宣偉 (SHW) 2008 Q2 法說會逐字稿

Good morning. With us on today's call are Chris Connor, Chairman and CEO. Sean Hennessy, Senior Vice President Finance and CFO, John Ault, Vice President and Corporate Controller, and Bob Wells, Vice President Corporate Communications. This conference call is being webcast simultaneously in listen-only mode by V-call via the Internet at www.sherwin.com. An archived replay will be available beginning approximately two hours after this conference call concludes and will be available until Wednesday, August 6th, 2008, at 5:00 p.m. eastern time.

This conference call will include certain forward-looking statements as defined under US Federal Securities laws 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 statement whether as a result of new information, future events, or otherwise. A full declaration regarding forward-looking statements is provided in the Company's earnings release transmitted earlier this morning.

After the review of second quarter results we will open the session to questions. I will now turn the call over to Bob Wells.

Thanks, Claudia. In order to allow more time for questions, we've provided balance sheet items and other selected information on our website, www.sherwin.com under Investor Relations, second quarter press release.

Summarizing overall company performance for second quarter 2008 versus second quarter 2007, consolidated net sales increased $31.4 million, or 1.4% to $2.23 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. Acquisitions completed since June 30th, 2007 increased net sales in the quarter by 2.4%. Favorable currency translation rates added another 1.1% to second quarter sales. Consolidated gross profit dollars decreased $13.7 million for the quarter to $972.9 million. Gross margin decreased 130 basis points to 43.6% of sales from 44.9% in the second quarter last year. Selling, general, and administrative expenses increased to 30.4% of sales in the second quarter this year from 30.3% last year. An impairment charge of $23.9 million in the second quarter resulted primarily from trademark impairments related to soft sales in some acquired trademarks tied closely to the new residential market.

Interest expense net of interest and investment income increased $4.2 million compared to second quarter last year. Consolidated profit before taxes in the quarter decreased $47 million or 15.5% compared to the second quarter '07, to $256.2 million. Our tax rate in the second quarter was 33% compared to 33.2% in the second quarter of '07. For full-year 2008 we expect our effective tax rate to be comparable to last year's rate of 33%. Consolidated net income decreased by $30.9 million to $171.7 million from $202.6 million in the second quarter of 2007. Net income as a percent of sales was 7.7%, down from 9.2% in the second quarter last year. Diluted net income per common share for the quarter decreased $0.07, or 4.6% to $1.45 per share.

Looking at our results by operating segment, sales for our Paint Stores Group in second quarter 2008 were down 0.80 of a percent to $1.36 billion. Comparable store sales, sales by stores open more than 12 calendar months, declined 4.5%. The decrease in Paint Stores Group sales was the result of weak demand for architectural paint and non-paint items in most end user segments, which were partially offset by improved industrial maintenance coating sales and acquisitions completed during 2007. The acquisitions increased group net sells for the quarter by 2.6%.

Regionally in the second quarter 2008 our Midwest division led the sales performance, followed by Eastern division, Southwestern division, and Southeastern division. Three of the four divisions achieved positive sales results in the quarter. Segment profit for the group decreased $27.7 million, or 11.6% to $210.4 million in the second quarter 2008, due primarily to second quarter impairment charges of $20.4 million, related to certain acquired trademarks. Also, lower net sales and margin pressure from higher input and freight costs. Acquisitions reduced segment profit by 0.30 of a percent in the quarter. Segment margin declined to 15.5% in the quarter, from 17.4% in the second quarter last year.

In the Consumer Group, for the second quarter 2008, sales decreased 3.2% to $383.9 million. The decline was due primarily to soft DIY demand and most of the segment's retail customers. Segment profit for the Consumer Group decreased 28.8% in the quarter, to $58.8 million. Segment profit as a percent of external sales decreased to 15.3% from 20.8% in the same period last year, due primarily to dramatic increases in raw material costs, lower volume throughput in our manufacturing and distribution operations, and a $2.7 million second quarter impairment charge related to an acquired trademark.

Turning to our Global Group, the second quarter 2008, sales in US dollars increased $54.6 million, or 12.6%, to $488.9 million due primarily to increased sales volume, selling price increases, favorable currency translation, and acquisitions. Sales in local currencies increased 6.8% in the quarter, and acquisitions increased the group's net sales by 3.8%. This sales increase reflects growth across most product lines and geographies outside of the United States. Segment profit for the Global Group in US dollars decreased 1.7%, or $800,000, to $48 million for the quarter. Profits stated in local currency declined 7.5%, due primarily to the negative impact of the domestic economy on portions of Global Group's business that could not be fully offset by profit improvements from operations outside the United States. Acquisitions added 3.1% to Global Group profit in the quarter.

I'd now like to comment briefly on some of our balance sheet items. Our total debt on June 30th, 2008, was $1.23 billion, including total short-term borrowings of $933.6 million. Total debt on June 30th, 2007, was $757 million. Our cash balance at the end of the quarter was $45.6 million, compared to $57.5 million at the end of the second quarter 2007. Total borrowings to capitalization were 42.7% at the end of the quarter versus 27.3% at the end of the second quarter 2007. Long-term debt to capitalization was 15.5% at the end of the second quarter this year, compared to 13% last year.

In the second quarter 2008, the Company purchased 2.1 million shares of its common stock in the open market. At June 30th, 2008, the Company had remaining authorization to purchase 20.8 million shares of stock. In second quarter 2008, we spent $31.1 million on capital expenditures. Depreciation expense was $35.3 million, and amortization expense was $5.4 million. For full-year 2008, capital expenditures will be between $140 million and $150 million. Depreciation will be about $150 million versus $139 million in 2007, and amortization will be $21.4 million, versus $24.5 million in 2007.

I will now conclude by giving a brief update on the status of our lead pigment litigation. In our appeal of the Rhode Island lawsuit to the state Supreme Court, on July 1st the court released its decision reversing the trial court's finding that the defendants created or significantly contributed to a public nuisance in that state. A unanimous court held that the state could not show interference with a public right, nor that the defendants were in control of the alleged nuisance at the time harm was caused to Rhode Island children. This marks the end of the Rhode Island case. The abatement proceedings in the Superior Court have been halted, and the appointment of co- examiners - - and the appointed co examiners discontinued their interview process and will not be preparing a report for the court.

In Ohio, the city of Columbus has dismissed its public nuisance action with prejudice, bringing to an end the last of the municipal suits in Ohio. The Ohio Attorney General's suit has been removed to federal court by the defendants. A federal judge will determine whether this lawsuit will be heard in federal court or returned to state court. Oral argument on that issue has been set for August 25th.

In Wisconsin, the Thomas case, a personal injury suit 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.

In California, the defendant companies have petitioned the California Supreme Court to consider the question of whether cities and counties could retain contingent fee counsel to aid them in their suit against the former manufacturers of lead pigment. The court's decision on whether to hear this issue should be made by August 15th.

In Mississippi, the trial in the Gaines case has been delayed until June 17th, 2009. The case involves a single plaintiff adolescent. There are currently a number of procedural and dispositive motions pending before the court. It is not expected they will be decided upon soon.

That concludes my review of results for second quarter '08, so I'll turn the call over to Chris Connor who will make some general comments and highlight our expectations for third quarter and full year. Chris.

Thanks, Bob, and good morning, everyone. Thanks for joining us today.

At the beginning of 2008, we knew that our plans for sales growth and earnings improvement would face some very significant challenges. The likelihood of continuing turmoil in the domestic housing market, raw material cost inflation, driven by rising petroleum prices, slowing commercial construction activity, a weakening domestic economy, and declining consumer confidence, to name just a few. And, in fact, these were the realities we faced during the second quarter and first half of this year. Consequently, the demand for coatings products across North America continued to deteriorate, and the cost of producing, transporting, and selling these products continued to rise.

The good news is that every dark cloud has a silver lining. The actions we've taken in response to the difficult market conditions we faced this year we believe will make the Company stronger, more competitive, and more profitable in the years ahead. They will unlock new sources of cash, further streamline our operations, and position the Company to better capitalize on the eventually recovery that we expect in this market.

Despite the lower sales volume in the quarter, our working capital ratio, defined as accounts receivable, plus inventories, minus payables to sales, was flat, compared to last year at 14.1%. The combination of responsive production planning that held inventories in line with sales volume, and prudent management of receivables and payables contributed improvement of $44.3 million to net operating cash in the first half. Operating cash decreased by only $8 million to $262.8 million, despite a drop of almost $65 million in net income in the first six months. The contribution from working capital offset most of the shortfall from earnings. Free cash flow, operating cash minus capex and dividends, was flat year-over-year at $105 million, due to a reduction in capital expenditures in the first half.

On our first quarter call, I spoke briefly about our internal efforts to trim fat and build muscle across the organization. These efforts continued in the second quarter and helped to offset inflationary pressures on our operations. SG&A expense, as an example, increased only $10 million, or 10 basis points as a percent of sales, compared to the second quarter of '07. And we think this is particular noteworthy considering we supported seven acquisitions, and almost 100 net new stores compared to the second quarter of last year.

During the quarter, we continued our plans to close redundant store locations. So far this year we've opened 39 new locations, and closed 62 for a net reduction of 23 stores. Our store count in the US and Canada now stand at 3,302. During 2008 we expect our Paint Stores Group to open approximately 100 new store locations and close about 80, finishing the year with a net store increase in the range of 20 locations. Our Global Group added through new branches in the second quarter bringing their total to 12 new locations for the year.

I think it probably goes without saying that raw material costs continue to rise much faster than we can offset them with expense reductions. For that reason, we've announced additional price increases across many of our businesses effective in the July-August time frame. These price increases in the high single digit range, including an unprecedented third price increase announced for our Paint Stores Group, are necessary to help offset some of the raw material cost increases we experienced in the second quarter.

We believe the significant challenges we faced in the first half of 2008 will certainly continue into the second half. Demand is likely to continue to deteriorate, and raw material cost pressures will increase as the full impact of recent price increases have yet to be realized. Our outlook for the third quarter 2008 is for consolidated net sales to be down slightly, compared to last year's third quarter, with sales at this level we expect diluted net income per common share to be in the range of $1.20 to $1.45 per share, compared to $1.55 per share for the third quarter last year.

For the full year 2008, we are reaffirming our guidance that we expect sales to be slightly lower than 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 $3.60 to $4.10 per share compared to $4 .70 per share last year. Yesterday our Board of Directors declared a regular quarterly dividend of $0.35 per share, continuing our longstanding record of paying out 30% of prior year's earnings per share.

Finally, I think it's appropriate for me to briefly comment on the development and lead pigment litigation that have occurred during the last three months. Just as I did back in the first quarter of 2006, when a Rhode Island jury found that our Company caused or substantially contributed to the creation of a public nuisance in their state. At that time we comment that we continued to believe these suits are without merit and that the facts and the law are on our side. We pledged to vigorously defend these in all jurisdictions, wherever they may arise. It took nine years, two juries and a state Supreme Court hearing, but today the public nuisance law in Rhode Island is squarely in line with the overwhelming majority of jurisdictions in the United States.

Again, thanks to all of you for joining us this morning, and now we'd be happy to take your questions.

Thank you. Ladies and gentlemen, we will now be conducting the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question is coming from Saul Ludwig of KeyBanc Capital. Please state your question.

Hey, guys. Impressive results considering the impairment charges. When you provided the guidance the last time, did you have embedded that in guidance the knowledge of the $23 million impairment charges and in thinking about guidance given for the rest of the year, does that include any known additional impairment or special items?

Good morning, Sal. This is Sean Hennessy, CFO. At that time when we put our forecast out of $1.40 to $1.50 it did have an impairment. As you know, when you take a look at -- hang on one second. Let me pull this out here, Saul. Impairments are taken when the sales volume of a trademark do not support the asset value on the balance sheet at that time. So as acquisitions are integrated, trademarks are phased out, and the decline in the value flows through our P&L. When you take a look at the process that we've taken this first six months, and the integration of some of the acquisitions, and you can see on the segment table that $20 million of this actually went through the stores group, it's -- it refers to a lot of the acquisitions that we've -- more recent acquisitions. So as we've integrated increased velocity of that integration, we had a feeling that the sales of those branded products were going to decrease, and so we had had it there for the second quarter. For the full year, we'll watch to see what happens with the sales, but, it's hard to -- we don't after specific forecast for the impairment for the second half.

So there's no impairment charge in your second-half outlook, so to speak?

That's true.

Okay, good. Second question, I notice that in the quarter your environmental expense fell sharply from $7 million to $1 million or so -- from $8 million to $1 million this year, which certainly helped earnings. I see at the last year, in the third quarter environmental expense was like $14 million. How do you -- and then $6 million in the fourth quarter. So you had $20 million in environmental costs, back end of the year last year, it seems to be running much, much less this year. How do you think about that, granted hard to estimate precisely, but in your guidance how are you thinking about environmental costs?

Right now, as you said, a year ago, environmental costs in the second and third quarter were a little higher than the prior year. This year the lower. We do look at this. We have a team of environmental attorneys that are working on environmental problems that we have in the -- inside the company. As we look at those, we feel that we will have some environmental expense in the second half of the year, but we really don't forecast that line by line. But we do have some environmental in there for the second half.

Less than last year, maybe.

Probably less than last year.

Then just finally, what was your raw material -- let's say unit raw material cost increase second quarter versus second quarter this year?

I'll have to pull that out. We'll give that you answer in a second.

Thank you. You can go on to the next question then.

Our next question is from Jeff Zekauskas with JP Morgan.

Hi, good morning. Was your volume decrease on a consolidated basis in the second quarter greater or less than your volume decrease in the first quarter in gallonage terms? Maybe that's the way to put it.

The movement in units were slightly below the first quarter, but not dramatically different.

So is it fair to say in that rough terms, maybe your volumes were down 4% and your prices up 2%? Is that an order of magnitude that seems correct?

That's correct, Jeff.

I assume that what would you expect is the pricing to accelerate as you issue these new increases. Do you see the volumes in the second half as being comparable to the volume decrease in the first half, or are you more worried or less worried, or can't you tell?

I think it's a little early to make that call. I think the guidance that we've given that we expect sales to be slightly lower in the second half would indicate that it the's possible that it could it go down further.

And all things being equal, will you expect your raw materials to really step up in the third quarter versus the second quarter?

Yes.

I don't know if you noticed, but there's some possible consolidation among your acrylic suppliers.

Wow, we hadn't heard.

What do you make of that? Do you think that that -- is that neutral for Sherwin or negative or positive?

Well, time will tell. I guess I would comment on Dow and [Roman Haas] that both of these companies have had longstanding relationship with Sherwin Williams. They are important suppliers to us. They've been very good companies to deal with, and we expect that that relationship will continue, and time will tell whether this is positive, neutral, or negative. Too early to make that call.

Would you have any interest in integrating into acrylics?

Again, too early to make that call.

Too early to make that call. Okay. Thank you very much.

Thanks, Jeff.

Our next question is coming from Robert Felice with Gabelli & Company.

Hey guys. Congrats on a nice quarter. A little better than I think everyone had expected. First question, with the threat of the potential liability from lead paint now gone, could you discuss your existing capital structure, whether you feel it's optimal, and what actions, if any, around a more aggressive buyback, perhaps an ASR, we should expect?

I think, you know, we've certainly managed our balance sheet and liquidity sources differently since February '06. The date of the Rhode Island trial verdict. Our philosophy continues to be the same. We'll use our cash and balance sheet to increase shareholder value. If you haven't noticed, we already eliminated the $500 million accounts receivable securitization line of credit, which will lower our liquidity costs. On the balance sheet, the verdict does give us tremendously more options, which we are evaluating.

Our current forecast calls for year-end debt to be in the range of that $9.50 to $9.75. We haven't changed that yet. When you look at the verdict, received the first week of July, we haven't really stepped that up, except for the accounts receivable securitization. That's also without any additional acquisitions. We do have one acquisition in southeast Asia, but the acquisitions, buyback opportunities, we're going to be watching the stock price, and we do have 20 million shares authorization from our Board. So I would say that we'll watch the stock price, and we'll be careful to see what's happening on the acquisition front, and then we'll make that decision.

But at this point no, plans for any aggressive or accelerated buyback?

No.

If I look at your first and second quarter earnings, then your guidance for the full year and for the third quarter, it implies that you expect to have your worst year-over-year earnings comparison in the fourth quarter of the year, something north of 30% decline in EPS. Yet at that point, you will have -- you should have the bulk of your pricing in place to offset cost inflation. So I was hoping could you just help me understand that a bit.

I think in the -- when you take a look at the forecast, we have our second half gross margin lower in the second half than in the first half of the year. First half of the year came in at 43.7. Second quarter, 43.6. We have the lowest gross margin in the fourth quarter for one reason. Really, that's when we're going to take the bulk of the LIFO expense. We'll see what event we have forecasted right now in the fourth quarter, we'll see, as raw materials continue to roll in, so our gross margin is lower in the third quarter, then lower again in the fourth quarter, but it has to do with LIFO, not the selling prices.

Okay, that's helpful. And then I guess lastly, you had mentioned, Chris, the high single-digit price increase. I was hoping maybe you could provide greater clarity around the magnitude of the price increase specifically in the Paint Stores Group.

I think as we commented in the past, the January and May price increases were both kind of in the mid single-digit range, and this one that we're going out with right now is going to be in the high single-digit range. These are being discussed with customers as we speak right now, and implemented in the middle of a paint selling season, and we'll see how well they go.

Okay. And how much of the cumulative pricing hag stuck so far? I guess I'm wondering what run rate you're at.

The effective implementation?

Yeah.

I would tell you for the company-wide, when you look at the company in total, what we've said is, it usually takes us 12 to 18 months. And between the first -- right now in the first price increases that we implemented in the first of January we're running about 50% -- 55%, which is normal at this time. The second price increase that we mentioned in stores group were below that, a little below that because we're implementing it today. But if you take a look at it, it's right on pace with prior years, and we think eventually we'll recover in this the marketplace.

So just cuffing the numbers, remembering what they were, sounds like you're probably running at about a 3% -- 3.5% pricing run rate at this point. Is that fair?

Correct. Yes, in the month of June.

Great. Thanks for take my questions.

Thanks, Rob.

Our next question comes from John Roberts with Buckingham Research. Please state your question.

Good morning, guys.

Good morning, John.

Couple things. Why didn't the range on the guidance narrow? We had $0.50 of range with nine months, and now you have certainty in the quarter just reported. We still have $0.50 of range.

Well, when you take a look at it, when we did put out the $0.50, that was the first week of June, so it was only four or five weeks ago, and we had a pretty good view of where we were in the second quarter at that time, and that's why we came in right in the middle of the range, the $1.45. So I think that the volatility of the gross margin, we're going to wait to see what happens with the gross margin. Jeff asked us about some volume questions, and we'll have more of a view of it here in the third quarter. Third quarter is a very large quarter for us, so I understand what you're saying. You've seen the second quarter, but we had a pretty good idea where we're going to come in in the second quarter when we gave that range.

In the back half of the year you're going to open more stores than you'll close. During the first half, you've closed more than you opened and now that reverses. Is that going to impact productivity some -- productivity has been a pretty good offset for you to help offset some of the volume weakness.

That kind of opening schedule is very traditional and historic for us. We've always had had third and fourth quarter have been higher openings for the stores. And I think it speaks to the aggressive nature of the closing, so you're right, that's going to reverse a little bit. From a productivity standpoint, we're talking about 20 stores on a basis of over 3,000, so it's not going to have a material impact.

Then lastly, sometimes the averages, average volume declines in margins kind of belie the range that you're seeing. Could you maybe give us a sense of kind of where the worst areas, and do you have some areas that are down well over double-digit percentages? And what are the strongest areas of the Company? Do you have any areas showing double-digit percent kind of volume trends?

I think in Bob's comments we gave some indication, geographically, about where we're struggling, and I think we made the comment that the southeastern part of the United States was our poorest performing, with the exception of that one division, the other three actually had had sales gains, including pricing and acquisition support for them, but definitely the southeastern part of the United States, which for us is the Virginias, the Carolinas, Georgia, Florida, and the Caribbean, where the vast majority of the new residential housing market has impacted, and continues to do, so by the way. We don't think we have seen the bottom, and we don't think we'll see the bottom in '08. We think it deteriorates in '09, particularly from Florida, from the latest data points we're looking at. So that's the part of the United States that we're getting hit with the hardest. When we look at by more of a customer segment, again, the new residential component of this business, not only in southeastern, but wherever there's new residential, the west coast, as well, continuing to struggle.

John, through June, new residential construction square footage was down more than 40%. Nationally. And certainly above that in the pockets that Chris mentioned.

Thank you.

Our next question is coming from Dmitry Silversteyn with Longbow Research. Please state your question.

This is [Jonathan Grassy] for Dmitry. Can you first give us your performance in the Paint Store Group versus the Consumer Group versus the overall market? It did a lot better than one of your competitors who reported this morning. What would you attribute that to?

First of all we're just seeing some of those other numbers come out, and we rely on the Federal Government's data points, which usually come out several quarters in arrears. So I'm not sure we're prepared to claim victory just yet on this quarter. Our strategy has been to focus on primarily through the Stores Group, on the professional painting contractor, and our -- we are bullish on that segment long term. To the extent that those -- that customer continues to grow and play an important role we'll benefit from that. We are definitely taking on the chin in the new residential. We marginally believe that we're gaining share against all the segments that we're involved in, and time will tell whether that continues.

There are a few segments, Jonathan that we mentioned are doing -- are still holding up okay. Industrial a minute nabs coatings is holding up okay. Commercial repaint, which is property management sales in terms of the industry are holding up pretty well. One of the advantages of our stores network is that we can focus the attention of our selling organization on those segments that are holding up. So that's where they've been concentrating their efforts, and it may bear out in perhaps a little less negative growth rate in the industry.

Okay. Are you seeing a big difference between professional contractors and DIY customers?

No, both are down.

Similarly?

You know, within reasonable range, they're not dramatically different.

And then I guess one last question regarding Latin America. Have you started to see any deterioration in that market or is that holding up pretty well?

Holding up well for us. Predominant portion of our business in Latin America is in Brazil. That's the largest country for us. That economy continues to do well. We have a good presence in that country with architectural, industrial, automotive, finishes, as well as some specialty products as well. No end in sight right now.

Okay. Thank you.

Our next question is coming from P.J. Juvekar with Citigroup. Please state your question.

Hi, good morning.

Morning, PJ.

Bob, can you give us some price volume breakdowns in all your three major segments? I think that would be helpful if you give that on an ongoing basis.

P.J., we've never done that, other than to say in somewhat general terms that certainly volumes are down more than sales, which implies that pricing was positive, and, you know, I think Jeff kind of spit out some numbers earlier in the call, and they're certainly in the range.

Okay. I will follow up with you on that.

Okay.

You mentioned that you announced third price increase in Paint Stores Group. The big boxes are not raising prices fast enough. So is there risk that you lose the marginal customer to big box?

You know, that's always a risk, P.J. We pay close attention to that. We're aided by the fact that Sherwin-Williams product are only available in our own stores, so the apples to apples comparison is not something we were concerned about. The quality of the products, the innovation, the continued focus on bringing new product to market also has created a gap anyway in that environment. And, of course, we're paying attention. We're blessed with great competition in this space. The price elasticity of demand is important to us. However, we are behaving in our typical traditional fashion, rationally, in raising prices to offset raw materials, and we'll continue to do that going forward.

Thank you.

Thanks, P.J.

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

Good morning.

Good morning, Amy.

Two quick questions. The first one is, what's your year-over-year raw material cost increase assumption behind your second half '08 earnings guidance?

Amy, when we talk about raw material costs we typically comment on the industry. As you know, at our financial community presentation, we said that we expect year-over-year for the full year raw material costs to be up in the 9% to 14% range. They were certainly less than that in the first half, which implies that they're going to be on the high side of that range in the second.

Okay. And then -- I guess you'll prepare for another price hike in the second half '08 if we see the raw materials cost peak over the next six to 12 months.

That would be the historical way we've dealt with that and you should expect to us continue to do that.

Non-residential construction market, obviously people have started to worry about that market in second half '08, not only the commercial sector but also the industrial and institutional sectors. Can you remind us how much is the Sherwin-Williams exposure to that market and also if overall non-residential construction market demand declines by 10% or 20% in second half '08, on a year-over-year basis how big impact would that be on Sherwin-Williams?

In answer to the first part of the question, we have pretty broad exposure across all new construction segments in the U.S. So we're certainly in that -- in those arenas, and have substantial share in all of those arenas. Basically what we've seen so far is that some of the non-residential markets have already been declining pretty rapidly. The commercial and manufacturing segments are down sharply through the first half, through June total nonresidential is down about 19%. But there's kind of a dichotomy there because -- at least according to the data we're looking at a lot of those institutional components or categories are still holding up well. Educational buildings, public buildings, et cetera, are still pretty sharply positive. So we have not seen weakness in those sectors yet. It's not to say it can't come, but it certainly could.

If you look at the breakdown of the industry, when you're talking about new construction, you're still only talking about a relatively small piece of the business. You're talking about primarily the architectural coatings market, which is roughly half of the industry in the U.S. So you're excluding all the industrial segments that are growing pretty well. And then, within the architectural segment, new construction only accounts for about 20% of unit volume. So we're going to see pressure in residential and non-residential new construction, but it's pressure we've been seeing, and it's small portion of the overall market.

So that means in the second half, your second half '08 EPS guidance, you don't assume much more pressure from the non-residential construction market. Is that right?

We assume it will continue to diminish, but to Bob's point, the scale of it is relatively small, and it's baked in the forecast we're giving you.

Okay, understood. Thank you.

Our next question is coming from Jeff Zekauskas with JP Morgan. Please state your question.

Thanks very much. How are prices going in your consumer business? Are you -- do you have any plans to increase prices in the third quarter?

Yes, Jeff, we have, as we've indicated earlier, taken pricing out in our Consumer Group at the beginning of the year, and the comment that I made in my opening remarks were that across all segments we're instituting pricing in the July-August time period. That includes our Consumer Group, and that includes the comment that these are in the high single-digit range.

Your global business didn't grow as much as it normally does. Can you talk about some of the weak factors that soften the results this quarter?

As you know, Jeff, in our global business we have really three different businesses that we include in that. We have our automotive refinish business on a global basis. We have our product finishes, what we call our chemical coatings business on a global basis, then we have our international architectural business, primarily in Latin America. The Latin America and architectural businesses have continued to do very well and trend at the same kind of high performance that we've seen the last several quarters. The softness for global in this particular quarter mainly is coming in the domestic automotive businesses, refinish business is down as miles are declining with higher oil prices. And some softness in our product finishes business also domestically.

In the second quarter, were the volume trends very different month to month, or could you perceive any trend through the quarter, Chris?

Well, the second quarter, you have to remember, April we didn't have Easter versus the last year, but when you adjust it for April, if you look at April, May, and June, there really was no distinguishable difference. It was relatively strength or weakness was across the board.

And lastly, one of the raw materials that really hasn't touched the paint industry very much over the past couple of years has been TI02, but there's been a lot of raw material increase for the TI02 suppliers, for some of them, notwithstanding the very weak demand environment. Are they having any luck in pushing through price increases?

I think the revised guidance that we've given now on the industry's raw material costs likely to be in the 9% to 14% range does include the recent raw material price increases announced in titanium, and that would be premature for me to comment on how those are going for them.

Okay. Thank you very much.

Thanks, Jeff.

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

Good morning, all.

Good morning, Gregg.

I'm looking at that time interest expense, and in light of some of the -- Sean's comments what is your guidance for the full year? Do you expect interest run rate to sustain or to go down, or can you help us out on that one?

I think what we'll mention is that the net interest expense, which is interest expense minus the interest income, we believe will be in the low $60 million range. So between 61 and $63 million.

Okay, excellent.

For the year.

Good. Second question is, you mentioned, if I recall that there are 39 new stores open year to date, and you expect 100 by the end of the year. Will the bulk of these new openings come in the third quarter, or are they going to be spread out fairly evenly over the rest of the year?

You know, Greg, we start every year with the discipline and mind-set that we're going to get these open, 25 every quarter, on a straight line, and despite our best efforts, they always tend to lag toward the back half of the year. A lot of this is driven by municipality, building inspectors, et cetera, that are creating delay in the process. There always seems to be a push to get them in before the year is over. That's important to developers and landlords, et cetera. So despite our best forecasting, this thing always tends to push towards the back half. My guess is, as we sit here right now, we're thinking we're probably going to have pretty equal third and fourth quarter, but the reality and the history would tell you some of the third quarters will lag and the fourth quarter has always been our largest opening quarter.

Thanks for the help.

Thanks, Greg.

Our next question is from Ivy Zelman with Zelman & Associates. Please state your question.

It's actually Dennis for Ivy. My first question relates to the Paint Stores segment. If you look at the 40 basis point deterioration in margin, can you break down the delta on the growth line versus the SG&A line on that segment?

What we've always continually said, we need to be on a 3% growth rate to start to see some leverage. So when you see that our external sales for the first six months are about negative 1-2, the sales are probably 30% of the -- of the deterioration and 70% is the gross margin.

Well, I guess looking at at different way, would SG&A within that segment be lower year-over-year?

Not lower year-over-year but it was well controlled. The reason why it's not probably in the core -- what I'll call core was lower. But with the acquisition last year of MAB in June 1st, we had three months versus one month. Columbia had three months versus zero months. So without acquisitions, it was lower. But with the acquisition it was higher.

So the percentage of sales, SG&A would have been slightly lower within that segment on a comparable basis, and the deterioration would largely be driven by leverage loss in the raw material pressure?

Yes.

Okay. Remembering back it to investor conference, I don't think the 9% to 14% increase included the most recent Dow announcement. Is there a reason why that didn't put some upward pressure on that?

I think we're waiting to see how that price increase goes in. I mean, the reason we give a range, Dennis, is because there's a lot of moving parts. And the range was up dramatically from our previous range. So it anticipated some future pricing actions.

okay. That's helpful. Then just lastly, Sean, I missed your comment earlier about the 4Q '08 LIFO adjustment. Can you run through what you're getting at there?

What I'm getting at, we are a LIFO company. What we do is we run our company on FIFO, then put in the LIFO research. As the raws are increasing this year, as it goes from the lowest raw material increase, we're going to experience, first quarter through fourth quarter, so the last raw materials are the first ones that we're going to expense through our P&L. So what we do is we put in a forecast, and we try to put in what we think the LIFO expense is and we try to straight line it quarter by quarter, but when we look at it, invariably when we have years like this, the fourth quarter, the LIFO expense tends to be higher than any other quarter, as more information comes in, as more and more the raw change. So we just have more LIFO expense in our forecast in the fourth quarter than any other quarter.

Okay. So I guess one way to think about it, if you had perfect forecasting, the current gross margin would be slightly lower, in the fourth quarter would be slightly higher than what you'll probably ultimately impact.

Yes. What ends up happening, because of our sales curve that higher expense creates a higher impact because of the fourth quarter, because of the low sales.

Okay. Continue on.

No, I was just is going to mention, I wanted to mention to Saul, the sheet that I have here just shows the raw materials versus the forecast, and the raw material variance for the second quarter was immaterial. So it was right on our forecast. I just don't that have forecasted number.

Sean, did income close?

No, did it not close in the first or second quarter. We believe it will close in the third quarter.

Thanks a lot, guys.

Thanks, Dennis.

Our next question is coming from Eric Bosshard with Cleveland Research Company. Please state your question.

Good morning. Two things, first of all, the LIFO effect, Sean, that you just talked about in 4Q, do we continue with a difficult year-over-year LIFO comparison when we get into 1Q and 2Q of '09 as well?

No, because usually we'll reset the standards, then it won't go right into our standards, and the first -- but you are absolutely right, we believe the first and second quarter will be -- right now, the way the run rate, the raw material hurdle we'll have will be the highest in the first and second quarter, of '09.

Okay. And then secondly, the price increase, the third price increase in eight months, I think, is unprecedented in your history. I know you've had three in 15 months or something like that. But how is it going if you could give us your perspective on the feedback from your customers and also from a competitive standpoint, how you feel like that's going?

Yeah, I'll comment on that Eric. Two days ago we had all of our store leadership in from around the United States to go through a first half review with them, and this was a topic of great discussion, as you would imagine. I would say that as we've commented frequently on these calls, as well as on individual meetings with investors, we are operating in a rational industry. We are seeing pricing activity occurring from all of our competitors, and we are working our way through this. No customer is happy to receive a price increase, let alone three of them in one year, and specifically in the middle of the paint season. So these are difficult discussions. They're well supported with facts in terms of why the company needs them. Our customers, to the best of their ability, are passing them on.

We are blessed particular well the professional painting contractors. We've also shared the fact that a typical painting job is approximately 80% labor, 20% material. So that does mitigate the impact somewhat for these folks, and our guys are out there doing a good job of making progress on this. The price increases that we're talking about in the July-August time period are being announced as we speak. They're not set to take effect until later in the month. So it's a little early for us to comment on how well they're going to go in, and we'll certainly be prepared to comment on that on the next quarter call.

Great. Thank you.

Thanks, Eric.

Our next question is coming from Steve O'Neil with Hilliard Lyons. Please state your question.

Good morning.

Good morning, Steve.

I think you answered this as part of Jeff's question but could you elaborate on the impact of the domestic economy on the Global Group? I think the tail end of his question you answered that, and I'm afraid I missed it.

We didn't give any specific numbers, Steve, on what that was. We just directionally commented that while the architectural businesses in Latin America and the other businesses products were doing terrific for us that some of the softness in the segment relative to previous quarters was related to the domestic automotive refinish and some of the domestic product finishes businesses, which are feeling the effects of the economy in North America like so many other businesses.

And then I think this was asked, and I'm afraid I didn't understand it. Did you say earlier that your guidance of $1.40 to $1.50 from March did include the impairment charge?

Yes, we had figured that we would have some impairment in the quarter in that number.

Thank you.

Our next question is from Gregory Melich of Morgan Stanley. Please state your question.

This is [Matt McGinly] on behalf of Greg. Can you tell me how the mix has changed as your prices have increased? Have you seen any signs of a down trade?

Actually, we looked again at that at the end of July, and we looked at specifically some of the high end exteriors and we're not seeing it shift down at all. We're seeing a slight positive shift for us.

Okay. In regard to promotional and advertising spending in this environment, are you increasing it due to the environment, or are you decreasing it in line with the drop in demand?

Basically consistent with the process. Those dollars are managed or a percent to sales, so they may be slightly down this year, but in terms of tone, types of discount, frequency, all those things are maintaining.

Okay, great, thanks a lot.

Thanks, Matt.

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

Thank you. Two questions. First, Chris, still a bit confused on your outlook for the paint market. I know you talked about the southeast getting worse next year. If you look at the broad national architectural market do you think we've bottomed here at 8% year-over-year decline? Do you see it getting worse in the second half before it it gets better?

Don, we're a little reluctant to give outlooks and forecasts. This has been a remarkable period to go through. We think that certainly there are pockets in the United States where the new residential market will continue to deteriorate, even further from these historic low levels. And to the extent that that's offset by the repaint markets, it's just really early for us to make that call to. Your point, with 8% gallon declines for the industry, it would be difficult to see that worsening much from that level. But we are a little reluctant to say it's going to get any stronger from that level, certainly for the next several quarters.

A capital structure question. You said you haven't really changed your view yet post the successful resolution of the pigment litigation to lever up a bit more. Is that partly because you're trying to keep your powder dry for acquisitions, and what is the sort of acquisition environment or some of the smaller companies still a little shell shocked about the environment and not yet willing to consider selling?

On your first point, you're absolutely correct. We want to keep the powder dry. We do think -- and this goes to your second point. We think that eventually there might be some real nice assets here. We're continuing to look at it but I don't think the owners of these business has really changed. We'll see how they feel over the next six months and to the year, but we continue to push.

And what's the backlog like on international acquisitions? Is there any more progress there?

There's some interesting properties out there right now. To Sean's point, more willingness to sell on an up trend. We don't comment much more beyond that in terms of what we're seeing or what we're doing.

Thank you.

Thanks, Don.

Our next question is coming from [John Emrick] with Iron Works Capital.

Couple of unrelated questions if I could ask them separately. First of all, I apologize, I missed the depreciation and amortization guidance for the year and if you gave capex ranges as well.

We did. The capex range that we gave, John, was $140 million to $150 million.

Okay.

And for the year, we said depreciation would be about $150 million. And amortization would be about $21.4 million.

Super. And second to last, what's the right tax rate to use for this company, kind of on a go-forward basis?

We think that the low -- right now we've been able to maintain in the low 30s. We've commented that we think that that's what will be. On an ongoing basis our tax rate is 38%. The low to mid-30s would probably be the right one to use.

Okay. Then lastly, just some balance sheet metrics specifically debt and cash, long and short-term, if you had it.

Yes, our total debt at the end of the second quarter was $1 billion 250 -- or, I'm sorry, $1.5 billion, and $300 million of that is long term, $1.2 billion is short-term.

Cash?

$50 million, approximately.

Thank you very much.

Our next question comes from Chuck Cerankosky from FTN Midwest.

This is Alex sitting in for Chuck. What trademark was impaired in the quarter?

These trademarks were, as Sean said, of the $23 million, $20 million in our Stores Group. We don't give specifically which ones but we've indicated trademarks from recent acquisitions as we've begun to consolidated quicker.

Thank you very much.

(OPERATOR INSTRUCTIONS) Our next question is coming from John Roberts with Buckingham Research. Please state your question.

This morning PPG indicated there were significant differences regionally in raw materials, and that there were international raw material costs were significantly lower for them than domestically. Are you maxed out in terms of what you can do regionally to shift your sourcing?

I can't really comment on Chuck's comments on the PPG call in terms of what they're saying. These chemicals frequently are priced on a global basis. We are sourcing chemicals, both from the United States as well as markets around the world. I wouldn't characterize us as being maxed out on any raw material strategy, and we'll continue to aggressively manage these going forward.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Thank you. I'd like to close by expressing our appreciation for you taking time to join us this morning. As usual, I will be around this afternoon to answer any additional questions that arise, and thank you for your continued interest in the Sherwin-Williams company.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.