宣偉 (SHW) 2008 Q1 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of first quarter 2008 results and its expectations for the second quarter and full year. With us on today's call are Chris Connor, Chairman and CEO, Sean Hennessy, Senior VP Finance and CFO, John Ault, Vice President, Corporate Controller and Bob Wells, Vice President Corporate Communications. This conference call is be webcast simultaneously in listen-only mode via the internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com beginning approximately two hours after this conference call concludes and will be made available until Friday, May 9th, 2008 at 2:00 p.m. eastern.

This conference call will include certain forward-looking statements as defined under U.S. federal securities law with respect to sales, earnings and other matters. Any forward-looking statements 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 first quarter results we will open this session to questions.

I will now turn the call over to Bob Wells. Thank you. You may now again.

Thanks. In order to allow more time for questions we have provided balance sheet items and other selected information on our website at sherwin.com under "investor relations first quarter press release." Summarizing the Company's overall performance for first quarter 2008 versus first quarter 2007, consolidated net sales grew 1.5% to $1.78 billion due to strong sales by our global group and acquisitions that were partially offset by sales declines in the paint stores group and consumer group. Consolidated gross profit dollars decreased $10.9 million for the quarter to $780.5 million. Gross margin decreased 130 basis points to 43.8% of sales from 45.1% of sales in the first quarter last year. Selling, general and administrative expenses increased to 36.6% of sales in the first quarter this year from 35.2% last year. Interest expense net of interest and investment income increased $5.7 million compared to the first quarter last year. Consolidated profit before taxes in the quarter decreased $50.5 million or 30.9% compared to the last year's first quarter.

This year our tax rate in the first quarter was 31% compared to 31.6% in the first quarter of 2007. For the full year 2008 we expect our effective tax rate to be comparable to last year's rate of 32.6%. Consolidated net income decreased by $33.9 million to $77.9 million from $111.8 million in the first quarter of 2007. Net income as a percent of sales was 4.4%, down from 6.4% in the first quarter of last year. Diluted net income per common share for the quarter decreased $0.19 or 22.9% to $0.64 per share.

Looking at our results by operating segment, sales for our paint stores group in first quarter 2008 were down 1.9% at $1.03 billion. Comparable store sales, sales by stores opened more than 12 calendar months declined 6.5%. The decrease in sales for the segment was the result of weak demand for architectural paint and non-paint items in most end user segments, partially offset by improved industrial maintenance coating sales and two acquisitions completed during 2007. The acquisitions increased group net sales for the quarter by 3.2%. Regionally in the first quarter of 2008 our eastern division led the sales performance, followed by Midwestern division, southwestern division and southeastern division. Two of the four divisions achieved positive sales results in the quarter. Segment profit for the group decreased to 31.9% to $83.3 million in the first quarter 2008. Acquisitions reduced segment profit by 5.6% in the quarter. Segment margin decreased to 8.1% from 11.6% in the first quarter last year due primarily to higher product and freight costs and the negative impact of acquisitions.

In the consumer group for the first quarter 2008, sales decreased 4.8% to $286.9 million. The decline was due primarily to soft DIY demand at most of the segments retail customers. Segment profit for the consumer group decreased to 23.7% in the quarter to $42.8 million. Segment profit as a percent of external sales decreased to 14.9% from 18.6% in the same period last year due primarily to the timing and severity of raw material cost increases and lower volume throughput in our manufacturing and distribution operations. Turning to our global group for the first quarter '08, sales in U.S. dollars increased 14.8% to $461.9 million due primarily to increased volume, selling price increases, favorable currency translation and acquisitions. Sales in local currencies increased 7.9% in the quarter. Acquisitions increased the group's net sales by 3.7%. This sales increase reflects growth across all geographies outside the U.S. and all product lines.

Segment product for the global group -- I'm sorry, segment profit for the global group increased 21.7% to $43.1 million for the quarter. Profits stated in local currency improved 11.9%. This improvement was mostly attributable to increased sales, operating efficiencies related to increased volume and expense control. Acquisitions were slightly accretive to global group profit in the quarter.

I would now like to comment briefly on some of our balance sheet items. Our total debt on March 31st, 2008, was $1.35 billion, including total short term borrowings of $1.04 billion. Total debt on March 31st, 2007 was $1.03 billion. Our cash balance at the end of the quarter was $20.1 million compared to $299.8 million at the end of first quarter 2007. Total borrowings to capitalization were 45.4% at the end of the quarter versus 35.1% at the end of the first quarter 2007. Long-term debt to capitalization was 16% at the end of the first quarter this year compared to 13.8% last year. In the first quarter 2008, the Company purchased 4.1 million shares of its common stock in the open market. At March 31, 2008, the Company had remaining authorization to purchase 22.9 million shares of its common stock. We expect to continue from time to time our opportunistic purchases of the Company's stock for treasury since we continue to believe our stock is a good value.

In first quarter 2008 we spent $39.8 million on capital expenditures, depreciation expense was $35.8 million and amortization expense was $5.3 million. For full year 2008, capital expenditures will be less than $160 million. A significant share of the capital expenditures will go toward investing in new stores with continued spending to upgrade our manufacturing facilities and replace other equipment where necessary. Depreciation will be about $150 million versus $139 million in 2007, and amortization will be about $21.4 million versus $24.5 million in 2007.

I'll conclude my remarks with a brief update on the status of our lead pigment litigation. In our appeal of the Rhode Island lawsuit to the state Supreme Court, briefing has been completed and oral argument is scheduled for May 15th. These proceedings will be webcast. In the ongoing abatement proceedings in Rhode Island, the appointed coexaminers have begun interviewing individuals they believe may help them understand what is necessary to abate the nuisance found by the jury to exist in the state. So far, the interviews have been primarily of Rhode Island public health officials. It is expected that the entire process will take a number of months to complete. It is not tied to any deadline or timetable relating to the appeal.

In Ohio, the lone remaining municipal lawsuit is the suit brought by the City of Columbus. The Ohio attorney general's suit had been consolidated with the Columbus suit but was subsequently removed to federal court by the defendants. A federal judge will determine whether this lawsuit will be heard in federal court. In Wisconsin, the Thomas case, a personal injury case tried successfully to a jury last fall, has been appealed by the plaintiffs. Another individual plaintiff case has been accepted on appeal by the Supreme Court on the question of whether lead pigment is an inherently defective product. Approximately 36 suits were filed on behalf of individual plaintiffs in Wisconsin. Half of these have already been voluntarily dismissed by the plaintiffs.

In California, the intermediate appellate court recently overruled the Saint at that Clara Superior Court and held that the cities and counties could retain contingent fee council to aid them in their suit against lead pigment companies. The companies will now decide whether to ask the California Supreme Court to consider the question. And finally, in Mississippi the Gaine's case is currently scheduled to begin trial on June 17th. The case involves a single plaintiff adolescent. There are currently a number of procedural and dispositive motions pending before the court. That concludes my review of our results for the first quarter 2008. So I'll turn the call over to Chris Connor who will make some general comments and highlight our expectations for the second quarter and full year. Chris.

Thanks, Bob. And good morning, everyone. Thanks for joining us today. I know many of you are on our conference call on March 24th when we lowered our guidance for the first quarter in full year of 2008 and that was a disappointing day for us. It was the first time in 19 consecutive quarters that we failed to meet or exceed our original earnings guidance. Although there were many factors that contributed to our weaker than expected earnings in the first quarter, clearly in the declining demand for architectural coatings across most North American market segments and the increase in the price of some petroleum based raw materials over the past four months were the principal causes. Facing these market conditions, we began putting plans in place in the first quarter to improve our results over the balance of the year.

I'll highlight some of the things we're doing in a moment, but first let me touch briefly on a few things that we're not doing. For example, we are not counting on a near term recovery in the housing markets. The prolonged weakness in sales of new and existing homes in the U.S. has been a drag on industrywide architectural paint volumes since the middle of -- or middle of 2006. This downward spiral in these residential markets continued in the first quarter and we believe these markets will not show year-over-year improvement during the remainder of 2008. I think it's worth noting that the weakness in domestic sales in the first quarter was partially offset by stronger than expected sales growth from our global segment. Our businesses throughout most of Latin America and Asia continue to generate double digit sales increases and in most cases corresponding profit improvements.

We're also not expecting help from the commercial construction market. Forecasts for U.S. commercial construction have recently turned negative. In the first quarter, we saw softening in the commercial construction activity, which we expect will continue over the balance of the year. It's too early in the season to get a good feel for the strength of residential and commercial repaint markets, but we have based our outlook for the remainder of the year on the assumption that growth in these markets will be challenging.

Another thing we're not doing is counting on oil prices to drop back to the mid 2007 levels. The escalation in crude oil and natural gas and the declining U.S. dollar drove the cost of certain chemical commodities such as ethylene, propylene and methanol to all time highs in the first quarter. Planned outages, plant maintenance turnarounds and strong international demand particularly in Asia have also resulted in some supply tightness for a number of these commodities despite the weakness in the U.S. economy. If crude oil remains in the $110 to $120 per barrel range and natural gas remains in the $10 to $11 per million BTU range, it is likely the price of many raw material commodities will continue to rise. Given this scenario, we would expect the raw material price increases in the paint and coatings industry to increase at the high end of the range of 4% to 8% for the 2007 to 2008 time frame.

Let me take a few moments to highlight some of the things that we are doing. Internally, we refer to these efforts as trimming fat and building muscle. Throughout the first quarter we began implementing aggressive plans to streamline the Company and reduce SG&A. We have made adjustments to our part-time labor schedules and curtailed overtime hours in our stores. We have froze hiring of nonessential positions across the Company and consolidated functions wherever possible. We're also accelerating our closing of redundant store locations resulting from the paint stores group's acquisitions. During the first quarter the paint stores group opened 17 new stores and closed 23 redundant locations for a net reduction of six stores. During 2008 we expect our paint stores group to open approximately 100 new locations and at the same time continue their accelerated pace of redundant store closings, finishing the year with a net store increase. Our global group, on the other hand, opened nine new branches in the first quarter and closed none.

We have already seen the effect of these efforts in some areas. However, most of the impact will benefit our results in the second half. SG&A increased in dollars and as a percent of sales in the first quarter. Virtually all of these increases were attributable to currency exchange, acquisitions and new stores open or acquired since the first quarter of last year. We're also building muscle, which means to us that we're taking actions that will strengthen our business in the short run and accelerate our growth in the long run. We have announced additional price increases across several of our businesses effective in the April/May time frame. These second price increases in a year are necessary to help offset some of the raw material cost increases we're experiencing this year. This year, additionally, we'll introduce a broad range of new and unique products and technologies to the market. For example, our new moisture resistant resilient exterior latex cures in about half the time of conventional exterior paints, allowing customers to paint outdoors even when there's rain or dew in the forecast.

Perhaps most important we remain committed to providing the high quality service our customers have grown to expect. Raising prices and reducing expenses are not without some risk. We will manage these risks in part by ensuring that our customers continue to receive Sherwin-Williams trademark quality service across the Company's footprint. Over the balance of the year we anticipate continued softness in most domestic end user markets and we expect that will continue to restrain our sales growth. Our outlook for the second quarter of 2008 is for sales to be up in the low single digits over last year's second quarter. With sales at that level, we expect diluted net income per common share to be in the range of $1.45 to $1.60 per share, compared to $1.52 per share for the second quarter last year.

For the full year of 2008, we expect sales to increase in the low single digits over 2007. With annual sales at that level we are reaffirming our guidance that our diluted net income per common share for the year will be in the range of $4.70 to $4.85 per share compared to $4.70 per share last year. Finally, last week our board of directors declared a regular quarterly dividend of $0.35 per share, continuing toward our long-standing record of paying out 30% of prior year's earnings per share. Again thanks to all of you for joining us this morning and now we'd be happy to take your questions.

Thank you. We will now conduct a question-and-answer session. [OPERATOR INSTRUCTIONS] One moment while we poll for questions. Our first question is from Jeff Zekauskas from JPMorgan. Please proceed with your question.

Hi, good morning.

Good morning, Jeff.

Was there much difference in your ability to raise price in coatings versus your ability to raise price in paint stores in the first quarter?

Jeff, our ability to do that has been historically pretty much consistent with what we saw in the first quarter. As we have commented in the past, we have a little more pricing leverage and ability through our store's model than we do through our consumer segment and that would have been true in the first quarter of 2008.

So like order of magnitude, were prices up 2% in stores and zero in coatings? Is that the right order or is there a different order of magnitude?

I think we've commented about the Company's performance as opposed to segment on pricing. We indicated that throughout the first quarter we were taking pricing in the range of 3 1/2 to 6 1/2 for the Company. That was consistent across all segments. And, Sean, you want to comment about what percentage of that pricing we've actually received in the first quarter?

In total we were in the 50 to 60% range. So in that 3 to 5%, Chris talks about 50 to 60% of that we realized in the first quarter.

I'm sorry, so 50 to 60% of 3 to 5, so that's a little bit more than 2%? Is that what you realized? Is that what you're saying?

Yes.

Okay. Were you satisfied with your SG&A cost control in the first quarter?

Yes, and when you take a look at the annualization of the acquisitions and when you take a look at where we came in at versus what we had forecasted, we were very close to what we forecasted.

And then now having said that, Jeff, we're taking aggressive steps to reduce it going forward, so room for improvement to be sure.

And just lastly, are your volume expectations for the second quarter very different from the volume trends that you experienced in the first quarter?

No.

And that is -- it's a similar -- similar same store volumes is what you're expecting?

Right. We're given guys we'll be in the slow single digits sales growth. We're not seeing significant mix changes so the volume is going to be consistent with what we had in the first quarter.

Okay. Thank you very much.

Our next question comes from P.J. Juvekar from Citi.

This is [Anthony Petanary] filling in for P.J.

Hey, Anthony.

On their earnings call last week, PPG indicated that their sales through the big boxes were holding up relatively better than their paint stores. When you look at DIY customers going through big boxes and then professional contractors going through paint stores, do you have a sense of which segment will start to stabilize first or in terms of volume and demand, where do you see the light at the end of the tunnel first?

I don't think we're in a position to comment on which ones are those we think will stabilize or rebound first. This softness is pretty consistent across both of those segments, so time will tell.

Okay. And obviously, the global group had a great quarter and I think on the year end call you indicated you expected segment sales to be up mid to high single digits for the year. Given the strong performance this quarter, is kind of low double digits more realistic?

Our first quarter is always the -- the smallest quarter we have in the course of the year, so I think we're still comfortable with the guidance we have given for global. If we start to making some progress in these next quarters, we'll adjust that.

Okay. Great. Thanks.

Our next question is from Saul Ludwig from KeyBanc. Please proceed with your questions.

Good morning, guys.

Good morning, Saul.

We've had now three quarters in a row where we've heard about dilution from acquisitions. When does the -- when does that turn?

Well, I think when you take a look at it, Saul, we're happy with the acquisitions we have made. I would tell you that if you compare it to the cycle, the integration is going well. I would tell you that we had the fourth quarter and the first quarter and as we have mentioned, we believe that in the second quarter we're going to see improvement and third quarter will show -- you'll be close to flat and then the third quarter we'll start seeing some improvement versus last year. So I think that's when you're going to see it. But just when you take a look at the market in general as the market has gone down, that's caused our sales to be a little behind on these acquisitions.

When we look at the decrement in your margins in both consumer and the paint stores, how much of that decrement was due in a contractual in your variable margin, meaning your price versus raw materials versus volume as it impacted fixed cost absorption?

I would tell you that it was -- the fixed piece was probably 20 to 25%.

And the other, the larger share, okay. And in the interest -- interest expense, I was very surprised to see your interest expense lower in your first quarter this year. We had expected a substantial increase in interest expense year over year, your average debt appeared to be much, much higher this year than last year. What was the story with interest expense and what do you see for the rest of the year, Sean?

Well, when we talk about interest expense, we also -- if you take a look at it, Saul, the interest income was down. When you take a look at it --

I'm talking about the debt, which is gross interest.

What we expect is that that debt -- our debt is going to be higher, our interest income will be lower. I think that we've been talking about when you combine the two that we'd be up somewhere between $8 million and $10 million this year versus last year, and that's what we expect. We expect that by the end of the year our total debt will be in that $950 million range.

I understand why your interest income is down. I don't understand why your interest expense just gross interest expense which relates to the amount of debt and the rate that you pay was down in your first quarter when your debt had to be up $250 million.

I think when you take a look at the interest rates, we went out there with some of the liquidity instruments that we have that are at favorable LIBOR rates.

Okay. So it was rates that did it?

Yes.

Okay. And then how much did you pay, how much did you spend for the stock that you bought?

$220 million, an average cost of $53.69.

Great. And finally, I know you kind of skirted the question. The 6 1/2 % drop in comp store sales, should we assume, Chris, that it may have been 8 1/2, 9% in volume with 2, 2 1/2 % increase --

Yes. I didn't intend to skirt that question at all. Absolutely our volume in stores across the Company is declining faster than sales, as it would with pricing going in.

Right. But are the numbers that I suggested --

Yes, you're in the range.

Thank you very much.

Our next question comes from Amy Zhang with Goldman Sachs. Please proceed with your question.

Good morning. Thanks for taking my questions. I have two or three questions. The first one, I'm curious about the trends in the industrial coating product lines as the U.S. manufacturing economy continues to soften. Your competitors obviously noted some weakness there. So can you give us some color?

Yes. The industrial coatings business for us is in our global segment which had a good quarter. Within that segment, the industrial coatings piece of it also contributed to the improvement for the quarter. We have -- the vast majority of that business is domestic business. We have some exposure to Asia Pacific and some of those softening export markets that our competitors might have talked about, but we're seeing some modest strength in growth in that business, Amy, both domestically and building from a very low share position outside the United States.

Okay. And then my second question is sort of like a follow-up to Anthony's question earlier. And then, I think two or three of your competitors when they reported their results, obviously, there was some surprising volume against through the big box retailers service as DIY customers. So I was wondering over the past several -- I think one or two quarters have you seen any market share shift in the DIY channel?

Boy, Amy, we really don't have the data to determine that. The only information we have seen on that is exactly what you've seen. We know how our business through our consumer segment is. It's obvious -- obviously soft, but in terms of shift between manufacturers we don't know.

Okay. And then -- and lastly, SG&A as a percentage of total sales nearly 37% this year. On an annual basis what's your expectation for '08? Because I know you had some pretty aggressive internal initiatives that have been going on. And then the historical range for that annual rate is about 32 to 34%, so are you going to -- are you expecting to achieve the high end of that range or sort of like a meet point? Can you just give us some color for that line?

Basically we're trying to give -- we have given you annual guidance on sales and EPS. Right now we really are not going to go down the P&L and give you guidance of what we think the SG&A and give you a range for gross margin and so forth.

Let me put the question another way. So going forward do you expect this SG&A's percentage of total sales, this ratio declining on the sequential basis but still high on the year over -- I mean still high on the year-over-year basis?

We believe our SG&A will be higher as a percent this year than last year yes.

Okay. Thank you.

Our next question comes from Chuck Cerankosky with FTN Midwest Research. Please proceed with your questions.

Good morning, everyone.

Good morning, Chuck.

First question if we look at the acquisition environment, how does that appear to you in terms of perhaps sellers that might be a little more interested in talking to you right now versus a year ago?

There are a number of opportunities in the market right now, Chuck, that we're speaking with, as are others. I think given the softness in the U.S. market particularly, some sellers may be more inclined to hang on and wait for better forecasting going out. But we expect that there will be a couple of deals we'll be able to get done this year.

All right. If you look at your paint store segment and one makes an assumption about what percent of those sales go to new construction, what kind of shift have you seen in the sales mix there over the last few months, that is, if one assumes it's X percent, how much of the -- of that percentage has gone down?

Well, we don't give specific percentages of the specific customer bases inside that. I think in Bob's comments he made the discussion about regions of the country and how they were doing. We indicated that our Eastern and Midwestern divisions, which are the northern markets for us, actually had sales gains and it was in the Southwest and Southeast particularly where we were struggling and those would be the areas in the country where historically we've had the most aggressive new home construction market. So there's significant mix change in those two divisions as they are taking the brunt of the new residential market slowdown, which by the way, continues. And estimates that perhaps we were nearing the bottom of that I think have now been amended and we expect that the new housing market to continue to spiral downward this year as we commented.

All right. Thank you.

Our next question comes from Eric Bosshard from Cleveland Research Company. Please proceed with your questions.

Good morning.

Good morning, Eric.

A couple things. First of all, on price, can you just talk -- Sean, I know you commented that you had seen 50% of the price increase stick to this point. Can you just talk about how this is going and why the need to push forward with this second price increase and perhaps a bit of guidance on the magnitude of that second price increase?

Sure, be happy to, Eric. I think the pricing is going exactly as it has for us historically through this model. We were asked a question earlier in the call by Jeff Zekauskas regarding stores versus our other businesses and this is following the historical pattern that we have seen. As Sean has commented, we're getting a portion of that pricing in as the season unwinds and we're able to conclude those negotiations, get off some jobs that perhaps we had provided some pricing protection for and it's on track to continue to be implemented as we commented. You know, frankly, as we said in the earnings call, we did not see the rapid and the steepness of this raw material climb appropriately in the fourth quarter and did not get the kind of price increases we need to cover us for the calendar year. For those reasons, the management team has decided that it's necessary to get a second price increase in the year.

As you recall, we have done this as recently as the '04, '05 time period where we went out for two price increases in the course of the year and unfortunately we're in that position where we have to do it again in calendar year 2008. Our stores group has announced in the month of April that they would be taking pricing up again effective May 5th, 4% and those price increase announcements are out there as we speak and we're working through them. Do you have a follow-on, Eric?

No.

Latanya? We are not hearing any of you on the call. If you're out there standing by, we are calling the operator at the moment to see if we can reengage. Please stand by for a few moments.

Stand by, ladies and gentlemen, the conference will be (inaudible - technical difficulties)

Hello. Is there an operator on, please?

Okay, Mr. Wells, the conference is back live.

Thank you. Welcome back from that brief intermission. We'd like continue with the question-and-answer session and, Eric, we were in the middle of a question from you about pricing, so if we could continue that line of questioning, that would be great.

I'm not sure how much of my answer got through, Eric. Did you get that or do I need to repeat it?

Eric is out of cue. He needs to press star 1 and get back in.

Let's take the next question, operator and we'll catch him back later.

The next question we have Steve O'Neil from Hilliard Lyons. Please proceed with your question.

Good morning. I didn't realize when I went in with my question it's going to knock everybody else off-line.

Good morning, Steve.

I just wanted to ask about the redundant stores. You purchased about 170 stores last year and I was wondering if you could given me an idea of maybe how many you plan to close and maybe just elaborate on the situation. Have some store locations been weaker than expected in the current environment? I guess what's the thought process that's going into this movement.

Very good question, Steve, and I think as we comment on redundant store locations it really speaks to the acquisitions that we've made for quite some time now, not just last year, as we have discussed, we have historically taken a very slow path to integrating stores from these acquisitions, maintaining stores sometimes literally next to each other, across the street well within a mile location. A number of these store locations that we're speaking of are Durant store locations that we've purchased back in 2004 and there are other store locations from acquisitions made even prior to that. In the state of Florida, for example, Flex Bond and others. So it's a combination of the groups that we made last year plus historically, so there's quite a large number of stores to look at, including in that, when we say redundant, acquisitions oftentimes allow us an opportunity to close an exiting Sherwin-Williams store and consolidate into the opposition's location, which may be a better facility. So we're taking the softness in the market to accelerate what would be a normal trend for us to start to close these things at a later point in time. In terms of total count, it's a little difficult for us to get our arms around that at the moment. You know, our guess is that it's going to be somewhere in the 40 to 60 to maybe even 70 range as the year unwinds. Hence, the comment that 100 stores will generate probably somewhere in the net 20, 30, 40 new stores for us as the year unwinds. So hopefully that gives you a little more color there.

That's helpful. And then lastly on interest expense, how much of the lower interest do you think was caused by moving to so much short-term debt and I guess as a follow-on to that, do you plan to maintain this high level or are you going to try to lock in rates as the year goes on and if you do, what might that do to your interest expense for the year.

Right. Actually 100% of the interest rate reduction was because we have not -- we have stayed in the short interest rate environment. I would tell you that we're continually watching. We've looked at the 10-year rate. Eventually, as we have consistently said, we're waiting to see a little more clarity on the lead situation and once we do, then we believe we can get a document to go back into the long-term market and without a lot of covenants. And then what we'll do is we plan eventually to term some of this out and lock in at some of these long-term rates, at rates that we believe will be a little higher than what we're paying short term, but then we'll also have the ability to look at some swaps.

Thank you very much.

Our next question is from Saul Ludwig with KeyBanc. Please proceed with your question.

Just one quick follow-up. A lot of people refer to the PPG release and as you know in their public release, they said that their unit raw material costs were up only 2% year over year and that they expect the full-year raw material cost increase to be two to 4%. Those seem to be pretty modest numbers and I'm trying to just reconcile with what they have said publicly with what you're experiencing because if raw material costs were in fact up only 2%, you wouldn't have had the margin compression that you experienced.

Yeah, Saul, it's difficult for us to comment on PPG's raw material because we have no specific knowledge of their mix of materials and further, as you know, we only comment on the industry basket of raw materials which we define pretty broadly. Because the mix varies pretty significantly company to company, we prefer to just keep our comments on our outlook for the industry both in the quarter and over the balance of the year.

Okay. Great. Thank you, Bob.

Our next question is from Chuck Cerankosky with FTN Midwest Research. Please proceed with your questions.

Guys, I don't have a question. I was just hitting buttons when you were asking if anybody could hear us so --

Could you hear us, Chuck?

Now I can.

Okay. Our next question is from Ivy Zelman with Zelman and Associates. Please proceed with your question.

Hi, good afternoon, guys. This is actually Allen on for Ivy. How are you?

Great.

First quick question in housekeeping. On your full year EPS guidance, what tax rate and share count are you guys using?

What we've said is that the -- we believe that the tax rate will be in the low 30, very comparable to the 32.6% tax rate we had last year. We really have not given guidance on our share count.

Okay. Great. And then the next question, Chris, I was just hoping you could elaborate a little bit more about your comments on the commercial construction market. I think you said you saw some softening in 1Q and on your call a month ago you said you were expecting commercial to be up, I believe, low single digits for the year. I was just wondering if softening in 1Q implied that it was actually negative on a year-over-year basis or if it was just left positive and if so, do you still expect it to be up in that low single digit range?

Yeah I'm happy to comment on that. We refer often to a number of industry data points that comment and predict this. One of them is the McGraw Hill's Dodge report which I think on the last call had indicated a slowing in commercial construction but still positive for '08. Those reports now are tending to show, particularly in the segments that we saw coatings, into a negative projections for '08. So it's not a first quarter only phenomenon. We are expecting the commercial new construction activity will be negative for the year.

Okay. And in terms of quantifying that in kind of the low -- low single digits, negative.

Yes, yes.

Great. Thank you very much.

Thanks, Allen.

[OPERATOR INSTRUCTIONS] Our next question is from Robert Felice from Gabelli & Company. Please proceed with your questions.

Hey guys. Just a couple of quick questions and I apologize if they were already asked. I had to redial back into the call because of some of the technical difficulty. I guess first, does the 3 1/2 to 6 1/2 % pricing range that you've spoken about include the second round of pricing?

No. That was the first round we took out in the first quarter across all segments. And one count that we made, when you may have been off of it, our stores have announced in April, effective May 5th an additional 4% price increase.

So it would bring that range to --

7 1/2 to 10 1/2.

7 1/2 to 10 1/2. Okay. And then a couple of weeks ago, you had talked about being at a percent or a percent and a half off on pricing relative to recovering raw material costs during the first quarter. I know it's only been a couple of weeks since then, but any meaningful change in terms of the price cost gap where you stand today?

No. We're making progress towards it but in that short period of time, no meaningful change.

On you're still within that kind of 60% realization on that 3 1/2 to 6 1/2 %.

I think Sean made the comment around closer to 50 through the first quarter.

Okay. And then of the 7 1/2 to 10 1/2, how much would you expect to realize for the full year?

Typically when we get -- when we take a look at the price increases over the history of the Company, we'll eventually over a period of time and we have actually commented sometimes it takes up to 18 months, but what we'll end up with is 80 to 85%.

But for 2008, of that amount, probably are we thinking about half by the time it rolls in?

Probably slighter than half.

Slightly higher than half. Thanks so much.

Thanks.

Our next question is from Don Carson from Merrill Lynch. Please proceed with your question.

Good morning. This is Adam (inaudible) in for Don Carson. Question about the price increases as it relates to product mix, historically or in the first quarter at all have you seen any change in which price points are being purchased more by the contractors or by the DIY in your stores?

When you look at our Company, when you take a look at the product mix, we have -- we've actually had a slight improvement in our product mix. I would not call it very material, but the product mix is slightly higher.

And that would be historic and consistent, Adam, with past price increases that we have seen, particularly in the contractor segment when faced with higher prices, occasionally they'll step up to a better performing product to help reduce labor cost.

But as you said, it's not terribly material so probably doesn't roll through to margins?

That's correct. It's just, as opposed to marginally moving the wrong direction, it's performing as it has historically and moving slight up.

Right.

You have to realize the first quarter is typically our smallest quarter and so a lot of things that we see, even though they are positively moving, it's not material for the full year.

A definitional question about your 4 to 8% outlook. You said it's a broader industry metric. Is there any component of freight in there with diesel costs and shipping costs?

Yes, of course there is.

Okay. And do you have an idea, 4 to 8% is the industry, you expect to be -- is Sherwin-Williams at the upper end of that industry range as well? In line with your previous comments.

No we would hope to be at the lower end of that industry range.

Right.

Given our size, we would expect to do better than our smaller competitors.

Right. And then just a final question on the global group. Obviously, you bought Nitco Paints last year and you've commented that would be a platform for growth in India. I was wondering if you had any further developments in any of the Asian regions coupled with your, obviously, purchase in Singapore.

A lot of work happening in our Nitco business in India. I think it's a little premature to comment on some of the next steps, but as Sean said, we're pleased with these acquisitions and they are continuing to move in the right direction.

All right. Thank you very much.

Our next question is from Gregg Goodnight with UBS. Please proceed with your question.

Sure. A lot of my questions have been asked and I appreciate your responses. The one question I still had was your comment about the Rhode Island appeal to the Supreme Court, that oral arguments were going to be webcast. A few questions. When will that be? Who is webcasting these oral arguments and why are they webcasting them?

The -- I believe that the Rhode Island court is actually controlling the webcast. It will be live, so it will begin on May 15th.

Okay. And it will be on a website that the court provides?

Correct.

Okay. Very good. That's really all I had.

Our next question is from [Jim Warner] with Carlson Capital. Please proceed with your questions.

Thank you for taking my call. I have two questions. As we move into warmer weather, could you first provide any color on what you're seeing with regards to exterior paint demand? And second, what sort of exterior paint demand expectations have you built into your guidance for this year? Thank you.

Sure. As Sean has commented, I think, the first quarter is our smallest quarter. We're heading into the historic painting season in North American markets and we'd expect to start to see the exterior paint market emerge. It is following the trends that we're commenting on where we expect low single digit growth. There's not a significant mix change occurring here between interior and exterior coatings. The softness in the residential markets will have an impact there and it's consistent with the guidance we have given for the year.

Our next question is a follow-up question from Robert Felice with Gabelli & Company. Please proceed with your question.

Hi, guys just a quick follow-up. I was looking at your raw material cost expectation for the year, 4 to 8%, and if I translate that into absolute dollars it looks like it's roughly $300 million to $350 million give or take a little bit. And at the midpoint of your 7 1/2 to 10 1/2 % pricing that would imply $600 million to $650 million in pricing creating a net benefit of somewhere around $300 million and yet your guidance would suggest significantly less than that in terms of absolute gross margin dollars. So I'm curious to know where the offsetting factors are. Is it SG&A? Is it weak volume or lower volume? Just kind of trying to get a sense as to what diminishes that.

I guess what I'm doing in my head real quick, when you're using the 4 to 8, I guess you're using $3 billion in raw material purchases to get your $200 million to $300 million?

Roughly $300 million, yeah.

And then --

Using the high end of your range.

Right. A couple things here. You might have overestimated. I don't believe our raw material purchases were that high. We have a lower number than that. And maybe it's because of -- a lot of times when we talk about paint, paint is not 100% of our sales so we have non-paint sales in there that you're probably adding 100% into the raws. So our numbers are a little higher. In the paint industry raws are typically 50% of the average selling price and so if the 4 to 8, that means that our total costs are going to go up about 2 to 3% if we -- but back to your point, if we -- the 4 to -- the 7 1/2 to 10 1/2 that Chris mentioned is where you get into the 3 to 6 1/2 is a 12-month number and then we have the four-month -- 4% over eight month so that the -- you can't just add the 4 to the 3 1/2 to 6 1/2, and so when you annualize that number, if we can get the 50 to 60%, our gross margin dollars would be fairly close. Then if you -- which means that our gross margin percent will be down slightly.

Okay. So the answer is you don't expect to get all 8 1/2 % the way it folds in for the year it will be less than that?

Yes, yes, because stores group has announced May, which means that we'd really only have eight months to get that in.

Okay. That's helpful. Thank you.

There are no further questions at this time. I would like to turn the call back or to Mr. Wells for closing comments.

Thanks, Latanya. We appreciate you joining us today and we apologize for the technical difficulties in the middle of the call. I will be around all day to answer any follow-up questions you might have and as always, we greatly appreciate your interest in Sherwin-Williams.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.