宣偉 (SHW) 2008 Q3 法說會逐字稿

Good morning. Thank you for joining us the Sherwin-Williams Company's review of the third quarter 2008 financial results and expectations for the fourth quarter and full year. With us on today's call are Chris Connor, Chairman and CEO; Sean Hennessy, Senior Vice President, finance and Chief Financial Officer; John Ault, Vice President, corporate controller; and Bob Wells, Vice President, corporate communications. The Company has provided information regarding the third quarter and first nine months financial results, business segment sales and profits, balance sheet items and selected statistical data on their website, www.sherwin.com. Choose about us investor relations third quarter press release. Please access this information to supplement comments made on this call.

This conference call will include certain forward-looking statements as defined under US federal securities law with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made and the Company undertakes no obligation to update or revise any forward-looking 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. This call is being webcast simultaneously in listen-only mode by Vcall via the internet at www.sherwin.com. An archived replay of the call of this call -- of this webcast will be available approximately two hours after this conference call concludes. It can be accessed at www.sherwin.com and will be available until Tuesday, November 4, 2008, at 5:00 PM eastern time. After the Company's opening remarks we will open the session to questions.

I will now turn the call over to Mr. Bob Wells.

Thanks, Doug. Good morning everybody. Summarizing overall Company performance for third quarter 2008 versus third quarter 2007, consolidated net sales increased 3.3%, to $2.27 billion. Acquisitions increased sales 1.7% in the quarter and favorable foreign currency translation rate changes added 0.9%. Consolidated gross profit decreased by $27.9 million for the quarter to $960.5 million. Gross margin decreases 270 basis points to 42.3% of sales from 45% last year. The reduction in gross margin was primarily due to higher raw material costs, lower manufacturing volumes and expenses associated with the closing of certain manufacturing and distribution facilities during the quarter, which were all partially offset by higher selling prices.

Selling, general and administrative expenses decreased as a percent of sales for the quarter to 30%, from 30.5% last year, due primarily to tight spending controls. Interest expense, net of interest and investment income, was $14.3 million compared to $15.2 million last year, due to a year-over-year reduction in average affected interest rates. Consolidated profit before taxes for the third quarter decreased $28.2 million, or 9.6%, to $266.1 million, due entirely to the reduction in gross profit. Our tax rate for the quarter was 33.5% compared to 31.9% in the third quarter of 2007. We expect our effective tax rate for the full year to be roughly flat with last year at 33%.

Consolidated net income for the quarter decreased by $23.3 million, or 11.6%, to $177.1 million. Net income as a percent of sales for the third quarter was 7.8% compared to 9.1% in the third quarter last year. Diluted net income per common share for the quarter, decreased 3.2%, to $1.50 per share compared to $1.55 per share in the third quarter of 2007. Acquisitions and currency translation changes together added approximately $0.04 to diluted net income per common share for the quarter.

Looking at our results by operating segment, sales for our Paint Stores Group increased $9.5 million, or 0.7% to $1.41 billion in the third quarter 2008. This increase was due primarily to acquisitions completed since the third quarter last year, which added 1.5% to sales, and price increases. These two factors were partially offset by lower volume sales during the quarter. Comparable store sales, sales by stores open more than 12 calendar months, decreased 1.4% in the quarter compared to third quarter last year. End market demand remains soft across most architectural coating segments during the quarter with no material change in sales momentum month to month.

Regionally, in the third quarter our mid-western division led the sales performance followed by eastern, southwestern, and southeastern. Three of the four divisions achieved positive sales growth in the quarter. Segment profit for the Group decreased $7.4 million, or 3%, to $241 million. Operating margin decreased to 17.1% of sales from 17.7% in the third quarter last year, due primarily to increased product costs that could not be fully offset by price increases and positive contribution from acquisitions.

In the Consumer Group for third quarter '08 sales increased $6.2 million, or 1.8%, to $355.7 million. This was due primarily to selling price increases and volume gains at some of the segment's largest retail customers. An acquisition completed in 2007 added 0.4% to sales in the quarter. Consumer segment profit decreased $37.8 million, or 59%, to $26.3 million in the quarter. Segment profit as a percent of external sales decreased to 7.4%, from 18.4% in the quarter -- prior year, primarily due to higher raw material costs, lower volume through-put in manufacturing and distribution operations, and expenses associated with the closing of certain manufacturing, and distribution facilities that were all partially offset by tight SG&A control. Acquisitions had no impact on segment profit for the quarter.

Turning to our Global Group for third quarter '08, net sales in US dollars increased $55.8 million, or 12.5%, to $500.8 million. Acquisitions increased Global Group's sales in the third quarter by 3.1% in US dollars. Stated in local currency sales grew by 8% in the quarter, due primarily to volume gains, selling price increases, and acquisitions completed since third quarter last year. Segment profit for the Global Group in US dollars decreased $2.7 million, or 5.6%, to $45.3 million. Segment profit as a percent of net sales declined to 9% from 10.8% last year. This decrease in the segment's profit in the quarter was mostly attributable to increased raw material costs and the negative impact of a soft domestic economy on portions of the segment's business that could not be fully offset by volume gains outside the US and price increases.

Turning to some balance sheet items, our total debt on September 30, 2008 was $1.0268 billion. Short-term borrowings increased $59.6 million to $715.9 million compared to third quarter last year. Total borrowings to capitalization were 37.1% at the end of the quarter versus 34.2% at the end of third quarter 2007. Long-term debt to capitalization was 15.2% at the end of the third quarter this year compared to 14.2% last year. Our cash balance at September 30, 2008 was $40.9 million compared to $21.2 million in 2007. During the third quarter the Company acquired 793,000 shares of its common stock on the open market, bringing our year-to-date total to approximately seven million shares. On September 30, 2008 the Company had remaining authorization to purchase 20 million shares. In third quarter 2008 we spent $20.9 million on capital expenditures, depreciation expense was $36.2 million, amortization expense was $6.2 million. For the full year '08 capital expenditures will be $125 million to $140 million, depreciation will be about $145 million versus $139 million in 2007, and amortization will be $23 million versus $24.5 million in '07.

I'll conclude my comments with a brief update on the status of our lead pigment litigation. In Rhode Island defendants have filed a motion in the superior court to recover certain expenses related to the trial, including fees paid to court-appointed coexaminers certain deposition costs, travel expenses and expenses related to expert testimony. In Ohio, the Ohio Attorney General suit, which was removed to federal court by the defendants, has been remanded back to state court by a federal judge. We do not expect any activity in the case until at least late November following the election of a new Attorney General. In Wisconsin, the Thomas case, a personal injury case tried successfully to a jury last fall, has been appealed by the plaintiffs. Briefing is now taking place although unlikely that the case will be heard this year. Another individual plaintiff case has been heard on appeal by the Wisconsin supreme court on the question of whether lead pigment is an inherently defective product. A decision should come out in the fourth quarter of this year or first quarter of 2009.

In California, the state supreme court has agreed to consider the question of whether it is permissible for cities and counties to retain contingent fee counsel to aid them in their suit against the former manufacturers of lead pigment. Briefing is on going and oral arguments should not take place until at least the second quarter of 2009, with a decision some months after that. Finally, in Mississippi the trial in the Gains case I delayed until June 17, 2009. This case involves as single plaintiff adolescent. There are currently a number of procedural and dispositive motions pending before the court and it is not expected that they will be decided any time soon.

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

Thanks, Bob, and good morning, everybody. Thanks for joining us today. Third quarter of 2008 turned out to be better than we had anticipated. Both sales and earnings per share for the quarter exceeded our guidance, due primarily to a marginally-stronger performance at some of the larger retail accounts, the successful implementation of some of the price increases we've announced over the past three quarters, and tight expense control. Despite this performance we're not satisfied with these results given some key metrics that are still moving in the wrong direction; sales volumes gross margin and net income, for example.

However, we did make significant progress in some very important areas of our business, specifically our control of SG&A, organic store openings, management of working capital and, as always, cash generation. Our ongoing efforts here at Sherwin to trim fat and build muscle across the Company continued in the third quarter and helped offset the effects of a falling demand and rising input costs. During the quarter we continued to close redundant store locations and controlled our store service expense by reducing scheduled overtime and part-time hours. Consolidated SG&A expense for the quarter increased by only $11 million compared to the third quarter of '07, and as Bob previously mentioned, actually declined by 50 basis points as a percent of sales.

In the third quarter our Paint Stores Group opened 18 new stores and closed 12. So far this year we've opened 57 new locations and closed 74, for a net reduction to 17 stores. Our store count in the United States, Canada and the Caribbean now stands at 3,308 locations. For the full year of 2008 our Paint Stores Group remains on track 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 Finishes Group added ten new facilities in the third quarter, bringing their branch additions for the year to 22 and the total store count to 541 locations.

We also made progress in the management of working capital during the quarter. At the end of the September our working capital ratio, defined as accounts receivable plus inventories less payable for sales, was down 140 basis points to 13% of sales compared to 14.4% last year. The combination of responsive production planning, mainly holding inventories in line with sales volumes, and prudent management of receivables and payables reduced our network working capital by $92 million since the end of the Q3 last year. Compared to first nine months of '07 year-to-date net operating cash increased by almost $29 million to $593 million, despite a drop in net income. Free cash flow, which is net operating cash minus CapEx and dividends, increased by $53 million to $377 million as a result of the increase in net operating cash and lower CapEx spending in the first nine months.

I've touched on some aspects of our business that are moving in the right direction, let me comment briefly on some things that are not moving in the right direction, beginning with the weakness in our sales volume in the quarter and year to date to prove we are not immune to the significant downturn in both the domestic and worldwide coatings demand. Although we;re committed to keeping costs in line with sales, we believe the best response to declining volume is to continue to expand our controlled distribution platform into new markets, as well as to continue to develop and launch new innovative products and services and we're doing both of these.

Our margins also moved in the wrong direction in the third quarter, again due primarily to the persistently-high raw material costs. The recent reversal in crude oil and natural gas prices have begun to positively impact raw material pricing, but we have a long way to go before input costs return to late '07 levels. It's likely that year over year raw material pricing for the industry will be up in the low end of our range of 9% to 14%, successful implementation of the price increases announced earlier this year and selective reductions in manufacturing. Capacity will be vital to improving margin performance in future periods.

Liquidity is another issue on everyone's mind, so I've asked Sean Hennessy, our Chief Financial Officer, to take a few moments to comment briefly on our liquidity sources. Sean?

Thanks, Chris. Good morning, everyone. We have two liquidity sources for short-term credit that total $1.9 billion; a $910 million credit facility that we use to back our commercial paper dollar for dollar and a $1 billion revolving and letter of credit facility from Citibank. Today we are using draws from our $1 billion revolving credit facility for 80% to 90% of our short-term needs and meeting the remainder of our needs in the commercial paper market. The combination of our he internal cash flow, draws from the revolver facility and the (inaudible) of commercial paper will satisfy our current and future liquidity needs. OUr short-term debt balance at year end is projected to be $575 million and our first quarter short-term liquidity needs projected will peak at $790 million, which is below either liquidity source and well below the combined source of $1.9 billion. We are well positioned to meet any liquidity needs for the Company.

Chris?

As we look ahead the final quarter of 2008 will be a challenging one. Worldwide demand is likely to continue to deteriorate and we expect a input cost pressure is likely to persist as the raw material price increases already announced work their way through the supply chain. Our outlook for fourth quarter 2008 is for consolidated net sales growth, in percentage terms, to be in the range of plus or minus low single-digits compared to last year's fourth quarter. With sales at this level we expect diluted net income per common share to be in the range of $0.40 to $0.60 per share compared to $0.80 per share for the fourth quarter of last year. For the full year 2008 we expect consolidated net sales to be slightly above 2007. With annual sales at that level we're raising our expectation for diluted net income per common share for the year to be in the range of $3.97 to $4.17 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 toward our long-standing practice of paying out approximately 30% of prior-year's earnings per share and marking our 30th consecutive share of increased dividends.

One final note, planning for 2009 is currently in progress. We will be prepared to provide you with sales and earnings expectations for next year during our year-end conference call scheduled for late January. Again, we'd like to thank all of you for joining us this morning and now we're happy to take your questions.

Thank you. (OPERATOR INSTRUCTIONS) First question prom the line of Eric Bosshard with Cleveland Research Company. Please proceed with your question.

Good morning, thank you.

Good morning, Eric.

Couple things. In terms of -- the progress on the SG&A looks quite impressive. On the gross margin line the deterioration looks like it was a little worse in 3Q than we saw in 2Q on a year-over-year basis. Can you help us understand, number one, the incremental progress with price and contribution of price in the quarter versus what we saw in 2Q? And then secondly, can you help us understand why gross margins behaved as they did and how we should expect that going forward in the current price (inaudible)?

Okay. Couple of things there, Eric. First on the pricing. We actually -- when we look at pricing progress that we're making with the price increases we feel pretty good. I would say that the third quarter on the Stores Group we continue to show the improvement that we've expected in the past and it's really in line. I would tell you that the reason why the margin was a little short, I know last quarter someone asked me and I said that the margin would be in that 42% to 43.2% range, it's really - the LIFO expense was a little higher than expected in the third quarter and our margin also reflected the costs of closing some logistics operations that Bob mentioned during his comments. So without that we'd have been right in that range, we'd have been just short of that range, so pricing is doing just like we expected and so forth. When you look at the fourth quarter margins we expect that the margin will be down in the fourth quarter, but we're probably not going to give you guidance this quarter as exactly where we're going to be. We're not going to give that kind of a range, but it will be below last year but the pricing we're pretty comfortable is going well.

In terms of putting some numbers around that, can you give us sense of what, either in total or in the Stores Group, the contribution from price was in the quarter and also can you give us any sense of the one-time costs that you ran through the P&L in both Stores and Consumer (inaudible)?

Sure. Pricing for the quarter in the Stores Group we can help you with that, Eric, as you know from the report we were up slightly in that segment and volumes down in the high single-digit range.

When you ask about the incremental costs in there, we do have in the Consumer Group the cost of closing some logistic operations and so forth. And as I just mentioned, we came in at 42.3% and we told you that we were going to be in the 42, 8% versus 43, 2%, so I told you without it we'd be at the low end of that so it's 0.5% our sales is pretty much just short of that.

Then lastly, in terms of the -- you commented that you didn't want to give comments on 4Q gross margin, but should we -- and I understand how LIFO and FIFO really have a different impact based on the size of the quarter, but should the year-over-year decline in gross margin should 3Q here be the trough and should we start to see some recovery quarter to quarter as we move forward from this point?

And that's why we sort of -- there's a lot of different moving parts in the margin in the fourth quarter. It's not just LIFO, it's a lot of other things. We take a year-end inventory at our stores, we evaluate different things. We really don't want to give that specific of guidance. Prob -- we'll give a little more color at the end of the fourth quarter and then give you a little more guidance for '09 in the January call, as Chris mentioned.

Okay, very good. Thank you.

Thanks, Eric.

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

Thank you. Good morning.

Good morning, Amy.

The first question, for the segment profit margins see -- for this quarter we see a big divergence between the Paint stores with a 17% and the Consumer, which reported about 7.4%, could you just provide some color why we see the big difference? And also, secondly, for the Paint store -- for the Consumer's segment margins I think it's close to historical lows if we look at the trends over the past several years, do you think it has troughed or how we think about the trend for that segment going forward?

Consumer Group margins, Amy, are really driven off of two distinct different issues. One is the ability for this group to get pricing with their customers as they move their products through our third-party retailers. And as we've commented on this call, as well as past calls, the pricing activity there is proceeding as we would expect it to. The bigger impact in the quarter is that the second impact for the Consumer Group is their margins are impacted by the volume that goes through the supply chain part of our Company. As the Store's volume has softened throughout the year and as we just commented to Eric's question, backwards in the quarter, high single-digits, the impact on this segment's margins you're seeing the impact of it with the numbers that you speak to. Whether or not we've troughed will be determine on the kind of volume gains we see going forward. If we can start to moderate and see a little lift in that those margins will come back up to their historic run levels.

Okay, thank you. My second -- actually my third question, for the -- the Paint Store Group reported the 1.4% decline in comp store sales in 3Q versus 3.9% decline for the first three quarters, wondering can you just give us a little bit more color on the underlying trends. Have you seen underlying demand stabilize while still at that low level or is like -- more of a function of easy comps?

I think we're seeing the impact of the price increases, Amy, work through the segment. Volumes have been consistently poor through this segment for the year.

Okay. Then can we assume in terms of pricing gains have already peaked in the third quarter or maybe the second half of this year?

I think the pricing gains have continued to (inaudible as we have historically said they do. Our last price increase for this segment was announced early in the third quarter and it typically takes us two to three quarters to get the full implementation, so there's pricing to come in the segment.

Thank you.

Thanks, Amy.

Our next question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question.

Good morning. This Silke Kueck for Jeff, how are you?

Hi, Silke.

A couple of questions. You said that you've had some volume gains at larger retailers and said the effect of gaining some share would suggest that the doing-it-yourself business is just doing better versus the professional market -- professional painters market?

Yes, I think that it's a little of both, primarily the former, Silke, that we have been seeing some share gains.

All right. And secondarily, can you talk about how the commercial business has held up, whether that's begun to slow, and how much readability do you have going into 2009?

Silke, as we've commented before the commercial business has been slow over the course of the year. Commercial square footage has been down significantly, like in the high 20%, range, and the rate of decline in August was about the same, it was about 27%. It suggests that we're not seeing further deterioration in the commercial market, just continued weakness.

In terms of your raw materials, do you expect your raw materials to be flat or down next year?

We haven't commented on that yet, Silke.. I think our plans are taking shape and our discussions with our vendors are occurring and we/ll be happy at that January call to give you our best look at the guidance for industry's raws for next year.

How about the fourth quarter, then, do you think that the current pull back in oil and gas costs will make a difference to the type of --?

Again, as we commented we are seeing some of the softening in the raw material input costs for us. We are now guiding you to the low end of our range of 9% to 14% for the industry. I would remind you that we are on the back half of a very traditional-looking bell curve for paint demand in North America, and any softening in raw material costs will have very little affect for us this year. We are winding down production, we're holding inventories flat. This is a period of time where we're not really acquiring a lot of raw materials.

Maybe two more questions. There was a reduction in corporate expenses in the third quarter and will we see something similar in the fourth quarter?

Silke, when you take a look at it we were down around $20 million. If you go through the details you'd see that really it's -- 70% of that decline was really the environmental expense that we had versus last year. We think that that's pretty much annualized now and when you look at the fourth quarter we -- right now we're looking at not showing that kind of improvement in the fourth quarter, being relatively flat to the fourth quarter last year.

Okay. And then lastly, you're still generating a lot of free cash flow and there's a large share repurchase still available, how do you plan to spend the free cash you generate?

I think share authorization that's remaining is exactly what it should be. We tend to get large chunks from the board it and it takes us a number of years to get through that, so the $20 million that are out there by no stretch of the imagination will we be bringing those in throughout the remainder of this year or even next year. We'll continue to use cash as we have historically and to the extent there is M&A opportunities we'll look to take advantage, but our cash uses for the year are pretty well set.

Thanks, I'll get back into queue.

Thanks, Silke.

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

Good morning, everyone.

Morning, chuck.

First question, Chris. In looking at these distribution manufacturing facilities that were closed during the third quarter, what did that relate to? Was it redundant equipment, is it -- are these permanent closures or is it just temporary due to demand?

No, Chuck, these are facilities that we've announced that we would be closing permanently and disposing of the assets. The vast majority of them have come from recent acquisitions that we made in the Store's Group.

Okay. Somebody just asked a little bit about the stock repurchase, Sean, what is your feeling given the current credit market where Sherwin should be repositi -- should positioned or thinking about and maybe you can put it in light of how you repurchased stock during the third quarter. Was it -- were you a little more aggressive in the early part of the quarter versus the latter part?

Actually it was probably the midpoint, Chuck, when stock prices first came down, but we were -- we felt during the first half of the year we had purchased the majority of the stock that we were going to buy for the year when we were looking at our cash as deterioration of the credit. As I mentioned, when you sit there and take a look at the thoughts of having around $575 million projected on short-term debt, which would would take our total debt into that $950 million to $975 million range that you can see that really the majority of the stock has been purchased and we think it's more prudent for us to be in a situation -- with our stock at the price it is today, it's still a good buy, but we're going to put -- make sure our balance sheet and our liquidity sources are fine for the year. So I would say that you're looking at a very similar type of quarter in the fourth versus the third.

In terms of the credit markets.

And the number of shares that we purchased.

All right. What's the acquisition environment like right now? Not everybody has liquidity resources that Sherwin-Williams has.

Well, as we've commented in the past, particularly in North America, when we look to do controlled distribution opportunities given the downturn in the market it's not a particularly good time for these privately-held businesses to come on the market. We don't think there's going to be much activity there. Opportunities for perhaps some troubled assets here and abroad are still out there; however, cost of money to get them has gone up significantly. I think the Company still has terrific access, given the liquidity position Sean took you through, to access the capital markets if we had an interest, but the costs have certainly gone up dramatically and that'll have a chilling affect.

Got you. Finally, Chris, any positive signs out there in any of your markets?

Well, I think the year has continued to show some strength for our protective finishes businesses, the industrial maintenance and marine category. We are seeing nice performance in our Latin America operations, but the domestic architectural businesses are still under quite a bit of stress and we don't see any end in sight,

All right, thank you very much.

Thank you, Chuck.

Our next question comes from the line of Saul Ludwig with KeyBanc. Please proceed with your question.

Hello?

Hello, Saul.

Okay. Can we just get a little more color on the -- first on the Consumer Group. The degree of earnings compression is what I want to focus on. The trends and volume weak, as you said, Chris, have been weak all year. Your inner-segment transfers year over year have been very similar throughout all three quarters, but the precipitous drop in earnings in the third quarter, is that more than it would be in, let's say fourth quarter? Could you just elaborate a little more on what was special and what drove the numbers down so much?

You know, Saul, when you take a look at it the third quarter, what we commented in the past is that each quarter the amount of -- the experience of raw materials continues to rise, so third quarter -- the raws were higher in the third quarter than either the first or second quarter. Secondly, you can imagine that because of our capacity situation what ends up happening is in the second and third quarter we're usually really producing at 100% volume on a daily basis. We did get our inventory down, we made sure our inventory's down because of the volume. So the third quarter probably -- and any one quarter is probably felt the greatest reduction in the volume going through put from the plants and DSC side than quarter one or two.

Quarter four, which is usually a situation where by the -- we start to -- we're used to bringing down the volume coming through the plants. I think that it won't be as dramatic in the fourth quarter, but we still have it going through. And then finally, we have mentioned that they took -- they did take the one -- took some logistic situa -- facilities out from the acquisitions that Chris mentioned, from the most-recent acquisition so they had to take that hit. So that's really what caused it to be the greatest. Last year in the fourth quarter our operating margin was 9.4, this third quarter it was 7.4. It probably will be less than the third quarter but the difference, which was down almost 11% in the third quarter, I just don't see it being that large in the fourth.

Closing the facilities, I guess alluded to that it was 0.5% on the gross margins, so that would be like about the $10 million or so?

Yes, I think it was -- we combined that with the incremental LIFO that we took to try to get -- yes, I think it's just short of that between the two, yes.

And would that have all been In the Consumer division?

Consumer would have taken, probably, the majority of it. Well, a high percentage of it, yes.

So if we were to add back that $10 million the decline then would have been more commensurate with what we saw in first half of the year?

Yes.

And then you're saying in third quarter it's going to be more like the first half of the year decline rather than the precipitous drop in the third quarter?

The fourth quarter you mean, yes.

Yes, fourth quarter.

Right. Then the next question I have is on the Global Group you did sell $50 million -- $55 million more product and you would have thought you had made gross profit on the $55 million of more sales yet your profits fell. I just wondered if you could give a little more color on what's happening there and what might happen as we move forward?

Yes, two things fell. Really in Bob's comments, the ten minutes that the -- we did see sales weakness and volume weakness in the domestic markets in the Global Group. I would tell you that the profitability on the domestic piece is a little higher than we have outside the United States for scale and other reasons that we have, and then also we started to see some currency hits in the Global Group.

And how do you see that playing out in the fourth quarter?

In the fourth quarter we do believe that the margin last year we came in at around eight -- we came in at 8% ROS last year. We think that in the third quarter we were down -- no, I'm sorry. Sorry we came in at 3%. We do think that we'll see a little improvement there.

What was 3%?

3% was the ROS for the fourth quarter '07 in the Global Group.

It was -- I had 6.3%.

You probably have added back a piece of the impairment we took that is asso -- that was associated with that.

You made $28 million in the Global Group last year in the fourth quarter.

Okay. I would say that you're not going to see the sharp decline that we had in the fourth -- in the third quarter.

Okay, great. And then finally on the volume, if you look at the percentage decline that you saw in your stores -- comp stores do you think that gets worse in the fourth quarter or basically stays at about whatever the decline was in the third quarter?

Yes, we don't think it gets worse, Saul. I think we're feeling the brunt of the market right now and time will tell whether it starts to come off of that, but we don't think it worsens.

And finally, I think on your last conference call, Chris, you presented a pretty pessimistic view in that when you were talking about the downdraft in earnings that you were going to experience in the second half of the year I think you extended that expectation to the first quarter, as well. Do you still feel as pessimistic about the first quarter, given the relief that you're seeing on raw materials, to the degree that you did when you last commented on it?

We're not seeing any movement in the demand for volume, which is the key driver for the Company, and it's just premature for us to comment on the first quarter. We'll be happy to do that in January.

Great, thank you very much.

Thanks, Saul.

Our next question comes from the line of Don Carson with Merrill Lynch. Please proceed with your question.

Yes, thank you. A couple of questions. Chris, where do you think we are in the architectural coatings downturn? You said you didn't see improvement. I think you talked in the past, though, total industry down perhaps 8% or 10% this year. Have we bottomed in the sense that the comps get easier next year and you're not going to see that kind of further decline? If you can outline how you see volumes for the industry going forward?

I think that everything that we read would indicate the housing market is still way too early to call the end. While existing home turnover, which is a key driver for us, is starting to show some life. There's an awful lot of forecast activity in there, which really shouldn't give us much confidence because it's not the kind of existing home turnover that we typically need to see to drive demand for coatings. New residential construction, again, not quite sure if that flattens out or declines further, but we know for a fact that the commercial construction tends to lag the residential market so we would expect to that be down, as well. We think it's way too early to comment that the end of the softness and declining year over year architectural coatings demand is at hand and for that reason 2009 could be a soft year for the Company, as well.

Another -- just to add to that, Don, recently it's been pretty well publicized that consumer spending is weakening, and although it's not as large a portion of our business as it is of the industry in total, the DIY market could soften further.

Okay. So basically the only good news is that maybe the comps get easier?

Correct.

On price in the Consumer Group, obviously some of your larger customers there they follow raw materials pretty closely. We are seeing some key raws start to break, like propylene into the acrylics chain, are you getting any pressure back from those customers to start cutting prices in line with raw materials since it was rising raws that drove the price increases, or at least for the rational for the price increases?

No, Don, we wouldn't comment specifically on any one customer, but as a segment we would comment that we have been taking pricing activity to the market. It's taken us longer to get that pricing in than it has in other segments and so Sean's comments on some of the way the margins flow throughout the year. I think it's early to determine whether or not we're going to see price pressure coming back from those guys.

Okay, and then final question. Sean, you mentioned that normally Q2, Q3 you're running about 100% operating rate on the manufacturing end, how weak was the operating rate in the third quarter?

It was probably in the high 80s, low 90s.

All right, okay. And then you mentioned normally Q4 is quite weak, what is Q4 normally, and then you said it might be better this year.

Well, yes. What I meant by that is, yes, usually in the fourth quarter we'll run around 75% of what we'll run in the second and third quarter, Okay, so you think could come in a little better then? Yes. We're not going to see the 10% decline from that point.

Okay, thank you.

Thanks, Don.

Next question from the line of Gregg Goodnight with UBS. Please proceed with your question.

Good morning gentlemen.

Morning, Gregg.

SG&A costs were pretty low this quarter, what do you see the run rate going forward specifically into 2009. Are we going to be at these levels or were there some one-time items that depressed that number a little bit?

No, I think -- Gregg we're in the planning process and what we've tried to do is avoid to give any kind of indication of where we're going to be in '09 and we'll comment on that at the -- in January where we give the final fourth quarter and then also full-year guidance for '09.

Sure. You did say fourth quarter is going to be flat with last year, approximately?

On SG&A the percent to sales?

Yes.

I think the cuts that we've made in SG&A are not one time or unique in nature. They're the blocking and tackling that we should be doing running a large retail organization and given volume performance, if it comes in as predicted, SG&A will be flat for the quarter.

Okay. The second question, in the past you've said that your plan is to open about 100 stores a year through thick and thin, good times and bad. Does that still your position into '09? Are you going to open 100 stores in '09 or you going to net out some closures also?

Well, we're opening 100 stores this year and if this is a thick or thin I'd say we got the 100 open in the thin part of the equation. Again, to Sean and Bob's comments, as well, we're not prepared today to give guidance for '09. Suffice to say the Company will continue to be opening stores next year as we build out that platform. Our long-term goal. as, we've commented frequently to the investment community. is that 4,000 stores in North America is the next mile marker along the path, we're just slightly over 3,300 locations, so we will continue o be moving in that direction and we will give you guidance on that January call in a range of the number that we expect to get done next year.

Okay. Thanks gentlemen.

Thanks, Gregg.

Our next question comes from the line of Steve O'Neil with Hilliard Lyons. Please proceed with your question.

Good morning.

Morning, Steve.

Just want to make sure I have this straight. You all were talking about the curtailment of manufacturing and distribution operations and I thought I heard you say that that -- is that primarily in the Consumer segment?

Yes the expense for that went 100% in the Consumer Group. That's where the expense was felt.

So that was not really referring to closing of paint store locations that were redundant?

Correct.

Okay, just wanted to make sure I had that straight. Thank you..

Thanks, Steve.

Our next question comes from the line of Jonathan Grassi with Longbow. Please proceed with your question.

Good morning, thank you for taking my question.

Good morning, Jonathan.

I guess first on your paint store pricing, obviously you guys have implemented three price increases so far this year, with our consumers perception of raw materials falling what is your expectations for being implement your traditional price increase in January?

Well, Jonathan, of course we're not commenting on whether we're taking any pricing activity in 2009 at this point. As we have historically commented that it takes us some time to get pricing implemented through our system, the most recent price increase in the beginning of the third quarter still being implemented as we speak and that's all we're really speaking to at this point.

Okay. I know you said you were just entering into negotiations for raw material costs for next year, but I was hoping you could just maybe comment a little bit on the titanium dioxide pricing. Obviously we're heard that price increases that have been announced by the titanium dioxide producers throughout 2008 have not really been realized but now that some of the other producers are getting behind some of these price increases they're expecting to realizing some price increases. Could you comment on that?

Yes, we seen, as you have, some noise surrounding titanium pricing yet still to come in the back half of 2008. Those numbers are baked into the industry guidance that we're giving of 9% to 14%. To your point about some of them not having been successful this year, that's typical for this industry. Pricing is often announced and then various levels of it are either accepted or negotiated or in many times not implemented at all.

Okay, thank you. ANd finally, on the -- just on the Global Group you've been getting about 34 to 4% revenue from acquisitions, when does that anniversary?

In the Global Group we actually completed an acquisition in third quarter, Inchem, so we will have acquisition sales all the way through the third quarter 2009.

How much do you think that's going to add in fourth quarter?

It's going -- I got to believe the fourth quarter will be right around the same amount in the third quarter , maybe it's slightly higher because of that acquisition. But we are going to annualize a few acquisitions in Uruguay, as well in Mexico in that Group. But in the third quarter acquisitions added 3%, and I would tell you that in fourth quarter it will probably in the

Okay. Thank you.

Thanks, Don.

Our next question comes from the line of Ivy Zelman with Zelman & Associates. Please proceed with your question.

Good morning, everybody. Congratulations on probably the best quarter of any company we'll see this quarter so you should be very happy.

Thanks, Ivy.

We're just trying to understand a little bit on the Consumer margins were obviously, I'm sure, not up to what you had hoped for, but you definitely had the ability for pricing to go up and it seems like the consumer is taking the brunt of that. Trying to understand the volume versus price mix going forward and how far you think you can push it in this environment with the consumer so tepid right now?

When you're talking about margin in the consumer side, Ivy, you're talking about the Consumer Group operating margins that were lower or the ability to --?

I'm assuming that the top line was good but margins were good, so the top line -- you got -- the top line was driven by strong price, right, so thee seems to be a bit of a disconnect so I'm just wondering --?

We keep coming back to trying to give as much color as we can into that group's margin performance for the quarter and the significant impact is the low stores volume had on the operating side of the Company, which is included in our Consumer Group. If we just look at the pricing activity of the Consumer Group marketing team and those brands who are our retailing partners, we have taken pricing, as we've announced. We're pleased with the implementation of that. We're seeing the appropriate progress on that side of it, and until we can start to get some volume coming back, primarily to our stores organization, that segment's going to be under margin pressure.

I know. I'm sorry, maybe I'm not asking the question directly right. I'm thinking more on a go-forward basis would you consider maybe reducing price to create more volume because the consumer is in such a very tough situation right now because you could maybe util -- get better utilization rates as volumes are better?

Yes, that option clearly is always available to us. I think, as we've commented frequently, the vast majority of the cost of these products is included in the raw material input and as those continue to stay high we're likely not to see prices come down and that would be our approach to that, as well.

And I guess we should make some assumptions if you get raw material relief that we'll see some of that pass maybe through to the consumer at some point?

You can make whatever assumptions you (LAUGHTER).

Okay. Your comments I think, were very frank regarding the commercial markets and how tough they are, with volume down you said north of 20%, do you think that this is a -- just a interesting perspective from someone in your tenured position and how does that compare to the 2001-'03 downturn and do you think that the non-res maintenance demand does it play out any differently next year versus new non-res?

Yes, the '01, '02 downturn for us in the commercial segment was really a maintenance product line that was under terrific stress, as corporate profits were tough, states and departments of transportations lacked the budget to maintain highways and bridges, et cetera. This particular downturn, as you know, has very little to do with that and it's mostly on the housing side as it's trickled through and now affecting the commercial construction side, as well, too. While that cycle turned around relatively quickly this one seems to have much longer legs and as we've been commenting on the call we think next year is a soft year, as well.

Great. Well, thanks, appreciate your answers. Thank you.

Thank you, Ivy.

Our next question comes from the line of [Greg Millich] with Morgan Stanley. Please proceed with your question.

Thanks, guys.

Morning, Greg.

Good morning. Just a follow up on mix versus price and how you calculate that in there. If the volume was down like it was, high single digit, we assume price was something similar to that on the other side, was mix a help to that price or was it a negative, given that DIY was stronger?

On the -- what we've commented on is mix has favorable again in this round of pricing. We have seen a positive mix for higher selling price products continually. If you break it out and just down into the different segments, we really don't go down that deep but in total the mix was positive.

And you haven't there seen any trend of consumers, whether they be consumers or pro -- your pro customers trading down at all?

On the pro side not at all. On the DIY side we do think that we're starting to see a little bit of trading down on the DIY side.

Great, thanks lot.

Thanks, Greg.

Our next question comes from the line of Robert Felice with Gabelli & Co. Please proceed with your question.

Hey, guys, most of my questions have been answered, just a couple more. The dollar strengthened over the last several weeks quite a bit and that's been a tailwind for a while, so could you highlight the impact of FX on Sherwin's P&L if that starts to go the other way?

Just so you know, if you take a look at what we've done is in our total debt structure we have approximately $100 million of nondomestic debt located in countries that -- sporadic around the country -- the countries that we have sales in and that debt has sort of dampened the affect of that on the P&L side. But because it's not one for one it had a minimal affect on us in the third quarter and we think it's going to be have a minimal affect on us in the fourth quarter.

Okay, so we shouldn't look at it as a large headwind?

Not on the P&L side -- not PBT side and the sales side, because what we end up happening is your sales does become -- start to have a headwind, but on the other side your debt comes down and on the balance sheet you get relief from that.

Okay. Then I guess also could you remind me the magnitude at the year-to-date price increases across all three segments?

Sure I'd be happy to do that, Robert. In our Stores Group we've indicated that we took three separate pricing actions in January in the slightly less than 5% range, again in May in the slightly less than 5% range, and again, in the beginning of the third quarter lightly less than 10%. The other segments of the Company have also been out with pricing in a range of similar volumes and we've taken those out once or twice, depending on the product line and the environment we're selling in.

Okay. And year to date what percentage of that have you realized?

We've been in the -- for the Company we're at about the 50% range. What we said is it takes us approximately eight -- 12 to 18 months for the complete Company to get the price back into the market. Stores may be a little shorter than that but when you put the whole Company together we're at about that 50% to 55% right now.

So you'lll need about 4.5% pricing to offset the low end of the cost inflation range and it sounds like you're at that run rate or close to it at this point. So as we look to '09 should we expect you to completely recover your price/cost gap,.

Our -- we are at the run rate that we need to be at given the guidance we've provided. We would expect that if you look at margin performance historically through these cycles, as Sean says, it tends to take us 12 to 18 months to recover. As the severity of this cost increase has gone in, we have not given guidance about how quickly we would return to our post most recent peak in margins. Again, we'll be happy in the January timeframe to give you our expectations on margins for 2009 and how closely we can get back up.

Okay. And then I guess lastly, earlier on in the year when you revised your guidance you talked about raw material costs getting substantially ahead you, that you play catch up as the year progressed, and to that end second quarter and third quarter performance was substantially better than the first quarter, yet the fourth quarter guidance implies the largest year-over-year decline in earnings that we've seen thusfar in '08 and it sounds like raws are coming in toward the low end of expectation, you're getting the pricing. What's changed? Is it the volume absorption that you expect in the fourth quarter? Are things getting worse from a volume perspective?

I would tell you first is sales. In the third quarter, for the Company we were over 3%. What we're saying is we're going to be down slightly or up slightly and so with the -- in the fourth quarter when you look at the -- SG&A is in a relatively-fixed situation, so depending on the positive or negative sales situation, what you end up with is your most -- a large percentage of your gross margin dollars actually flow to the bottom line. It's like at a break even point, and so with that sales projection of minus six -- I'm sorry, minus slightly or positive slightly that's really the difference. We were at 3.3% in the second -- or third quarter, which allowed us to be relatively close to last year's EPS.

Okay, so it's absorption of a relatively fixed cost base?

Yes.

Okay, that's helpful. Thanks for taking my questions.

Thanks, Rob.

Our next question comes from the line John Roberts with Buckingham Research. Please proceed with your question.

Good morning, guys.

Morning, John.

There's been a lot in the press recently about liquidity issues for small businesses. Given the seasonal working capital needs of the paint business do you think a lot of the small competitors, as they go through the winter and they need to build inventory into spring are going to face any issues in terms of competitiveness (inaudible) spring?

I would tell you that when you look at a lot of the competitors that we have acquired, whether that was MAB, Duron and so forth, if you really look at the capital structure a lot of these companies, number one, they have factories that were built in the 40s, 50s, 60s, and are paid off. They own a large percentage of the real estate they're in. Their cash needs they're very -- they don't have the cash needs of servicing debt and so forth. I think that they're going to have a squeeze because they're going to have less positive cash flow from the business operation, but I don't think that their capital structures force them to be in a tough situation. It's a tough situation but it's going to be a dire situation.

It's not a critical fact?

Yes.

And then you're closing 80 stores this year, how widespread are store closings across the industry? Is there any anecdotal or industry specifics on industry-wide store closings?

I think that that's probably the high watermark from our competitors. I think we've seen more of a focus on not opening new stores and expanding than aggressive closings.

Okay, thank you.

Thanks, John.

Our next question comes from the line of [Merissa Moss] with Banc of America Securities. Please proceed with your question.

Hi, thanks for taking my call. I just have a couple of questions about liquidity. Can you provide us with your CP balance as of the end of the third quarter? Then it just seems like in the past you used to more evenly split your borrowings between CP market and bank borrowings, so I'm curious why you shifted to 80% to 90% borrowings on your bank lines?

Sure. Just so you know that's 80% or 90% n the revolver that we have with Citi, not the credit facility that we have that backs our commercial paper. We have not drawn on our credit facility and we do not have any plans on drawing on that facility. It really comes down to price. With commercial paper market has really continued the drive up in price. The pricing of commercial paper has gone up and so we compare the one to the other and that's the reason why. The commercial on -- the price on revolver is less than commercial paper right now. As far as the balance I believe today we have around $94 million in commercial paper balance.

Great, Okay, thanks so much.

Thanks Merissa.

Our next question is a follow-up question from the line of Saul Ludwig. Please proceed with your question.

On the question on pricing, assuming you had no additional pricing in the first quarter next year, the cumulative effect of this year's pricing, what would be your realized year-over-year price improvement in the first quarter just based on what you've already done so far this year in both the Stores Group and the Consumer Group?

Well, Saul, we wouldn't comment on that specifically for the quarter but the math is easy to do. We took a slightly less than 5% in the first quarter in the Stores so you have to assume that is already in there in the first quarter next year. But then we followed that up with a slightly less than 5% and slightly less than 9%.

Let's say we have 4%, 4% and 8%, so that's 16%, and you get half of it so would we think 8% increase would be about the minimum level to expect?

Well, you already had 4% of it in the first quarter from January 1 impact.

Okay, so you have -- subsequent to that you had a 4% and a 8% so you have 12%.

Correct, so that's the math.

We would be up 12% in the first quarter?

To the extent that we got 100% implementation, yes, but as we're commented we don't have 100% implementation of pricing even at conclusion.

So you would have at least half, so you have at least 6%?

That could be in the right direction.

Okay, great. And then same thing on the Consumer.

Correct.

Great. Thank you very much.

Thanks, Saul.

Our next question is a follow-up question from the line of Steve O'Neil. Please proceed with your question.

Thank you. I wondered if you could just elaborate a bit on the lower environmental reserve?

Every quarter when we take a look at the environmental expense that is -- we have a full team that continues to work on environmental and really relating to the -- some of the older locations that we have, and as we continue to do things that reduce our costs we're starting to see that and so we really are expensing less. It's not that we're reversing any accruals, we just are -- the increase of our accruals did not happen this year because of controlling the total end cost of having these clean ups.

Okay. Then as a follow up to my earlier question, could you elaborate just a little bit on the nature of the manufacturing distribution facilities that you have closed?

When you say elaborate they're -- when we -- over the last few years we've brought in acquisitions of small paint companies -- smaller paint companies in the United States and with that plants and DFCs that in the long run did not -- we felt did not fit our logistics model and we are going to get synergies from that. Some of them took a little longer so it was not handled in the purchase accounting and this month -- I'm sorry, this quarter we got to the point where we took a reserve for closing of a warehouse prior to the logistics, so that's really what they are.

Even though those were regional paint companies that operated paint stores those operations were still considered part of the Consumer Group?

Yes. What we do is the Paint Stores Group is the stores mar -- our marketing and sales organization. What we do is consolidate all of the manufacturing and logistics for the consumer customers as well as stores in the paint and coatings in the Consumer Group. And so yes, they have the responsibility and we find that that gives us the most efficient model for manufacturing and logistics.

Great. Thanks very much, and a very good quarter.

Thank you, Steve.

Gentlemen, there are no further questions in the queue at this time. I'd like to hand it back over to you for some closing comments.

Thanks again, Doug. Thank you all again for joining us this morning. As always, I will be available for the balance of the day and the week to answer any additional questions you might have. We appreciate your participation today and we appreciate your interest in Sherwin-Williams.

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