宣偉 (SHW) 2008 Q4 法說會逐字稿

Good morning. Thank you for joining the Sherwin-Williams Company's review of fourth quarter and full year 2008 results and expectations for 2009. With us on today's call are Chris Connor, Chairman and CEO; Sean Hennessy, Senior VP Finance and CFO; John Ault, Vice President, Corporate Controller; and Bob Wells, Vice President of Corporate Communications.

This conference call is being webcast simultaneously in listen-only mode by Vcall via the internet at www.sherwin.com. An archived replay of this webcast will be available at Sherwin.com beginning approximately two hours after this conference call ends and will be available until Wednesday, February 11, 2009, at 5:00pm Eastern Standard 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 speak only as of the date on which such statements are made and the Company undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the Company's earnings release transmitted earlier this morning.

After the review of our fourth quarter and full-year results and 2009 expectations, we'll open the session to questions. I will now turn the call over to Bob Wells.

Thanks, Jackie. In order to allow more time for questions, we have provided balance sheet items and other statistical data on our website, Sherwin.com, under Investors Relations 2008 Year-end Press Release.

Summarizing overall company performance for the fourth quarter and full year 2008, consolidated sales for the fourth quarter declined 8.3% to $1.7 billion due to sales volume declines resulting from worsening economic conditions in the US and abroad.

For the full year sales declined $25 million or 0.30% to $7.98 billion. Acquisitions completed during the year increased consolidated net sales 0.70% in the quarter. Businesses acquired during 2007 and 2008 added 1.9% to consolidated net sales in the year.

Unfavorable currency translation rates decreased consolidated net sales 2.8% in the quarter. For the year, favorable currency translation rates increased sales 0.40%.

Consolidated gross margin in the fourth quarter increased to 46.2% of sales from 44.9% in the fourth quarter of 2007. For the year, gross margin declined to 43.8% compared to 45% in 2007.

Selling, general, and administrative expenses in dollars decreased $8.5 million in the fourth quarter compared to fourth quarter last year, but increased as a percent of sales to 37.3% from 34.6% in the same quarter last year. For the full year 2008, SG&A expense increased to 33.1% of sales from 32.4% in 2007. Tight expense management across all operating divisions could not fully offset an increase in SG&A from acquisitions and the effect of a slowdown in sales growth on SG&A percentage for the quarter and the year.

In the fourth quarter of 2008, the Company took a trademark and goodwill impairment charges totaling $30.7 million or $0.18 per share, to reflect the reduction in sales and cash flow across certain acquired trademarks and businesses. During the year, the Company took trademark and goodwill impairment charges totaling $0.31 per share. As a reminder, the Company took an impairment charge of $16.1 million or approximately $0.08 per share, in the fourth quarter of 2007.

Interest expense for the quarter decreased by $4.5 million to $14.7 million due to a reduction in short-term interest rates. Interest and net investment income was roughly flat in the quarter at $1.6 million. For the year, interest expense decreased $5.9 million due to lower short-term borrowing rates and lower average borrowings. Interest and net investment income decreased $10.2 million in the year due to lower overall rates and lower average investment compared to 2007.

Our effective income tax rate for the fourth quarter 2008 increased to 36.6% from 33.7% in the fourth quarter of 2007. For the year, our effective tax rate was 33.2% compared to 32.6% in 2007.

Consolidated net income for the quarter decreased by $50.6 million or 50.2%, to $50.2 million from $100.8 million in the fourth quarter of 2007. For the year, net income decreased $138.7 million or 22.5%.

Net income as a percent of sales decreased to 3% in the fourth quarter this year from 5.4% in the fourth quarter of last year. This decrease was due primarily to the year-over-year SG&A expense increase as a percent of sales, the higher impairment charges and the increase in our fourth quarter income tax rate.

For the year, net income as a percent of sales decreased to 6% in 2008 from 7.7% in 2007. The decrease was a result of lower gross margin, higher SG&A as a percent of sales, and higher impairment charges taken during the year.

Diluted net income per common share for the fourth quarter 2008 was $0.42 per share including an $0.18 per share impairment charge, compared to $0.80 per share in fourth quarter 2007, which again included an $0.08 per share impairment charge. For the year diluted net income per common share decreased 14.9% to $4.00 per share from $4.70 per share in 2007.

I would now like to review our performance by segment. Sales for our Paint Stores Group in fourth quarter 2008 decreased 8.8% to $1.04 billion. For the year, net sales decreased 2.4% to $4.83 billion. For the quarter and year, decreased paint volume sales across most customer segments were partially offset by selling price increases.

The acquisitions of MA Bruder and Columbia Paint completed during 2007 had no effect on sales in the fourth quarter and increased net sales for the group 1.8% in the year. Comparable store sales decreased 10% in the quarter and 5.3% in the year.

Regionally in the fourth quarter, our Southwest division led all divisions, followed by our Eastern division, Midwestern division, and Southeastern division. Sales by all four paint stores divisions declined in the fourth quarter and full year.

Segment operating profit for the Paint Stores Group decreased 28.2% to $113.2 million in the fourth quarter, and decreased 15.5% to $647.9 million for the year. Acquisitions completed during 2007 had no affect on segment profit for the quarter and reduced segment profit by 0.60% for the year. Segment operating profit margin for the fourth quarter decreased to 10.9% from 13.8% last year. Profit margin for the full year 2008 decreased to 13.4% from 15.5% in 2007. The reduction in profit margin for the quarter and year was due primarily to the impairment charges.

Turning now to the Consumer Group, external net sales in the Consumer Group decreased $18.7 million, or 7.1%, to $245.6 million in the fourth quarter, and decreased $39.6 million, or 3%, to $1.27 billion for the year compared to the same period last year. The sales declines were due primarily to sluggish do-it-yourself demand at most of the group's retail customers.

Segment operating profit for the fourth quarter, including an asset impairment charge of $8.2 million decreased $9 million or 42.4%, to $12.3 million. Segment operating profit for the year including an asset impairment charge of $11 million, dropped $83.9 million or 37.4%, to $140.2 million. As a percent of net sales, Consumer Group's operating profit decreased to 5% for the quarter from 8.1% last year and decreased to 11% from the year from 17.1% in '07.

For our Global Finishes Group, net sales in the fourth quarter decreased 7.9% to $414.4 million as a result of unfavorable currency translation and deteriorating market demand. Sales for the year increased 7.8% to $1.87 billion. Acquisitions increased the group's sales in US dollars by 2.6% in the quarter and 3.3% in the year. Sales in local currency before acquisitions decreased by 0.80% in the quarter and grew by 2.9% in the year due primarily to volume growth.

Global Finishes Group segment operating profit in the fourth quarter decreased $12.6 million or 44.5%, to $15.8 million. Segment operating profit for the full year decreased $8.5 million or 5.3%, to $152.2 million. Stated in local currency, segment profit decreased 29% and 8.2% for the fourth quarter and year, respectively.

Global Finishes Group profit for the quarter and the year were negatively impacted by increased raw material costs that could not be fully offset by higher sales volume, selling price increases, and volume related manufacturing efficiencies. As a percent of net sales, Global Finishes Group's operating profit decreased to 3.8% for the quarter from 6.3% last year, and decreased to 8.2% for the year from 9.3% in 2007.

I would now like to comment briefly on our balance sheet items. You will find more balance sheet information on our website under Sherwin.com Investor Relations press releases.

Our total debt on December 31, 2008 was $833.7 million including short-term borrowings of $516.4 million. Total debt as a percentage of total capitalization decreased to 34.2% in 2008 from 35.1% at the end of 2007.

Our cash balance at year end 2008 was $26.2 million compared to $27.3 million in 2007. Capital expenditures were $25.4 million in the fourth quarter and $117.2 million for the year compared to $165.9 million for the year 2007.

Depreciation expense was $35.9 million in the quarter and $143.2 million for the year. Amortization expense was $5.4 million in the quarter and $22.3 million for the year.

In 2009, we anticipate capital expenditures for the year will be in the range of $100 million to $120 million. Depreciation will be about $145 million, and amortization will be about $24 million.

I will conclude this review with a brief update on the status of our lead pigment litigation. In Ohio, the attorney general's suit, which was removed to federal court by the defendants, has been remanded back to state court by a federal judge. The defendants have filed a motion to dismiss and are awaiting the State's response. We do not yet know how the new attorney general views this lawsuit.

In Wisconsin, the Thomas case; a personal injury case tried successfully to a jury last fall, has been appealed by the plaintiffs. Briefing has been completed, and we are awaiting for a hearing date. Another individual plaintiff's case has been heard on appeal by the Supreme Court on the question of whether lead pigment is an inherently defective product. A decision should come out within the first few months of the new year.

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 pigments. Briefing is ongoing, and oral arguments should not take place until at least the third quarter of 2009 with a decision by the court some months after that.

That concludes my review of our results for fourth quarter and full year 2008. So I will turn the call over to Chris Connor who will make general comments and highlight our expectations for 2009. Chris.

Thanks, Bob, and good morning, everybody. Thank you for joining us today. On the eve of the Revolutionary War, Thomas Payne, one of our country's founding fathers, wrote the now famous line, "These are the times that try men's souls." I think those are apropos words for today's call.

The lack of visibility in the US economy during the past year was simply unprecedented. Financial markets, business and consumers, all reacted strongly to the growing economic uncertainty. Businesses and consumers both reined in spending and nervous investors ransacked stock exchanges around the world. Each time we thought things couldn't get any worse, in fact they did.

I think it is safe to say the fourth quarter of 2008 was the worst quarter for the global coatings market in decades. The recession that has pummeled demand for coatings and other building materials in the domestic markets for the past two years expanded to global markets in the second half of '08. And the catalyst for recovery is simply nowhere in sight.

It has become increasingly difficult to forecast our business with any degree of confidence. For this reason, we considered suspending our longstanding practice of providing sales and earnings guidance. But we believe that offering even a broad range of expectations has value and we will continue the practice of providing guidance. More on this topic in a moment.

The rate of decline in end market demand we experienced throughout the year, particularly in the fourth quarter, coupled with the sharp increase in raw material costs during the first half, reduced our sales and pressured our earnings all year. Simply stated, we are not pleased with our results for 2008. But, we do believe that we took appropriate and decisive actions in response to the difficult conditions we encountered. These actions were focused primarily in three areas. Mitigating the rising input costs through cost control as well as pricing actions, growing market share, and maximizing net operating cash.

The dramatic spike in raw material costs early in the year took us somewhat by surprise. We had expected a more gradual rise in the range of 3 to 6%, as I think we shared with you earlier in the year. In response to this steeper than expected increases, we took immediate and aggressive steps to reduce SG&A manufacturing and distribution expenses and implemented appropriate selling price increases to help offset some of the impact on our margins.

During the year, our Paint Stores Group closed 79 stores that were located in close proximity to other stores, as well as reducing non-essential overtime and part-time service hours. We consolidated some sales territories and focused our selling efforts on market segments and customers that offered the highest potential for share growth. Operations at seven manufacturing and distribution sites were idled and/or closed during the year, and we trimmed administrative expenses across the organization.

Concurrent with these expense reductions we implemented multiple price increases across most of our business units and product lines. These were all difficult steps to take, but their impact on our results were timely and meaningful.

The challenging market conditions last year did not discourage us from continuing to make prudent investments in an effort to capture share. For example, our Paint Stores Group opened stores in 100 new markets. Backing out the store closures, we finished the year with 3,346 stores in operation, an increase of 21 net new facilities over year end 2007.

Our Global Group added 22 net new branches including our first company operated locations in India. At the end of 2008 our Global Group had 541 company-operated branches.

We continued to invest in research and development and introduced some important new product technologies to the market in 2008. Across all divisions we recruited 667 high caliber people into our respected management training program. We're confident these investments will benefit the Company in the near term and deliver appropriate returns in the long-term as well.

You know, strong cash generation has always been a focus of our Company. In 2008, we generated net operating cash of $864 million surpassing 10% of net sales for the third consecutive year. This strong cash flow performance was due in large part to a $121 million decrease in our year end working capital. As a reminder, our working capital ratio defined as accounts receivable plus inventories less accounts payables to 12 month sales decreased to 11.2% in 2008 from 12.7% in 2007.

During the year we also continued to invest the Company's cash to create value for our shareholders. Again, for example, we invested over $70 million to complete three acquisitions; strengthening our industrial coatings businesses in and outside of North America. We acquired more than seven million shares of our Company stock for treasury, reduced our total debt by more than $130 million, and returned a portion of our net operating cash to shareholders in the form of a cash dividend.

2008 marked our 30th consecutive year of increased dividends; a string we intend to continue. At our February meeting of the Board of Directors, I will recommend approval of a dividend payout rate for 2009 above our traditional 30% of prior year's earnings per share in order to continue our string of consecutive annual dividend increases. This recommendation will be made as a result of our strong net operating cash performance and our commitment to return cash to shareholders.

Looking ahead to 2009, we believe the rapid deterioration we saw in the United States and many international markets during the fourth quarter will continue at least through the first half of this year. Industry volumes in most markets will erode to the point that positive volume growth in the first six months is highly unlikely.

Given this dismal demand outlook, we anticipate that our first quarter consolidated net sales will decrease in percentage terms in the high single digits to low teens compared to the first quarter of 2008. With sales at that level we estimate diluted net income per common share in the first quarter will be in the range of $0.05 to $0.25 per share compared to $0.64 per share earned in the first quarter of 2008.

For the full year 2009, we expect net sales will decline in the low to mid-single digits versus 2008. With annual sales at that level we estimate diluted net income per common share for 2009 will be in the range of $3.00 to $4.00 per share compared to $4.00 per share earned in 2008.

Again, thanks to all of you for joining us this morning, and I would be happy to take your questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from Saul Ludwig of KeyBanc Capital Markets.

Good morning, guys.

Good morning, Saul.

First, you had this improvement in the gross margin which was outstanding considering the precipitous drop in volume. Could you talk about the factors that allowed you to higher gross margins in the quarter?

Saul, this is Sean Hennessy. When you take a look at the gross profit in the fourth quarter, one of the things that allowed us to have that 46.2 was really the LIFO expense reduction. And so without the LIFO you see the 45.1 -- or you don't see it, but it would have been 45.1, not the 46.2, which still is an improvement.

And we felt that at the end of the third quarter, we did mention we thought we were in the trough with gross margins. But with the raws coming down in the fourth quarter, I mean adjusting in the fourth quarter, our LIFO expenses was adjusted. So our expenses came down because now it went the other way, and we had expensed too much LIFO in the first three quarters. So without that though our gross margin at 45.1 for the fourth quarter we were pretty pleased with.

Next question, in your supplemental sheet you show that the fourth quarter included a loss of $14 million on sale of assets. I assume that's separate from the goodwill impairment. Which segment bore the brunt of the loss on asset sales? $14 million, that's a lot of earnings per share hit.

You're absolutely right. It is not included in the goodwill impairment. It actually is plus the goodwill impairment, and when you take a look at the majority of that was in the Consumer Group.

Okay. Then also your fourth quarter included a $10 million currency loss versus a gain a year ago. Where did that show up or where did that benefit show up?

Saul, this is John Ault. The foreign currency gain shows up primarily in our Global Finishes Group. Although there is some impact as well in the administrative segment but on a much lower basis.

Well that loss -- that was one of the factors that caused your Global Group to have such a horrible comparison. Because when you add back last year's special charge, the decrement was fairly dramatic.

That's correct, Saul.

And then finally, how much are you assuming in your revenue forecast for '09, Chris? How much of that do you think is price that you will get from carry over from this year that you'll have for all of next year assuming no further price increases?

The big impact in the forecast for '09, Saul, is obviously on volume and demand. The pricing activity that we've taken throughout calendar year 2008, as Sean commented, has gone in pretty much as expected. We expect to have some pressure to be able to hang onto that. But for the most part the guidance that we're giving for '09 is going to be mostly attributed to a fall off in volume.

Okay. Do you think that price, 4% or 5% increase, is reasonable?

As a company, you know, we probably are in that ballpark.

Great. Thank you very much.

You know, Saul, what we're trying to do really is to really just comment -- and we were wide in our range because instead of walking away from guidance, we tried to give you some kind of indication. We are trying, instead of going down the list of the margin or SG&A, we're trying to really give guidance just on sales and EPS. But the one other thing that we would like to comment on is the other item that we would like is our pension expense. And because of the change in the asset values in our pension, our expense will increase by $55 million to $60 million pre-tax in 2009 versus 2008.

The pension expense or pension income?

We're going to go from a pension income to a pension expense. So that difference will be $55 million to $60 million pre-tax, which is going to be around $0.32 for the year, which is going to be about $0.08 a quarter for us. So that's in our forecast and that's in our guidance.

Thank you very much.

Thanks, Saul.

Thank you. Our next question is coming from Chuck Cerankosky of FTN Midwest Securities.

Good morning, gentlemen.

Good morning, Chuck.

Chris, can you talk about the concept in '09 of price increases in raw materials. They seem like they're pulling back. And how that affects margins. I can think of a scenario where you simply raise prices and raws drop off or you give back a little on price because raws are dropping even faster than expected, but you're still seeing some benefit at the gross margin line.

Let me comment, Chuck, on the pricing thinking of the company and then I am going to ask Bob Wells to weigh in a little bit on the raw material issues.

As you know, Chuck, our historic practice has been not to comment on pricing activities until we have announced them to our customers. And to this point in time we've announced no pricing activities for calendar year 2009. We probably, given this environment, would find that to be a difficult thing to accomplish. And I think that the raw material forecast and the volatility there makes it a little difficult for us, again, to have a lot of visibility into that.

Bob, you may want to comment a little bit about what we're seeing there.

Traditionally, Chuck, as you know, we provide raw material cost guidance for the industry on our calls. And frankly, we're hesitant to do that on this call. We are absolutely expecting continued volatility in the energy markets this year. Which when you combine that with the fairly significant portion of our raw material basket that's driven by factors other than energy. Factors like capacity, transportation, labor, capital investment, and down to even ore prices, it makes it very difficult in this environment to forecast raw material costs.

So if we do see a trend of price stability in the future including intra year, we'll return to giving specific raw material guidance, but at this point we're going to hold off on giving a range.

Sean, with regard to looking at the gross margin, up for the quarter, down for the year, can you look at either one of those and say if we held price in raws sort of constant would kind of impact volume decrements had on those numbers?

Yes. Mathematically, you're going down the right path. You can see it, what that will do.

Well, I am asking for a little help on that.

I know, Chuck, and again this has been probably one of -- with the volatility, we have about four or five different algorithms that get us back inside of our range. And we've got different algorithms in the gross margin for all of those variables. And to give you guidance on -- okay, I think it is X. In the past we've always said, we think okay our year end gross margin will be close to where we were last year or this year or that year. We're going to avoid doing that because with all the volatility it is going to be tough to do that.

The uncertainty. I think that's fair. A couple of other things. Besides the pension in your guidance, do you have any assumed impairment charges or room for impairment charges over the course of '09?

No, Chuck, we really don't. But when you ask, the first question was no. And the second question when you say is there room, you know, with the accounting rules today with the way things are -- you know, a couple of years ago we had about $4 million and we had about $3 million. And so, in my mind, if our impairment charge is $5 million or less, that's pretty much a zero.

Got you. What's the acquisition environment like right now?

We continue to have opportunities to discuss targets. The fact that this year saw three deals compared to seven the year before would indicate that there is a slowing and I think that will continue.

Chris, is that due to buyers expecting a little more than you want to pay in this environment?

Probably.

Okay. Last question, did Euro Navy close yet?

Yes.

Congratulations.

Thank you.

Thank you. Our next question is coming from Dimitri Silverstein of Longbow Research.

Good morning. A lot of my questions have been answered but I just want to follow up on a couple of things.

First of all, can you look at your coatings business outside of architectural to the extent you have some small industrial and marine and maintenance businesses? What was the performance there like in the fourth quarter versus the architectural businesses? And what's the outlook for this segment versus the consumer paint segment?

Sure, Dimitri. The industrial coatings segments of our company in previous quarters last year, we had commented had been performing slightly better than the architectural. But certainly in the fourth quarter as the global economic slowdown occurred, these businesses began to struggle as well. And pretty much behaved right in line with the total company's performance.

Okay. And what's going on currently in the outlook for the near term? Is it as pessimistic for the industrial applications as it is for the consumer applications?

Yes. The guidance we've given for the year with the demand down in gallons would be consistent across architectural and industrial coatings.

Okay. And in the same vein, can you make comments on various geographic regions? You talked about revenues being down in all regions of the world and in all segments, but was there a region that was doing better or worse than the others?

Yes. We've comment historically, particularly in our stores organization, to give you kind of a feel in North America about how that has flowed. I think for the last probably two years now we've been commenting that our Southeastern division has been lagging our other divisions. This is the part of the country where most of the new residential home construction has taken place or most of the impact of the downturn has taken place.

The Midwestern part of the United States not as affected, has done well. Our Southwestern division has done well. These are the historic southwestern corner of the United States markets, which while there is some homebuilding down there, we're seeing some strength there as well.

But we're really splitting hairs here because it is pretty much broad based across the board that we're feeling the stress in the architectural markets across the United States.

Are any international markets doing better? You're still experiencing growth in Latin America and Asia or is that turning negative?

Our business model, Dimitri, is primarily a western hemisphere model. Most of our global coatings outside of North America are in Latin American markets. Brazil has had a reasonable year. We've commented on that frequently. We've been helped by currency through three of those four quarters. And now that's turning on us a little bit. And as we commented, those markets are slowing as well, too. So while they have the potential to be somewhat positive, I think the impact for the Company given the currency turn will be a soft year in our Latin American operations as well.

And then final question; and I am just trying to come at the raw material outlook from a different angle. What's the percentage of your raw material spend as part of cost of goods sold or revenues? Can you give us an idea of how much you're spending?

When we take a look at this, what we've always said is that raw material is around 50% of the average selling price of paint. So when you take a look at the percentage of the cost of goods sold, it's definitely tremendously higher in there because we have the gross margins. So if you think about our gross margin being around 44%, 45%, 50% of the selling price is raws, you can take about 5% to 6% of our sales as other; the conversion, the logistics, and the freight.

So the vast majority of cost of goods sold it sounds like --

Yes, yes, exactly, north of 80%.

When raw materials start coming down, this should be a big tail wind provided that you can maintain pricing, which my understanding is, at least historically, at the retail level, paint prices (inaudible).

That's the key phrase you just said, Dimitri, maintaining pricing.

All right. Thank you.

Thank you. Our next question is coming from PJ Juvekar of Citigroup Inc.

Hi. Good morning.

Good morning, PJ.

I am surprised at the weak results in the Global Finishes Group even after taking out the effects impact that your profits were down 29%. Was the volume growth positive in the quarter in the Global Group?

We've never really commented on unit volumes by segment. But I think you can tell we talk about the sales without the conversion, with prices. You can probably take a guesstimate of where that ended up.

Okay. Sean, can you explain the reduction in asset impairment charge in that segment of $11.6 million?

The asset impairment that we took was really dealing with trademarks. In that segment -- that was just from an acquisition that was from prior years. The cash flows, you take a look at cash flows, and the discounted cash flows, we just had to write down some of the goodwill.

So it is a reduction in impairment charge?

Yes.

Okay. I will follow up on that. And then finally, Chris, do you think the international consumer is more likely to delay painting in a slowdown than a US consumer?

That's a great question, PJ. I have no idea. We've been through economic downturns obviously many, many times in the Company's history, and recently in Latin America as well. I think we have commented about the Argentinian economic collapse in the first half of this decade and that our company experienced some gallon gains through there. We expect soft demand in our Latin American operations this is year. I think it will behave somewhat similar to the way the US will behave.

Okay. Thank you.

Thanks, PJ.

Thank you. Our next question is coming from Amy Zhang of the Goldman Sachs Group.

Thank you. Good morning.

Good morning, Amy.

I have several key questions, and the first one is really to follow up on you pricing. Just wanted to get a little bit more color on the competitive environment. And obviously, you raised the price fairly aggressively in '08 and there was some very nice carryover impact in first half '09. And I heard Sean was just actually saying you expect a 5% price increase in this year. But, (inaudible) I heard a lot of your competitors already stopped raising prices in the later part of 4Q and then expect flat pricing trend for them.

Yes, let me clarify that point. We have not announced any price increases this year. I think the question that Sean was answering was the impact of the price activities announced in 2008 as they carry forward into 2009 would have the impact of about a 5% lift for us. But clearly, to your point, all competitors are experiencing difficult volume issues. And we think pricing is going to be a difficult prospect for the Company this year.

So for the first half of '09, do you think, because of the carryover impact, do you think that 5% price increase could have some negative impact on your volumes given many other competitors they probably started to give up some pricing or just stopped doing the price increases?

That will be the challenge that management has to work on -- is to react to the market environment along those lines. Our guidance here in the range that we provided this year which is much wider than we historically do, recognizes the fact that that's one of the many moving parts that we're going to have to manage through. Time will tell, and we'll be obviously reporting on that on a quarter by quarter basis. You will be able to see how we do.

Sure. Can you just give us a little bit more color on your customers' reaction to your price increase in the fourth quarter '08?

We didn't raise any prices in the fourth quarter of '08.

Sorry, the positive impact from the previous two price increases you announced in the second half?

As we continue to implement the pricing actions that we took throughout the first half primarily of 2008, the customers reactions were historical in terms of how we've been able to pass them through. We've said that typically it takes us a better part of twelve months to get them in. That at completion -- we're somewhere in the 70% range achievement plus or minus a few points. And that these price increases have performed in that same fashion. So there were no issues in the fourth quarter that would change the discussion on how that's happened historically for us.

Got you. Second question, SG&A as a percent of sales -- is 37% for 4Q and then I understand there is probably some charges there. Going forward, how we should think about that ratio? Obviously that's the historical high level. And I understand you guys have a lot of operational initiatives in the pipeline. And then what should we expect?

You know, if you take a look at the top line sales that we have given you that we're going to be down in the mid-single digits, we would have to drop our SG&A down by that same percentage to have the same percent of sales. I would say that, again, we're not going to go down the P&L and give you guidance, but I wouldn't be surprised if your guidance showed that the SG&A as a percent of sales was higher next year.

Okay. Thank you.

Thanks, Amy.

Thank you. Our next question is coming from Jeff Zekauskas of JPMorgan Chase and Co.

Hi, good morning. In the fourth quarter, can you talk about the demand pattern that you experienced? In other words if you compared October to November to December, sort of what were those monthly trends like?

Jeff, the trends were pretty consistent, and the amazing trend was actually in the back half of the third quarter where it really began kind of in September. There was this significant and consistent demand drop across all segments and then the fourth quarter months all pretty much ran at the same level down in this double-digit demand that we've been talking about.

Okay. And in your forecast for next year you have a very low number in the first quarter and then relatively much higher numbers for the successive three quarters. I take it that that has to do with some kind of rebound in the profitability of your paint stores business given that that's the largest segment by far. Is that the case and why is it that paint stores would be very depressed in the first quarter and then would meaningfully pick up?

I think there is a couple of factors at play here. First of all, the trends coming out of the fourth quarter into the first quarter have not changed and that's the guidance we're giving. These are our two smallest quarters of the year. Some movement there has the bigger impact on us.

We do think that a couple of things could impact better performance in the back half of the year. One, the comparisons will get easier as we go up against the significant fall off that we had in the back half of '08. Secondly, like you, we're reading some indications that if there is going to be any kind of stabilization or flattening of this demand curve, it is likely to happen in the second half of this year.

Again, I just would go back to the wideness of this range that we've provided the investment community this year which indicates how difficult pegging this volume is for the Company. We're giving you a point in time best look. We're going to have to wait and see how that flows through.

In the Global Group, I think in answer to Saul's question, you said that there might have been a $10 million currency hit. Is that something that's one-time only or is that something we might see in the successive quarters? In other words, is your Global Group annualizing at operating profits of around $100 million or is it more like $60 million?

Yes. I think when you take a look at it, and we've commented, the high percentage of our business is really in Latin America. You look at the currencies, specifically the Brazilian Real and so forth. And take a look at the curves and you look at the curve that we've just gone through, where now the exchange rate is back to 2004. But I know that it is between that 60 and 100 and I would have to go through and do some calculations to give you -- but really when you take a look -- I understand the question, it is just I don't have that. I would have to work it out.

Maybe if I could just ask it differently. What's the meaning of foreign currency related losses? Are these hedges or is this the effect of currency on the business?

It's the effect of currency on the business. When the Real changes, the amount of -- and we report in US dollars, that change occurs.

That's very helpful. And then lastly, is the demand trend in paint stores weaker or stronger than the demand trends in the Consumer Group?

I think it is slightly weaker given the results that we reported on for the quarter. And here again, so much of the malaise in the demand side is occurring now in the commercial and the new construction, and consumer has little exposure to that, if any. And the stores is bearing all the brunt of that right now.

What's your tax rate for the year?

'08?

For '09, I am sorry.

It will be in the same ballpark of 33.

Okay. Thank you very much.

Thanks, Jeff.

Thank you. Our next question is coming from Greg Melich of Morgan Stanley.

Hi. Thanks. A couple questions, guys. One is on SG&A. I realize you're not going to give us a number given the volatility, but you did get it to drop in dollar terms a percent in the fourth quarter, which is a real trend from earlier in the year granted some of that is FX. What could you reasonably do this year in terms of SG&A dollars? Especially given the pension expenses you already highlighted, which I think is a couple percent of head wind?

Right. Again, it is hard to answer because I have a specific number in my forecast. I don't want to give it to you, quite honestly.

Maybe just operationally. What could -- would it be hours in the stores? Would you consider some stores maybe not being open as long as you are? Or just give us some flavor there.

Those are all the factors, Greg, that come into play. And the stores, for example, do look at all those things aggressively. We have taken hours out of the store. We've managed our part-time hours. We've paid particularly close attention to our overtime hours. We'd probably be reluctant to reduce hours. That's not a place that we would go to look. We'd probably look to a more efficient utilization of the hours during the times that the stores are open.

Okay. Great. Second, could you give us just the numbers, not the forecast, but where we actually finished for all of 2008 in terms of raw materials, pricing, and volume?

For the Company?

Yes.

We don't give raw material data for the Company. We have given raw material, as Bob said, historically for the industry. We felt that raw materials; the last guidance we gave was 9% to 14%. And as the fourth quarter was coming in with some lower costs than we had had earlier in the year, we said we thought it was going to come in around 9% for the industry.

Do you think that's where it ended up for the year?

That's the last guidance we gave and that's directionally correct.

Okay. And on the other, the volume and the price, again, historic not --

Bottom line is we've never broken out our sales between volume, price, mix, those type of things. Because we have paint in gallons. We have units in miniwax. We have units in brushes and rollers and so forth. So it can be really misleading, so we just don't answer that question.

Is it fair to say that the third quarter to fourth quarter deceleration in comps, which I guess was what 500 basis points give or take --

Yes.

All of that and then some was all volume driven.

Correct.

Yes.

Intuitively, as the price increases went in, sales performance as a negative number was not as negative as the volume.

Thanks a lot.

Thank you. Our next question is coming from Eric Bosshard of Cleveland Research Company.

Good morning. This is [Omar Lien] in for Eric.

Hey, Omar.

Good morning. A couple of things. Excluding the charges, when you look at the year-over-year profit decline in 1Q, your expectation, why is it so much greater than what happened in the fourth quarter?

In the fourth quarter we had some other things. I mentioned that the gross margin was helped by the adjustment; the final adjustment of LIFO. And that was over a point. And when you take a look at it in the fourth and first quarters, you look at the bell-shaped curve of our sales, you really see that we have a higher percentage of our stores at below break even point.

In the second and the third quarters, we have that occurring versus the fourth and third. And then also I mentioned the pension; change in pension. We have to expense -- we're going to have $0.08 hit in the first quarter that we didn't have in the fourth. So adjustments to the final year numbers and then the pension. That's the reason why.

Okay. Secondly, volume in the industry in the fourth quarter, where did it end up roughly?

We think all year long, Omar, we have been saying that we felt like the industry in volume was down in the 12% to 13% range. We think that definitely the rate of deceleration definitely picked up in the fourth quarter. We think it could have been easily mid-teens or greater.

Mid-teens or greater?

Yes.

On the cost side, going back to raw materials for a moment. The expectation had been coming out of or entering third quarter 9% to 14% growth and then obviously high single digits was kind of the expectation. Where did cost increase end up for the year in total?

We don't know that data point. But you're exactly right, Omar, the last guidance we gave was at 9% to 14% and that it was trending towards the bottom of that, which was the high single digits. To the best of our knowledge that's where it ended.

Okay. Going back to price for a quick second and last thing. Just walk us through the price contribution. I think it was mid-singles, maybe 5%, 6% was where you had talked about seeing the realization in the third quarter. Where did it end up at the end of the fourth quarter, the price, and the contribution relative to the third quarter?

It was very comparable. It was slightly higher in the fourth than the third.

Great. Thank you, guys.

Thank you. Our next question is coming from Stephen O'Neill of JJ B Hilliard.

Good morning.

Good morning, Steve.

Bob, I think you're just going to have to help me with the asset impairment charges, the phrasing about increased impairment charges in each of the segments is just confusing me. Would you please just tell me what they are?

Sure.

Otherwise, I'm going to add them up incorrectly and I will do them wrong.

For the year, the goodwill and trademark impairment was $46 million, and of that we took $22.5 million in the fourth quarter and $23 million in the second quarter. We also took -- and I am looking for the breakout here.

Actually, if I could just have the fourth quarter and full year for the segments that would be fine. Because that's where I think maybe the number a year ago may have changed a little bit and I want to make sure I have it correctly.

Steve, in our press release we do break down the impairment charges by segment. In the Paint Stores Group the asset impairment charges, the increased asset impairment charges, were $42.7 million for the year and $22.3 million in the quarter. And that's just the year-over-year change.

Right. I don't think there was an asset impairment charge in the paint stores last year, so it would have been $22.3 million.

That's correct.

Yet, you said it was $3.8 million increase in the consumer group for the quarter. What was it in absolute dollars?

It was $8.1 million for the Consumer Group in the fourth quarter of '08 and $4.2 million in the fourth quarter of '07.

Okay. That's fine because 4.2 and 3.8 is 8, but that's what I was rounding. Okay, that's fine. And then it was $11 million a year ago in the Global Group.

That's correct.

But you said $11.6 million, so it was actually a positive 0.6. I asked this earlier. It was actually a positive 0.6 in the fourth quarter.

For the Global Group --

Last year we were going up against history of $11.6 million and the impairment this year was $800,000. So a positive of $10.8.

For the quarter.

Yes, that's correct.

Okay. But then you said $10.8 million for the year, but I thought there were -- is that just the absolute number because that was the only charge for the year? Last year was $11 million?

Yes.

Okay. And then I think I can figure it out from there. What was the figure -- just to be sure, in the Consumer Group for the full year of $6.6 million. What was the absolute number for the year for the Consumer Group?

Impairment? $11 million.

Even for the Consumer Group?

$10.975 million. I rounded it to $11 million.

And I think this was asked earlier, and I want to follow up about the loss on the asset sale. That would have then occurred -- that would not have been in the corporate or administrative, that would have actually been subtracted from the Consumer Group operating profit?

Yes, it is.

And then along the same lines, the foreign exchange impact is not something that's accumulated in corporate. It would have gone into the Global Group operating income.

Yes.

Both of those figures understated by those factors, then?

Yes.

Great. Thank you very much.

Thanks, Steve.

Thank you. Our next question is coming from Dennis McGill of Zelman & Associates.

Hi, guys.

Hey, Dennis.

I have a couple of questions here but hopefully they will be quick ones. On the raw side, I understand the hesitancy with forecasting anything. But if you were to just take what you're paying for raws today, and assume that stays constant for the year. Can you give us a sense of what the annualized change would be '09 to '08?

No. Nice try, Dennis.

I told you it would be quick, right? On the stores, can you give us a sense of what your plans are as far as openings and closings?

I think last year, as we commented, the net was 21, and I think we're going to be close to that range again for 2009. There shouldn't be nearly as many closings as we had this year, but I don't think we'll be as aggressive in new market penetration. The net number should be very close to where we finished this year.

Okay. On your end channels, you mentioned through the quarter it was fairly comparable in total. Were there any more significant changes on a relative basis by end channel that either I would assume it would have been to be weaker but that got weaker through the quarter?

In terms of specific customers?

Not customers but just end channels as far as, as best as you can analyze it, by the new construction, repair, remodel, non-res, industrial.

The one market that we commented that has been doing slightly better in this environment is the property management market. As folks get out of homes that they don't belong in and move back into rental equipment, that segment has done marginally better, but still negative. With that modest little trend, all of them are pretty consistently down significantly.

Okay. Sean, on the pension expense how much of that will flow through the segments as opposed to corporate?

90% will go in the segments.

Okay. I think you talked about this earlier, but I want to make sure, on the currency impact do you have a ballpark of what would be included in that, the guidance range?

Yes, but like on the raws we're not going to answer that one.

Okay. Thanks a lot, guys.

Thanks, Dennis.

Thank you. Our next question is coming from [Ablad Artimono] of Coastal Capital Management.

Hey, guys.

How are you doing?

Good. My question is on the guidance. Basically, as I can see it, you're projecting very steep declines in revenue in first quarter, and an EPS of roughly a quarter of last year's EPS. And then you proceed on the call to state that you see no improvement whatsoever in the environment coming, and at the same time you project the full year EPS that implies a very big turnaround in the remainder of the year, and the same for the revenues. So how can you possibly project such a huge turnaround in implied EPS for the remaining three quarters in the year that are roughly the same as the three quarters of EPS in '08 while the environment is dramatically dramatically worse?

I think when we're talking about the environment, the sense is that demand has dropped to the second half of this year, and it is kind of flat lining now at this level. At the current volume run rates and the guidance we're giving, as we go through the year we start to have much better favorable comparisons. This is the worst quarter that we're going to have in terms of volume and also in terms of raw material costs impact on a year-over-year, so as the year goes on, if we don't see further deterioration in the demand side, our visibility at this point in time would indicate, to your point, that the subsequent quarters get a little bit better, and that we don't have quite the deterioration in earnings that we've seen in this first quarter. That's the best we can tell you at this point in time.

The other thing I would just like to point out is that, again, the change in the pension is $0.32, it's $0.08 a quarter. $0.08 on 64 is 1/8, 12.5%, is 32 on $44 is less than that, and when you take a look at it, Chuck Cerankosky asked me, and I said we don't have as much impairment in this year, and impairment costs us $0.32. So when you sit there and start taking a look at it, there is a lot of other moving factors.

I understand on the pension and the impairment stuff which I acknowledge them, but they don't seem to be the defining factor here, but I just want to come back to the comparisons becoming easier, how will comparisons become easier when the second quarter of last year was quite good and the third quarter was not bad either?

We've tracked the gallon demand through our stores through this cycle, and I can just tell you that's the critical factor. We're not forecasting the significant volume declines on top of the double-digit volume declines through the second half of this year. At the same time that that's happening, the raw materials start to get a little bit more favorable for the forecast that we provided. Those two drivers along with the other things that Sean mentioned support the guidance that we've provided.

So do you project improvement to begin in the second quarter of '09, or how are you projecting it internally?

We're not projecting improvement in this plan at any quarter, we're just projecting better comparisons in the latter half.

All right. Thanks.

Thank you.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Mr. Bob Wells for closing comments.

Thanks again, Jackie. Let me conclude our call this morning by asking you to save the date of Wednesday, June 24th on your calendars. That's the day we'll be hosting our annual financial community presentation this year in Atlanta, Georgia. We will hold our customary morning presentation with questions and answers followed by a reception and lunch, and after lunch we have scheduled tours of our latex paint manufacturing plant in Morrow, Georgia, and our distribution service center in Beaufort, Georgia. Again, the date is Wednesday, June 24th, and we will be sending out invitations and related information in the weeks ahead.

As usual, I will be available this afternoon for any additional follow-up questions, and we would like to thank you again for joining us today and thanks for your continued interest in Sherwin-Williams.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.