nuisance suits filed in Ohio since late 2006, all but one has been dismissed or voluntarily withdrawn. The sole remaining case is the city of Columbus suit joined by the Ohio Attorney General. A motion to dismiss is pending before the court in this suit.

In Wisconsin, the trial of the Thomas case, a single plaintiff suit brought on behalf of a minor child ended in November with a unanimous jury verdict for the defendant. Importantly, the jury found that although Steven Thomas did have elevated blood lead levels as a child, he was not harmed as a result.

In California, plaintiffs have appealed the Santa Clara county superior court ruling that government plaintiffs cannot enter into contingency fee arrangements with outside lawyers to prosecute public nuisance lawsuits. In January of this year, oral arguments were made before the Court of Appeals.

That concludes my review of our results for fourth quarter and full year 2007. So, I'll turn the call over to Chris Connor who will make some general comments and highlight our expectations for 2008. Chris?

Thanks, Bob, and good morning everybody. Thank you for joining us today. Market conditions for paint and coatings in North America were very challenging in 2007.

New residential construction was down in the high 20% range for the year. Existing home turnover decline nearly 20%. Consumer spending slow dramatically. Credit markets contracted, manufacturing activity turned negative. Consumer confidence sagged and GBP growth stalled. In short, it was exactly the kind of year that we anticipated 12 months ago.

We entered 2007 prepared for the inevitable slow down in end market demand and as a result of this preparation, Sherwin-Williams turned in what I would describe as a solid performance last year. Consolidated net sales grew a modest 2.5% to just over $8 billion in sales. Consolidated net income increased almost 7% and earnings per share increased more than 12% to a record $4.70 per share. All three of our operating segments improved earnings, inoperating margin for the year and we managed expense as well across the entire company. Sales, net income and earnings per share are all important indicators of our 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 put the strength of our results last year in perspective. For example, earnings before interest taxes, depreciation and amortization increase by more than $100 million or 10% to $1.15 billion in 2007. This increase is a reflection of our success in generating strong cash earnings leverage on a modest sales improvement for the year. As a result of our operating profit performance, net operating cash for the year increased to $874 million well over 10% of sales from $816 million in 2006. During the year, we used this cash to continue to invest the company's cash to create value for our shareholders. For example, in 2007, we invested over $280 million to complete seven acquisitions.

These acquisitions further increased our paint store penetration in North America adding 172 M.A. Bruder and Columbia paint locations to our Paint Stores Group. Our global segments strengthened it's automotive finishes, architectural and industrial [inaudible] portfolio in Mexico and Latin America and we gained access to the high growth Indian market for the first time last year. We also continue to invest in organic growth. In 2007, our Paint Stores Group opened 107 net new stores.

At year-end the combination of acquisitions and organic store openings boosted our store count to 3,325 stores in the U.S. and Canada compared to 3,046 stores at the end of 2006. This year, we will continue to pursue our goal of 2 to 3% organic growth in store count opening in the range of 100 plus net new stores again.

We're equally committed to returning a portion of the cash we generate to shareholders through treasury stock repurchases and cash dividends. In the fourth quarter 2007, the company took advantage of continued weakness in the housing sector that has suppressed our stock price.

We purchased 3 million shares of our comon stock and the open market during the quarter bringing the total shares purchase in 2007 to $13.2 million. A record level for our company. We closed 2007 with remaining board authorization to purchase 27 million shares. This strong opportunistic buying reflects management's confidence for the company's underlying value and significant earnings power remains intact. 2007 also marked our 29th consecutive year of dividend increases, a string we intend to continue. At our next meeting at the Board of Directors, I'll be recommending a continuation of our policy of paying out approximately 30% of prior year's earnings per share in the form of a cash dividend in 2008.

This would result in a quarterly dividend of 35 cents per share or $1.40 for the year, an increase of 11.1% over the $1.26 per share we paid out in 2007. Looking ahead to 2008, we expect market conditions in North America to remain difficult.

Particularly in the first half of the year. In spite of this fact, we are confident that we'll sustain our strong operating momentum and earnings leverage. We anticipate that first quarter consolidated net sales will increase in percentage terms in the low to mid-single digits versus the first quarter of 2007. With sales to that level, we estimate diluted net income per common share in the first quarter will be in the range of $0.72 to $0.80 per share, compared to $0.83 per share, earned in the first quarter 2007. For the full year 2008, we expect net sales also increase in the lower to mid single digit over 2007. With annual sales to that level, we asked to meet diluted net income for common share for 2008, will be in the range of $5 to $5.15 per share compared to current analyst consensus of $5.03 in 2008 and $4.70 per share earned in 2007.

One final note on January 22nd, Fortune Magazine, once again named Sherwin-Williams to their list of America's 100 best companies to work for. To us, this is more than a popularity contest. Our continued growth depends on our ability to attract and retain the best and brightest talent in our industry. Being named to this prestigious list carries significant weight with perspective employees and affirms that our current employees recognize the quality work environment we have all worked so hard to create. We sincerely appreciate the hard work and dedication our employees put in to achieving another record year in 2007. And with that, we'd be happy to take your questions.

Thank you, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). Our first question comes from Chuck Cerankosky with FTN Midwest Research. Please state your question.

Good morning, everyone.

Hi, Chuck.

First question. Little bit of housekeeping. Just want to make sure I understand something in the release. It said the Paint Stores segment saw a profit down 7.4% in the quarter is the result of acquisition. Should wind up, simply apply a 7.4% to the $163 million in the Paint Stores segment profit in '06 fourth quarter?

Hang on, Chuck. Just looking for that line.

It's on, at least on my release, page 2, second line.

7.4. Okay, I see it. Okay. Paint Stores Group segment increased 6.5% in the year and decreased 3.2% in the quarter. The time of acquisitions caused the segment to be negatively impacted 2.2% in the year and 7.4% in the quarter. Yes, the way you read it was correct.

All right, thank you. If you're looking at 2007, Chris, how do you expect acquisitions to impact profitability?

2007 or 8, Chuck?

2008, sorry.

Hey, do you want to take that [inaudible]?

In 2008, we basically believe that the acquisitions that were completed in '07 will be flat to down slightly for the year. So, zero to $0.02 for the year.

Is that, is that the economy or is that anticipated at the time of act position -- acquisition?

I would say timing and when you look at the market in North America, the timing of the acquisitions and the cycle of North America.

Got you. All right, for the bigger picture, I'm thinking about your guidance for 2008 sales, Chris, how would you sort of allocate that sales growth between price volume and contribution from existing acquisitions?

I think as we kind of look at next year's sales, I'll break it down in a couple ways for you and the rest of the listeners. By segment, we expect that our stores group for the year is going to be up in the lower to mid-single digits. We expect our Consumer Group to be flat up slightly this year. And the Global Group to continue to be our strongest performer up in the mid-to high single digit range. In terms of price and mix and acquisition, I think all three of those are going to play a role and it'd all be about the same percentage.

Okay. And then to look at it, yet another way, how would you break down sales between market growth and sure [inaudible] just taking market share?

Zero from market gross. It'll all come from share.

All right. Got you. Sean back to you on the tax rate. When I'm looking at impairment charges, what tax rate should I apply to them for all of '07 and for the quarter as well?

Yes. For all of '07, the impairment, because it occurred totally in the quarter, I would use 35%.

35%.

Right.

And what would you offer as guidance for the tax rate in '08?

What we see as, Chuck, we've gone from 31 in 2006 to 32.6. We think we'll be up slightly from that 32.6 in 2008. And as you probably also noticed, we had some wild swings in '06, less in '07, but we believe next the year '08 will be fairly stable for [inaudible] quarters.

All right. And one last thing, here in Ohio, in the South Park Mall in Strongsville, you had a kiosk set up in there. I was wondering what's sure, for sure [inaudible] product? What was that designed to do and is there more of that going on in the U.S.?

Chuck, you need to stay out of the malls.

[LAUGHTER] It's winter time here, Chris.

As we would do from time to time across our footprint testing different types of marketing concept, that was a concept to test implementation of a color program in that mall. It was only up during the holiday season.

Okay, and obviously DIY-oriented?

Correct.

Thank you.

Thank you. Our next question comes from Saul Ludwig with KeyBanc.

Good morning, guys.

Good morning, Saul.

Well Sean, I always complain about high administrative costs and this quarter it really tumbled down. What is it that gave you the big drop off in the admin expense?

Well, actually, I hope you remember, Saul, you've asked this question a couple of quarters ago and we sort of said that we had some tiny changes. And really did, we have forecasted the full year to be up by inflation. I hope you remember that.

Right.

We ended the year right around 238 versus 230 last year, but it really comes back to , in the first three quarters we had some compensation and other benefits that we were expensing in the first three quarters, that went through the P&L in the fourth quarter of last year. So now you're seeing the flipside of that. When you look at the total year, then you'll see a better

Will 208 be a similar pattern to this year than 2007?

We believe that the pattern will be the same, but interest expense will be a little higher next year so we expect it to be up just slightly more than inflation to next year.

And why did you get a tax credit on writing off goodwill?

I don't know how to answer that Saul. I'll have to get back to you. It depends objection -- on, I just remember, we have different subs, I'll have to look into that and get back to you.

All right, Chris, looking at the, in the way you posture earnings for 2008 with the weak start, what is it that you expect in the economic environment in the back end of the year to be much better than the first part of the year? What's built into your assumptions from an economic standpoint that supports the strong second half versus the weak first half?

Really nothing, Saul. And if you think about it, the kind of guidance we're giving for the year is that the company will be up in the low to mid-single for the year. That's the same quidance we're giving for the first quarter. So, we're not expecting any kind of economic change in the second half that will elevate revenue and bring us forward. I think what you're seeing in the first half is the impact of the market environment that we're facing. New residential construction is being hardest hit in the southern markets and those have typically been the markets that have carried us through the first quarter.

Additionally, the recent store acquisitions we've made tend to be in the northern half of the United States. Like we used to operate, we didn't make money in the first quarter with our stores. These are not operating at our full operating profit margins yet. They will be overtime. So the combination of those two things are negatively impacting our first quarter, but we still expect the kind of earnings leverage that we can get off this store's business through the second and third to bring the year into the numbers that we've given guidance on.

And in your guidance, what did you do with regard to pricing? Usually in January, you put in a price increase through your system, what was the magnitude of the price increase and what do you expect, I'd say, unit from raw material costs to be in '08? Sure, as always, we are prepared at this call to give guidance on that. Let me start with what we expect the raw material cost increase to be for the industry as we have always done at this time. We're, right now, looking at an industry increase of somewhere in the 3 to 6% range. It's a little wider than we've typically given, but I think it reflects the continued uncertainty that we're seeing out there. There are a number of other major global chemical companies who have, on these same calls, been talking to me about significant pricing increases they'd like to get through the industry. All that work is still ongoing, we think that when all is said and done, we will be in the 3 to 6% range on a cost basis. Sherwin has taken appropriate pricing action as we typically do and announced pretty much across all of our segments in the month of December, in the range of price increases that we went out with, would be from a low of 3.5% to a high of 6.5%, again, depending on the particularly business segment that we're operating in and individual product lines within side of those segments. 3 to 6 on costs, 3.5 to 6.5 on selling price and with that we should be able to get through the year.

Saul, with given that level of pricing, you're not counting it very much on volume. So volume is going to be flat to down, actually, to get to the sales numbers that you've projected.

We've just come through a year where industry volumes in architectural were done in high single digits. We outperformed that with a low single digit value decline and we're not forecasting much in [inaudible] the market conditions for next year.

Finally, what is the share count that you have baked into your earnings per share guidance assumption?

When you take a look at the fourth quarter, I think the fourth quarter was right around 127, we've got it slightly below that, Saul.

Okay, great, thank you very much, guys.

Thank you. Our next question comes from Jeff Zekauskas with JP Morgan Chase. Please state your question.

Hi. Good morning.

Hi, Jeff.

In terms of the demand for the DIY market and the, I guess the professional contractor, how would you compare the demand characteristics for 2008 from those two groups?

We don't know exactly what it'll be like in 2008, but if it follows the trend in 2007, what we've seen, Jeff, is that the demand in the DIY side has been negative and the demand for professional painting contractors that are focused on the new residential construction market has been negative. With that exception, the other demand that we have seen for painting contractors on all the other segments, residential repaint, property management, commercial painting and industrial maintenance coatings paintings have all been positive. We'd expect that same trend to continue in '08.

What is your outlook for industrial maintenance coatings, relatively positive for '08?

Yes.

And you talked about, I think in answer to Saul's question, possibly passing through price increases of 3.5 to 6.5%, in an environment where the volume characteristics are not strong, do you think that will be a big challenge, Chris, or why is it that you might be able to achieve those increases?

Jeff, it's always a challenge to implement price increases and pass them on. We don't like to do them, and our customers don't like to get them, but the reality of the market is that's the cost environment that we're operating in. Of note, from our analysis, the vast majority, if not all of our competitors have taken very similar pricing actions through the fourth and first quarter of last year and this year. We will have those discussions with our customers throughout the first quarter as we've commented in the past, it takes us a period of time to implement price increases as we honor particular jobs the contractors are still working on. So we'll have a better feel as the year goes on how affective we'll be. Past practices and history are any measure, we would expect to get better than 50% implementation of those prices.

Okay. Thank you very much.

Sure, Jeff.

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

Morning.

Morning, Eric.

Couple things. On the gross margin line, you did an impressive job in 2007, the [inaudible] looks more difficult that '08. What should we be thinking about in terms of the gross margin year over year in '08?

Eric, this is Sean. When we're looking at the gross margin, we're looking at it for the the full year forecast in a range, we think the range isn't going to be significantly off the 44.9 that we're able to achieve this year. We don't see it going up or down very significant from that point, but we're comfortable managing the company within a small range around that.

Is the difference this year, versus last year, the cost side of the equation that won't allow you to expand gross margins?

Absolutely, we have a much more cost aggressive environment that we're facing. A year ago, we thought the industry was going to be flat to up 1 to 2%, and this year we're right off the bat talking 3 to 6. It's a different environment we're facing this year.

Secondly, Chris, I think you kind of answered this, but I just want to be clear, I understand the sales guidance of 1Q earnings are guided effectively down, can you just, again, explain why that is?

Sure, I'll take another crack at this. If we just look at our stores segment, the line share of our company, the southern divisions and Bob takes you through that on the call, in terms of which parts of the stores group are performing the best, I think he made the comment that our southeastern division was the first performing of the four geographic segments in the stores division. Typically it's been the southeast division less than the southwest division. Is this where we have better weather, flatter sales curve throughout the year, and these are the parts of the country that are being impacted the most aggressively and particularly Florida which we talked about in this call in the past. We're not getting a lift from the southern portions of our store segment early in the year to carry the first quarter.

Adding to that, the two acquisitions that we made this past year are northern type acquisitions and again, they have a more traditional kind of profit curve where the second and third quarter, the quarters where they make most of their contributions. We added a significant number of stores that lost money in the first quarter. Those stores are suffering through the marketing environment, for that reason we guided the first quarter down, we expect all those things, as they typically do to catch up in the second quarter. That's why we have somewhere between an 8 and 10% guidance for the year earnings.

Next, in terms of the momentum of the business, relative to 90 days ago when we last had a call, have you seen any meaningful change and in what areas of your business?

I don't think we've always see much of a meaningful change at all. The home buliding market continue to [inaudible] in the fourth quarter. Commercial construction softened and existing home turnover really kind of fell off a cliff in the fourth quarter. So if anything, you know, some of those metrics worsened for us in the fourth quarter. But, when we look out over 2008 and try to make our best estimate of how those things are going to impact us, I think we've given appropriate guidance in the low to mid-single digit sales growth and I believe we can deliver that.

And the two last questions, you bought 13 million shares in '07, you think you'll buy 13 million in 08?

No.

Why?

If you look at net debt last year, was right around $200 million, we had the cash on the balance sheet, our net debt is around $950 million this year, if you take a look at what we've said, our net debt will be around 80 basis, 80 to 85 declined basis points to our EBITDA for the short-term, so that gives us a little less cash this year to work with than it did last year. That's why I don't think we'll hit 13 million.

But you expect you'll still be active?

Yes. If you look historically, our track record, a much more normalized run rate here has been 6 to 8 million shares. This was an opportunistic year for us given the pricing particularly in the second half, other expectations is stock's going to come back up.

Right. If you remember in '06, we did buy only 5, a little over 5 million. So, the 5 plus the 13 we [inaudible] about 9. and the prior years were around 8.

And now my last question, can you talk about what acquired businesses require the goodwill impairment charge and if there are any lessons learned from that experience?

I think there's always lessons. I think we learn lessons from every acquisition, but what we've decided to do is we have no problems telling you which segments they're in, but we really do not, we're not going to specifically comment on this [inaudible] goodwill from which acquisition.

On an ongoing business, 142 requires us to look at the goodwill on our balance sheet on an annual basis and as the value of those assets change, an impairment curves, so in the future it's hard to forecast, but when things occur in the marketplace and the value of that good will changes, we're going to take impairments. So it's hard to forecast, but we're not going say which, we're not going to identify the acquisition. You know, I think Eric, the FAS 142 ruling here that's applied the cause of this is a much shorter term look than it has been historically. While these acquisitions are suffering still remain very strategic, appropriate, we are bullish on them. In many regards they continue to meet pro forma on what expectations were, they just can't meet the hurdle for stricter FAS ruling. We've taken the impairments and will continue to do so going forward as I mentioned.

Perfect, thank you very much.

Thank you. Our next question comes from PJ Juvekar with Citigroup. Please state your question.

Yes, hi, good morning.

Morning.

Can you talk about which area, can you try to quantify the amount of these cost reductions in '08?

I'm sorry, Cost reductions in '08?

Yes.

Yes, I think basically when we if talk about cost reductions, it's a generic comment, PJ. just looking for consistencies in manufacturing operations, supply chain, managing the SG&A at our stores slightly better, none of the expectations or guidance we've given for '08 are built on any significant cost reductions in the business.

Okay, and Chris, you talked about commercial constrictions lowering in your comments. Can you elaborate on that and just tell us how much slow down you're seeing on the commercial side?

Yes, PJ. We take a look at a number of industry documents and reports that comment on commercial construction growth, we think that last year that commercial construction growth was somewhere between the mid to upper single digits in terms of construction put in place. In looking forward, this same organization would indicate that new commercial growth this year will be in the low to mid single digit as opposed to the mid to upper. Slightly lower than last year's performance.

Okay, and then if I look at Sherwin-Williams, it's still a very U.S.-centric company, can you talk about outlook for M&A outside the U.S.? Thank you.

Sure, we have consistently shared with you that revenue mix is domestic to outside the United States. This past year, four of the seven acquisitions that we made were outside of North America. We continue to look in those markets for opportunities to add to shareholder value and I expect we'll continue to do that going forward. One thing we have been consistent about however is that we expect growth to come from all the markets we're in, including the United States. Certainly we're in a rough market environment as we said here today, but our continuing investment in new stores should give confidence that we see it the longer term opportunity to continue to grow share and revenue in North America. We will, from time to time, find opportunities outside North America and whether that volume mix changes inside our company or not is not necessarily a goal that we have. We're just interested in driving growth wherever we can find it and investing this money to get the appropriate returns.

Thank you.

Our next question comes from Robert Follis with Gabelli and Company. Please state your question.

Hi, guys. Most of my questions have been answered, just have a couple more. At the low end of your guidance and off of the adjusted $4.78 you earned in 2007, that imply EPS growth with down 4.5% and at high end about 7.5%. If I then adjust next year for the reduced share count, it really doesn't imply very much leverage from the top line growth to the EBIT line. You mentioned that you expect gross margins to be roughly stable looking to 2008 and I'm just kind of trying to parch through, what's going on. Does that mean you expect SG&A to be up quite a bit? I'm just hoping you can delve into why there's not more leverage to the bottom line?

I really didn't want to go down the whole P&L here. We don't usually do, that but when you take a look at SG&A, we had a fairly good year, but when you continue to go through for another year, we've got a couple things that are going on. We, in total we expect our SG&A as a percent of sales to go up with the sales increase, with the diminishing returns on savings that you can continue to get out of SG&A. I mentioned our debt is going to be higher this year, so our interest is going to be up. I understand the shares will be accretive, but the interests will be also, will be dilutive, so when you talk about the leverage on there, we've talked in the past of how much the sales had to increase for us to get leverage, our total, when you look at our total year sales, you have to realize there's acquisitions in there also, annualization acquisitions. That's why SG&A will go up probably as a percent of sales.

Okay, fair enough. Just looking at the pricing you mentioned earlier. 3.5% to 6.5%, you mentioned it'll probably get about half of that in throughout the year, which would suggest to me that maybe you'll get 2, 2.5% price. There should be pressure on gross margins, yet you expect them to be relatively flat. So maybe you can just parch through that and delve into where the offsetting factor could be?

Our raw material costs represent about 50% of average selling price in our industry for a gallon of paint. So we need an effective 3% selling price increase to offset a 6% cost increase. When you do the math and the numbers, you just reference, that brings you'd do about a flat margin.

Okay, that's very helpful. And I guess lastly, I was hoping you could delve into underlying assumptions around your values of $5 to $5.15. But that really implies the state of North America and the rest of the world. As you look out today relative to those underlying assumptions, what could cause things to come in better or worse than you expect?

I think the assumptions we're making in giving that guidance are widely recognized and known again to the earlier question regarding ourl dominance in North America and of course the ongoing impact of the housing market in this particular year, rising raw materials. So we have a number of bad ones that will be facing going into it. The obviously answer to what things could change that would impact this number would be if those markets were to come back quicker. We've long talked about existing home turnover market as being a better correlation than existing, or new home construction and this was a very tough year for that, I think. Some reports have commented it was the sharpest decline since the depression and worst housing market since that period of time . So were we to see existing home market sales and bounce off that bottom, that could have a positive impact on the company's performance. But I think it would be inappropriate and premature on this call to give that kind of guidance or expect that to

Okay, fair enough. Thank you.

Thanks, Rob.

Just a reminder, to ask a question, please press star 1. Our next question comes from Gregg Goodnight with UBS. Please state your question.

Good morning, all.

Good morning, Gregg.

Did I miss guidance for 2008?

No, but I'll give to you. If you take a look at our interest this year was up about $14 million from the prior year. When I talk about interest, I'm talking about interest expense plus income. So when you take a look at the next year, I believe it's going to be up slightly more than that.

Up an additional 14.

A little higher than that, yes.

Okay, next question, the, did you break down your expectations for '08? For the Paint Store in terms of same store sales growth versus overall revenue growth?

No, we did not. We'll comment looking backwards on comp store performance, but we have not [inaudible] looking forward. As you noted, last year, our comp stores were negative 1.1%.

Right. Do you think it will be, 2008 will be higher or lower than that number or...?

I think we're giving guidance that we're expecting markets and sales, all the pieces and parts to be similar to this year.

All right, next question if I could, this may be something also I missed, I understood the re-evaluation and charge you took was $11 million pretax and Global Group and $4 million in the Paint Store Group, is that correct?

Consider the $4 million was in our Consumer Group.

Consumer, okay. That's what I missed then. And in terms of generically, the global group, I guess you're not going to give us some guidance in terms of exactly why you had to take that revaluation?

I mean, we basically said that the goodwill that we have on our books when we did the 142 testing showed the value of the assets on our books were lower than what we originally, a year ago, so that difference goes through the P&L as an impairment, so we're just following 142, but the guidance we're not going to give is specifically to point out which of the acquisitions that the goodwill incurred that we bought it from.

Okay, that's all I had. Thanks, guys.

Thanks, Gregg.

Our next question comes from Steve O'Neill with Hilliard Lyons. Please state your question.

Good morning.

Good morning, Steve.

Just wonder if you could elaborate a little bit on the causes for the acquisition dilution and what steps you take this year, maybe next year to make these acquisitions accretive? Thank you.

Yes. I think when you take a look at the in general when we said that we're going to be flat to down slightly with the acquisitions, I think it goes back to something that Chris said.

These acquisitions are in a northern part of the country, so timing wise, and as we get this savings, if you think about going through different cycles and economic cycles, and when you're going through a tougher cycle that we are going right now, our sales are not as strong as the increases are not as strong as we originally thought. If you think about this four or five years ago doing an acquisition, the acquisitions we were able to do were accretive basically in the second quarter that we owned them.

This is just taking longer and we are still getting the savings. We've looked at the SG&A, we've looked at the systems, we've looked at the raw materials, we've looked at the manufacturing rationalization and the synergies, we feel pretty good about the synergies and so fourth. It's just that the sales have not been coming as strong, so the sales, the margins been increase has been good, just with the sales decreases. It just, they aren't as accretive as quick.

And I would comment and add to that, Steve, that when you look at the basket of acquisitions we made this year the two big ones were these two store acquisitions we've commented on and as Shawn said in the past, for us to get leverage on the earnings side, we really need to be running these comp stores somewhere in the 3% range, plus or minus a few points, and for the last question from Greg, we made the comment that comps were down last year 1.1, and these businesses are not significantly different, so it's been difficult for us to get that leverage.

Again, we make these acquisitions on a longer term basis. This is a business that we have great confidence in. These are good brands with excellent people and great customer relationships and it's just going to take a little bit longer from a market timing standpoint to get them to where they will be contributing at the level we expect them.

Thank you.

Our next question comes from Michael [Lowitz] with JL Advisers. Please state your question.

A couple questions. Have you noticed any difference since Axel bought Imperial and how Imperial's know the acquisition just closed so if you haven't yet would you anticipate any difference on the competitive landscape?

Michael, we've not seen any significant change in their strategy and I think it's too early or inappropriate for me to comment on what they might do.

Okay, and then maybe I missed it when you were doing the legal overview but is there anything still going on in Wisconsin to be aware of?

The two cases in Wisconsin have gone to trial. One with the City of Milwaukee case which was a public nuisance case and the other was the Steven Thomas case, a personal injury case, both were decided by a jury for the defendant. I don't know the status of any appeal in those cases off the top of my head. I understand that there may be additional personal injury plaintiffs but I don't believe any trial dates have been set for any of those cases.

Okay, and then before when you were talking about buyback and you were talking about how many shares you had averaged, just because the stock is down so much, I guess my question is, how much is the dollar amount, how much is left on the buyback right now and what's the dollar amount you've been averaging in terms of your by back?

When you take a look at the authorization we have from the Board of Directors we currently have 27 million shares left from the authorization of 30 million that they gave us in October.

Okay.

When you take a look at it, I can't comment for prior years but last year we averaged around $36 because we were buying throughout the year. Unfortuntely, we hit the blackout, that's when the stock really dropped, but so the average was right around $63 last year but I don't remember the prior years.

Okay. Just in regard to price increase. Could you just talk a little bit, how does that work in terms of implementing a price increase? Do you do it nationally everywhere at the same time? Is it rolled out regionally at different times? Could you just talk about how it actually goes into effect and over what time period until or while that it is put into effect?

All of our business segments as we commented announced pricing actions in the Fourth Quarter of the year.

All at the same time or throughout the Fourth Quarter?

No, not all at the same time. All during the month of December, all with different implementation rollout schedules.

Uh-huh.

And depending on whether this is a business that we sell-through our own Company owned stores or whether it's coatings that we sell-through other retailing partners, or whether it's products that we sell-through distributers that would then sell into those Markets, so all of those factors play a role and I think the guidance we've given is that as the year goes through, we will be implementing those and effectively gaining as much of that price increase as we can. I don't think we would comment specifically on which customers or business segments took which price increases in which month.

In terms of your own stores. You put the price increase in at all the same time?

Yes.

Throughout the country?

Yes.

And are you assuming, this wasn't clear to me, the December price increase, are you assuming that an additional '08 price increase on top of that in your own stores?

No. The price increase that was announced in December is the only pricing that we're talking about and that's what the we have planned in these numbers.

Okay, and in '07, was there only one price increase? How many price increases traditionally in the last couple years have you had? Is it just one per year?

Typically we go out with one price action a year. We have in periods of aggressive raw materials gone out twice. '07 was a period when we went out one-time and as we've committed we've announced just one for '08.

And was there, does your competitors follow you in December?

No. We don't comment on who is leading and who is following. I think the rational industry, people buying from the same raw material suppliers, we tended to go out for pricing when we need to regardless of whether we're following or leading.

Okay, thank you very much.

Thank you.

Our next question comes from Chuck Cerankosky with FTN Midwest Research.

Hi, again. Follow up, guys. In looking at the rough operating environment, how are you thinking about the acquisition market? Do you think it will be a better buying opportunity and are you trying to keep the Balance Sheet in shape for that relative to sounding like you have a lower appetite for stock repo this year?

Yeah, I think, Chuck, the environment is fairly close to what it was a year ago. I think that there possibly could be wider expectations between buyers and sellers this year versus last year, and our Balance Sheet, yes, we're trying to, we feel that our Balance Sheet is an asset that we can use and if the right acquisition comes up, we'll go for it and in lieu of that, with the cash generation that we'll have from in general from our operations. I don't see us paying down debt. If we do get an opportunity, we will buy stock in lieu of an acquisition, Chuck.

All right, and then on working capital last year, Sean, we did some quick calculations here and it looks like you used about $105 million net working capital. How much of that would you say is just higher raw material costs?

Actually, the biggest factor of that was acquisitions, Chuck. If you take a look --

That's right, okay.

If you take a look at inventory and receivables without acquisition, both numbers were down, the absolute numbers were down. The other factor was our payables were down, and so we put a new system in and we're working through a few things. That won't happen again next year but when you take a look at it, raw materials I would say had a very small effect on us and we were able to get the inventory dawn for the year without acquisition.

Thank you.

Our next question comes from Saul Ludwig with KeyBanc.

Just a quick one. How much did you spend in the Fourth Quarter for share buyback?

Saul, it was in the neighborhood dsh-- I don't have the exact number but I think the number was, we bought 3 million and the average selling purchase price was right around $60 so probably $180 million. Plus or minus by 5-10.

With the dilution from the acquisitions you said that it cost you, per Chuck's question or somebody's question before, $11 million which is about $.06 a share, and then you said that you anticipate --

In the storage room. [inaudible]

It would be neutral or maybe $.02 dilutive. Would that be an incremental up to $.02 dilution, meaning a negative swing of $.02 or would it mean $.02 rather than $.06 which would constitute a favorable swing of $.04? How should we interpret your commentary?

It's 4.

It's what?

Favorable is 4.

Oh, okay, so get less back?

Right, right, the absolute number is 0-$.02.

Got you. So that's part of your positive swing in your earnings that you're looking at this year versus last year?

Yes.

Okay, and then also, you commented that in your consumer business, your manufacturing team did a great job of holding down costs in an environment where they produced fewer gallons. Can they squeeze it some more or are you sort of at the end of the line with regard to manufacturing efficiencies?

You know, Saul, we're not looking for a repeat in the reduction of our variable costs next year. We think that, I mean they are going to continue to look, but we think that that's going to be really not much difference. You also have to remember that we had the new plant last year that Fernley plant can was really productive compared to the Oakwood plant that we closed but that helped us but I don't see the big increase this year.

Great, thank you.

But back to the other thing, Saul, I'll tell you they did a great job of getting the inventory down in the Fourth Quarter which will help us in 2008 because we didn't put that debit on our Balance Sheet.

Great. Good point, thank you.

Our next question comes from Greg Goodnight with UBS.

A question, in terms of your continuing to open 2-3% more Paint Stores which would be about 100 stores again this year, can you comment on doing that in the down market and the second question is will you get any cannibalization of your existing store sales through opening continued opening new Paint Stores?

Gregg, we have had a long history hereof taking a longer view of the store model and I think as we've shared with you and other investors that we see 4,000 stores being an appropriate target for us to shoot for. In doing Real Estate, as we've commented, the vast majority of these deals are leasehold situations and in a down market it's actually a great time to be out negotiating for rents and securing longer term rents, so we have stayed through cycles like this in the past, on task here with adding these stores. As you can imagine, the stores that we're going to be owning in the first half of this year were all negotiated and concluded last year, just as we're continuing to work this year on stores that will open in 2009, so this is a long term strategy that will stay the course. We have not commented on this call about cannibalization when we give our comp store numbers, we've always had to deal with the fact that we've opened this store count, that business does migrate from existing stores to our new stores, but those trend lines won't change dramatic dramatically they've been performing for the last decade.

Okay, thanks for that answer.

Thank you. Our final question comes from Joseph Salusky with Credit Suisse.

Good afternoon. Thanks for taking my call.

Hi, Joe.

I wanted to ask to clarify a number you mentioned earlier, that 3-6% decrease, is that your expectation for overall North American industry volumes for 2008?

The 3-6% number I recall giving on the call was about raw material cost increase for the industry. In terms of volume industry decrease in North America, we did comment that last year, the industry saw architecturally about an 8% volume decline. We have not given guidance on what we expect the industry to be backwards in volume for 2008.

Okay, and finally, with your historical price increases? Have you been able to get 100% or close to it of what you seek?

We've never received 100%. There's been times when we've been in the high 80's, close to 90 but typical is right around 80%.

Terrific. Well, thank you.

Thank you.

Thank you. I would now like to turn the floor back over to Mr. Wells.

Thanks, Diego. I'll close this morning by asking all to save the date of Tuesday, June 24th on your calendars. That's the day we will host our annual financial community presentation at our headquarters in Cleveland. The morning program will be followed by a reception and lunch where you'll have an opportunity to meet with our operating level Management and after lunch, we've scheduled a brief technology tour at our Breen Tech Center down the hill from our headquarters. Again, the date is Tuesday, June 24th. We'll be sending out invitations and related information in the weeks ahead. Thanks for joining us today and thank you as always for your continued interest in Sherwin Williams.